One noteworthy aspect of Oakeshott’s work on rationalism, which I address initially because it often has been misunderstood or denied, is that it is not an ideological platform, not an endorsement of conservatism, liberalism, libertarianism, or any other political stance. In “Rationalism in Politics” he explicitly points out that rationalism is a primary ingredient in all of the major brands of modern politics, having “come to colour the ideas, not merely of one, but of all political persuasions, and to flow over every party line.” Oakeshott even accused F.A. Hayek, who might seem to be his natural ally, of responding to the proposals for improving society according to a “rational” plan with a rationalist system of his own: “This is, perhaps, the main significance of Hayek’s Road to Serfdom—not the cogency of his doctrine, but the fact that it is a doctrine. A plan to resist all planning may be better than its opposite, but it belongs to the same style of politics,” he writes.

Oakeshott’s Critique

So what is the substance of Oakeshott’s critique of rationalism? As he saw it, the primary feature of the rationalist approach is the belief that the essentials of any human practice can be conveyed adequately by means of a “guidebook” comprising explicitly stated rules, formalized technical procedures, and general abstract principles. Such a belief implies that understanding a theoretical model for some subject is all that is required for its mastery. Indeed, to attend to other features of a practice, such as experienced participants’ rules of thumb or tacit understandings on how to proceed in the domain,  could serve only to impede the necessary rational reconstruction of the subject in question.

To the contrary, Oakeshott argues that the rationalist, in awarding theory primacy over practice, has gotten things exactly backwards: The theoretical understanding of some activity is always the child of practical know-how, and never its parent. In fact, he sees the dependence of theory on practice as being so unavoidable that not only is the rationalist incapable of skillful performances guided solely by theory, he is not even able to stick to his purported guidelines while performing poorly. Instead he inevitably will fall back on some
tradition of how to proceed in order to give context to his abstract instructions. (This is similar to Wittgenstein’s insight that every attempt to follow a set of formalized rules necessarily is grounded on informal customs and practices that determine what it means to follow a rule “correctly”—the formal rules cannot also embody their own, “correct” inter-
pretation because any effort to incorporate that interpretation into the first-level rules would create a set of “meta-rules” themselves requiring meta-meta-rules to guide the interpretation of the meta-rules, and so on, in an infinite regress.)

Oakeshott contends that the essence of an accomplished practitioner’s skill cannot be conveyed to a neophyte through explicit technical instructions, but instead must be learned tacitly, during a period of intimate apprenticeship. The formal rules purported to underlie success in an activity merely present an abstraction from the concrete and formally unspecifiable knowledge possessed by the true master, who may offer such an explicit set of precepts as a rough surface map of his deep sea of experience-born proficiency, useful so that the beginner does not feel lost when first venturing into those waters, but hopelessly inadequate as a guide to their depths.

To offer a concrete example, the rationalist cook is oblivious to the years that the skilled chef has spent establishing intimate relationships with his ingredients and tools, and tries to get by in the kitchen solely with what he can glean from a cookbook. As a result, he botches most of the dishes he attempts. However, his repeated failures typically do not lead him to suspect that his fundamental method of proceeding might be faulty. Instead, each disappointment only spurs the rationalist to search for a new, improved, and even more “rational” book of recipes.

Influence of Rationalism

Despite that modus operandi being no more workable in political activity than it is in cooking, Oakeshott points out that rationalism has had its greatest influence in the arena of politics: “But what, at first sight, is remarkable, is that politics should have been earlier and more fully engulfed by the tidal wave [of rationalism] than any other human activity. The hold of Rationalism upon most departments of life has varied in its firmness during the last four centuries but in politics it has steadily increased and is stronger now than at any earlier time.”
The preeminence that Oakeshott assigns to rationalist influence in modern political life may appear to be at odds with his assertion that the rationalist can never actually realize his program, but will always, in fact, wind up acting more or less along lines indicated by some existing practice. However, Oakeshott’s contention that the rationalist never really can proceed according to her avowed principles does not mean that her attempt to adhere to them will be inconsequential, but only that it will not succeed.

An analogy may be helpful here: A person who tries to fly by vigorously flapping his arms whenever he walks surely will fail to achieve his goal, but, in the endeavor, he will succeed in making his perambulations much more tiring, awkward, and comical. Similarly, since the pronouncements of the rationalist disparage current practices, customs, and morals, insofar as they do not follow from his rational deliberations about how his society ought to be ordered, they will erode the spontaneous ease of the communal life that those traditions nourished, while offering in its stead only the artificial routines and regulations of a “rational” bureaucracy. Oakeshott offers this example: “First, we do our best to destroy parental authority (because of its alleged abuse), then we sentimentally deplore the scarcity of ‘good homes’, and we end by creating substitutes which complete the work of destruction.”

Oakeshott’s view of the rationalist project as fundamentally misguided does not imply that all traditional practices are sacrosanct or even that they all are laudable. There is plenty of room in any healthy tradition for innovations and reforms, so long as those alterations spring from an appreciation of the life of that tradition, rather than representing an attempt to wipe it out and replace it with an abstract scheme. Traditions are like living organisms, in that both ought to and usually do grow and adapt in response to their external circumstances and internal tensions, or, failing to do so, soon cease to exist. But those adaptations, if they are to meet the challenges presented by novel situations successfully, must not promote the deterioration of the very organic order they purport to be serving. The political theorist can serve to diagnose and treat ills in his polity much like a physician does in his patients. But, as Oakeshott notes in his Lectures in the History of Political Thought, “[T]o cure is not to transform, it is not to turn the patient into a different sort of being; it is to restore to him such health as he is naturally capable of enjoying.” Because the rationalist physician attempts to transform rather than merely heal his charge, his treatments are likely to do far more harm than good.

Unfortunately, the “rationalist chef’s” counterpart in social reform similarly is inclined to interpret the social maladies produced by his projects not as evidence of any problem with his basic premises, but, quite to the contrary, as signaling the need for an even more energetic and thorough implementation of rationalist social engineering. This explains the tendency, noted by Ludwig von Mises, Hayek, Sandy Ikeda, and others, for each intervention in the economy to prompt yet further interventions. And the engineering metaphor itself encourages the planners to regard the rest of the citizenry as parts of a machine, cogs to be readjusted and rearranged as called for by each new blueprint, each drawn up to fix the problems generated by its predecessor. Since most people are disinclined to acquiesce to a life in which they are constrained to behave as an externally controlled mechanical device, the breakdown of each new, rationalist design for society is the predictable result.

In On Human Conduct, published in 1975, Oakeshott presents a dichotomy similar to that between the “rationalist” and the “traditionalist” found in his earlier works, which is worth discussing here for the additional light it sheds on his ideas. He opens the book with a meditation on the nature of theorizing. As he concludes that section, he segues into the discussion of the practice/theory dichotomy by noting the debt his ideas on theory owe to Plato’s analysis of the same topic, especially to the famous metaphor of the cave presented in The Republic. Given that similarity, Oakeshott wishes to note an important difference.

As Oakeshott understands Plato, the cave dwellers represent those individuals whose conceptual horizon is bound within the world of practical affairs. Plato was correct, in Oakeshott’s view, in holding that, because such people fail to recognize the limited nature of the practical understanding of reality—instead mistakenly accepting it as the only possible mode of comprehending experience—they therefore have, in effect, imprisoned themselves within its confines (Plato’s cave). And Plato also was accurate in regarding the understanding of the theorist—in that it represents at least an attempt to transcend those limits—as offering, in a sense, a higher form of knowledge than that gained by the solely practical thinker.

However, Oakeshott argues, contra Plato, the truth that the practical understanding of the world is inherently limited does not imply that what it yields it is not really knowledge at all, only that it is knowledge within a restricted domain. Moreover, quite crucially for Oakeshott, the superiority of theoretical knowledge over its practical counterpart in no way means that the former can replace the latter for dealing with the practical world.

As knowledge of the realm of the shadows is a real and hard-won achievement, the theorist goes gravely astray when he relies on his theoretical insights to issue directives to the practitioner, ridiculously trying to “set straight” the practical man on matters with which the theorist has no familiarity. The cave dwellers, first encountering the theorist on his return, might be impressed “when he tells them that what they had always thought of as ‘a horse’ is not what they suppose it to be . . . but is, on the contrary, a modification of the attributes of God. . . . But if he were to tell them that, in virtue of his more profound understanding of the nature of horses, he is a more expert horse-man, horse-chandler, or stable boy than they (in their ignorance) could ever hope to be, and when it becomes clear that his new learning has lost him the ability to tell one end of a horse from the other . . . [then] before long the more perceptive of the cave-dwellers [will] begin to suspect that, after all, he [is] not an interesting theorist but a fuddled and pretentious ‘theoretician’ who should be sent on his travels again, or accommodated in a quiet home.”

This passage provides a fresh perspective from which one can contemplate the character of the rationalist and perceive how it is that he has gone astray. Here the modern rationalist is understood as a “theoretician” who is reiterating Plato’s ancient misstep. Furthermore, Oakeshott now offers a more sympathetic picture of the rationalist than in his earlier, more polemical essays—the reader can appreciate how easy it is to fall into the error of rationalism, since the theorist really has broken through to a higher form of knowledge, and it is quite understandable that, elated by his achievement, he mistakenly concludes that theory ought to be the unquestioned master of practice. But while this model of rationalism significantly enriches the one put forward in the earlier essays, it does not contradict their central thesis.

“Rational” Urban Planning

A real-world example of the sorry effects of the rationalist mentality on society can be drawn from the works of the famed analyst of urban life, Jane Jacobs. Her detailed description of healthy urban neighborhoods is based on her close observation of them, not on armchair theorizing.

