The question is not as easy to answer as I would like–a fact that makes the accusation understandable (but, I hope, in the final analysis untrue).

My employer, George Mason University, is indeed a government-created and -owned outfit. And I indeed spend most of my time decrying government interference in people’s lives as well as decrying the taxation necessary to fund that interference.

How do I justify myself?

The easy answer is that our world isn’t ideal. In a less-than-ideal world, navigating reality requires compromises. After all, would you have me also not drive? Roads and highways are almost all government-owned and -operated.

Given that it is nearly impossible to live as part of society without consuming some government-supplied goods and services–and without helping to pay for those things (which is to say, without helping to encourage the state provision of those things)–each libertarian must make compromises with this reality. Each libertarian must do his or her level best to decide where acceptable compromises with the State begin and where they end.

Because so many universities are state-owned and -operated, and because almost all but a tiny handful of the “private” universities receive vast sums of government largess, working for a state university is, for me, an acceptable compromise. This compromise is even more acceptable when I reflect on the fact that the department of economics at George Mason University is by far the best department for the kind of economics I admire and I strive to do. I can best contribute to the scholarly endeavor and to the great cause of human freedom by serving on the GMU faculty of economics.

The above isn’t a bad argument. I believe it. But I confess that it’s not fully satisfying. Do I believe that argument only because by believing it I’m able to rationalize my employment at GMU?

Government-Issue Moral Dilemma

I think that the answer to the last question is no, but I’m really not sure.

Principles, after all, are ideals to uphold even when–indeed, especially when–doing so is personally costly or difficult. For me to resign my position at GMU Econ would be difficult (because I put great store in being part of a faculty that so deeply understands markets and values freedom). So perhaps I’m not as principled as I fancy myself to be.

On the other hand, resigning from GMU would not be costly to me in a monetary sense. A few private universities have offered me jobs with salaries higher than what I earn at GMU. My reason for rejecting each of those offers is that I feel a deep commitment to GMU Econ and the iconoclastic and pro-market role it plays in the economics profession as well as in public discourse. So by remaining at GMU despite more lucrative offers at private schools, do I demonstrate my commitment to the ideal of sound economic teaching and research? Do I demonstrate my commitment to the brand of liberalism that is so prominently featured and furthered at GMU Econ? Or do I demonstrate hypocrisy by continuing in the employ of the state?

These questions aren’t rhetorical. I myself cannot answer them with any great confidence. I’m pretty sure that, were I to resign from GMU (which is the largest university in Virginia), fewer young people would be exposed to my teaching and my writing. Given that my comparative advantage (such as it is) lies in introducing students to the economic way of thinking, would I harm the cause that I so profoundly believe in by resigning from GMU? Or would I further that cause by demonstrating my commitment to the principle of separation of school and State?

And does it matter that I have my 12-year-old son in private school? My wife and I pay the substantial tuition each year not so much because the government schools in Fairfax County are lousy (they’re not), but because of our principled objection to government schooling.

Blurring the Line

The larger lesson is that the State does more than act to protect us from violence–so much more, in fact, that it blurs the distinction between itself and society. I have no doubt that, were the government completely out of education, excellent private schools would flourish at all levels, from pre-K through post-doc. And I have no doubt that the quality of education would be greatly improved.

But the State is involved, and heavily. This involvement makes it artificially difficult for private schools to thrive. So should educators and researchers who oppose such involvement as a matter of principle content themselves to teach only at the very small number of schools that get no government funds? And should those libertarian educators and researchers who can find no employment at such schools find some other occupation, even if it’s likely that they can contribute more to the cause of freedom by teaching and researching than by abandoning that career?

I wish that I had unambiguous answers to these questions, but I don’t.

No Easy Answers

Another consideration turns on the distinction between choosing rules and choosing how to act within a given set of rules. It would be a clearer case of unethical behavior on my part if I voted for further government involvement in higher education than if I simply accepted the reality of that involvement–a reality unlikely to be changed any time soon. I can legitimately say, “I would arrange education differently, but because that power is not mine, it’s okay for me to work for a government school even though I would prefer that such things not exist. I don’t make the rules.”

This argument, too, has some merit. But it also has a weakness: Society’s rules often are changed by persons who refuse on principle to accept what seems inevitable. “Playing by the rules” is not a free ticket to violate your ethical norms.

The bottom line is that I don’t believe that I violate my libertarian principles by working for GMU Econ, which happens to be a state institution (although one that also receives a good deal of private support). But I don’t think it’s unreasonable for anyone to question me strongly and skeptically on this matter.

No related posts.

For example, why are so many economists suddenly changing their minds about the economics of John Maynard Keynes (1883–1946)? Veritable stampedes of my fellow economists are rushing to take up again the banner of Keynesian economics, which most economists had abandoned by 1980.

Keynesian economics is an account of economywide employment that rather too simply alleges that economic health and growth—and, hence, the number of jobs—declines with decreases in “aggregate demand” and improves with increases in “aggregate demand.” No need to bother with questions about how well individual markets are working; no need to worry that the money supply might be growing too fast and causing individual prices to be out of whack—no! The economy is really much simpler, said Keynes, than those silly classical economists, such as Adam Smith, made it out to be.

All that really matters is the total demand for output (“aggregate demand”). If consumers cut back on their spending to save more, aggregate demand falls. As aggregate demand falls, firms scale back their operations. Workers are laid off. As workers are laid off, aggregate demand falls even further, causing even more layoffs. The economy spirals down into an “unemployment equilibrium.”

Only higher spending can salvage the situation, and the only agency sufficiently immune to animal spirits to know what to do—and that has the wherewithal to spend with sufficient gusto—is government. If government spends, the resulting increase in aggregate demand will restore “confidence” to the economy. Business people will again be confident that they can sell what they produce, so they’ll hire more workers. These newly hired workers will also spend. The economy will be saved.

The only trick is to make sure that the government doesn’t spend too much. If it does, the result will be inflation.

Economists before Keynes (at least, those who were taken seriously) rejected such ideas. These economists—labeled disparagingly by Keynes as “classical economists”—pointed out that if people reduce their consumption expenditures and save more, the additional savings push down interest rates and prompt entrepreneurs to invest more. Rather than disappear from the spending stream, these savings are spent, but they’re spent as demand for investment goods rather than as demand for consumer goods.

