Despite the widespread acceptance of this narrative, there are many reasons to question whether it accurately portrays the motivations and hopes of some Progressive-Era reformers. In a 2005 article in the Journal of Economic Perspectives, “Eugenics and Economics in the Progressive Era,” the economist Thomas C. Leonard offered a completely new historical account of the sources of Progressive-Era labor legislation and the intentions of its supporters. Leonard’s work, including an important 2009 article coauthored with legal scholar David E. Bernstein for Law and Contemporary Problems, “Excluding Unfit Workers: Social Control Versus Social Justice in the Age of Economic Reform,” indicates that lurking behind what many people see as humanitarian reforms was something much uglier.

Leonard and Bernstein argue that some of the most prominent of the Progressive reformers were “partisans of human inequality.” They supported interventions as ways to forward their eugenic goal of a purer (that is, whiter) human race by eliminating the opportunities for the “unfit” to get meaningful work. The “unfit” here included not just nonwhites (especially African-Americans) but also the “insane,” immigrants (especially from central and eastern Europe), and in a somewhat different way, women.

In other words, what we today think of as the unintended consequences of laws supported by today’s well-meaning but economically uninformed Progressives were actually the intended goals of some of their intellectual ancestors a century ago. Early Progressive economists understood the effects of these interventions, but they thought those effects were desirable.

The Progressive economists of the late nineteenth and early twentieth centuries saw social science not merely as a means of inquiry and understanding but as a guide to social management and control. The advent and broad acceptance of Darwinism in the late nineteenth century, combined with a more general belief in the power of science and scientific management to solve social problems, led to a fascination with eugenics and the possibility of using public policy to ensure the “survival of the fittest” and the purity and strength of the human race. In the hands of many thinkers at the turn of the twentieth century, Darwinian theory became a rationale for using the power of government to weed out the “undesirable” and “unfit” in much the way that the new understanding of evolution was changing agriculture and animal husbandry. Eugenics clubs and societies grew rapidly and many of the leading intellectuals of the early twentieth century, including a number of well-known economists (such as John Maynard Keynes and Irving Fisher, perhaps the most famous American economist of the time), were active in these groups and saw their work through the lens of eugenics.

Eugenics and Intended Consequences

We look back on the eugenics movement with proper horror. Yet the same ideas that led to forced sterilization also led to restrictions in the workplace, because labor markets were one place where eugenics-oriented economists could combine their two interests. They recognized early on that legislation which  excluded the “unfit” from labor markets would advance their eugenic goals. Most of these laws were enacted at the state level during this period, but the New Deal era saw many of the same arguments applied at the national level.

Consider minimum wage laws, for example. Today we tend to think people support them because they believe a minimum wage is a free lunch that will help the poor. Classical-liberal economists have long criticized such regulations, arguing they are a perfect example of the law of unintended consequences and of the disconnect between intentions and outcomes. In a competitive labor market any worker who can produce value is hirable at some wage up to that value. Even workers with limited skills are employable. What the minimum wage and other mandated benefit laws do is create a minimum productivity criterion for hiring, closing off the labor market to workers whose productivity is too low to justify that cost.

Leonard’s work shows that some advocates of the minimum wage, including many giants of the early days of the economics profession, such as John R. Commons and Richard T. Ely, understood exactly what minimum wage laws would do and liked it. In addition, various Progressives and socialists who were not economists, such as Eugene Debs and Beatrice and Sidney Webb, also supported minimum wage laws and other interventions into the labor market precisely because they would weed out those who were deemed too stupid or lazy to compete in a market economy—in particular, women, immigrants, and blacks.

Leonard writes, “the progressive economists . . . believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’” He quotes the Webbs’ statement that “this unemployment is not a mark of social disease, but actually of social health.” Further, he quotes Henry Rogers Seager of Columbia University, who suggested that minimum wages were necessary to protect workers from the “wearing competition of the casual worker and the drifter.”

A. B. Wolfe, who would one day be a president of the American Economic Association, wrote in the American Economic Review in 1917 (quoted in part by Leonard and Bernstein): “If the inefficient entrepreneurs would be eliminated [by minimum wages,] so would the ineffective workers. I am not disposed to waste much sympathy upon either class. The elimination of the inefficient is in line with our traditional emphasis on free competition, and also with the spirit and trend of modern social economics. There is no panacea that can ‘save’ the incompetents except at the expense of the normal people. They are a burden on society and on the producers wherever they are.”

In the context of the early twentieth century this group largely included nonwhites, immigrants, and women, as well as white males with physical or mental disabilities—the very same groups the Progressive eugenicists thought were diluting the quality of the human gene pool. Unlike their modern successors, these supporters of minimum wage laws were under no illusion about the effects of their proposed policies; they understood and intended the negative consequences that economists now go to great lengths to argue will be the outcomes of the policies favored by contemporary Progressives. A great irony of the Progressive movement for a minimum wage is that while it aimed at eliminating the “unemployable,” it in fact created a group of “unemployables.”

Leonard’s research shows that even professional economists, including some for whom distinguished prizes and lectures are named today, engaged in a manner of thinking about issues like minimum wages that was profoundly—even obscenely, given their explicitly racist goals—anti-economic. According to some Progressives, wages were determined not by marginal productivity but by the living standards to which a particular worker was accustomed. Competition from women, children, and members of “low-wage races” threatened the dignity of white male heads of households, the robustness of the white genetic stock, and ultimately the social fabric. Leonard and Bernstein quote sociologist Edward A. Ross, who wrote that “the coolie, though he cannot outdo the American, can underlive him.” If society was to endure, white male breadwinners needed protection from outside competition.

Economists today sometimes argue that subsidies or expansion of negative income tax programs like the earned income tax credit are far more efficient ways to help the poor than policies like minimum wages. Leonard and Bernstein point out that according to Progressive economist Royal Meeker, wage subsidies were undesirable precisely because they would create more employment, particularly among “unfortunates.” The virtue of the minimum wage was that it increased the supposed dignity of white labor while separating “unfortunates” and “defectives” from jobs they would have otherwise had. Minimum wages were supported by explicit racists seeking explicitly racist ends.

Fast-forward a few decades and the results are still the same even if the intentions are more noble. In a recent paper, “Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases,” William Even and David Macpherson argued that in states fully exposed to the most recent minimum wage increases, the law cost young African Americans more jobs than the recession has. We should judge policies by results, not intentions. As the economist Thomas Sowell might say, whether a policy is deemed “compassionate” or not should depend on its effects rather than the stated goals of its advocates.

Other Labor Market Interventions

Eugenics provided an allegedly scientific pretext for protectionist legislation—specifically, restrictions on immigration. The eugenicists supported immigration restrictions because they believed that members of “low-wage races” would compromise not only whites’ living standards but also whites’ genetic stock through miscegenation. According to them, immigrants and other outsiders (read: African-Americans) would degrade the labor force and debauch the species. The Progressives proceeded on a model of society in which a (white male) breadwinner earned a “family wage” sufficient to support a (white) wife and (white) children. Women were to fulfill their roles as “mothers of the race,” and children were to be trained to do the same in the following generation.

In his 2005 article Leonard pointed out that restrictions on child labor were enacted specifically to prevent the lower classes from putting their children to work. Presumably this would then cause them to think twice about procreating as well as limit their incomes.

The Progressives used the same techniques to reduce the labor market opportunities of women. Women were seen both as fragile—in need of protection from the rigors of the workplace—and as having a special role in bearing children and managing the household as “mothers of the race.” This was in contrast to the perceived “overbreeding” of nonwhites and immigrants from places like eastern and southern Europe. Progressive reformers tried to keep women out of the labor force by enacting a variety of “protective” legislation at the state level, including maximum hours and minimum wage laws for women, both of which were set differently from those for men. Such laws made women less desirable and more expensive employees, which limited their labor force participation—precisely the goal of the reformers.