Unlike Jacobs, mid-twentieth-century urban planners, possessed by the rationalist mindset, looked at city tenements and saw only chaos. The residents of such neighborhoods were subjected to the noisy activities of industry and commerce, disturbing their peace. Their children, living in densely built-up districts, were forced to play on the sidewalks! What these people lacked was fresh air, sunshine, green spaces, and quiet. As Oakeshott predicted, the planners could not really free their thoughts from the world of practice—instead, what they actually tried to do was create a likeness of their own wealthy, suburban lives in the context of poor neighborhoods, completely ignoring the differences that made suburban life workable, such as greater wealth, ubiquitous ownership of automobiles, lower population densities, more homogeneous populations, the relative absence of strangers passing through the neighborhood, and so on.

Therefore, these planners claimed, the “obvious” solution to the discomforts of ghetto life was to tear down these “slums” en masse and in their place erect purely residential complexes, consisting of high rises separated by wide swaths of grass and trees—in other words, the giant housing projects of the 1950s and ’60s. As Jacobs noted, the rationalist planners, blind to the concrete reality of tenement life, failed to realize that the mix of businesses and residences increased the safety of the residents by providing “eyes on the street.” The neighborhood shopkeeper, who knows all the residents, is out sweeping his sidewalk early in the morning, the workers going to and from their jobs provide a steady stream of pedestrians, and even the neighborhood bar ensures that the streets are not deserted until the wee hours of the morning. Parents transporting their children to and from school appear on the street. Mothers with preschool children head to the parks, workers come out to eat lunch in them, and shoppers come and go from area stores.

The children playing on the sidewalks could be monitored easily by all of these people, many of whom knew them, as well as their parents, leaning out the second-story window to shout, “Johnny, cut that nonsense out!”

By contrast, the new, “rational” housing projects were empty of life around the buildings for most of the day. The basketball court and the lovely green parks were unsupervised because there was no one around. The mother, now living up in her 30th-floor modern apartment, was completely unable to watch over her children’s play if she let them go down to those “recreational” spaces. The result is well-known. The community ties of the bulldozed tenements were shattered, the spaces around the high rises became the domain of drug dealers and muggers, and the rationally designed inner cities of the late 60s exploded with crime and waves of riots.

The effects of rationalism in Nazi Germany, Soviet Russia, Cambodia, and communist China were even more extreme, of course, leading to the deaths of millions upon millions of people in the twentieth century. But I offer the above example from Jacobs because I think it is important to see the relevance of Oakeshott’s work in a more familiar and less obviously rationalist society.

Lovers of liberty should keep Oakeshott’s work on rationalism in mind for at least two reasons. First, it offers a complementary but still significantly different critique of planning to those of Mises and Hayek. However, at the same time, it provides a warning to the advocates of freedom not to fall into the rationalist quagmire themselves. The relevance of the latter point is demonstrated by, for example, the tendency of many development economists, even those who are “market oriented,” to attempt to impose their theoretical schemes for taking a shortcut to westernization on some Third World country, while running roughshod over all the traditions, customs, and morals native to the place, which, whatever their short-comings, at least managed to sustain the society in question over previous centuries. Freedom cannot be “imposed” on a people according to some preconceived scheme. We all need to watch out for “the rationalist within.”

Related posts:

1. Book Review: Rationalism in Politics And Other Essays by Michael Oakeshott
2. Book Review: Environmental Politics: Public Costs, Private Rewards Edited by Michael S. Greve and Fred L. Smith, Jr.
3. Book Review ~ Investor Politics: The New Force That Will Transform American Business, Government and Politics in the Twenty-First Century

Jared Diamond, in a January 2 op-ed in the New York Times, argues for a political solution to what he sees as a looming “consumption crisis” facing humanity. He notes that the current consumption of many resources, such as oil and metals, is roughly 32 times higher in the developed than in the developing world and that, given the earth’s finite stock of these substances, developing countries will be unable to fulfill their desire to live First World lifestyles. He proposes mandating reduced consumption in wealthier nations, so that the poor may consume a fair share of these limited resources.

Those concerned with individual liberty are likely to resist Diamond’s program because of its coercive nature. But that objection may prove inadequate: many people may believe our situation is so dire that we need to sacrifice freedom to ensure the survival of our species. However, I will argue that Diamond’s case fails even on its own terms.

Diamond contends, “Now we realize that [a rising population] matters only insofar as people consume and produce. . . . [Many commentators find a big problem in the] populations of countries like Kenya . . . growing rapidly . . . but it’s not a burden on the whole world, because Kenyans consume so little.”

However, the residents of countries like Kenya generate problems out of proportion to their consumption levels. Their relative poverty means that they burn dirty but cheap fuels, that they cultivate much more land than their First World counterparts to produce equivalent output, and that they devote little of their income to activities like creating wildlife preserves.

Diamond continues, “People in the third world are aware of this difference in per capita consumption. . . . When they believe their chances of catching up to be hopeless, they sometimes . . . become terrorists, or tolerate or support terrorists.” So why not allow the poor every chance to catch up by promoting economic freedom? Then their improving living standards will give them hope for the future and lessen the tendency for them to embrace nihilism.

To support his case, Diamond cites China: “Among the developing countries that are seeking to increase per capita consumption rates at home, China stands out.. . . The world is already running out of resources, and it will do so even sooner if China achieves American-level consumption rates.”

Here, Diamond has embraced a hoary economic fallacy. What counts as a “resource” is an economic question, not a material given. Things become resources when acting man conceives of how he can employ them to further his ends. The history of economic development is one of creating greater value out of the same quantity of physical inputs. Whereas in 1970 “it took [Americans] 15,000 BTU to produce $1 of GDP . . . [by] 2003, this had fallen to 9,500 BTU, a decline of nearly 37 percent,” writes Richard H. Mattoon, a senior economist at the Federal Reserve Bank of Chicago. Similarly, “since 1950 . . . 200 million acres of U.S. farmland have been retired,” despite the growth in America’s population, says Jerry Taylor of the Cato Institute.

Indeed, the nascent field of nanotechnology already offers much more efficient use of raw materials, as well as holding out the possibility that the contents of garbage dumps or sewage plants efficiently could be transformed into valued consumption goods. (For examples, see http://tinyurl.com/32bm4v.) And progress in space travel will make available physical resources from beyond the earth. “Available resources” are constrained by human ingenuity, not by fixed physical endowments.

Diamond writes, “Per capita consumption rates in China are still . . . below ours, but let’s suppose they rise to our level. . . . Oil consumption would increase by 106 percent and . . . metal consumption by 94 percent.” But as China becomes more prosperous, its increasing demand for productive inputs and the consequent rise in their prices will spur entrepreneurs to employ those inputs more efficiently and to find alternatives to scarce commodities.

Diamond chastises those who advocate freedom as the best solution to poverty, saying, “[W]e . . . promise developing countries that if they will . . . institute honest government and a free-market economy—they, too, will be able to enjoy a first-world lifestyle. This promise is impossible, a cruel hoax. . . .”

I suggest we humbly admit to having no idea what kind of lifestyle our descendants may achieve. Think of Stone Age Jared Diamond berating optimists for suggesting that one day, most humans might be able to live to the venerable age of 50 or 60 reached by only a lucky few in his time.

Diamond advocates a future “in which all countries converge on consumption rates considerably below the current highest levels [since] willingly or not, [Americans] shall soon have lower consumption rates, because our present rates are unsustainable.”

That conclusion assumes that raising living standards requires ever more use of the same resources employed today. However, Stone Age consumption of mammoth tusks and inhabitable caves was clearly unsustain-able given a population growing from 100,000 to 6,000,000,000. Fortunately, there was no need to increase consumption of those products in step with our increased numbers.

To support his case, Diamond notes that “Most of the world’s fisheries are still operated non-sustainably. . . even though we know how to manage them in such a way as to preserve the environment and the fish supply.”

But why are current fishing enterprises exploiting these resources so profligately? Private owners of limited resource pools have an incentive to use them responsibly, not extracting so much for current income that tomorrow’s income goes to zero. Notice that there is no crisis of sheep, chickens, or corn being harvested “non-sustainably.” But when the stock of a resource is unowned, then every producer is motivated to grab as much of that common pool as soon as possible, since other producers will be doing the same.

Political Will

Diamond recommends reliance on “political will” to enforce a command-and-control regime of conservation. Even if he has no concern for the loss of personal freedom his program entails, I suggest that he is betting on the wrong horse in this race. A conservation “solution” that relies on coercing individuals to ignore their self-interest is inherently “non-sustainable”: any time the “political will” enforcing it wavers, it is likely to fail. Governments, always in need of the support or at least the acquiescence of their citizens, in times of crisis are quite likely to opt for the reckless exploitation of some resource over the threat of widespread unrest or rebellion. Preserving our natural heritage for the benefit of future generations is a laudable aim, but our best hope for realizing it is to create institutions aligning wise stewardship of the environment with individuals’ desire to improve their own lives, rather than fantasizing that everyone can be united perpetually behind some central planner’s bucolic vision.

Related posts:

1. Consumption Can Drive Economic Growth? ~ It Just Aint So!
2. Book Review ~ The USA Tax: A Progressive Consumption Tax by Laurence S. Seidman
3. Ending Farm Subsidies Wouldn’t Help the Third World? It Just Aint So!

We’ve all seen the signs in our local cafes, boasting something like: “We proudly sell coffee brewed with Fair Trade coffee beans, acquired at a price that permits sustainable farming and pays growers a living wage.” These posters are part of a popular trend in “progressive” circles to promote “fair trade.” For some reason, perhaps because many of these folks get really hyped up on Joe every day, fair trade in coffee seems to be the chief focus of the movement.