Classical economists argued, therefore, that higher savings were good, for they meant that the size of the economy’s capital stock would increase. More saving meant more and better machinery, larger factories, more R&D, more worker training, more infrastructure. Over time this larger capital stock makes workers more productive and thus pushes real wage rates higher. Living standards increase.

“Pshaw!” respond the Keynesians. “If consumers spend less on consumption goods, why would entrepreneurs increase the capacity of their operations? Moreover, even if people saved more today with the goal of consuming more tomorrow, investors’ motives are so haunted by animal spirits that we can’t rely on investors to read lower interest rates as a signal to invest more. Alas, only government can provide the rationality, stability, and spending necessary to keep the economy at full employment.”

The “classical economists”—which include in this case not just scholars who preceded Keynes, but also the likes of Frank Knight, Ludwig von Mises, and F. A. Hayek, who were contemporary with Keynes or even younger than him—pointed out that an increase in savings doesn’t mean a permanent desire to consume less in an absolute sense. It means a desire to spend a lower portion of income on consumption goods. As income increases, consumption will rise in an absolute sense.

A person saves more today, first, to increase his income and wealth over time so he can consume more in the future while still preserving or even growing his wealth, and, second, to be able to consume comfortably when illness or retirement makes further work impossible. The notion that people work to produce valuable output without any desire ultimately to consume the fruits of their labor is really rather bizarre, when you think about it, but it forms part of the foundation of Keynesian economics.

Short Memories

Another mysterious thing about economists’ sudden renewed infatuation with Keynesianism is the flimsiness of the reason. It seems as if a year-long and (at least as of mid-April 2009) still-mild slowdown in economic activity has caused economists to forget an entire decade of experience. Are the 1970s that distant a memory?

Remember the disco decade? In addition to bad fashion, it featured high and rising unemployment along with high and rising inflation. Keynesian theory, unless it is contorted beyond recognition, doesn’t allow both of these things to occur simultaneously. So the 1970s “stagflation” prompted economists to reassess Keynesian theory and the policies it suggested. Although no single macroeconomic consensus replaced the then-discarded economics of Keynes, economists finally recognized Keynesianism to be seriously flawed.

But here we are, a mere 30 years later, and it’s as if the 1970s didn’t happen. The lessons of an entire decade of harsh reality contradicting Keynesianism are cast from economists’ memories by a burst housing bubble, a few months of economic slowdown, and an unemployment rate (again, as of April 2009) that hasn’t been seen since way, way, way back in the 1980s.

What’s going on? Why this change away from sounder macroeconomic reasoning by economists toward a once-discredited (and never really sound) Keynesianism?

I wish I knew the answer. But all I have are guesses. Part of the reason is that economists’ memories are indeed shockingly short. Being experts at blackboard theorizing and computer simulations, too few economists familiarize themselves with economic reality. Another reason, at least for those economists who crave to be advisers to presidents and other government pooh-bahs, is that Keynesianism supplies ideal intellectual cover for the irresponsible spending that politicians long to do. Professor Smith or Dr. Jones stands a much better chance of being consulted by our leaders if the economists are prepared to tell them what they want to hear.

I hope against hope that matters will change. But I fear that my hope is too audacious.

Related posts:

1. Keynesianism in a Nutshell
2. Professor Hutt on Keynesianism
3. Correction, Please!

Since the early 1980s, however, no significant recession emerged.

Why not? The logic of the Austrian theory seemed sound. People do respond to changes in relative money prices, including interest rates. And whenever such changes are caused by money manipulation (rather than by changes in underlying economic reality), resources are certain to be channeled into activities that are economically inappropriate.

My curiosity about the apparent disconnect between empirical reality and the predictions of the Austrian theory intensified in recent years, spurred on by conversations I’ve had with a handful of Austrian-minded friends, each of whom disagreed with my claims that the economy has been growing and prosperity increasing. “Look,” they’d say, “much of this prosperity isn’t real! It’s an illusion created by excessive money growth that gives rise to malinvestments.We’ll have to pay too high a price for this ‘prosperity’ when it comes crashing down in the future.”

Everyday evidence of greater prosperity—better cars, faster microchips, greater varieties of offerings in supermarkets, less-expensive and higher-quality clothing— combined with the long period (nearly 30 years) over which such evidence built up, convinced me that this prosperity was real. It was no illusion.

So I began to speculate that capital goods are more flexible than Austrian theorists assume them to be. A machine designed, say, to help build automobiles might be rather easily converted into one that helps build motorcycles or even mattresses—so easily converted that little economic disruption occurs as a result. Sure, money injections divert the economy from its ideal path, but many of the less-than-ideal paths that it can find itself on probably are not so very different from the ideal. Or at least these less-than-ideal paths are nevertheless ones that generate perceived net improvements in living standards over time.

I did not formulate my hypothesis in any formal way. Nor did I subject it to empirical testing or to other economists for critical feedback. I was just beginning to think seriously along these lines when 2008 dawned—and with this annus horribilis, the scariest financial meltdown of my lifetime. In November, the Dow Jones Industrial Average was down 43 percent from its all-time high, which it had reached only 13 months earlier.

That figure represents an enormous crash in asset prices. In addition, unemployment is rising, so workers are being shed from uses that are now proving to be unprofitable.The underlying economic reality is exerting itself, destroying a crust of bad investments that, we now know beyond doubt, had built up over the years.

Perhaps the Austrian theory is correct after all. Perhaps the appropriate length of time necessary for the boom-bust scenario to play out is much longer than I’d assumed it to be—not a few years but a few decades. And perhaps many of the outputs produced by the malinvested capital turn out, in their own way, to be genuine and positive additions to society’s material prosperity—not additions compared to total output without any money manipulation, but compared to total output in a world in which no further investment at all took place.The best evidence that I’ve seen reveals that the Federal Reserve under the chairmanship of Alan Greenspan (and certainly under his successor, Ben Bernanke) was very loose with the money supply—a policy that, according to economist Lawrence H. White, fueled the recent real-estate boom that has now gone bust. Here’s White writing on December 2, 2008, at Cato Unbound: “As calculated by the Federal Reserve Bank of St. Louis, the Fed from early 2001 until late 2006 pushed the actual federal funds rate well below the estimated rate that would have been consistent with targeting a 2 percent inflation rate for the PCE deflator.The gap was especially large—200 basis point or more— from mid-2003 to mid-2005. The excess credit thus created went heavily into real estate. From mid-2003 to mid-2007, while the dollar volume of final sales of goods and services was growing at a compounded rate of 5.9 percent per annum, real-estate loans at commercial banks were . . . growing at 12.26 percent. Credit-fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates.The housing sector thus exhibited a disproportionate share of the price inflation predicted by the Taylor Rule [the formula devised by economist John Taylor of Stanford University for estimating what federal funds rate would be consistent, conditional on current inflation and real income, with keeping the inflation rate at a chosen target]. (House prices are not, however, included in standard measures of price inflation.)”