The perils of the 1930s provided an opening for additional burdens on the labor market designed to exclude “unfit” workers. Leonard and Bernstein report that the Davis-Bacon Act, for example, was “passed with the intent of preventing itinerant African American workers and others from competing with white labor unionists for jobs on federal construction projects.” The amplification of interest-group politics was evident in the relatively transparent attempts by New Deal Progressives to protect special interests from low-wage competition from the South—from African-Americans and other “low-wage races.”

In the 1930s U.S. Rep. John Cochran (D-Mo.) said he had “received numerous complaints in recent months about southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Clayton Allgood (D-Al.) joined in: “Reference has been made to a contractor from Alabama who went to New York with bootleg labor. This is a fact. That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.”

The disemployment effects, for example, of the National Industrial Recovery Act (NIRA) were stark. Leonard and Bernstein cite one estimate that the NIRA’s “wage provisions directly or indirectly led to the dismissal of 500,000 African American workers.” They also write that “the American Federation of Labor took credit for the failure of the FLSA [Fair Labor Standards Act] to provide for a lower minimum wage in the South,” preventing southward capital flows.

The Progressives, the Modern Left, and the Dismal Science

This history can be read as the American version of what happened earlier in England. David Levy has shown that economics became known as the “dismal science” because classical-liberal economists (such as J. S. Mill) favored racial equality in a free labor market. Reactionary, elitist British Romantics such as Thomas Carlyle and John Ruskin argued that the free market, with its underlying assumption of equality, would eliminate racial hierarchies and bring a “dismal” future of racial mixing. It was the classical-liberal economists who were providing the intellectual support for that future.

The moral of the story is that, despite the modern left’s continued claim that the pro-market philosophy is racist, sexist, and xenophobic, history demonstrates that classical liberals/libertarians were proponents of equality and opponents of racism, and that those who viewed the races as unequal were likely to seek backing from the State, particularly in labor markets. The historical record of the left on these counts is much more mixed than it is willing to acknowledge.

Despite their odious views on race and the use of the State to enforce their eugenically informed vision of the future, Progressive-Era reformers were ahead of their modern liberal counterparts in one important way. They understood that free markets, especially free labor markets, are the enemy of racism.

Economic and environmental religions both deliver old wine in new bottles. According to Nelson, a professor of public policy at the University of Maryland, a religion can be “understood . . . as a person’s way of framing his or her basic perception of the world and its meaning.” Religions require priesthoods. Some religions believe we need priests to mediate between God and man. Economic religion requires priests to mediate between gold and man. Environmental religion posits the need for mediators between Gaia and man. The 9/11 attacks, for example, were interpreted by some as punishment for our economic sins, while Hurricane Katrina was interpreted by others as punishment for our environmental sins.

Economics as such is value-free, but many economists are not. Twentieth-century neoclassical economics created, Nelson writes, a “gospel of efficiency.” The most prominent economic religions he identifies are varieties of statism: socialism/communism, Keynesianism, and industrial policy. Socialism claimed that centrally planned economies would produce abundance, which would cure social ills. According to interventionist varieties of neoclassical economics, experts could “fine tune” the economy. The push for “scientific” policy-making turned economists into a group of gods-by-committee issuing edicts from Mount Olympus (or from seminar rooms at Harvard and MIT) to be followed by our wise and noble rulers.

Nelson also discusses the rhetoric of economic and environmental religions. Environmentalists’ accounts of the “damage” we’re doing to the natural environment or how this or that arrangement of flora and fauna has “intrinsic value” independent of its ability to satisfy human wants bring to mind Misesian/Hayekian questions: How do we know? How is “intrinsic value” measured? How is it a guide to action? On what basis does the activist substitute his or her judgment for mine? We can argue about who does or does not have superior revelation, but this is properly discussed as theology rather than economics or natural science.

Chapter eleven (“Environmental Colonialism: ‘Saving’ Africa from Africans”) is especially interesting. In it Nelson recounts in detail various endeavors—all under the guise of “conservation”—that are basically a form of secular evangelism. One of the ironies Nelson points out is that the attempts to “restore nature” are actually attempts to subjugate complex natural processes. Africa’s enormous national parks and reserves have more in common with Jurassic Park than with the pre-human African landscape.

Elsewhere, Nelson asks where environmentalists find their moral sentiments. It isn’t clear what “healthy” and “sustainable” mean apart from human action in light of the relevant tradeoffs. There is little recognition of what happens when people disagree. For example, a statement like, “I believe in wilderness for itself alone” (quoting former Sierra Club leader David Brower), runs into unanswered complications: What if I don’t? On what grounds are your values better than mine? Citing and quoting his faculty colleague Herman Daly, an ecological economist, Nelson notes that environmental religion is “theologically incoherent” if there is no purpose to the universe but we should still take great strides to protect nature. This is a serious issue that needs to be addressed head-on.

I fear that some readers will not separate “economic religion” as a religious concern with material abundance from the economic way of thinking, which focuses on incentives and opportunity costs. Nelson ought to have sharpened that distinction. Also, the differences between an ideology, a religion, and a philosophy are left unclear. Nonetheless, the theological approach Nelson adopts is illuminating, and he does a great service by pointing out how much of the materialist and environmentalist gospels are explicitly derived from religion.

The Christian faith posits that God is the potter and we are the clay. In economic and environmental religion, our moral and intellectual surrogates are the potters and ordinary citizens are the clay. Both economic religion (a secular gospel of virtuous prosperity) and environmental religion (a secular gospel of virtuous poverty) are pretexts for managing the affairs of others and of directing them in how they should employ their capitals. Given these stakes, I fully agree with Deirdre McCloskey’s back-cover endorsement: “Anyone who cares about the economy or the environment or religion needs to read The New Holy Wars.”

One example of media complicity is a Thanksgiving Day column in which Debra Saunders called the enhanced pat-downs “freedom fondles.” Reason editor Matt Welch assembled two sets of links for the Hit & Run blog cataloguing favorable media statements about the new techniques. We have been advised by the Los Angeles Times to “shut up and be scanned.” The Santa Fe New Mexican tells us we should “stand, or bend over, on principle and suffer attendant indignities,” while the Rochester Post-Bulletin tells us to “grin and bear it.” The Louisville Courier-Journal asks, “At what point did Americans turn into a nation of crybabies?”

What’s particularly stunning is how often these defenses of TSA procedures came from the (so-called) liberal press, such as the New York Times or the Nation. Actress Whoopi Goldberg and her left-leaning colleagues on ABC’s The View agreed that those protesting the invasive techniques by slowing down the process at airports are equivalent to terrorists. It is striking how quickly the left adopts “America: love it or leave it” and forgets that dissent is the highest form of patriotism when their guys are in power. Would these people be bending over backward to excuse the TSA if a Republican were in the White House? We don’t think so.

Beyond the media treatments, the idea that we should trade off a little liberty to get more security presents a false choice. The TSA does not provide security. It provides what security experts like Bruce Schneier call “security theater.” As one of us (Carden) wrote recently, the TSA agent with his hand in your pants is not there for your safety. He is there to give you the illusion of safety. The TSA dog-and-pony show is just the government’s very expensive way of saying, “We’re doing something about this.”

If we were serious about security, we would do three things. First, we would eliminate the TSA. It makes flying less convenient and gives people an incentive to drive. Per passenger mile, driving is far more dangerous than flying. The evidence suggests that more people will die on the roads than would have died in terrorist attacks on planes because they are discouraged from flying by the TSA and its new, more invasive procedures.