According to the latest data I could turn up on the Internet (http://tinyurl.com/2hh6zf), fair-trade coffee buyers must pay at least $1.50 per pound if the spot price on the commodities market is lower than that figure. If the market price is higher, they will pay a 5-cent-per-pound premium over the going rate. (The exact current numbers, if they have changed, are unimportant to our analysis.) I’m not clear how the “fair” price was determined to be $1.50, rather than $1.46 or $1.59 or even $20.00, but so be it. The fair traders evidently believe that growers who cannot make a profit at the market price ought to be helped to stay in business anyway. (To what extent the current market price is a free-market price will be examined shortly.) They find it unfair that, in the words of the website Global Exchange: “Many small coffee farmers receive prices for their coffee that are less than the costs of production, forcing them into a cycle of poverty and debt” (http://tinyurl.com/2h75zq).

There are two possible causes of the situation described by Global Exchange. In some cases it may be that a particular farmer could run his business profitably except that he is competing against others who receive some form of state-granted privilege, for instance, a direct subsidy from their own government or favorable terms of trade from some coffee-importing country. That is clearly unjust, but I contend that the best way to address such injustice is to eliminate the favoritism, rather than trying to compensate for it.

On the other hand, considering that the phenomenon of unprofitable coffee farmers is widespread, it also appears likely that there are simply too many producers in the world relative to the demand for their output. (And, of course, for any particular instance of a money-losing plantation, both factors may be relevant: the farm in question might do better than it does at present if it faced no subsidized competitors, while still falling short of profitability.) To whatever extent the second cause is to blame for the plight of growers, the only long-term, effective remedy is that a sufficient number of those farming at a loss exit the industry so as to permit the remaining producers to operate at a profit. (I am using “profit” here in the accounting sense, meaning an excess of income over expenses, and not in the economic sense of an above-normal return on capital.)

Advising struggling Third World coffee farmers simply to abandon their trade and find another way to make a living may seem flippant and heartless, especially coming from a well-off First World resident who is not confronted with such a daunting prospect. But I suggest that the compassionate concern apparently motivating that initial reaction is only superficial since it ignores two hard realities. First, continuing to operate a money-losing business in the absence of a scheme that plausibly could reverse its fortunes merely makes one’s financial predicament more and more dire. If the situation does not appear likely to change for the foreseeable future, then even relaxing in a hammock all day is a better business plan than continuing to grow coffee at a loss. The former option at least stops the bleeding.

Second, it is ludicrous to imagine that a social arrangement is sustainable in which anyone who chooses to persist in a money-losing occupation is entitled to be supported in his obstinacy by the rest of his society. If all members of a society decided to follow their own inner calling without regard to the needs and desires of their fellows, soon enough there would be no resources available to support the pursuit of their visions. A prosperous society can afford to maintain a certain number of commercially disdainful artists, mendicant religious ascetics, selfless social reformers, unworldly scholars, and carefree “dharma bums,” but only through the efforts of the bulk of its members who grow food, build houses, produce clothing, treat diseases, collect garbage, discourage criminality and violence, and perform all of the other jobs meeting the more mundane requirements of orderly social existence.

Since the very possibility of following a way of life indifferent to material concerns depends on the output of a multitude of others who are attending to those matters, people choosing the former course have no right to demand as their due any share of the resources produced by those opting for the latter course; rather, the visionaries’ just claim for support could lie only in persuading their more-worldly companions voluntarily to aid them in their mission. It is the responsibility of every minimally functional adult to discover how she can perform some activity that others value enough to provide her with her sustenance, whether those others express that valuation by commercial transactions or ideal-inspired donations.

In light of the inescapable requirement that, for a society to continue, its members on net must engage in genuinely productive—meaning remunerative—activities, I can conceive of no plausible case for singling out coffee farmers as members of a special class that is exempt from pulling at least its own weight.

If we reject on principle the notion that any interest group has a rightful claim to such a privileged economic status, it does not imply that we lack sympathy for the real hardships likely to face a poor, largely uneducated peasant whose whole working life has been spent farming coffee and who must abandon the one occupation he knows well for the uncertain promise that he can do better elsewhere. But I suggest that those seeking to ameliorate that peasant’s plight are well advised to direct whatever funds and energy they would devote to that aim toward helping him learn a new, more viable trade rather than using them to postpone the day when he must face up to his real situation.

Somewhat ironically, if fair traders choose to follow the second alternative, it is likely they will wind up even further depressing the coffee price confronting any farmers who are not producing fair-trade beans, since each consumer who switches to the fair-trade product is one less buyer for the “un-fair” coffee traded on the commodity market. “But,” fair traders may protest, “our ultimate goal is that all coffee purchased be fair-trade coffee, so that all growers will receive the higher, fair-trade price!” However, even if that seemingly implausible scenario comes to be realized, the fair-trade movement still could not succeed in securing for every current coffee farmer a higher income than he receives today. A fundamental principle of economics is that the quantity of a good demanded drops when its price increases, meaning that at the universally higher price for coffee the fair-trade campaign would achieve by reaching its final aim, consumers would drink less of the beverage and the current glut of coffee farmers only would be exacerbated.

I suggest that this belief in the power of some concerned body—be it composed of government officials, economic “experts,” religious authorities, or social activists—to discern some “just price” for a good, other than the one emerging from the market process, is the most fundamental misunderstanding bedeviling the fair-trade movement.

Arbitrary-Selection

However, that is not the only problem with its present modus operandi. At least in its current corporate embodiment in the company bearing the name TransFair USA, which is the entity that officially labels certain coffees “Fair Trade,“ the movement appears somewhat arbitrary about which producers are to be blessed with the label. Kerry Howley, writing in the March 2006 Reason magazine (http://tinyurl.com/2dnuv8), describes the predicament of farmers like Gregorio Martinez, who owns a small, family-operated plantation in Honduras. In the course of operating his business he overcame severe hardships, including the destruction of an entire year’s crop by Hurricane Mitch and the threat of imminent foreclosure, to eventually win an important international prize for his product. It might seem that Martinez is just the kind of farmer the fair-trade movement ought to be promoting, but TransFair USA will only certify growers who are part of a cooperative, and so he cannot sell his beans with the “Fair Trade” label. Similarly, in Africa, many coffee farms are deemed ineligible for the label because they are run in a more traditional tribal style rather than in the democratic fashion demanded by the Eurocentric arbiters of who deserves the “Fair Trade” imprimatur.

Marching under the fair-trade banner along with such dubious company are some genuinely promising initiatives. For instance, the effort to convince consumers to purchase “shade-grown” coffee instead of coffee produced in the monocultural method more common today, in which the crop is grown in a cleared field, is a plausible way to help maintain biodiversity. The natural setting of the coffee plant is as an understory shrub in dense forests, meaning that farmers can grow it under a canopy of trees, which may yield profitable crops themselves. Growing coffee under shade certainly results in a more natural environment than having large swathes of land occupied by only one plant species; it’s an environment much friendlier to animal life and perhaps even helpful in slowing global warming. And consumers who buy shade-grown coffee at a higher price than that of coffee grown on a monocultural plantation are not attempting to supplant the market process with their own, arbitrary judgments about what various goods “ought” to cost, but are acting through that process to express their preference for a healthier, more vital environment. Indeed, to an extent that could only be determined by a detailed historical study quite beyond the scope and aim of this article, it was not the market that chose the current predominance of high-tech, monocultural coffee production, but governmental policies. As Deborah James of the Center for Economic and Policy Research notes, “In the 1970s the United States Agency for International Development (USAID) gave over $80 million to coffee plantations in Latin America to ‘modernize’—to strip coffee of shade trees and purchase chemical pesticides and fertilizers” (http://tinyurl.com/2ba9pz).

“Bird-friendly” coffee, as far as I can determine by my (admittedly limited) reading on the subject, is just an alternate name for “shade-grown” coffee—the trees above the coffee plants provide homes and resting places for birds—so buying it is similarly defensible. And if organic farming is really preferable to “chemical farming”—which is a disputed contention, since it is unclear where all the inputs needed for productive organic farming, such as manure, would come from if everyone forswore industrially manufactured fertilizers and pesticides—then buying organic coffee may also make sense.

Another plank of the fair-trade platform, advocating that consumers purchase coffee only from producers who embrace a minimum standard of decent working conditions for the agricultural laborers growing and harvesting their beans, cannot be ruled out on its face as a possible means of improving the lot of those impoverished workers. If some relatively wealthy residents of developed countries are willing to pay a higher coffee price to benefit poor farm hands, their intention is entirely laudable. However, I think the right approach here is to shop for a guarantee of labor standards while letting the market determine what the price for those standards will be, not to attempt to guess at a “just” price and pray that it makes everything all right.

Furthermore, anyone deciding to pursue this course should remain keenly aware there is no “silver bullet” with which to slay the beast named Third World Poverty. Even given that consumers are willing to pay a higher price for coffee produced under stricter labor standards, that labor will still be more costly to the farm owner, meaning that, at the margin, he will find it profitable to use more capital, such as machines or fertilizer, and less labor than he would under less-stringent labor requirements. It is inevitable that fewer workers will be employed under the improved conditions than would have been in their absence. The net result still may be preferable to the situation that existed before the consumers’ campaign for higher labor standards. But if activists are really concerned about the well-being of the people they purport to be helping, and not just their own satisfaction in having adopted a noble cause, then their judgment of whether a real improvement is likely to occur ought to be based on both the positive and negative effects of their actions and not on a naïve faith that good intentions necessarily yield good outcomes.