I’m not sure where recent events—the economy’s still-ongoing turmoil—leave my assessment of the Austrian theory. But I am much more inclined now to find in it the empirical oomph that for so many years I thought it lacked.

Related posts:

1. On the Austrian Theory of the Trade Cycle, Part I
2. The Current Economic Crisis and the Austrian Theory of the Business Cycle
3. Free-Trade Theory No Longer Applies? It Just Aint So!

Sitting in that same carrel, I then read Gerald O’Driscoll’s 1977 book Economics as a Coordination Problem—a work that explains in more up-to-date terms the logic of Hayek’s theory of such cycles.

Having done my best to digest these works, along with some related articles and helpful conversations with my professor Bill Field, I believed myself to have gotten a pretty firm grasp of Hayek’s macroeconomic thinking. And the logic of Hayek’s explanation for economic booms and busts made good sense to me.

Spending time with Roger Garrison during my doctoral-study days at Auburn University only raised my confidence in this explanation of so-called “trade cycles.”

The logic is straightforward. Investors and business people, like consumers, respond to relative prices in deciding how to act. And relative-price movements are crucial signals directing resources to uses that consumers value most.

So, for example, if the demand for apples rises relative to the demand for pears, the price of apples will rise relative to the price of pears. Producers—responding to this signal—will then switch some resources and effort from pear production into apple production. This response is appropriate.

But prices, of course, are expressed in money terms. If relative prices are caused to change not by any change in underlying economic reality but instead by changes in the supply of money, then producers and consumers will be misled by these changing relative prices to act as if some real economic fact has changed when actually nothing has happened. For example, if the central bank injects new money into the economy by giving it to people who have a special fondness for eating apples, this new money will enable its recipients to increase their demand for apples beyond what it would be without the new money. The price of apples will rise relative to that of pears, peaches, and other goods and services.

Eventually, though, this new money spreads throughout the economy, causing all prices to rise (resulting in what modern economists call inflation). Importantly, relative prices eventually adjust to reflect more accurately the underlying economic reality. When the underlying reality is clearly revealed by the now-correct relative prices, production plans based on the false price signals must be undone. Undoing these production plans takes time. One result of this process of undoing economically unsustainable production plans is temporary unemployment.

Interest Rates

The power of Hayek’s theory, though, lies in its focus on a particular price: the interest rate. This price coordinates production and consumption plans across time. If people are very impatient to consume and, in consequence, save very little, interest rates will be higher than they would be if people were more willing to defer consuming the fruits of their labors. A high rate of interest, therefore, signals to businesses that it is not worthwhile to use resources today to build highly complex and expensive machinery for producing greater output in the future. In these circumstances, resources satisfy more urgent needs when they are used to produce goods for consumption today rather than to produce producer goods that will increase the availability of consumer goods only tomorrow.

Only if people generally become more willing to save—that is, to allow a greater amount of resources to be used not to increase the flow of consumer goods today but to build production processes that increase outputs tomorrow—does the size of an economy’s stock of capital increase.

The price that signals this greater willingness to save is the interest rate. The higher the willingness to save, the greater the supply of savings available to be loaned to entrepreneurs—hence, the lower the rate of interest. But just as changes in the supply of money can cause the price of apples relative to pears to “lie” about the underlying demand for apples relative to pears, so too can changes in the supply of money cause the interest rate to “lie” about people’s willingness to save.

Building on works by Richard Cantillon, Carl Menger, Eugen von Bohm-Bawerk, and Ludwig von Mises, Hayek argued that increases in the supply of money (beyond any possible increases in people’s demand to hold money) are especially likely to cause the nominal rate of interest to fall. And as this price is pushed below its true (“natural”) level, entrepreneurs increase the size of their investments. They channel resources from producing consumer goods into producing capital goods.

This “lengthening” of the production process, however, is not done in one fell swoop. It takes time and requires a continuing flow of resources for its completion. For example, an entrepreneur lured by a low rate of interest to build a new factory needs resources not only today to build the factory’s basement, but tomorrow and the next day to complete his planned construction. If this entrepreneur discovers tomorrow that the resources that he thought would be available to complete the factory are not available, then he must abandon his plan. Workers hired in the expectation that the factory would be built and operated will be laid off.

Because newly created money usually enters the economy through the banking system, monetary expansion typically does indeed push the nominal rate of interest below the real rate. Entrepreneurs and businesses in general are thus misled into making production plans that require a continuing flow of capital larger than the flow of capital that will be forthcoming given people’s actual plans to save.

The new money, however, soon causes a rise in the general price level—including a rise in the nominal rate of interest. This general rise in prices reflects the lower value of money, and the higher nominal rate of interest reflects the spreading expectation that money will continue to lose value.

To keep the inflation-adjusted rate of interest artificially low enough so that it continues to deceive investors about the public’s willingness to save, the monetary authority must increase the speed with which it injects new money into the economy. Inflation rises faster and faster. The economy either eventually grinds to a halt because money prices have become so unreliable or the monetary authority stops printing new money.

In either case, adjustments to the true, underlying reality of people’s preferences and resource constraints must be made. These adjustments take time and involve unemployment.

As I said, this theory made sense to me. But the economic growth of the past 30 years caused me to doubt its veracity. And today’s economic turmoil is causing me to revisit both this theory and my doubts about it. In my next column I explore my doubts about the theory and my new doubts about my doubts.