Second, we should give the airlines responsibility for security. The discovery process of genuine market competition among airlines would determine the degree of security passengers are comfortable with, while also avoiding techniques they find invasive. What profit-seeking firm would want to alienate its customers by taking nearly nude photos or touching “their junk”?

It’s the airlines that stand to lose physical capital and reputation, so they have every reason to get it right. They will certainly be more responsive to fliers’ needs than a monopoly would.

This second point is the response to the claim that we are corporate shills looking to advance a privatization agenda. While there might be some cost savings from privatization, this might also do more harm than good since a “privatized” TSA would do a lot of the same invasive things, only the State would be able to shift blame to the private sector. As a monopoly, a “privatized” TSA would still lack the ability to respond to customers’ desired tradeoffs. What we need is not “privatization” but “de-monopolization.”

Finally, we would get serious about using decision markets for terrorism detection. This idea met with fierce resistance when first introduced—politicians and pundits said no one should “profit from terrorism.” These critics missed the point, though. As economist Robin Hanson has written, decision markets are a very high-efficiency way to obtain information, even when the payouts are small.

Hanson points out that a crucial failing of international intelligence gathering is that information is incomplete and/or flawed. Ironically (and tragically), the political outcry over the Policy Analysis Market (PAM; summarized on Hanson’s website) demonstrated precisely why such a market is necessary. In the face of incomplete and incorrect information and in the presence of important cognitive biases, sources of reliable and unbiased information are indispensable—especially when so many lives are on the line.

The PAM started as a Defense Advanced Research Projects Agency (DARPA) project to allow people to purchase very small contracts that would pay out in the event of a given combination of outcomes. The project drew fundamentally on the insights of F. A. Hayek and James Buchanan, who argued that the process of exchange itself reveals crucial information and generates order. In the early trials of the project, traders were asked to predict different combinations of events that might result from adopting a particular policy.

The Need for Information

As an aside, the furor over the Policy Analysis Market and the ratcheted-up procedures by the TSA are especially interesting in light of the controversy over WikiLeaks. Some have denounced WikiLeaks and its founder, Julian Assange, for endangering American lives, and we remain agnostic on this until the fury has settled. Even if WikiLeaks is morally culpable for endangering innocent people through its leaked documents, we would be willing to bet that those who were instrumental in canceling the PAM in 2003, thereby thwarting the open flow of information, are responsible for more casualties by several orders of magnitude. As a rule, more information is better than less.

Bruce Schneier and others argue that the best way to fight terrorism is to identify terrorists rather than scanning grandmothers or treating someone’s urostomy bag as if it were a possible explosive device. One of the best ways to do this would be to develop a terrorism prediction market like the one proposed by Hanson.

The TSA should be abolished and serious, competitive alternatives should be explored. As Carden argued on Forbes.com, “Full Frontal Nudity Will Not Make Us Safer: Abolish the TSA” (emphasis added). The problem with government-run airport security is that it eliminates the market’s search process that would otherwise allow people to discover the most effective and customer-friendly security methods.

Cohen provides what he terms “a compelling preliminary case for socialism.” He proceeds to identify two desirable features of a camping trip—equality and community—and then asks readers to consider whether those principles don’t also make socialism desirable for whole societies. Later he discusses the feasibility of socialism but never responds to the criticisms made by Mises and Hayek. Cohen thus builds his case on a foundation that was blasted to rubble decades ago.

He argues (rightly, in my view) that few would like a camping trip in which every act of cooperation took place within formal markets and explains persuasively why personal relationships are not mediated through markets. I do not charge my children for attending to meals and bath time, nor do I expect to be paid for accepting dinner invitations. There certainly are degrees to which our daily affairs are organized along “socialist” principles, but that’s irrelevant to the economic critique of socialism, which concerns economic calculation in a complex society when the means of production are not privately owned. As Mises and Hayek have shown, such calculation is impossible.

Arguments for socialism, Cohen’s included, crumble when they fail to recognize the problems inherent in socialist production. In constructing his example of the camping trip, Cohen begins by assuming “facilities with which to carry out our enterprise: we have, for example, pots and pans, oil, coffee, fishing rods, canoes, a soccer ball, decks of cards, and so forth.” The questions of what should be produced and how have just been assumed away. Cohen’s hypothesized camping trip is also (I assume) voluntary, which is at odds with the coercive nature of socialism.

For Cohen socialism’s problem is that designing production processes is difficult, but he thinks the problem can be solved by wise technicians and bookkeepers. Further, he seems not to understand the problems of competing claims to productive resources and competing ideas about what should be produced. Cohen doesn’t say what he would do with people who don’t wish to be reacquainted with their “species-essence,” as Marx put it, by abandoning the market in favor of allegedly “natural” socialism. Most telling of all, he never mentions the mountains of corpses produced by those who tried to implement his vision in the twentieth century. How do we avoid “the worst getting on top,” as Hayek put it?

Cohen calls the free market “a casino from which it is difficult to escape” and denounces the inequalities it produces. Markets, he contends, are based on greed and fear, but even if that charge were true, it isn’t clear that centralized control of the means of production would be an improvement. The organization of production, as he sees it, is a question of overcoming greed and harnessing generosity. Only someone who knows nothing about the twentieth century could think that putting government officials in charge of the economy overcomes greed and harnesses generosity.

Cohen’s misunderstanding of the market is also evident in his discussion of people like doctors, nurses, and teachers, who he thinks are motivated by higher ideals than narrow self-interest (though doctors and teachers are represented by powerful lobbying groups aiming to increase their incomes). He writes, “. . . market signals are not necessary to decide what diseases to cure or what subjects to teach, nor are they efficient means of deciding that.” That simply isn’t true. Market signals are of utmost importance; without them, we cannot know whether to devote our next dollar or hour to AIDS eradication or cancer research.

The book leaves the impression that Cohen’s vision of social organization is one with an army of smiling New Socialist Men and Women accepting orders from a small coterie of philosopher-kings who are blessed with knowledge of The Very Best. In the final analysis Cohen’s attempted “compelling preliminary case for socialism” is neither compelling nor convincing. The book will make excellent grist for the mills of freshman seminars, but it collapses under the slightest scrutiny.

These questions are fundamental to human life. In this essay we discuss some ways societies have organized themselves and consider the consequences of such efforts. This allows us to conclude that a society based on secure private property rights, trade, and the division of labor is not only economically efficient, it is morally superior to all other types of organization.

The Welfare State

Let us first consider the welfare state. In theory it aims to use government force to redistribute property in order to achieve a more equal consumption of economic goods. Advocates of this manner of social organization argue that it is based on the ideal of charity. However, this cannot be so since the logical implication of this form of organization is not the promotion of charity but the promotion of theft. Genuine charity involves the voluntary sacrifice of the giver. When the force of government is employed to redistribute property, there is no voluntarism in it. Rather, there is only forced sacrifice, which is the essence of theft.

Fundamentally, the welfare state is a type of social organization in which some people subsist off the fruits of other people’s labor by the use or threat of force. There are three ways to enjoy the fruits of others’ labor. The first is to receive legitimate charity. In this case, the producer has voluntarily parted with his product for the benefit of someone else. The second means is through voluntary exchange. In this case someone must make an attractive offer of something desired by the producer. The third method is to use violence or the threat thereof to appropriate the product. This form of getting what you want is especially pernicious when it is perpetrated by government, for then the victim has little recourse. (Fraud is a subtle form of theft—that is, of obtaining someone else’s product on terms other than those he would agree to.)