The fair traders’ broad criticisms of the current institutional foundation on which the global coffee industry is built also are justified, at least for those who advocate a free society, since the current world coffee market could hardly be termed “free.” The coffee market itself is directly subject to many politically motivated distortions. For example, Kendra Okonski of the London-based International Policy Network points to recent policies adopted by the government of Vietnam as contributing significantly to the “coffee crisis” (http://tinyurl.com/2nzmmk). State officials, encouraged by international agencies to undertake “market reforms,” decided to turn the country into a major coffee exporter, with the result that the nation, as of 2006, was the world’s second-largest producer (http://tinyurl.com/39fc7t). The government subsidized producers, assisted in its project by low-cost loans to Vietnamese coffee farmers made by French, German, and Swiss government aid agencies, at a time when coffee prices were high.

But only looking at direct state interventions in the coffee market would seriously underestimate the full impact of state policies on the industry. As Okonski notes, an even “bigger problem is highly subsidized farmers in wealthy countries. Huge subsidies to farmers in parts of the West mean that farmers in poor countries cannot diversify their production, because they cannot access these markets. Poor farmers choose to produce coffee, cocoa and other commodities because they have few other options with which to generate income.” Furthermore, developed countries put high tariffs and import quotas on processed agricultural goods, discouraging the development of valued-added processing industries in the Third World.

Land Theft

The final major deviation of the contemporary coffee market from a genuinely free market that I will note is that the existing pattern of land holdings, in all countries but especially in many of the Third World nations that produce the crop, is hardly the outcome of purely voluntary exchanges. Rather, it owes much of its current shape to past acts of theft, fraud, and highly coercive or manipulated transactions masquerading as trades on a free market. Indigenous people robbed of the land that supported them, land with which their intimate familiarity may have been their most valuable social capital, often were left with no better option than to toil at the behest of their expropriators on whatever miserable terms they were offered, and the lamentable effects of such injustices are still with us today.

As a result of such recent government interventions and past exploitations, farmers who are not the beneficiaries of policy favoritism may find themselves operating at a great disadvantage compared to those who are luckier in that respect. That situation is certainly deplorable. But I can’t see that consumer action would be a promising way to rectify those inequities. How can a coffee shopper be expected to keep track of just which producers are getting just what advantages due to government policies and correctly calculate just what price he should pay to offset the effects of those state-granted privileges? No, it seems to me that the only sensible approach is to fight against the unfair policies directly, at the ballot box, through op-eds, by lobbying, and so on. Perhaps individual buying decisions can have some impact in the meantime, but their effect is likely to be minuscule compared to the scope of the problems.

In short, I see the Fair Trade movement as embodying a mixture of sound ideas for improving the state of the coffee industry and well-meaning but misguided attempts to fight the realities of supply and demand. The latter stem, I believe, from the misconception, common in Progressive circles, that the free market is a merely contingent feature of human social life, rigged up by the powerful to enable their exploitation of the weak. To the contrary, as brilliantly demonstrated by Ludwig von Mises and F. A. Hayek, the market process is the only method for rationally allocating scarce resources in any advanced economy. The mistaken view of many Progressives stems, to some extent, from a simple lack of economic understanding. But their mistrust of free markets also is bolstered by the fact that apologists for the many current situations in which the powerful have manipulated government rules and policies to entrench and increase their privileged positions in society often attempt to disguise the true character of what is going on by claiming that those outcomes are the result of free-market decisions, and, as such, perfectly just. Therefore, it is vital that advocates of truly free markets work to expose such deceit for what it is.

A genuinely free market favors no one except those who best can produce the goods desired by consumers, and no participant in the market process can gain an elevated status in society that is exempt from the necessity to continue to serve the interests of consumers in the future. If Progressives, who typically are driven by a truly commendable desire for a fair society, come to recognize that moving toward genuinely free markets will advance, and not hinder, the achievement of their goals, then their efforts will achieve much better results, to the benefit of everyone except the entrenched interests that profit from the current, government-distorted markets.

Related posts:

1. The Case Against Managed Fair Trade and Strategic Trade
2. The Fair Trade Myth
3. Free Trade to Benefit the Many–Not Fair Trade to Benefit the Few

Thus far the typical libertarian response to the growing clamor has been to challenge the science behind it. Now it really is the scientific consensus that global warming occurred during the twentieth century. What is not so obvious is that (1) humans caused this warming and (2) this warming is necessarily bad.

Although it is interesting to explore the question of whether science has been perverted in the cause of environmentalism, there is a danger for libertarians in pinning their entire case on this strategy. After all, every serious student of science knows that when it comes to empirical claims, we never achieve certainty. For example, even if today one thinks that there are insurmountable problems facing the theory of manmade global warming, one still must accept the possibility that new evidence or theoretical advances could indicate that the environmentalists are perfectly right. Another possibility is that there is some other, similar disaster lurking unsuspected.

For these reasons, I believe it is crucial to accept provisionally, for the sake of argument, the scientific claims behind the case for manmade global warming. In the present article I will demonstrate that it still would not follow that the taxes and other regulations typically proposed by greens are the best way to address the problem. Just as the free market is still the optimal economic arrangement, regardless of how many citizens are angels or devils, so too does the free market outperform government intervention, regardless of the fragility of Earth’s ecosystems.

When trying to determine if the free market is to blame for possibly dangerous carbon emissions, a logical starting point is to list the numerous ways that government policies encourage the very activities that Al Gore and his friends want us to curtail.

The U.S. government has subsidized many activities that burn carbon: it has seized land through eminent domain to build highways, funded rural electrification projects, and fought wars to ensure Americans’ access to oil. After World War II it played a key role in the mass exodus of the middle class from urban centers to the suburbs, chiefly through encouraging mortgage lending.

Every American schoolchild has heard of the bold transcontinental railroad (finished with great ceremony at Promontory Summit, Utah) promoted by the federal government. Historian Burt Folsom explains that due to the construction contracts, the incentive was to lay as much track as possible between points A and B—hardly an approach to economize on carbon emissions from the wood- and coal-burning locomotives. For a more recent example, consider John F. Kennedy’s visionary moon shot. I’m no engineer, but I’ve seen the takeoffs of the Apollo spacecraft and think it’s quite likely that the free market’s use of those resources would have involved far lower CO2 emissions. While myriad government policies have thus encouraged carbon emissions, at the same time the government has restricted activities that would have reduced them. For example, there would probably be far more reliance on nuclear power were it not for the overblown regulations of this energy source. For a different example, imagine the reduction in emissions if the government would merely allow market-clearing pricing for the nation’s major roads, thereby eliminating traffic jams! The pollution from vehicles in major urban areas could be drastically cut overnight if the government set tolls to whatever the market could bear—or better yet, sold bridges and highways to private owners.

Of course, there is no way to determine just what the energy landscape in America would look like if these interventions had not occurred. Yet it is entirely possible that on net, with a freer market economy, in the past we would have burned less fossil fuel and today we would be more energy efficient.

Even if it were true that reliance on the free-enterprise system makes it difficult to curtail activities that contribute to global warming, still the undeniable advantages of unfettered markets would allow humans to deal with climate change more easily. For example, the financial industry, by creating new securities and derivative markets, could crystallize the “dispersed knowledge” that many different experts held in order to coordinate and mobilize mankind’s total response to global warming. For instance, weather futures can serve to spread the risk of bad weather beyond the local area affected. Perhaps there could arise a market betting on the areas most likely to be permanently flooded. That may seem ghoulish, but by betting on their own area, inhabitants could offset the cost of relocating should the flooding occur. Creative entrepreneurs, left free to innovate, will generate a wealth of alternative energy sources. (State intervention, of course, tends to stifle innovations that threaten the continued dominance of currently powerful special interests, such as oil companies—for example, the state of North Carolina recently fined Bob Teixeira for running his car on soybean oil.)

Private insurers have a strong incentive to assess the potential effects of global warming without bias in order to price their policies optimally—if they overestimate the risk, they will lose business to lower-priced rivals; if they are too sanguine about the dangers, they will lose money once the claims start rolling in. Individuals finding their homes or businesses threatened by rising sea levels will find it easier to relocate to the extent that unfettered markets have made them wealthier. Industrial manufacturers, as long as they are held liable for the negative environmental effects of their production processes—a traditional common-law liability from which state policies intended to “promote industry” have often sought to shield manufacturers—will strive to develop technologies that minimize the environmental impact of their activities without sacrificing efficiency. Government interventions and “five-year plans,” even when they are sincere attempts to protect the environment rather than disguised schemes to benefit some powerful lobby, lack the profit incentive and are protected from the competitive pressures that drive private actors to seek an optimal cost-benefit tradeoff.

If the situation truly becomes dire, it will be free-market capitalism that allows humans to develop techniques for sucking massive amounts of carbon out of the atmosphere, and to colonize the oceans and outer space. Beyond these futuristic possibilities, the obvious responses to global warming—such as more houses with AC, sturdier sea walls, and better equipment to evacuate flooded regions—are again only feasible when the free market is unleashed.

It is the poorest people and nations that stand to suffer the most if the worst-case scenario for global warming is realized, and the only reliable way to alleviate their poverty, and thus help protect them from those effects, is the free market.

Can the Market Meet the Threat Head-On?

In the first section I summarized some of the ways governments inadvertently contribute to the very activities that allegedly cause dangerous global warming; in the second I sketched some of the ways that free markets allow humans to better adapt to climate change. However, I haven’t really tackled the problem directly. Am I conceding that with a worldwide problem the market—which is just dandy for one-on-one interactions—can’t match the concerted “will of the people” working through their elected representatives for a common solution?

Of course not. Even when economic transactions generate so-called negative externalities (activities that shower harms on third parties), I still contend that the free market is the best institution for identifying and reducing the problems.

One way negative externalities can be addressed without turning to state coercion is public censure of individuals or groups widely perceived to be flouting core moral principles or trampling the common good, even if their actions are not technically illegal. Large, private companies and prominent, wealthy individuals are generally quite sensitive to public pressure campaigns.