Related posts:

1. On the Austrian Theory of the Trade Cycle, Part II
2. The Current Economic Crisis and the Austrian Theory of the Business Cycle
3. The Hayek-Keynes Debate: Lessons for Current Business Cycle Research by John P. Cochran and Fred R. Glahe

it makes vastly more difference practically whether we disseminate correct ideas among the people at large in the field of human relations than is the case with mechanical problems. For good or ill, we are committed to the policy of democratic control in the former case. . . . Our whole established tradition tends to the view that “Tom, Dick, and Harry” know as much about it [economics] as any “highbrow”; the ignorant will not in general defer to the opinion of the informed, and in the absence of voluntary deference it is usually impossible to give an objective demonstration. If our social science is to yield fruits in an improved quality of human life, it must for the most part be “sold” to the masses first.

Ironically, the book in which this passage appears—Risk, Uncertainty, and Profit—although a brilliant and classic contribution to economic theory—is virtually inaccessible to non-economists. But that’s okay, for Knight labored at what we might call the “raw material” stage of the idea-production process. Knight aimed his work chiefly at academics. His hope, no doubt, was to inspire other academics to think better and more creatively about reality so that they would more readily uncover truths about it—truths that eventually would result in better public policies. Just as drilling for oil does not directly pump gasoline into a motorist’s car, but is essential to that goal, so producing deep and abstract ideas does not directly inform or influence the public, but is essential to that goal.

And like the production of gasoline, the production of ideas takes place over many stages involving many producers working at different tasks and addressing different audiences—from philosophers and pure theoreticians to scholars who refine theories to those who apply them to specific cases. Also important are teachers who distill the important points of theories and make these accessible to students. At the “final” stage are popularizers—for example, op-ed writers, television pundits, and even (sometimes) politicians. These people don’t produce ideas any more than your local Exxon station produces gasoline; they retail ideas.

But just as Exxon’s oil rigs and field workers and chemists would be pointless (and profitless!) without an effective retail distribution system, so too are even the best ideas in economics pointless without effective ways to get these into the minds of ordinary men and women.

Promoting the Ideas of Liberty

What are those ways? FEE and The Freeman, of course, are important vehicles for inspiring nonspecialists to understand that markets are both productive and fair. A similar role is played by FEE speakers and by the publications and events of (thankfully now countless) organizations spread across the globe—organizations such as the Cato Institute, the Mercatus Center, the Institute for Humane Studies, PERC, Reason, the Institute of Economic Affairs, the Institute for Economic Studies–Europe, and on and on. The list really is long.

If a society of free, peaceful, and prosperous people thrives, it will be owing to the dedicated efforts of persons operating at all stages of production and distribution of the ideas of liberty.

Even the most dedicated and skillful workers at this effort, though, can never guarantee their success. Ultimately, it is up to ordinary men and women to choose to embrace these ideas and ideals. Just as oil companies and gasoline retailers—no matter how skilled and dedicated—would all go belly-up if consumers chose to reject petroleum products, teams of brilliant scholars and enthusiastic popularizers of the ideas of liberty cannot force their insights and values on others.

These ideas, as Knight put it, must be sold. Perhaps such language sounds crass. But I think it is both accurate and acceptable. The goal is not to brainwash others into wanting to live as you want them to live. The goal is to help others understand liberty so that they want—that they choose—to be part of a free society. To achieve this goal requires skill at explaining the ideas—at showing these ideas in their best light—and at helping others to understand (to put it bluntly) what’s in it for them.

The Only Proven Way

Economic freedom, after all, is an incredibly attractive product. It promotes peace, prosperity, dignity, and opportunity. To ask people to embrace these principles is not to ask them to be martyrs or to sacrifice the good life. It is to show them the only proven way to lasting, widespread, and secure prosperity and self-respect.

But as with all products, liberty’s benefits are not fully obvious on first inspection. They must be explained, and explained in ways compelling to the hearer and not simply convenient for the messenger. Also, as with all products, the ideas of liberty have competitors, many of which are fraudulent and others of which are merely, if honestly, defective. These competing ideas—not in spite of, but often because of, their weaknesses—frequently find ready customers. The world is full of people too ready to believe that reality is optional or that this or that Great Man will save us from earthly evils.

Such crude beliefs are powerful, in part because they permit the uninformed to hope for outcomes that the informed know to be impossible. These beliefs are powerful also because they convince the uninformed that someone else—the Great Man, for example—will do the bulk of the work while all that ordinary people must do is to obey and await the imminent earthly paradise.

By themselves libraries stuffed with the finest research and scholarly advances are useless against the power of such beliefs. The distilled essence of these ideas of liberty must be part of mainstream thinking of ordinary people. Making sure that the ideas of liberty do get a fair hearing in the minds of ordinary people—and that people understand what benefits liberty holds for them and their children—requires skilled retailing.

As FEE continues its efforts on this front under its new president, Larry Reed, I ask you to be generous in your support—for it is now, as it has long been, the indispensable American institution for making the ideas of liberty widely accessible and compelling.

Related posts:

1. To Communicate Ideas on Liberty
2. Liberty and the Power of Ideas
3. The Freeman: Ideas on Liberty

This confession often brings harsh reactions. A typical response is, “What?! Don’t you think that people are capable of choosing wisely for themselves?” (The unstated subtext is that I am either an elitist or that I have sympathies for Robert Mugabe-like tyrants.) And my answer is always the same: “Of course I think that people are capable of choosing wisely for themselves—which is why I want to minimize the subjection of individuals to any outside force, including the majority.”

I trust my neighbor to know what size toilet tank is best for him and his family. I trust my neighbor to know whether or not he should smoke cigarettes (or pot); to wisely choose how much to save for his retirement; to decide if the car made in Korea is a better deal for him than is the car made in Detroit; to educate his children. For these and countless other decisions my neighbor does not need the forced “assistance” of me and others. My criticizing the use of democracy for the vast majority of issues to which it is today applied is a defense of personal ability and responsibility.

Another reason democracy leaves me uninspired is that it is aesthetically grotesque. The sights and sounds of candidates pandering to voters have all the appeal, to me at least, of watching washed-up celebrities on late-night television making obviously phony pitches for reverse mortgages and magical mattresses.