Theft and fraud cannot be logical foundations for economic behavior because they suffer from the fallacy of composition. It is possible for a single individual to prosper as a looter, and indeed it may be possible for many people to prosper as a robber band. However, it is impossible for everyone to prosper as thieves since all thieves must have someone to steal from. The problem with thieves is that they do not produce anything, and if everyone is a thief then there is nothing to steal.

For this reason the welfare state rests on a very sandy foundation. It assumes there will always be something that can be looted from a productive class. Moreover, it assumes the productive class will continue to produce valuable goods and services even as they are being victimized. Pay-as-you-go entitlement programs like Social Security and Medicare are built on this shaky assumption. It relies on the notion that future generations will rise to meet the claims of older generations. In other words, to use Ayn Rand’s metaphor, the welfare state assumes that the harder it presses down on Atlas’s shoulders, the harder Atlas will work to hold the world aloft.

As an alternative, people can live as the beneficiaries of charity, but this too is unsustainable. There are certainly legitimate cases in which charity and gift-giving are appropriate, such as when someone suffers some unforeseeable calamity or when someone wishes to promote the interests of his friends and family members. When people get married or begin their families, for example, gifts are often very helpful and much appreciated. There are limits, however, to our charitable impulses, limits to our ability to discern need, and limits to our ability to feed others before we feed ourselves. In addition, it should be noted that the purpose of true charity is to promote the independence of the recipient. In this regard, charity is a noble, benevolent institution that is quite appropriate to a society of free, responsible, flourishing people.

But even charity can be carried too far. When someone expects to enjoy his bread by the sweat of another’s brow, he becomes what Rand called a moocher. Such a person claims the right to the fruits of others’ labor solely on the basis of his alleged need. He seeks to make himself dependent on someone else’s labor and is not interested in his own independence.

Mooching too is unsustainable because it presupposes that something has been produced. Therefore, we cannot all expect to live this way. Mooching as such provides no way for goods to be produced and in fact encourages the wasteful use of resources. If someone wishes to depend entirely on the kindness of strangers, he or she must invest in ways to elicit that kindness. In his 2007 book, Discover Your Inner Economist, Tyler Cowen points out tragic examples of places in India where people fight over begging turf or actually pay to have limbs amputated in order to increase their begging income. To borrow the terminology of William J. Baumol, these are exercises in destructive entrepreneurship. They create no new value; instead, they destroy value in an effort to appear more dependent and helpless so as to effectively attract the sympathies of others.

This has implications for how we understand what is known as paternalism. As we have already seen, proper charity treats people with dignity and directs them toward independence rather than dependence. Examples from fatherhood (or motherhood) are appropriate. The right goal for a father is not to give his children everything they want or to see that they are blissfully happy all the time. Rather his goal is to help his children flourish as independent, responsible people in an imperfect world. At every stage in their development, he is trying to help them achieve new levels of independence. When a young adult is capable of interacting socially through the process of voluntary exchange—thereby increasing his own range of opportunities by increasing opportunities for others—then the parenting has been a success. In other words, proper human life includes production and exchange. While there are cases when such autonomy cannot be achieved due to severe disability, nevertheless, the affirmation of human dignity and independence remains the goal as far as it can be achieved.

Production, Autarky, and Trade

Another way to acquire wealth is to produce it yourself and ask your neighbors for nothing; however, total individual autarky is impossible in its logical limit. There is no such thing as an autonomous, self-made person in a market economy, and people are social creatures not because of disposition only but out of necessity. It is not a psychological propensity to truck and barter that leads us to exchange, but a praxeological truth regarding the vast increase in productivity that arises from specialization, division of labor, and division of knowledge.

Leonard E. Read’s classic example showed that no single individual knows how to make something as simple as a pencil. This fundamental insight applies to a vast range of goods. Any kind of existence greater than that of the lowest animals requires exchange, and as exchanges increase, so too do the division of labor and division of knowledge.

Even before Adam Smith, economic thinkers had been well aware that trade creates wealth by making us more productive. We argue, however, that this is only part of the story. The criticism of homo economicus as an autistic and antisocial maximizer of pecuniary profit to the exclusion of all else is simplistic and naive. The economic person cannot take care of himself without taking care of others; indeed, the person who wishes to maximize his own profit can only do so by thinking constantly and deeply about the needs and wants of others. To be sure, homo economicus does not have to care about the people with whom he interacts in a deep moral sense. But this does not stop him from caring about them in a practical sense.

The Bible enjoins us to feed the hungry and clothe the naked, among other charitable endeavors. We do this most effectively through the market process. Indeed, the very act of buying low and selling high moves resources to areas where they are more valuable. While the entrepreneur does not have to know about the people he serves, he can only expand his own set of opportunities by creating opportunities for them.

In a lecture at the 2009 Austrian Scholars Conference at the Ludwig von Mises Institute, Rabbi Daniel Lapin made this point explicitly by considering the economic and social function of peddlers, people who would go through towns buying and selling. The good peddler was better off when he left town, but he only found himself in this happy circumstance by making the townsfolk better off as well. To borrow Lapin’s example, a peddler might show up at a house and ask if the residents had anything they were willing to sell. Suppose for a moment that they said yes and pointed to an old table with a wobbly leg that they were planning to throw away. The peddler might offer to buy it for $5, which they would gladly accept. They would now be better off by $5. At this point the peddler could repair the table and find another family that was planning to buy a similar table for $20. If the peddler offered to sell them the repaired table for $15, they would find themselves better off. And so it goes: With every transaction the peddler makes people better off and enables them to feed and clothe themselves. In a word, the peddler makes a direct contribution to their ability to flourish.

Of all the ways for societies to organize themselves, the free market is the only system that is simultaneously sustainable, prosperous, and conducive to human flourishing. We cannot live together as a community of thieves, nor could we sustain ourselves as a community of beggars, moochers, or wards of charity. Further, anything that can be properly defined as a human existence must necessarily rely on specialization, trade, and division of labor. This has the happy consequence of maximizing our ability to do well and do good by our neighbors. When we focus our attention on production and trade, we necessarily feed the hungry and clothe the naked because self-interest properly understood requires a degree of focus on the wants and needs of others that is conspicuously absent from other forms of social organization. To adapt a phrase from Harvard economist Claudia Goldin, life in the pre-market world was nasty, brutish, and short. In the world of free enterprise, life is long, healthy, and rich.

What DiLorenzo offers is not a biography of Hamilton, but instead a critical examination of his ideas and a historical exploration of how they have shaped American history. DiLorenzo contrasts the statist, mercantilist, and nationalist philosophy of Hamilton with the strict constitutionalism of Jefferson. He portrays Hamilton as a schemer, quoting contemporaries who felt that he was intentionally confusing in his economic proposals as a means of hoodwinking the uninitiated. Above all, DiLorenzo shows how Hamilton’s interventionist ideas have had disastrous consequences for America up to the present.

Hamilton’s vision for the nation included a strong sense of nationalism, zealous protectionism, enthusiasm for central banking, and methods of constitutional interpretation like the doctrine of “implied powers” that essentially stripped away the Constitution’s restraints on the central government. DiLorenzo depicts Hamilton and his intellectual followers as technocrats who view society as a lump of clay for them to fashion with their expert hands. They couldn’t grasp the spontaneous order of the free market.

To borrow a phrase from Adam Smith, Hamilton was the quintessential “man of system.” In his ideal society he and others who were blessed with inside knowledge of “the common good” would arrange things just so, thereby creating the ideal society. DiLorenzo points out explicit parallels between Hamilton’s thinking and Rousseau’s idea of “the general will,” under which government officials would “force people to be free.” Individual liberty holds no importance for such people.