To cite just one recent, significant example, Temple Grandin, a notable advocate for the humane treatment of livestock, asserts that McDonald’s is the world leader in improving slaughterhouse conditions. While many executives at the fast-food giant genuinely may be concerned with the welfare of cattle, pigs, and chickens, undoubtedly a strong element of self-interest is also at work here, as the company realizes that corporate image affects consumers’ buying decisions.

But that self-interest does not negate the laudable outcome of the pressure McDonald’s has applied to its suppliers to meet the stringent standards it has set for animal-handling facilities. Similarly, to the degree that the broad public regards manmade global warming as a serious problem, companies will strive to be seen as “good corporate citizens” that are addressing the matter. And this isn’t ivory-tower speculation on my part—I can see the “green friendly” ads already.

Critics of libertarianism sometimes denigrate it as a political program of “market fundamentalism” that, if put into practice, would reduce all human values to the price they can fetch as mere commodities. But that is a caricature of the social arrangements advocated by any sensible libertarian. The great figures of classical-liberal and libertarian thought have always recognized the vital contributions that nonmarket institutions, such as churches, families, charities, social clubs, communities of scholars and their students, art foundations, conservation groups, neighborhood associations, and youth athletic leagues, make to the healthy functioning of a free society. What libertarians offer as an alternative to statism is not a social order that judges every human interaction solely on a miserly calculation of profit or loss, but a society in which every desirable form of voluntary association is allowed to flourish, free from coercive interference by the state.

Customary Law

Besides the samples listed above, most libertarians recognize private or customary law as another important, nonmarket source of social order. A historical case in point is the Anglo-American common-law tradition in which legal norms evolved spontaneously from the customs of the people to whom it applied, rather than through legislation and state planning deliberately aimed at achieving some “public good.” The many centuries during which the common law sustained civic order in the face of inevitable divergences between individual citizens’ own interests demonstrate that a successful legal order does not inevitably require state sponsorship. The common law has shown itself to be fully capable of dealing with a number of issues that, while not exhibiting the worldwide scope of global warming, are still similar to our present concern in arising from the cumulative effects of many individual actions, each of which, regarded in isolation, appears to be unproblematic and not subject to legal sanction. For instance, the salmon-fishing streams of Scotland are a valuable natural resource, and the communities along them have developed quite successful institutions for ensuring the value of the streams is maintained, including private policing and legal penalties for overfishing and for polluting the water.

The many cases in which voluntary solutions to problems of collective choice have worked pose an empirical embarrassment for those who argue that “public goods” must be provided by the government. Most advocates of compulsory solutions to pollution abatement, for example, would assert that voluntary efforts will be vitiated by “free riding.” If individuals are not forced to contribute their fair share toward addressing these problems, this argument runs, each person rationally will hold back and hope others will pay for the proposed solution, since any free riders would gain the benefits (such as clean air) anyway. Since almost no one likes to be “the sucker,” it follows that the amount of resources devoted to the provision of the public good will fall woefully shy of the total that would be available if each person gave the amount he’d be willing to give if only he could count on everyone else pitching in equally. The sole solution that can be imagined is for the members of a society to create a “social contract” by which they are forced to pay for pollution abatement.

However, Anthony de Jasay notes in his book The State that this argument is severely flawed. If people cannot solve public-goods problems through voluntary cooperation, how can they rely on politicians’ promises to do so? There is no external authority to enforce those promises. There is only public opinion, the same thing that would enforce voluntary solutions. Moreover, government is itself a “public good” in the sense that free riders benefit from the efforts of those who try to get the government to produce public goods such as clean air.

Is Temperature a Public Good?

Another consideration is that the earth’s temperature isn’t such a public good after all. That is, certain people really do have more at stake, particularly if the warming is moderate. For example, if Manhattan became submerged because of rising sea levels, that calamity would not affect every human being equally. The residents of Manhattan and the owners of its skyscrapers would be hurt far more than people living in inland China. Because all the various potential dangers of global warming affect particular people more intensively than others, it is these groups that (in a free market) would have the incentive to reduce CO2 concentrations. For example, if rising sea levels would cause $10 trillion in damage to a comparatively small group of wealthy individuals, that’s a huge “pie” that the wealthy can offer others to motivate them to reduce emissions.

Despite my optimism about the potential to deal with environmental problems through voluntary means, I don’t wish to be misunderstood: If the official global-warming story is true, it presents a serious problem that humanity will find difficult to solve through voluntary means. But this isn’t a strike against voluntarism—of course a difficult problem will be difficult to solve! By the very same token, the government doesn’t do a terrible job at collecting stray dogs, because that’s a very simple task. When it comes to harder assignments, such as stopping terrorism or reducing teen pregnancy, the government’s record is quite a bit worse.

The very features of the official global-warming scenario that hamper purely private solutions would apply equally to government efforts. For example, even if the U.S. government passed draconian measures at home, that alone wouldn’t be enough if China and Indiadon’t follow suit. And just as private companies in a free market may have an incentive to pollute if they can get away with it, so the state, under the influence of special-interest groups and run by leaders always tempted to ignore the public good in favor of increasing their own power and wealth, can have incentives to allow more pollution than is optimal. (It should be clear the “best” amount of pollution is not zero, because even using fire to cook generates some pollutants, and I doubt that anyone but the most misanthropic, fanatical nature worshippers want to reverse all of the last 40,000 years of human progress.)

As in all debates over public versus private choice, it’s inappropriate to measure a realistic free-market response to global warming against an idealized government program. We must try to envision what real people would do if their property rights were respected and compare that scenario with the probable outcome of actual politicians in today’s world being given a blank check in the name of saving the earth.

Government programs don’t ameliorate world poverty or sickness, and no libertarian would deny that these are serious problems. So even if manmade global warming is a real threat, why should we expect governments to get it right on this issue?

Related posts:

1. Global Warming Revisited
2. Higher CO2, More Global Warming, and Less Extinction?
3. Global Warming and the Layman

I was sitting in a sports bar recently when the bartender and three of the patrons near me began discussing the salary of New York Yankee third-baseman Alex Rodriguez. (Rodriguez currently makes roughly $25 million per season.) One of the customers said it was absurd that Rodriguez makes so much when, for instance, teachers, charged with educating our children make only $50,000 or $60,000 per year. The bartender defended Rodriguez’s salary, asking, “If someone offered you $25 million, would you turn them down? And besides, if the owners can pay ballplayers that much, how much are they making?” (His second defense of Rodriguez’s income level is, of course, open to the objection that the owners are even more overpaid than are players.)

I am presenting an account of their conversation here not because I suspect that the readers of The Freeman are especially interested in Rodriguez, but because it struck me as representative of a type of complaint commonly made about the workings of the market: To many people it just doesn’t seem right that pop stars/investment bankers/athletes get paid so much more than nurses/firemen/teachers.

What no one participating in the barroom banter that afternoon seemed to consider was the question of just who is responsible for the size of Rodriguez’s salary. The correct answer, especially given that we were in a sports bar, is that the discussants themselves ultimately are the ones setting such high rewards for being an outstanding athlete. (Not just the four of them, of course, but them in concert with all other sports fans.)

It is the very fans who often grumble about the “ridiculous” wages paid to top athletes who in effect set their salaries. That’s because in a market economy the price paid for any factor of production (including labor services) arises from the choices consumers make about the items they wish to buy and how much they are willing to pay. Producers face costs in providing a good, and if they estimate that buyers will not pay at least enough for their output to cover their costs plus some profit, the good will not be produced. Those estimates can turn out to be over-optimistic: producers are often mistaken in gauging consumer demand, and many a business has gone under because it spent more to manufacture its offerings than consumers were willing to pay. But competition among entrepreneurs for buyers’ dollars rewards those entrepreneurs whose forecasts are generally most accurate with profits that allow them to remain in business and invest even more in the future.

Consumers must bid enough to prompt producers into action, and the price of every good—industrial products as well as consumption items—can be traced to consumer choice. Producers of items needed for the production of consumer goods will find it rewarding to produce those items only if consumers value the final goods enough to pay for the resources and work necessary to create them.

What’s more, the costs producers face in their operations are not determined by nonhuman factors such as energy expenditures, chemical transformations, or the abundance or scarcity of various raw materials; rather they are the consequence of the producers’ evaluation of alternative ways in which they might earn their livings by meeting consumer demand. Of course, producers must not ignore physical reality in their business decisions: it will clearly require far more time and energy to manufacture skillets from iron mined on Mars than from the same metal mined on earth. However, unless consumers value “Martian skillets” more than the terrestrial variety, expending all that effort to procure otherworldly metal will not result in a higher price being paid for it. It is the preferences of consumers that drive the formation of prices all the way backwards along the production chain. If some resource could be used in the creation of a consumer good, but producers judge that their efforts to acquire it will not add enough to the value of the final product to be worth their while, they simply will choose not to employ it; they have no power to drive up the price of the end product by picking an extravagant way of manufacturing it.

This aspect of the market economy, which has been termed “consumer sovereignty,” is entirely independent of how concerned a proprietor is about the welfare of his customers. One entrepreneur may start a firm because of a sincere conviction that the product or service he plans to provide will bring immense benefits to his clientele. Another may be motivated solely by his desire to become fabulously wealthy. But to succeed, both will be equally bound to judge accurately as to how much consumers will value his offerings. Certainly, an unscrupulous businessman may try to deceive consumers about the true nature of what he is selling, but that is more accurately classified as theft rather than commerce and properly is subject to legal sanctions.