But there’s this difference: relatively few people—even those who fall for the pitches—regard the celebrities as anything more than paid mouthpieces. In politics, though, the Barack Obamas, Hillary Clintons, George Bushes, John McCains, and Ronald Reagans are too often treated as selfless divines, secular faith healers whose will and touch will cure incurable problems.

How else to explain the ever-present reaching out of hands by crowds of people who long for just a touch of the president? How else to explain the thunderous applause that typically erupts from audiences whenever a famous politician pronounces the most banal platitude? How else to understand the widespread desire for the president to appear personally at disaster scenes and to hug (for the cameras!) a handful of victims’ relatives?

Political Delusion

I recently got an unexpected glimpse into the abyss of political delirium after an article of mine was published in the May 24 edition of the Wall Street Journal. In that article, I pointed out what struck me as an obvious contradiction in Hillary Clinton’s campaign rhetoric—namely, I argued that Senator Clinton’s complaint that her bid for the Democratic nomination was thwarted by sexism is at odds with her insistence that she would be a stronger candidate than Barack Obama in the general election.

I expressed no preference for Senator Obama or for Senator Clinton; nor did I offer a plug for or against the GOP candidate, John McCain. My point was a logical one. It was political only insofar as exposing any candidate’s inconsistencies helps to reveal the true nature of politics.

But my oh my! Within 48 hours my e-mail inbox was filled with over 300 responses from strangers. All but one was negative. (I didn’t think that this outcome was statistically feasible, but, well, I was wrong.) What follows are just four of the responses—and only ones that are fit for inclusion in a family-friendly publication:

Your educational background is in economics. So I have to tell you, your opinions in this area should have never seen the light of day. You want to comment on this topic, have a sex change operation, and live in this world for 10 years. Then, and maybe then, I will listen to your opinion. In the mean time, please shut up.

One of the biggest tactics of sexists is to dismiss a woman’s point of view and that is just what you are trying to do. . . . You should look more deeply into yourself and ask yourself “what is so threatening to me about a woman in power that I have to try to diminish her and her concerns?” Be a real man and be honest with your fears of powerful women and maybe this world can move a little step closer to equity for all.

Sir, and I say “Sir” with great reservation as I believe the homeless person on the street deserves more respect than you. I can only wonder what the men in other countries think of the male attitude in this one. It’s attitudes like yours that contributes to battered women. I keep thinking it will change, but until we manage to elect a President like Hillary, it likely will not happen.

Rise Hillary Rise!!!!!!!!

Biases of Politics

I cannot read such things without experiencing profound sadness—for it is sad that many people avoid challenging an argument on its own merits and, instead, treat any perceived lack of enthusiasm for their favorite candidate as a sign of either intellectual failure or moral turpitude. It is sad that so many people believe that secular salvation is possible through the election of a particular man or woman to political office. It is sad that so many people still believe that collective interests exist for all persons who happen to share the same kinds of genitalia or who happen to share the same skin color—and that men have interests fundamentally opposed to those of women and that “whites” have interests fundamentally opposed to those of “blacks.”

It is sad—extraordinarily and searingly sad—that so very many people seek salvation through politics and refuse to understand that many individuals, myself included, want neither to be saved nor persecuted by the state. We just want to be left alone by busybodies so that we can be part of building a great spontaneous order of free and prosperous people.

Related posts:

1. The Golden Calf of Democracy
2. Democracy or Republic?
3. What’s So Good About Democracy?

Why do left-leaning media such as the New York Times and CNN devote so much ink and airtime alleging that middle-class Americans have made little or no economic progress over the past 35 years and that the planet continues to spiral into imminent catastrophe?

Why, whenever the New York Times’s Paul Krugman and the Washington Post’s Harold Meyerson write (as they do, almost weekly) that ordinary Americans are trapped in a no-growth economic situation by “the rich” and powerful, do market-oriented bloggers respond with data showing that this claim is false?

And why, whenever the Los Angeles Times or The New Yorker publishes yet another “report” allegedly documenting continuing environmental degradation, do so many market-oriented scholars frequently expose these reports as being factually wrong or poorly reasoned, or both?

This pattern is so familiar that it eludes our attention. And yet reflection on it is fascinating. There’s no obvious reason why persons on the left should be biased into perceiving the state of the current world to be especially dire, and no obvious reason why market-friendly people should be biased into perceiving roses where there is really only rot.

 As documented often in this publication (and in several others) over the past few years, Americans’ living standards are today at an all-time high. Data on what ordinary, and even poor, American households regularly consume make clear that our prosperity is immense and growing. Likewise, the real value of workers’ total compensation (wages plus fringe benefits) continues to rise. Leisure time—leisure both from our jobs and from tedious household chores—continues to increase, as do our real expenditures on recreational equipment and activities. Life expectancy in the United States is at an all-time high.

In addition, the planet is neither running out of resources nor heading for environmental Armageddon. The works of the late Julian Simon and, more recently, of Bjørn Lomborg and Indur Goklany are important sources of careful documentation of these facts.

We’re living longer and healthier, working less, playing more, and consuming more, all on a planet that is resource-rich and vibrant.

 If I were a champion of big government, rather than deny these facts, I’d trumpet them as evidence that the interventionist policies pursued since the New Deal work wonders. Real household incomes are higher (I’d allege) because of Social Security, minimum-wage legislation, and several anti-discrimination statutes. We’re healthier and living longer (I’d allege) because of Medicare and Medicaid, a variety of product- and workplace-safety regulations, the efforts of the Environmental Protection Agency, and government’s crackdown on tobacco use.

And the natural environment is in fine health (I’d allege) because of the EPA and the plethora of national, state, and local regulations aimed at protecting it.

Yet if we are to believe the factual claims issued   by the modern left about the state of the world, it   is quite plausible to conclude that not one of their cherished programs works very well. Ordinary Americans and the earth stand on the brink of the abyss despite generations of government growth and increasing intervention.

Seems an odd claim, coming as it does chiefly from the left.

Perhaps equally odd is the consistent optimism about the state of the world by market-friendly scholars. It would hardly be surprising if, the moment someone asserted that the living standards of ordinary Americans have stagnated now for nearly two generations, students of Milton Friedman and scholars inspired by Mises and Hayek would accept such claims at face value and pronounce, “See! We told you so. First came the expansion of Uncle Sam’s power under Woodrow Wilson, and then came the explosion of such power under Herbert Hoover and Franklin Roosevelt, followed by increases in power ever since. The stagnation of incomes and the degradation of the environment surely are the result of the growth of the state during the twentieth and very early 21st centuries—or, at the very least, the growth of the state has done nothing to prevent these problems.”