DiLorenzo employs Austrian and Public Choice insights to expose the lasting harm we have suffered owing to Hamilton’s assortment of big-government ideas. Those ideas later metastasized into the “American System” of Henry Clay (the term was Hamilton’s) and the wide-ranging interventionism of Abraham Lincoln. They reached their nadir in the disastrous year 1913, with the adoption of the Seventeenth Amendment (providing for direct election of U.S. senators), passage of the federal income tax, and the establishment of the Federal Reserve. DiLorenzo sees that terrible trio as destroying what was left of Jeffersonianism and shackling the nation, perhaps permanently, with Hamilton’s ruinous vision.

The book makes a persuasive case about the harm we endure because of “the curse,” but DiLorenzo left me wondering about the relative fragility and robustness of different institutional arrangements. He discusses how constitutional words and phrases like “necessary” and “general welfare” were either grossly misinterpreted or used to usher in all sorts of state interventions, and he refers to the Confederate States of America’s attempts to remedy some of these problems in their own Constitution. But the kind of restraint that would have satisfied Jeffersonian strict construction begs to be explored in greater detail.

Only a few years elapsed between the ratification of the Constitution and the violent suppression of Pennsylvania tax rebels (which Hamilton himself led), and not too many years later the United States were (yes, the plural was once used) experimenting with central banking. How did we get so far from Jefferson’s vision so quickly?

DiLorenzo blames “Hamilton’s Disciple,” Chief Justice John Marshall, for misreading the Constitution, but I have to wonder if his famous decisions were so obviously a misreading and misapplication. Some libertarians like to believe the Jeffersonian minimalist interpretation is the “real” Constitution while the expansive Hamiltonian view is indefensible, and DiLorenzo seems to accept that view without questioning it.

The exact, intended meaning of the Constitution—if that can even be discerned—is not the focus of DiLorenzo’s book, however. Hamilton’s Curse explores the intellectual history of some of the ideas that helped transform the United States from a country where the government mostly left people alone into one where the government interferes in their affairs constantly. DiLorenzo reminds us of Richard Weaver’s famous quotation that “ideas have consequences” and proceeds to show the terrible consequences of Hamilton’s ideas.

The concentrated public-relations campaign against Walmart has been moderately successful, and the company has drawn criticism from all sides: Commentators on the left criticize the company for its alleged impact on wages and jobs; those on the right criticized its decision to join the National Gay and Lesbian Chamber of Commerce and to offer “abortion pills” in 2006. Recently, Walmart announced support for mandatory health coverage by large employers, bringing more criticism. Walmart’s handling of the attacks has been less effective than the company would have liked, and its attempts to defend itself have been a distraction.

The criticisms too often rely on anecdotes or statistical comparisons that are difficult to interpret. When one considers that Walmart is the world’s largest corporation, with revenues of about $300 billion and almost two million employees, anecdotes that cast the company in a good or bad light are not particularly surprising. Similarly, a simple comparison of employment (or wages) in a city with a Walmart to a city without one is only minimally informative because such comparisons often fail to control for other explanatory characteristics. Current research suggests that the economic, political, and social case against Walmart is exaggerated. Further, Walmart’s “Every Day Low Prices” do not come at an unacceptable social cost in the form of negative spillovers not reflected in prices. Walmart is certainly imperfect, and there are reasons to view the company with a critical eye, but the usual criticisms of the company collapse under the weight of the evidence.

Does Walmart Squeeze Workers and Suppliers?

Economists Jerry Hausman and Ephraim Leibtag argue that we systematically overstate the rate of price inflation because we don’t account for Walmart’s and other big-box companies’ impact correctly. Walmart claims to save consumers $2,500 per capita per year. This is probably an overestimate, but studies I have done with Charles Courtemanche of the University of North Carolina-Greensboro do suggest that Walmart increases our options.

Critics claim that Walmart can deliver low prices because it destroys jobs, lowers labor standards, and squeezes suppliers. The data, however, do not support the first two, while the third is misleading. Retail labor market studies by University of Missouri economist Emek Basker show that Walmart modestly increases retail employment. Critics are quick to counter by questioning the quality of those jobs, correctly noting that Walmart pays less than its unionized competitors. However, this should be qualified. Union pay scales restrict the labor pool from which unionized stores can hire: If the union contract specifies minimum compensation of $12 per hour, then people whose labor cannot produce at least that much in revenue will not be hired. Since Walmart is an open shop, it has no such artificial floor for the productivity of the people it can hire. Those who would not be employable under union conditions are made better off despite the illusion of exploitation.

The company’s critics correctly point out that the last several decades have seen a large gap open between manufacturing and retail wages. But these data must be interpreted with caution because immigration and changing labor participation have altered the distribution of the workforce. People who are today earning Walmart’s “Every Day Low Wages,” as the critics call them, might not have participated in the labor force several decades ago and their wages would not have appeared in the official data.

Supposedly, Walmart drives small local mom-and-pop retailers out of business, spreading economic havoc and weakening a community’s social fabric. In a paper published in Economic Inquiry, West Virginia University economists Andrea M. Dean and Russell S. Sobel fail to detect a statistically significant effect of Walmart on self-employment, the number of small businesses, or bankruptcy among small businesses. It is true that Walmart causes some businesses to close, particularly in sectors that directly compete with the company. However, these businesses can be replaced by businesses in other sectors. In a summary of their research that appeared in the Spring 2008 Regulation magazine, Dean and Sobel offer the example of Main Street in Morgantown, West Virginia, which was decimated by Walmart but which soon recovered as clothiers and electronics stores were replaced by small businesses in other industries.

They also discuss the obvious objection that perhaps Walmart’s wake leaves a swath of low-value, low-wage businesses. They show, however, that Walmart penetration does not appear to reduce the values of small
businesses. Stacy Mitchell, author of The Big-Box Swindle, argues that Dean and Sobel’s result relies on an incorrect interpretation of Census data. For their part, Dean and Sobel say Mitchell misunderstands the data. If they are correct, the effects of Walmart’s penetration are consistent with what economists believe about technology and economic growth as well as with Joseph Schumpeter’s well-known concept of “creative destruction.” Walmart’s expansion allows people to produce more with fewer resources and less labor, which frees those resources and that labor to move into other occupations.

Walmart also allegedly uses its raw bargaining strength to extract concessions from suppliers. It is usually able to get lower prices, but it also provides something of great value in return: access to its supply chain and logistical support. While anecdotes of Walmart’s hard bargaining abound, a 2001 Journal of Retailing study by Paul N. Bloom and Vanessa G. Perry found that while dealing with Walmart can hurt financial performance for companies that do only a small share of business with the company, “large-share suppliers to Wal-Mart perform better than their large-share counterparts reporting retailers other than Wal-Mart as their primary customers.” Bloom and Perry note that Walmart offers access to broad markets and that companies taking advantage of this prosper as a result.

Sweatshops

Another common refrain is that Walmart and other large retailers obtain their goods from third-world “sweatshops.” In an important 2006 study published in the Journal of Labor Research, economists Benjamin Powell and David Skarbek showed that “sweatshop” labor paid better than the alternatives. In a June 4, 2008, article for the Library of Economics and Liberty, Powell summarizes this research and points out that criticisms of “sweatshop wages” (like those aimed at a factory in Honduras making clothes for Kathie Lee Gifford in 1996) invariably compare the wages and working conditions to American rather than Honduran working conditions—a comparison he calls “irrelevant” because of restrictions on international labor mobility. Sweatshops are a blessing, not a burden. As Powell points out, sweatshop wages more than double the average in some countries. Unfortunately, boycotts and legislation will not improve working conditions around the world. Powell summarizes the conditions that create low wages in countries like Honduras:

Wages are low in the third world because worker productivity is low (upper bound) and workers’ alternatives are lousy (lower bound). To get sustained improvements in overall compensation, policies must raise worker productivity and/or increase alternatives available to workers. Policies that try to raise compensation but fail to move these two bounds risk raising compensation above a worker’s upper bound, resulting in his losing his job and moving to a less-desirable alternative.