Often the understanding of consumer sovereignty as presented above is attacked for not taking into account the character flaws and cognitive shortcomings of the flesh-and-blood people who really populate any economy. However, asserting that in a free market the consumers are sovereign in no way implies that every decision they make about spending their money is perfect and immune to moral or prudential criticism. If a father bets extravagantly on horseraces while neglecting to provide adequately for his children’s needs for food, clothing, shelter, and education, then his friends and family are quite justified in reproving his conduct, and if the neglect is severe, legal remedies may be appropriate. If a wealthy heiress spends her inheritance entirely on lavish evenings of debauchery, then a newspaper’s society columnist is perfectly entitled to bemoan that she is not putting her fortune to a better use. And while it is not immoral if I buy apples for $10 a bag despite their being available for $5 just down the street, a friend may sensibly and helpfully point out that I am needlessly wasting my money.

The recognition that, in the market, the consumer is the ultimate boss does not rely on any idealized model of him as a perfectly rational, fully informed, utility-maximizing supercomputer, whose choices are beyond reproach and are incapable of being improved on through reasoned consideration.

Some critics of “consumerism” argue that, in today’s market societies, consumers’ choices about what to purchase are “not really free” because they have been unduly shaped by massive and pervasive marketing efforts designed to convince people that they want or even need products that they could easily forgo, some of which actually diminish their quality of life. A paradigmatic case is cigarettes: smokers are persuaded to buy them because tobacco companies have made them seem glamorous or sources of great pleasure, but in reality they ruin the health of smokers, who will come to regret their habit.

Not Immune from Error

It is true that consumers are no less immune from error in their choices of what to buy than are producers in their choice of what to make. But if we are to allow free speech and treat our fellow citizens as autonomous individuals responsible for and entitled to make their own decisions, then it follows that they must be allowed to evaluate arguments as to how they should allocate their time and resources themselves. In a free society the proper remedy available to those who deplore smoking or are convinced that their fellows should buy fewer Britney Spears CDs and more Bach is to persuade others of their beliefs. That such efforts at persuasion will sometimes fail is an inescapable consequence of treating others as free agents rather than as one’s vassals whose lives can be directed as one wills.

It is important to note than nothing argued here suggests that every salary we see today is the result of consumers’ voluntary choices. To the extent that any interest group, such as corporate managers, can successfully lobby for favorable legal restrictions on free-market processes, such as laws hampering corporate takeovers, then the members of that group might be able to earn more than they would through purely voluntary transactions. Similarly, the owners of baseball teams who receive municipal subsidies to build fancy, new stadiums can pay their players more than they could without that government largess.

Nevertheless, the enormous salaries earned by sports stars are chiefly the result of the willingness of their fans to pay to see them play. If my neighbors in the sports bar are seriously distressed that star athletes make so much more than educators, the power to alter that situation lies with them. They can stop paying so much for ESPN and tickets to ballgames and instead spend the money they save on their children’s schooling. I certainly would not complain about such a shift in people’s priorities. But it is the only way a free people can address the situation.

Related posts:

1. In Praise of Athletes High Salaries
2. Book Review ~ Major League Losers: The Real Cost of Sports and Whos Paying For It by Mark S. Rosentraub and Home Team: Professional Sports and the American Metropolis by Michael N. Danielson
3. Superstar Athletes Provide Economics Lessons

Economists Sandra Peart and David Levy have written a deeply interesting but ultimately unsatisfying book. While the work uses a major episode in the history of economic thought to cast light on an issue still of great importance today, I believe that the authors’ methodological predilections and their misunderstanding of the proper relationship between scientific theory and practical life result in their dancing around the periphery of that issue.

Peart and Levy’s central argument is that, under the sway of the racist views current during the late-nineteenth and early-twentieth centuries, economists abandoned the axiom of human equality held by earlier practitioners, such as Adam Smith, David Ricardo, and John Stuart Mill. The authors make a convincing case that what the leading opponents of “classical” economics chiefly rejected was its assumption that human nature is the same everywhere and that people differ primarily due to their unique life history and the particular circumstances and incentives they confront. This implies that an “expert” is unlikely to make better choices for some individual than he is for himself. That egalitarianism was anathema to intellectuals like Charles Dickens, Thomas Carlyle, Francis Galton, and John Ruskin, for whom the white race had the mission of directing the lives of their genetic inferiors. A logical extension of racist thought, especially when coupled with the new understanding of evolution proposed by Darwin and Wallace, was eugenics, which advocated top-down control over human breeding in the interest of “improving the species.”

Evangelical Christians rejected white racial dominance based on their belief that, after the Fall, all people were incapable of self-perfection and stood equally in need of God’s grace. Therefore, they allied with the classical economists in a number of prominent public debates. For example, both groups demanded the prosecution of the white governor of Jamaica, Edward Eyre, for indiscriminately killing over 400 of his black subjects to quell an episode of civil unrest, and were opposed by the racists, who lauded Eyre for dealing resolutely with “savages” who refused to appreciate the benevolent tutelage of their white masters.

Unfortunately, racist ideas eventually triumphed even in economics, as Peart and Levy demonstrate with quotes from leading economists, including Alfred Marshall, F. Y. Edgeworth, Frank Fetter, and A. C. Pigou. As a consequence, the assumption that each person should count equally when evaluating the merit of some policy was replaced by the idea that certain people may have a significantly greater capacity for happiness than do others, entitling them to preferential consideration.

The authors having persuaded me that the demise of classical economics was closely tied to the increasing weight given to race in explaining human affairs, I kept expecting to reach their debunking of those racial doctrines themselves. But the nearest thing they offered was a mathematical analysis of how folk wisdom could possibly compete with scientific models in guiding decisions.

I found this disappointing for two reasons: First, the proper outcome of scientific research is not practical advice but theoretical understanding, and so trying to measure a scientific model on the same scale as a proverb represents a categorical confusion. Second, it isn’t even that near to the discussion I hoped to find—in fact, their defense of folk wisdom strikes me as being irrelevant to their central concern, because it could be true both that folk wisdom is often a match for scientific experts and that the racists were right in that the folk wisdom, say, of the Lithuanians is superior to that of the Latvians.

But Peart and Levy do not merely avoid examining the evidence for racist views: they disparage any effort to do so, asserting that the danger of taking such theories seriously outweighs the value of any scientific truth they possibly contain. Here again, I think the authors suffer from same fundamental confusion as did the eugenicists: theoretical understanding is not a rival of, or potential substitute for, practical judgment. No genuinely scientific theory should be declared beyond the pale because it is politically incorrect. The best safeguard against such horrors as Nazism and Stalinism lies in realizing that even if their key theories were scientifically sound, it would not justify the policies they were said to imply, for such matters can never be resolved based solely on scientific facts but involve ethical judgments as well. For example, there is nothing incoherent in a scientist’s hypothesizing that race is an important factor in human action while still regarding racial persecution and discrimination as immoral.

While Peart and Levy have written a fascinating and well-researched book that successfully illuminates an important factor in the transition from classical to neoclassical economics, their work falls short of its promise due to the authors’ failure to recognize the gulf separating theoretical speculation from practical reasoning.

Related posts:

1. Book Review: Classical Economics: An Austrian Perspective on the History of Economic Thought, Volume II by Murray N. Rothbard
2. Classical Economists, Good or Bad?
3. Book Review: Christianity and Economics in the Post-Cold War Era: The Oxford Declaration and Beyond Edited by Herbert Schlossberg, Vinay Samuel, and Ronald J. Sider

There are also schemes circulating for supplementing the current income tax with, for example, a sales tax or VAT (value-added tax), but such plans are unlikely to gain much support from libertarians, given that they pose the obvious danger of providing the government with an additional way to collect revenue. Since they threaten to merely increase the overall tax burden on society without offering, from a libertarian point of view, any compensating benefits, I will not address them in this article.

However, suggestions for replacing the income tax with a sales tax, or simplifying it by taxing everyone at a single rate and eliminating all deductions (a “flat” tax) have caught the fancy of some libertarians. The main attractions of these ideas are that substituting a sales tax or flat tax for the current income tax appears to ease the burden of tax compliance. A sales tax in particular does not seem to penalize savings and investment the way an income tax does, and the promoters of such policy changes contend that their new system of taxation will produce results closer to those that would come about on the unhampered market than does the existing apparatus.

One popular proposal along such lines has recently been described in The Fair Tax Book, coauthored by talk-show host Neal Boortz and Georgia congressman John Linder. Because of its prominence, I will use it as a paradigm for all plans of its kind. I believe that the problems it contains are endemic to other similar schemes; so my case against Boortz and Linder also applies more generally.

The authors under discussion present their alternative to our present system as a virtual cornucopia pouring forth blessings on the American people. Implementing their idea, they contend, will do away with the oft-reviled IRS, reduce the effort devoted to complying with the tax code to almost nil, greatly lift the living standards of the poorest Americans, reverse the trend of U.S. firms relocating overseas, and provide a tremendous boost to the nation’s economy. Clearly, if these promises are realistic, everyone should enthusiastically support their plan. However, a clear-sighted analysis of the proposal reveals that the case for predicting these benefits is constructed on a foundation riddled with wishful thinking and flawed logic.

For example, Boortz and Linder argue that their tax system will greatly boost the purchasing power of most Americans’ incomes, since it eliminates the portion of the cost of every good that currently stems from the seller’s tax burden. However, their argument relies on a ludicrous assumption as to where the incidence of present taxation actually falls: On the one hand, they claim that eliminating the income tax will reduce the price of what you buy roughly 20 or 30 percent because producers all pass the tax they pay on to you through higher prices. On the other hand, they also point out all the money you’ll save by no longer paying your own income tax. Apparently, unlike those involved in making everything you buy, you can’t just pass on that tax to others. It seems the incidence of the income tax falls entirely on one special segment of American society: the readers of The Fair Tax! The authors are guilty of counting the savings their readers will see from ending the income tax twice, once in the price of the things they buy and again in their own paychecks. In reality, getting rid of any tax will result in some combination of lower prices and higher incomes, the proportion depending on the particular circumstances of each case. But the total of the two effects will only sum to the gross reduction in taxation, and certainly not to double that figure!