But the typical free-market advocate resists this temptation. He or she examines the facts and correctly concludes that living standards and the state of the environment are much better today than they were 30 or 40 years ago.

Of course, it remains possible for the free-market advocate still to make a strong case against the many government interventions that today crowd our lives. But much, if not all, of that case is in the form of a counterfactual: If government were less intrusive, the economy and the environment would be even better than they currently are. However strong such a case is, the truth remains that the intrusive, grasping, and powerful government of the past   few generations has not absolutely reduced our living standards.

So why do free-market advocates consistently proclaim that living standards and the state of the world are generally improving?

Call me biased, but I’m pretty sure that free-market advocates look at the facts straight on and (although it would further strengthen the case against government) refuse to massage the data in ways that make reality appear to be worse than it is.

The more interesting question is why do statists—by repeatedly alleging that the economy is horrific and the environment a cauldron of toxins—effectively (if unconsciously) insist that their cherished programs have failed. Given the overwhelming evidence that our material lives are today better along most dimensions, I’m frankly astonished that so few statists accept this evidence.

Problem-Mongering

Or, more precisely, I used to be astonished. I am no longer, because I believe that I now understand why opponents of liberty constantly bemoan the current state of the world. Quite simply, problem-mongering is the surest path to power. No matter how good things are, we humans can always imagine them being even better. No matter how clearly the data show progress, data can be cherry-picked and interpreted to make matters appear grim.

And no matter how much freedom government has stripped from us, as long as some economic freedoms remain, those on the left will see such freedoms as the source not only of real imperfections, but also of failures to attain what can be achieved only in the fantasies of those with ample faith in the power of the state.

Friends of liberty are under no delusions that even maximum liberty governed by the best-possible rule of law will create heaven on earth. Opponents of liberty, in contrast, are convinced that the impossible becomes possible by giving the state more resources and power. And as long as there are still more resources and power for the state to acquire, the real world’s inability to live up to our fondest imaginations will be described by those on the left as “failure” and serve as an excuse for further limitations on liberty.

Related posts:

1. World in the Grip of an Idea: 16. Sweden: The Paternal State
2. World in the Grip of an Idea: 8. Russia – Impotent Populace and Massive State
3. Book Review ~ Money and the Nation State: The Financial Revolution, Government and the World Monetary System Edited by Kevin Dowd and Richard H. Timberlake

Fancying myself to be a morally upright person, I obviously don’t believe that not voting is in any way immoral or otherwise undesirable. Here’s why.

First—and least interestingly—my vote will never determine the outcome of a political election. The chances that my voting for candidate Smith rather than voting for candidate Jones (or rather than not voting at all) will assure that Smith wins the election are practically zero. Put differently, from my perspective, the outcome of any election will be what it will be no matter what I do or don’t do at a polling place on election day. Because my time is valuable, I never vote; I instead spend my time on activities whose outcomes I am more likely to affect.

Some people insist that non-voting is “selfish.” Perhaps. But note that I’m not the only person to benefit from my refusal to spend my time pointlessly. By not voting, I have more time to prepare for the classes I teach, or more time to write articles that (I hope) at least some people enjoy reading, or more time to spend helping my son with his homework or just enjoying time with my family. Because my refusal to vote changes nothing, the cost to others of my not voting is zero. But the cost of my voting to others (my students, my colleagues, my adoring reading public, my family) is real. So by not voting, I make at least some people better off while making no one worse off.

(By the way, whenever I’m asked “Well, what would you do if everyone refused to vote?” I answer, “Then I’ll vote!”)

The second reason I refuse to vote is that, unlike choices made in private markets, choosing among candidates is excessively imprecise. Here’s what I mean. If you see a shopper in a supermarket fill her grocery cart with three bottles of chardonnay, one chicken, one leg of lamb, six rolls of paper towels, two dozen diapers, and a bag of dog food, you can be pretty certain that she wants each of those items and does not now want any of the many other items for sale in the supermarket. The situation is very different in political elections. If you see the same woman vote for candidate Smith, you cannot legitimately conclude that she wants all of the positions taken by Smith. Perhaps this voter voted for Smith despite Smith’s promise to raise taxes.

A Package Deal

I have never encountered a candidate with a serious chance of winning elective office who did not take positions on many major issues that I find to be unwise or immoral. So while I almost always prefer one candidate to others, I cannot bring myself to vote for my preferred candidate because doing so is too likely to be misread as an endorsement of some policies that I oppose. And this misreading is more likely if my preferred candidate wins the election!

My third reason for not voting is that voting registers only each voter’s order of preferences and not that voter’s intensity of preferences. Unlike in private markets where I can refuse to buy a good or service if I judge its price to be too high—and then decide to buy that same product if its price falls—in elections each voter merely gets to say which candidate he prefers above all who are on the ballot. If I vote for Smith rather than Jones, this means only that I prefer Smith to Jones. My vote for Smith reveals nothing about how much I prefer Smith to Jones.

Because intensity of preferences is every bit as much a part of human likes and dislikes as is the order of preferences—and because in most choices in our lives we have at least some ability to express the intensity as well as the order—voting allows each of us to make only half-choices. The process simply gives no opportunity for any voter to express how much he prefers Smith to Jones.

Legitimate Process?

My fourth reason for not voting is that I disapprove of the political process and want no part of it. Of course, government wants part of me and my wealth; practically speaking, there is little I can do to prevent being harassed and shaken down by the state. If I vote, though, I give some legitimacy to the process. If my candidate wins, then what moral right do I have to complain about his pursuing policies that he said during the campaign he’d pursue but which I find deplorable? Even if my candidate loses, I implicitly agree—by voting—that the process of selecting people to exercise power over me is legitimate. So if I vote I have much weaker grounds for complaining than I have if I don’t vote.