Unwillingness to recognize this can lead to policies that do more harm than good. Abuses undoubtedly occur, but Walmart has the resources to be able to have an effective monitoring program—not necessarily because of explicit humanitarian impulses, but because consumers are willing to pay for the guarantees and assurances that they are not buying the products of slave labor. Since consumers demand information about the conditions in which those who make these goods labor, it is in Walmart’s best interests to monitor carefully the conditions in which people produce the goods they obtain from abroad.

The thesis that Walmart’s ethical-standards monitoring is an elaborate ruse is tempting, and a ruse might pay off in the short run. However, Walmart should be disciplined by the capital market. Failure to provide consumers with what they demand—guarantees about international labor conditions, for example—at the price they are willing to pay will hurt long-run profitability and, therefore, the stock price. It is wise to read with a critical eye, but if Walmart’s managers are running a systematic campaign of misinformation, then they are failing in their responsibility to shareholders. Someone who discovered such a ruse would be in a position to profit handsomely by acquiring Walmart stock and fixing the problem.

Walmart, Communities, and the Environment

In his 2000 book, Bowling Alone, political scientist Robert Putnam documented a decline in “social capital”—which he defines as “networks and norms of reciprocity” that hold communities together—in the United States since the 1950s.  Walmart has been accused of contributing to this phenomenon. In a 2006 study agricultural economists Stephan Goetz and Anil Rupasingha reported evidence that Walmart reduced several measures of social capital like census participation, voting, and a measure they themselves constructed. However, in a study published in Public Choice in early 2009, Charles Courtemanche, Jeremy Meiners, and I use Putnam’s data to show that there is no identifiable, systematic negative relationship between increased Walmart density/longevity and measures of noneconomic “quality of life” or civic participation. As Walmart penetration increases, we cannot tell that people spend systematically less time with friends or less time civically engaged.

Others have alleged that Walmart erodes American values. United States of Wal-Mart author John Dicker calls the company a “conservative cultural gatekeeper,” and right-wing critics like those who operate the Christian website www.saveWal-Mart.com took Walmart to task for joining the National Gay and Lesbian Chamber of Commerce. (The company discontinued this affiliation in 2007.) Using similar data and methods to those used in our study of social capital, my coauthors and I were unable to find a systematic relationship between Walmart’s penetration and individual values. It appears that while people get their groceries at Walmart, they get their politics and their values elsewhere.

Finally, Walmart has been criticized for its alleged contributions to environmental degradation, but its cost-cutting has considerably reduced the amount of packaging manufacturers use. This was particularly important in 2008 as gas prices hit record highs. A May 29, 2008, article on CNNMoney.com used Hamburger Helper as an example: To meet Walmart’s demands, General Mills produces “denser pasta shapes” that can be put into a box that is 20 percent smaller, saving “890,000 pounds of paper and eliminat[ing] 500 trucks from the road.” Conditions create solutions: Walmart has been able to use recent increases in fuel prices to trim additional fat from the supply chain and to innovate in ways that will lead to permanent increases in productivity.

Discrimination, Health Care, and Subsidies

Finally, Walmart has been criticized for alleged systematic discrimination against women and for aggressive patterns of seeking local government subsidies. Walmart is the defendant in the largest class-action civil rights lawsuit in history—Dukes versus Wal-Mart, in which an estimated 1.6 million women allege a decades-long pattern of discrimination—but the central tenet of the case is inconsistent with Walmart’s alleged morbid obsession with profits. In spite of their incompatibility, these criticisms often appear side by side. There are conditions under which firms can maximize profits while discriminating in employment, but before we can reconcile discrimination with profit maximization we have to prove that these conditions are in place. Otherwise, the hypothesis of profit maximization works against discrimination and discrimination works against profit maximization. If an employer insisted on discriminating by refusing to hire productive women or by paying them less than they were worth, he would create profitable opportunities for competitors to scoop up members of the victim group and earn profits by paying them something closer to their market value. An employer’s ability to discriminate will be sharply limited by competitive pressure.

Walmart’s critics have also argued that the company places undue burdens on the government’s public health infrastructure. But this is a “problem” that exists because that infrastructure exists and not because of Walmart as such. One could argue more plausibly that by paying better than their employees’ next-best alternatives, Walmart actually relieves some of the pressure on the public health infrastructure. The critics also miss that Walmart’s existence provides a larger pool of resources that can be taxed to provide these benefits.

One robust criticism remains: Walmart has sometimes used the State to redistribute resources to itself and to cripple its competitors. Walmart is aggressive about seeking subsidies, such as acquiring properties through eminent domain, from governments eager to “attract new jobs” and new tax revenue, as critical groups like Good Jobs First, WalMartWatch.com, and WakeUpWalMart.com point out. These subsidies distort patterns of economic activity and sometimes can have the perverse effect of taxing one firm to subsidize a competitor. The problem is compounded further by the alleged need for more subsidies to redevelop areas blighted in Walmart’s wake. This issue provides a setting in which Walmart’s critics can play a constructive role.

In 2005 Walmart supported an increase in the minimum wage, and in July 2009 it earned a front-page mention in the Wall Street Journal for teaming up with the Service Employees International Union and the Center for American Progress to advocate mandatory employer-provided medical coverage. Walmart’s seemingly counterintuitive advocacy is a classic example of what economist Bruce Yandle terms the “Baptists and Bootleggers” phenomenon. Among the supporters of Prohibition were Baptists, many of whom felt that consuming alcohol is a sin, and bootleggers, who stood to profit handsomely if the government crippled potential legitimate competition. In the health care scenario the “Baptists” are groups that believe everyone has a fundamental right to health care. The bootleggers are large firms (like Walmart) that know that mandates will hurt their smaller competitors.

There is also reason to believe that Walmart’s business model is partially underwritten by transportation subsidies. Critics often overlap with people who criticize the American “love affair” with the automobile. The two are related. While it is true that, all else equal, Walmart has been good for consumers, it is also an unintended consequence of the massive subsidies to transportation infrastructure that created today’s urban sprawl. To the degree that Walmart is undesirable, it is a symptom of a larger pattern of interventionism rather than a cause.

Perhaps most unsettlingly, Walmart’s embrace of the proposed health care mandates and advocacy of a higher minimum wage illustrates a disturbing truth about the reality of doing business in the twenty-first century. By backing President Obama’s health care proposal, Walmart might be able to use this to fend off more damaging legislation later. In short, Walmart could be aiding and abetting what Ayn Rand called “an aristocracy of pull.” A 2006 volume of critical essays called the company “the face of twenty-first-century capitalism.” If twenty-first-century capitalism means competition by politics rather than competition by production, we will see lower economic growth as a result. This does not excuse the company’s use of the coercive power of the State for its own benefit, but Walmart is an effect rather than a cause.

The economic, political, and social case against Walmart has been tried and measured against the best available data. For the most part, it has been found wanting. We are left with a rather flimsy criticism, which is that for all its virtues (or at least its non-vices), Walmart is aesthetically unappealing. This visceral reaction to capitalist aesthetics has been called “the yuck factor,” and economist Alvin Roth has argued that we have to take “repugnance” seriously as a political constraint. However, just because I find another’s choices repugnant, I don’t have the right to supplant those choices with my own. People have argued that what happens in someone’s bedroom is none of the government’s business. By the same logic, what someone puts in his or her shopping cart is none of the government’s business. Even if Walmart causes people to make bad aesthetic choices, the civility necessary for a functioning society must take over.