Another supposed advantage of the Fair Tax is that, unlike the present situation where taxes are withheld from every paycheck, obscuring the share of one’s income that the government takes, the Fair Tax will be clearly visible, listed on every sales receipt. However, given that it would be a ubiquitous aspect of all one’s shopping, it is hard to see why its presence won’t fade from view just as readily as the income tax has through withholding. After all, workers today get a “receipt” with every paycheck that plainly shows how much of their salary went straight to Uncle Sam, but that has not solved the problem.

IRS Unnecessary?

Another curious claim on the part of the authors is that the Fair Tax will make the IRS unnecessary. Apparently, people will simply pay this sales tax with no need for an enforcement agency. No one will ever claim that what are really retail sales are wholesale, and no one will ever hide cash transactions from the government—all because we’ve changed how we collect a tax burden that remains just as large as it is today.

To illustrate the lack of realism on display, I’ll offer just one example of how the Fair Tax could be avoided (with a little imaginative effort the reader will probably be able to come up with many others): the tax is imposed only on final sales, meaning those to consumers, and not on purchases made by producers along the way to that end point. So let’s say some executive is tired of paying 23 percent extra—that’s the sales tax rate our authors envision—on everything he buys. The way around the tax is to have the firm pay for as much of his consumption as possible, by devising some way to portray buying the items as important business expenses rather than personal purchases.

Boortz and Linder will no doubt respond that such a practice will be illegal, but that’s not the point. To catch people at such a game requires an investigative body on the lookout for its taking place—the players are not going to turn themselves in, nor will those uninvolved easily spot the activity and report the participants to the authorities. Even with today’s comparatively low sales taxes imposed by state and local governments, it is common for small-business owners to offer a customer a discount for paying in cash, thereby splitting the savings from tax avoidance between the two parties. The Fair Tax rate, three or four times higher than its present counterparts, will promise a proportionally larger reward for successfully dodging it. Fair Tax advocates may not call the agency tasked with enforcing compliance with the new law the IRS, but they will surely require such an agency if they plan to maintain government revenue at anywhere near its current level, which is a crucial element in their sales pitch.

Moving Offshore

The contention that this kind of tax reform will stem the tide of American businesses relocating overseas relies on firms taking into account the tax impact of corporate decisions. If moving headquarters to some tax haven, such as Bermuda or the Cayman Islands , can significantly lower the firm’s tax costs, then the move is likely to get serious consideration. It is true, therefore, that eliminating corporate taxation, as Boortz and Linder propose to do, will be an attractive change in the eyes of multinational companies. However, executives do not consider only corporate taxes in deciding where to locate. The taxes they and their employees will personally have to pay, as well as the amount the local tax system adds to the cost of the products purchased within the country, are also relevant factors. Therefore, the best bet for a nation wishing to retain existing businesses and attract new ones is to have a low total tax burden, rather than to eliminate one form of taxation while seeking to completely offset the lost revenue by introducing a new method of collection.

To be fair to our authors, I will note that they also suggest their support for reducing the overall tax take, but they have decided to separate that issue from their tax proposal and focus on the latter, since they believe it would prove highly beneficial even without any tax cuts. This, I suggest, is a major error.

There is a subtle matter of economic theory, expounded by the great Austrian economist Ludwig von Mises, that is worth examining here since it has great bearing on the topic at hand. In his crowning work, Human Action, Mises points out that the actual burden of any tax is determined by the market process rather than by the taxing authority. The deep import of Mises’s contention can easily be overlooked because it seems at first glance to merely reiterate a standard lesson contained in introductory economics courses. It is commonplace for beginning students to encounter a demonstration of how the portion of a tax on, say, alcohol, that is paid by the buyer versus the portion borne by the seller is quite independent of the government’s decision as to which party is legally obligated to pay the tax. If, for example, there were only one supplier of alcohol, while drinkers’ demand for booze dropped very little in response to increased liquor prices, then the consumers would wind up bearing most of the burden of any new tax, even if officials assign the seller the responsibility for remitting it. Indeed, Boortz and Linder sometimes seem to grasp this idea, although they ignore it in contending, as I noted, that all the cost of the present income tax is passed on through higher prices.

But Mises’s insight goes well beyond the typical analysis. The mainstream textbooks analyze the market for the taxed good as if it were entirely self-contained, isolated from the rest of the economy. But in the real world the supply and demand for any good is deeply intertwined with the markets for all alternative goods and services that might be produced or consumed. That means that although legislators might be seeking to tax the alcohol industry, in reality it could turn out to be, say, truck drivers who are hardest hit, if liquor companies shift toward shipping by rail in response to their new cost. Or perhaps soft-drink manufacturers will be the group most affected, if consumers decide to forgo a few sodas a week to maintain their previous level of alcohol consumption at the now higher price.

One crucial ramification of understanding that the market determines the true incidence of a tax is that the particulars of how a government collects its revenues are of decidedly secondary importance. Of course, it is possible to design tax schemes so Byzantine that trying to comply with them is even more onerous than paying the taxes themselves. But in general the market process will distribute the true incidence of a nation’s tax system according to the cumulative dictates of individuals’ supply-and-demand decisions, thwarting policymakers’ dreams of directing the burden by top-down planning.

Another fundamental error common to tax-reform schemes like the Fair Tax is that their proponents evaluate the attractiveness of their favored plan in an ideal world where powerful and wealthy special interests won’t greatly influence its realization. They then compare that fantasy scenario with the messy reality of the tax code we have today. But any method of taxation that attempts to divert as much of the output of society’s productive activities into the coffers of the state as does the current one will inevitably prompt intense efforts by a multitude of parties to tailor the actual details of the system to their liking. I see no reason to imagine that their lobbying would not complicate any “reformed” tax code until it is as convoluted as what we have today. The only reform that is likely to avoid that fate is a dramatic reduction in the total tax take, thereby greatly decreasing the potential payoff of successfully tilting the system in one’s favor.

I don’t mean to rule out the possibility that one or another tax reform might represent a genuine improvement over the present situation. But the key question is whether such proposals deserve any significant portion of the necessarily limited attention that libertarians can devote to policy issues. A small reduction in the penalties currently imposed for drug crimes would no doubt be a step forward, but I suggest that focusing on such a goal would be a distraction from the real libertarian aim of repealing all laws violating individuals’ freedom to decide on their own what to eat, drink, and smoke.

Similarly, while the hope of achieving any large decrease in the level of taxation may appear remote today, that hope will only recede further into the distance if we dissipate our energy in marginal battles that, even if won, would leave the core of the problem untouched.

Those who desire to relieve the crippling effect that today’s massive states have on their citizens ought to focus on reducing the share of private wealth that governments are able to claim as their due. To instead concentrate on tinkering with the means by which that claim is effected is like a doctor treating a person for athlete’s foot even while the patient is suffering a heart attack.

Related posts:

1. The Internet and the Death of the Sales Tax
2. Capital Letters: The Flat Tax
3. The Flat Tax: Simplicity Desimplified

Princeton University economist Paul Krugman, in his New York Times column of June 16, argues that the current fears about an increase in the U.S. inflation rate actually pose a more serious threat to the American economy than rising prices.

As he puts it: “I’m worried too—but not about recent price increases. What worries me, instead, is the Fed’s overreaction to those increases. When it comes to inflation, the main thing we have to fear is fear itself.”

Krugman acknowledges that there has been a general rise in prices of late, but says, “[T]he real issue is whether there’s a serious risk that inflation will become embedded in the economy.” He continues: “The classic example of embedded inflation is the wage-price spiral . . . of the 1970’s. Back then, whenever wage contracts came up for renewal, workers demanded big raises, both to catch up with past inflation and to offset expected future inflation. And whenever companies changed their prices, they raised them by a lot, both to catch up with past wage increases and to offset expected future increases.”

Krugman fails to explain how employers were able to pay ever-higher wages to their workers without going broke, or how consumers could afford to offer more and more money for the goods they wanted. Almost everyone would like to be able to charge a steadily higher price for whatever he offers on the market.

If one person is able to do so while most others cannot, the higher price will make him genuinely better off, as it enables him to claim a larger share of total economic output than he previously could. But it is clearly impossible for all market participants to increase the relative size of their “cut of the pie” at the same time. (Of course, in a growing economy, the pie itself is getting bigger, so successive slices that are proportionally identical still will grow absolutely larger over time.)

If prices are rising across the entire economy, it usually means that an increase in the supply of money is reducing its value relative to other goods. It is true that this process will enrich those whose wealth is concentrated in stocks of commodities rather than in cash, but that happens at the expense of those holding the bulk of their wealth in bank accounts, money market funds, and fixed-income pensions. Inflation redistributes wealth toward people who, by foresight or by luck, have anticipated rising prices, but it cannot create prosperity—only saving and the effort to produce what other people will appreciate can do that.

Krugman tacitly acknowledges that the real source of inflation is the treasury’s printing press, not abstract “pressures” or “spirals,” when he notes, “The Fed eventually brought the inflation of the 1970’s under control” by raising interest rates to slow the growth of the money supply. If the source of that inflation hadn’t been the flood of new money pouring from the monetary authorities in the early ’70s, then how could choking off that flow have alleviated the problem? Sellers, no doubt, would have liked to continue to get steadily higher prices for their offerings, but when the Fed stopped inflating the money supply, they were no longer able to do so.