I’m frankly saddened by the number of people who tell me that if I don’t vote I have no right to complain about government. This familiar refrain is nonsense. My rights—as recognized, of course, by the signers of the Declaration of Independence—exist because I am a human being. These rights are not created by government. Because I am a human being who respects the rights of all other persons, my rights should be respected even (or especially!) if I don’t participate in politics. Particularly today, with governments at all levels recognizing few constitutional restraints—that is, with government itself barely even pretending to play by the rules—why should any peaceful person be obliged to vote in order to retain his natural rights to life, liberty, and property?

Finally, even the practical justification for voting—that it lets your “voice be heard”—is wrong. Forget that no one vote will ever swing an election. Forget that it matters not one whit if your preferred candidate wins (or loses) by 34,767 votes instead of by 34,766 votes. The relevant fact is that there are countless better ways to get your voice heard.

Writing this column is one way that I get my voice heard. Casting a vote is not the only way to get your voice heard politically, and, more importantly, politics is not the only venue in which our voices should be heard. Denizens of a free society ought never be fooled into thinking that the only relevant way to be heard in that society is by yanking levers every few years in voting booths.

Related posts:

1. Where Does Your Vote Really Count?
2. Ideas and Consequences: How Important Is Your Vote?
3. Who Should Vote?

 The standard account contains grains of truth. Undoubtedly, many Americans during the Progressive era possessed a fervent faith in democratic government and a burning desire to “uplift” the lot of humankind. The temperance movement meshed with the Progressive spirit: use government to engineer better social outcomes—in this case, enforced sobriety. And there is no doubt that Prohibition not only failed to stop Americans from drinking, but also fueled organized crime.

But this account is simplistic. It overlooks the realities and complexities of political behavior, as well as important facts. The ideology of temperance played a role in staging Prohibition, but the raw logic of politics was the true director of this drama.

The central character was federal taxation. Specifically, the income tax proved a viable alternative to liquor taxation for raising revenue, making Prohibition politically possible. Despite decades-long agitation for Prohibition, Congress could not afford to sacrifice liquor-tax revenues until it discovered just how lucrative the income tax could be. That tax’s revenue-raising prowess reduced the cost to Congress of voting for Prohibition. Fourteen years later, though, matters changed abruptly when the onset of the Great Depression severely slashed income-tax revenues.

Before the modern personal income tax in 1913, Uncle Sam relied mainly on customs duties and liquor taxation. From 1870 through 1912 receipts from these two taxes alone accounted for more than two-thirds of federal revenues (and in many years accounted for more than 75 percent). Liquor taxes trailed only customs duties as the largest single source of revenue during the half-century preceding the modern income tax, with liquor taxes accounting for about a third of federal revenues.

Then came the income tax (implemented first in 1914) and, on its heels, America’s entry into World War I. During the war federal revenues received through income taxation for the first time exceeded those from any other single source. Income taxes went from about 16 percent of the federal government’s revenues in 1916 to double that proportion in 1917. By 1918 the income tax supplied nearly two-thirds of those revenues.

Income-tax revenues accelerated most dramatically in 1918, but the income tax had already demonstrated its prodigious revenue potential the year before. Receipts in 1919 were almost triple those of 1916. More important, Congress passed in October 1917—two months before it successfully proposed the Prohibition-enabling Eighteenth Amendment—the legislation that would yield 1918’s enormous increase in income-tax receipts: the War Revenue Act of 1917. It raised more than $2.3 billion in 1918.

By fall of 1917 Congress saw the income tax as its chief source of revenue, reducing the cost of voting for Prohibition in December 1917. The lost liquor-tax revenues (beginning January 16, 1920) were trivial compared with the huge and rapidly growing revenues derived from the individual and corporate income taxes. The temperance movement’s decades-long quest was seemingly brought to a triumphant conclusion.

Yet Prohibition’s cost to Congress increased not long afterward, so the Eighteenth Amendment was repealed in 1933.

This conventional explanation for repeal—that Prohibition was widely defied—can’t explain why Congress ended Prohibition after such a short trial run, particularly in light of the dearth of organized support for repeal during the 1920s. It’s far more likely that Congress proposed the Twenty-First Amendment (to repeal the Eighteenth) in February 1933 not so much because it was a faithful agent of voters who recognized the futility of Prohibition, but because the politicians desperately wanted more revenue.

The Great Depression severely reduced individual and corporate incomes, and income-tax revenues correspondingly plunged beginning in 1931. By 1932 federal income-tax receipts fell by well over a third from their level in 1931 and to almost half their 1930 level. In 1933 fiscal matters got even worse, with income-tax receipts that year less than 40 percent of their 1930 level. The revenues in 1933 were the lowest since 1917. The income-tax stream that had swelled so promisingly during Woodrow Wilson’s second presidential term was running dry.

A Search for Taxes

So Congress searched for another taxable activity. This search led the framers of the 1932 Democratic party platform to call for repeal of the Eighteenth Amendment in order “to provide therefrom a proper and needed revenue.” Jouett Shouse, president of the Association Against the Prohibition Amendment and an influential figure in the Democratic Party, predicted that repeal of the Eighteenth Amendment would generate at least $1 billion in additional revenue. A prominent House leader in the fight for the Twenty-First Amendment admitted in 1934 that “if we [anti-Prohibitionists] had not had the opportunity of using that argument, that repeal meant needed revenue for our Government, we would not have had repeal for at least ten years.”

And sure enough, Prohibition’s repeal did indeed generate higher liquor-tax revenues. As a percentage of federal government revenues, liquor taxes jumped from 2 percent in 1933 to 9 percent in 1934 to 13 percent in 1936. Repeal did not fully compensate for lost income-tax revenues, nevertheless it promised a sizeable stream of additional revenue.

Congress had strong allies in this revenue-seeking cause. Among the interest groups that supported the Twenty-First Amendment was organized labor allied with wealthy industrialists (such as Pierre and Irénée du Pont). Labor leaders and the very wealthy hoped that higher liquor taxes would restrain or even reverse the expansion of income taxation.

The loss of revenues from the income tax made it less costly for Congress to satisfy these interest groups than just a few years earlier. Beginning in 1934 effective income-tax rates were cut for all taxpaying groups with net incomes of $20,000 ($300,000 in 2007 dollars) or less. Although the typical income earner paid no taxes on his income during the 1930s, a significant number of unionized workers took home incomes high enough to be liable for the tax. For example, the median unionized worker in the building trades earned more than $2,000 a year all during the 1930s (nearly $31,600 in 2007 dollars). Workers with annual incomes between $2,000 and $3,000 and a single exemption saw their effective income-tax rate fall from 2 percent in 1933 to 1.6 percent for the years 1934 through 1939.