Walmart’s “Every Day Low Prices” policy has been alleged to reduce labor standards, to squeeze suppliers, to decimate small retailers, and to tear the social fabric. In virtually every instance, the empirical evidence available suggests that what Charles Fishman called The Wal-Mart Effect is at best positive, at worst benign. Walmart is a retailing innovator and a force for competitors and suppliers to reckon with. As a social phenomenon, however, the alleged negative spillovers from Walmart are greatly overstated.

Suspicion of profit runs deep. In an Atlanta Journal-Constitution op-ed, Cynthia Tucker spoke for many last summer when she wrote, “The for-profit health insurance industry is in the business of maximizing profits for their shareholders, and the only way they can do that is to hold down the payments they make for medical care” (emphasis added).

It just ain’t so. Holding down payments unreasonably or in violation of contract would give a company a bad reputation. Firms with bad reputations would have a difficult time attracting future customers in a competitive market, George Mason University economist Bryan Caplan argues. What would happen to profits then? Reputation provides a powerful incentive against the conduct Tucker fears. However, reputation would be a more potent force if people bought their insurance directly rather than through their employers. Nevertheless, the potential for profit does not lie simply in minimizing the payment of benefits.

But, Tucker argues, “There is no real competition among insurance companies, as recent research has shown.” She’s right. Competition is sparse, however, not because of any inherent market failure but because, among other things, the federal government forbids interstate competition. The purpose of the prohibition is to prevent consumers from finding better deals than those permitted by their state insurance regulators. The protectionist limit on competition is fine with the insurance companies, confirming Freeman contributing editor Steven Horwitz’s First Law of Political Economy: “No one hates capitalism more than capitalists.”

Admirably, Tucker takes Republicans to task for not doing something about competition when they could have. But the failure to repeal a bad policy hardly justifies piling a new bad policy on top of the old.

Profit: the Cure, not the Disease

Some people are repulsed that doctors and insurance companies profit from illness; indeed, Michel de Montaigne wrote a famous essay in which he argued that “the profit of one man is the damage of another.”

Illness, however, isn’t the source of profit. Rather, as FEE web columnist William Anderson points out, it’s the ability and opportunity to make someone well.

In a Freeman article last year, Horwitz went further: “Profit is not just a motive; it is also integral to the irreplaceable social learning process of the market. Critics may consider eliminating the profit motive the equivalent of giving the Tin Man from Oz a heart; in fact it’s much more like Oedipus’ gouging out his own eyes.”

Advocates of government-run health care argue that the profit-driven U.S. system is inferior to its Canadian and European counterparts. There is plenty of reason to doubt that claim, but more fundamentally, a system with government-subsidized consumption (Medicare, Medicaid, and tax-advantaged employer-based insurance) and government-constricted markets is not the system free-market advocates have in mind.

Some also argue that private for-profit insurance has higher administrative costs than the government’s nonprofit Medicare program. But lowering such costs is no free lunch. Economist Greg Mankiw points out that “Low administrative costs are not to be confused with high administrative efficiency” and cites his colleague Malcolm Sparrow, who argues that “health care fraud and abuse [cost] hundreds of billions of dollars per year. . . . The rule for criminals is simple: if you want to steal from Medicare, or Medicaid, or any other health care insurance program, learn to bill your lies correctly. Then, for the most part, your claims will be paid in full and on time, without a hiccup, by a computer, and with no human involvement at all.” If anything, this suggests that administrative costs for Medicare and Medicaid might be too low.

A Learning Process

It’s a misconception that profit is something tacked onto the price of goods and services. If that were so, why would profits change from year to year and why would companies go out of business? Profit and loss are indispensable to consumer well-being because resources are scarce and have alternative uses. How do we decide how much to devote to making people well and how much to devote to feeding, clothing, entertaining, and educating them? It isn’t merely that this is a difficult question to answer. It is literally impossible to answer in any meaningful way without market prices, profits, and losses.

Profit rewards the entrepreneur who takes a risk in transforming resources into products she correctly thinks consumers will value more than those currently being made with those resources. Entrepreneurs get needed feedback from profits and losses. If they create value, profits are the reward. If they destroy value, losses are the punishment. In a free market no entrepreneur may rest on her laurels. Profits attract competition and are competed away before long. So the incentive to innovate and economize is strong.

Contrast this with government. On several online networks I asked for examples of successful and sustainable government programs giving away 12- and 13-figure pots of money. The best examples were infrastructure and basic research, but even these aren’t disciplined by the market. Without market prices—and the possibility of profit and loss—we can’t calculate the opportunity cost of any given project. Our experiences with the Cash for Clunkers and ethanol debacles do little to inspire confidence.

Profits and losses provide crucial information that enables producers to engage in rational economic calculation in the service of consumers. Grasping this is one of the most important contributions economics has made to our understanding of the world. Thus the profit-and-loss system is as badly needed for medical services as it is for any other product or service. It is true that health care is unique in some ways, but this strengthens rather than weakens the case for subjecting it to entrepreneurial profit and loss. Health care is not “too important to be left to the market.” It is too important not to be.

Heller, who teaches property-law courses at Columbia Law School, summarizes his point this way: “Gridlock is a free market paradox. When too many people own pieces of one thing, cooperation breaks down, wealth disappears, and everybody loses.” I’m not convinced that this is really a “free market paradox.” If anything, gridlock is a state failure rather than a market failure.

The book’s main contribution to the literature on property rights and institutions is to show that private ownership is a necessary but not sufficient condition for the market to work its magic. When many people have private property rights that allow them to exercise veto power over more valuable projects, wealth dissipates because bargaining is dominated by holdup problems. Russian privatizations, for example, split rights across too many parties and erected veto points that created anti-commons resources.

Heller offers a wide-ranging discussion of regulatory pathologies leading to “gridlock,” particularly in the ways intellectual property is regulated in the biotechnology industry. He doesn’t, however, answer a question I had throughout the book. If it’s clear, as he says, that regulation cannot keep up with innovation (as we’ve seen in technology, medicine, and most recently high finance), why should we trust the state to regulate further? As a Hayekian, I’m skeptical of the notion that regulators can have the information they need to get the market as it is to function as it does on the blackboard in economics 101.

Since outside observers can’t articulate a theory of rights or a structure of institutions that will “work” a priori, it stands to reason that legal institutions should be flexible so as to allow for innovation across fields. While Heller looks for new ways to design institutions, perhaps we should find better ways to let these institutions evolve.

Heller notes that “judicial and political battles are overtaking the academic research” and that Congress is considering serious overhaul of the patent-law infrastructure. But will that solve the “gridlock” problem? Why should we expect members of Congress to know how intellectual property in biotech should be structured? We shouldn’t. I am afraid that Heller is too caught up in what James Buchanan calls “the romance of politics,” expecting politicians to solve problems of their own making.

It would be the height of folly for me as an economist in Memphis to presume to know how intricately detailed contracts in biotech firms should be structured, but we can see some of the pathologies of regulation in a dynamic economy emerging in high-tech enterprises. For example, Heller notes that the Federal Trade Commission arbitrarily dissolved the patent pool for laser eye surgery. He also points out a disturbing trend that deserves further investigation: “In telecom, competitors know that often the most profitable approach is not to innovate, but to stop others from investing.” He’s right. Patent law is often used in a rent-seeking fashion that burdens real innovators, but that has nothing to do with any market failure. Our system of intellectual property is a creature of the government.

Among the causes of gridlock Heller identifies is antitrust law. He writes, “For biotech pooling to have any chance, Congress may need to create special antitrust rules.” He seems not to see how such rules will be hard to adapt to further innovations. And again, he is too trusting of politicians to tinker with legislation to solve a problem. Outright repeal of the antitrust laws would be a much better move, solving numerous problems all at once.

There is much in The Gridlock Economy that could be explored in greater detail, but these are directions for further research rather than criticisms of the thesis. I expect that the book will find its way onto reading lists across campuses worldwide. It offers much food for thought, but readers should think skeptically about Heller’s eagerness to have politicians solve problems that are mostly if not entirely of their own making, not the free market’s.

The current economic climate has a lot of people talking about the Great Depression. In particular, it has been said by people of divergent political views (George Will and Paul Krugman, for example) that World War II ended the decade-long economic nightmare. Examining this claim is worthwhile because it has implications for whether government intervention generally and in connection with war specifically are good for the economy. Further, this examination will help us understand how policy changes alter incentives. Finally, it will shed light on features of the New Deal era that have ominous parallels with what’s happening today.

In Depression, War, and Cold War, Robert Higgs divides the Great Depression into three phases. The Great Contraction occurred during the Hoover years and went from 1929 to 1933. During this period private investment fell by about 84 percent. This set the stage for the Great Duration, 1933–1945. As Higgs shows, GDP and private investment increased during the early years of the New Deal, but as the 1930s wore on, President Franklin Roosevelt became ever bolder about undermining property rights. This delayed complete recovery. Finally, there was the Great Escape, which occurred after and in spite of World War II, not because of it. Higgs argues that the Great Escape occurred as a result of a partial dismantling of the regulatory infrastructure that had grown up during the Depression and the war; in effect, it was a rediscovery of the market and a new birth of freedom for entrepreneurs and workers.

In discussing the Great Duration, Higgs introduces the term “regime uncertainty” to argue that the Roosevelt administration’s aggressive interventions produced considerable uncertainty in the entrepreneurial environment. Investors did not know whether they would enjoy the fruits of their investments. One of my mentors in graduate school, a Keynesian, pointed out once that firms will not produce what they do not expect to sell. I would generalize this to say that they will not invest what they do not expect to control. The possibility of incurring the costs of an investment without enjoying any of the benefits made private investment much less attractive. 

How do we know that regime uncertainty was responsible for the lack of recovery? Higgs brings several types of evidence to bear on the issue. First, business leaders who were polled expressed uncertainty about the entrepreneurial climate. Second and more convincingly, Higgs shows that the risk premiums on long-term corporate bonds were substantial, suggesting fear of expropriation. A firm that wanted to borrow long-term had to pay much higher interest rates than firms that wanted to borrow short-term. This spread increased dramatically during the Roosevelt years.

The Great Depression did more than chill the investment climate. In Crisis and Leviathan, Higgs argues that during a crisis a “ratchet effect” produces net increases in government discretion, which is not completely reversed after the crisis. Two things happen when government intervenes. First, the bureaucracy naturally tends to expand beyond its stated goals—mission creep. Second, intervention alters incentives; that is, the creation of a bureaucracy to address some problem also spawns a rent-seeking pressure group with interests that will prevent reversion to the status quo ante.

Roosevelt’s advisers saw in his program not merely a road to recovery but the opportunity to remake society. In FDR’s Folly, Jim Powell, echoing an idea advanced by Milton Friedman, suggests that they “never appear to have considered the possibility that more power would magnify the harm done by human error or corruption.” Their intellectual approach was to contrast “actual capitalism with ideal government,” with intervention judged not on the basis of its effects but of its intentions. Further, the intellectual program of the New Deal was inconsistent and often contradictory. Powell argues that pragmatism and political expediency ruled the day:

It didn’t bother [Roosevelt] that New Deal policies contradicted one another. When an adviser gave FDR two different drafts of a speech, one defending high tariffs and the other urging low tariffs, FDR told the adviser: “Weave the two together.” The Agricultural Adjustment Act forced food prices above market levels, in an effort to help farmers, but higher food prices hurt everybody who wasn’t a farmer. The National Recovery Administration forced up prices of manufactured goods, hurting farmers who had to buy farm tools and equipment. Agricultural allotment policies cut cultivated acreage, while the Bureau of Reclamation increased cultivated acreage. Relief spending helped the unemployed, while corporate income taxes, undistributed profits taxes, Social Security taxes, minimum wage laws, and compulsory unionism led to higher unemployment rates. New Deal spending was supposed to stimulate the economy, but New Deal taxing depressed the economy.

The Depression and the War

What about World War II? Did it end the Great Depression? More generally, is war good for the economy? I answer both in the negative and borrow here from Ludwig von Mises: “War prosperity is like the prosperity that an earthquake or a plague brings.” As Higgs points out, because of the array of interventions in the wartime economy, war materiel was valued incorrectly and therefore the GDP data overstate economic conditions. Moreover, conscription and arms production gave a misleading employment picture. Instead, Higgs argues, the war was a period of capital consumption rather than capital accumulation. Tanks, bombs, and helicopters have limited uses outside of military applications. The labor that was used to produce them was not available to produce consumer goods and services; in fact, people went without consumer goods. The warships at the bottom of the world’s oceans represented lost opportunities for real consumption and prosperity. Conflict is sometimes necessary, but we should recognize what wartime expenditures represent: destruction of life and resources. If a depression constitutes a widespread contraction in living standards, then the Great Depression cannot have ended during the war.

The illusion of wartime prosperity is rooted partly in how national income is calculated and the statistics were compiled. Gross Domestic Product, one measure of a country’s output, is defined as the sum of consumption expenditure, investment expenditure, government expenditure, and net exports. A serious problem arises with government spending: How do we assess something not traded in markets? We can assess my computer, my shirt, and my pen because I voluntarily exchanged money for them. How do we assess government purchases? In the national-income accounting they are valued at cost, but at best this only tells us what those resources could have earned in alternative lines of production. The costs don’t indicate the value of what the government has produced. (This may not be the case when the government is providing a genuine public good or correcting a large externality, but much government action is aimed not at these things but at providing favors for well-connected constituencies.)

This problem was compounded by price controls during World War II—official prices simply did not reflect the true cost of the war. If we are going to have meaningful economic calculation, we need real market prices. Price controls and similar interventions introduce arbitrariness and uncertainty. Procurement at below-market prices is a way to mask the cost of any endeavor. Consider the draft, which forces people into military service at wages below what they would earn on the unhampered market. The amount spent on wages and board for conscripts is an underestimate of the real cost of maintaining the force.

Economists increasingly acknowledge that institutions—the rules, norms, and enforcement mechanisms that make up a society’s structure of incentives—are important determinants of economic outcomes. Changing the rules changes people’s incentives, and some of the long-run effects of the New Deal and World War II have encouraged people to use political means (expropriation and redistribution) rather than economic means (production and exchange) to gain wealth.

As an economist interested in institutions, I think that the relationship between the New Deal interventions and political incentives remains understudied. Higgs pointed out recently that part of the ideological and institutional legacy of the New Deal is apparent in the expanded powers exercised by the Bush administration. I would anticipate further expansion under the Obama administration. The protectionism and interventionism of the last several years have created incentives to seek wealth by developing cushy relationships with government officials instead of developing products people want to buy at attractive prices. 

The experience of the last several centuries and of the American economy during the Great Depression and wartime suggests that the kinds of plans people advocate during crises require knowledge that is not merely beyond political leaders’ grasp but that can only be revealed by the competitive market process. As we move further into the twenty-first century, I can only hope that we take those lessons to heart.