On the whole, then, income-tax rates for persons owing federal income taxes fell for all but the very highest earners. So while the du Ponts and their peers failed to win lower income-tax rates for themselves as a consequence of Prohibition’s repeal, the great majority of Americans who paid federal income taxes (including large numbers of politically potent unionized workers) had their income-tax burdens eased.

It is no coincidence that Congress first acted to repeal the Eighteenth Amendment only after the severe revenue-reduction shock administered by the Great Depression. Openly collecting taxes on freely traded liquor without repealing the Eighteenth Amendment and the Volstead Act would have too blatantly flouted the Constitution. So they were repealed.

As the cliché goes, money is the mother’s milk of politics.

Related posts:

1. Thoughts on Freedom ~ Politics and Prohibition
2. Prohibition Hasn’t Ended Yet
3. Book Review: The Crisis In Drug Prohibition edited by David Boaz

The summer of 2007 was no exception. The seminar we participated in took place in July near Deva, Romania. This was our second trip to Romania; a 2005 IES-Europe seminar was held just outside the beautiful Transylvanian town of Cluj-Napoca. As in 2005, this year we began our Romanian adventure in Bucharest. We immediately noticed how much it has changed since 2005. Not only has Delta Airlines launched a direct flight there from New York (which we took), but near the Bucharest airport now stands a brand-new IKEA furniture store. Roads and driveways boast more new cars, and the downtown is blossoming with shiny new hotels, restaurants, and trendy retail stores.

Bucharest still has a long way to go. No one there is ever far from signs of Romania’s communist past. Especially prominent are the hideously ugly, dilapidated concrete-block buildings. And most of the public parks are strewn with litter and obviously have enjoyed no landscaping in decades. But also unmistakable is the progress that Bucharest has made in the recent past—and is still making.

Some of our Romanian friends note that this progress has a downside: horrible traffic. And, indeed, the traffic in Bucharest is nightmarish. Streets with more than two lanes are rare (and rarer still in parts of Romania outside of this capital city). And the roads are largely unkempt. They are typically narrow, poorly marked, and badly in need of resurfacing. So while private enterprise is hard at work supplying new cars, new eateries, and new retail outlets to Romanians, the government seems to be working at a snail’s pace at supplying those amenities for which it takes responsibility.

Back in the U.S.A. 

When we landed at New York’s JFK Airport on our return from Romania, Karol and I found ourselves with an unexpected windfall of extra time to reflect on our most recent experience in eastern Europe. Our connecting flight (back to our home near Washington, was scheduled to leave JFK two hours after our flight from Bucharest landed. Fortunately, that flight landed about five minutes early. But then we proceeded to wait on the tarmac for more than 30 minutes before pulling up to the terminal to unload. The reason for this delay, the pilot explained, was that our gate was occupied.

Part of the blame for this delay, I suspect, belongs to Delta Airlines. For whatever reason, it couldn’t load and prepare the plane departing JFK with sufficient dispatch. But another part of the blame, I’m sure, lies with the system Americans use to supply commercial passenger air transportation. All commercial airports in the United States are built and owned by government. This means that commercial airports are neither built nor operated in full accord with the profit motive. Political and bureaucratic incentives are the dominant forces in play to guide the construction and operation of these airports.

One result is too few gates for loading and unloading passengers at busy airports. With no profit motive guiding the building of such gates—or, more generally, with the price system not used to convey information about how many gates it would be best to supply—politicians and bureaucrats have too little incentive and information to ensure that the number of gates at airports is economically appropriate. So at busy airports such as JFK access to gates is too often allocated by waiting—such as the inordinate amount of time that our flight from Bucharest waited before it gained access to a gate.

Still, by the time we stepped off the plane into the terminal, we had just over an hour to catch our connecting flight. “We’ll make it,” I assured Karol. Because the flight from Bucharest was ten hours long, both of us recoiled at the thought of missing our flight from New York to Washington. Exhausted, we longed to sleep in our own bed.

Minutes later, though, we realized that we’d miss our flight to D.C. After walking down a long and dreary hallway to U.S. Passport Control, we and our fellow passengers were herded into the room where agents stood at their desks waiting to check our passports.

Despite the fact that JFK is one of the world’s busiest airports—despite the fact that summertime is the peak of the international travel season—despite the fact that other international flights were landing about the same time at that terminal—the U.S. Department of Homeland Security had a total of three agents employed that evening to examine the passports of U.S. citizens returning home. Three agents. That’s all. I didn’t count the number of agents assigned to inspect the passports of non-U.S. citizens, but I couldn’t help but notice that most of the passport-control desks stood empty, mocking the many tired and frustrated passengers lined up and waiting in a slow-moving queue to have their passports stamped, clear customs, and then catch their connecting flights.

It took us 50 minutes to have our passports checked. By the time we claimed our luggage and cleared customs, we’d missed our flight.

Government Health Care?

As I waited with increasing irritation in that line, I wondered why so many people want government to supply health care. Do these advocates of government-supplied health care never fly internationally during the summer? When these people wait in long lines just to clear passport control and, in the process, notice the many empty desks that could be (but aren’t) occupied by additional agents, do these people not think that similar poor service might, perhaps, also characterize government-run health care? Do these champions of state-run health care never visit the post office?

The queues at passport control and the post office, along with the indifferent “service” typically rendered there, are too common not to be symptomatic of government supply. When “customers” neither pay directly for what they receive nor have the option of either not paying for the product at all or of seeking an alternative supplier, suppliers have little motive to respond to the wishes of the people they are allegedly employed to serve.

So, for a good sense of what government-supplied health care would look like here, all you must do is to visit a foreign country (preferably during the summer), fly home on a late afternoon or early evening, and then watch government service in action. You’ll have plenty of time to observe.

Related posts:

1. Book Review: What Has Government Done to Our Health Care? by Terree P. Wasley
2. The Immorality of Government-Mandated Health Care
3. Health Industry to Gain from Health Care Reform