Krugman contends there is little chance of a “wage-price spiral” setting off today, because wages aren’t increasing much. That leads him to ask: “But if wage pressures are so moderate, where’s the inflation coming from? The answer is soaring oil and commodity prices.”

Once again, money is notably absent from Krugman’s story. If the amount of money in circulation hasn’t increased, then a rise in the price of, say, oil, gold, or wheat must be offset by a decline in the price of various other goods, making for a relatively stable purchasing power for the dollar. People can only spend more on some things without spending less on others when there is more money around than there was before the price increases. (Since Krugman makes no claim that rising commodity prices have had an impact on the “velocity” of money, I see no need to introduce that complication in responding to his argument.)

Krugman even tries to get us to make friends with inflation: “And bear in mind that many economists . . . have said that a little bit of inflation… is actually good for the economy.” Sure, and many economists once claimed that socialism could provide a higher standard of living for the common man than capitalism could. Those temporarily mistaking a general rise in prices for increased demand for their product or service may briefly be spurred into increasing their output, creating the appearance of a booming economy. But since the increase in production is prompted by a misunderstanding of the real economic situation, it inevitably will result in the misuse of scarce resources. Once it becomes apparent that consumers were not really expressing a greater demand for the goods whose prices were rising, but were only bidding more because more dollars were available than before, then many producers will come to regret their decisions to increase output.

The spurt of business activity generated by “a little bit of inflation” is closely analogous to the spurt of physical activity following the ingestion of “a little bit of speed.” Both seem to create positive results in the short run but prove to be unsustainable and costly in the long run. Keynes attempted to dismiss such objections to his own inflationary prescriptions by noting “in the long run, we are all dead.” However, in the case of an inflationary boom, the “long run” is short enough that most of those who were present for the opening act will still be around for the denouement.

Could Be a Problem

To his credit, Krugman does admit that he “can think of ways in which inflation could become a problem.” But that mental exercise shouldn’t tax a prize-winning economist very much. For instance, it does not require an esoteric appreciation of some arcane economic theory to conceive that inflation could become a problem by tearing apart the very fabric of social cooperation in a nation, as it did, say, in Germany in the 1920s, Argentina in the ’70s and ’80s, or Hungary at the close of World War II. It might also have occurred to Krugman that even “moderate” inflation is problematic, since it distorts the price system, rewarding some people not for their productivity but because they correctly anticipated rising prices, while penalizing others whose only sin was to be holding too much cash during an inflationary period.

Krugman declares that he is far less concerned by the specter of inflation than he is about other possible economic troubles, such as “a rapidly deflating housing bubble.” But what pumped up the housing bubble in the first place? It is simply a manifestation of the easy money that the Fed previously supplied to lenders. The aim of that policy was to maintain consumers’ enthusiasm for spending, an enthusiasm generated by the steady and strong rise in the price of their houses, thus enabling homeowners to upgrade their lifestyles through refinancing and second mortgages.

Krugman is surely aware of the many economists who insist that the root of every inflation is an increase in the money supply, since that group includes such prominent figures as the Nobel-prize-winner Milton Friedman. Why, then, doesn’t he even mention monetary theories of inflation in his column? The only reason I can imagine is that Krugman’s commitment to increasing the power of the state blinds him to the fundamental character of inflation: it is the consequence of the government printing new money to achieve some policy goal by stealth, without the unpopular move of raising taxes.

Related posts:

1. Something Besides Money Growth Causes Inflation? It Just Ain’t So!
2. Inflation 101: Cause Versus Transmission
3. Inflation in One Page

In an op-ed in the January 6 New York Times, “liberal” U.S. Senator Charles Schumer and conservative economist Paul Craig Roberts tapped into the anxiety felt by many Americans about their changing roles in the global economy. The authors argued that new economic conditions undermine the classic argument for free trade:

The case for free trade is based on the British economist David Ricardo’s principle of “comparative advantage”—the idea that each nation should specialize in what it does best and trade with others for other needs. . . .

However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods—what he called the “factors of production”—would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today’s case, to a relatively few countries with abundant cheap labor. In this situation . . . some countries win and others lose.

For many advocates of liberty, the primary argument for free trade is a moral one, succinctly captured by FEE founder Leonard Read in the title of his book Anything That’s Peaceful. They contend that if two people voluntarily enter into an exchange of goods, then no one else has a right to aggressively disrupt it. The moral status of such interference does not depend on whether the people live in different countries.

But those who argue for free trade on moral grounds are usually pleased to hear that it also leads to prosperity. Furthermore, there are many people who are swayed chiefly by utilitarian arguments: Will policy A make their nation’s residents better off than policy B? Therefore it’s worth examining the claim that, under modern economic conditions, Americans are being hurt by free trade with low-wage countries such as China.

Schumer and Roberts assert that they are not “old-fashioned” protectionists. They favor free trade in goods. But Roberts claims that there is a fundamental economic difference between an American’s purchasing clothing from a Chinese manufacturer and his purchasing it from another American who has opened a factory in China. In the first case only the clothing moves internationally, while in the second case capital also moves.¹

However, if China is more suited to clothing production than America is and if there is free trade in goods, then capital value will move to China, however mobile American capital is. Clothing-related capital goods in China will increase in value while those in America will decrease. The difference between Roberts’s two cases is who will own the appreciating capital goods.

When an American capitalist moves a factory to China, factory jobs do leave the country, but the profits still return to the United States. Not only does the American capitalist benefit, but so also might many other Americans. It is true, as critics of free trade often point out, that some of the beneficiaries may hold low-wage service jobs, such as gardeners, maids, waiters, and nannies. While their pay may not be impressive by American standards, they no doubt appreciate having a job. In fact, many teachers, engineers, and managers from poorer countries eagerly seek such jobs here. Furthermore, the American capitalist is also likely to employ higher-wage workers, such as accountants, architects, massage therapists, chefs, and chiropractors.

If American capitalists are denied opportunities overseas, foreign capitalists will take advantage of them. If, say, a Swiss capitalist does so, those jobs will be in Switzerland instead of the United States. How, exactly, would that benefit Americans?

Resource Immobility

Schumer and Roberts are wrong in contending that the case for free trade depends on productive resources being relatively immobile between countries. As Ludwig von Mises said in Human Action:

People cavil much about Ricardo’s law . . . [because it] is an offense to all those eager to justify protection . . . from any point of view other than the selfish interests of some producers. . . .

It has been asserted that Ricardo’s law was valid only for his age and is of no avail for our time which offers other conditions. [But] if one assumes that capital, labor, and products are movable . . . then it is superfluous to develop a theory of international trade as distinguished from national trade. . . .

The teachings of the classical theory of interregional trade are above any change in institutional conditions.²

In other words, international trade is different from trade within a nation only when national borders restrict the movement of productive resources. But Ricardo’s law of comparative advantage applies among all people, whether or not they live in different countries. Mises preferred to call it “the law of association,” since it is the foundation of all interpersonal exchange.

Because each person differs from everyone else in his relative ability at different tasks, any individual will always have some comparative advantage over any other person. Therefore, any two individuals always have some mutually beneficial way to cooperate. And since trade between nations always boils down to trade between individuals living in those nations, any two countries also will have mutually beneficial trade available to them.

Of course, Schumer and Roberts are not merely imagining that some Americans are having a difficult time because of the greater ease with which certain jobs, such as high-paying high-tech jobs, can now be moved overseas. An honest advocate of free trade must admit that there will often be people who are made worse off, at least in the short run, by the freedom to trade internationally. But the same is true of trade within the borders of a country: If you open a restaurant near to and better than mine, my business will suffer.

It might be pleasant to live in a world of unlimited resources, where everyone who wanted to run a restaurant could do so without having to compete for customers’ scarce dollars. But since we don’t, the fact that my situation might worsen because of your business activities is an unavoidable consequence of the freedom to buy from and sell to whomever one wishes. If we try to prevent all such unpleasant outcomes, we will eliminate the market economy and regress to a hand-to-mouth existence.

Those who find that scenario enticing are welcome to retreat to the wilderness and live that way today, without trying to impose their vision on others. The rest of us should realize that freedom necessarily means that we can’t pre-arrange social affairs to guarantee every outcome we desire. The result of voluntary interactions among free people will not always be to the liking of every interested party. The alternative to a market economy is not an economy in which someone can control all outcomes, but a “non-economy,” or, as Mises called it, “planned chaos.”

Notes

1. Paul Craig Roberts, Mises.org Blog,  http://www..mises. org/blog/archives/2004_01.asp
2. Ludwig von Mises, Human Action, Scholar’s Edition (Auburn, Ala.: Ludwig von Mises Institute,     1998), pp. 160–63.

Related posts:

1. Free Trade Has Been Refuted? It Just Aint So!
2. Free Trade to Benefit the Many–Not Fair Trade to Benefit the Few
3. Free Trade and Flexible Markets

When discussing business dealings, the phrase “Money talks!” often comes up. A similar aphorism is, “He who pays the piper calls the tune.” The idea behind such sayings is that a person who is paying money is the superior of the person receiving the money. The payer gets to determine the nature of the relationship, while the payee can either conform or trade somewhere else.

On its surface, this seems to be a “capitalist” way of looking at things. After all, what could be more market-oriented than the payer’s getting what he wants for his money?

I believe that such a view is fundamentally flawed. It obscures the most important aspect of market exchanges, and foments resentment against the market where it needn’t arise.

To understand why, we must return to the roots of the marginalist revolution that swept economics 130 years ago. In 1871 the Austrian economist Carl Menger pointed out in Principles of Economics that parties to exchange cannot value the traded goods equally. After all, Menger asked, if they do so, why wouldn’t they immediately trade the goods back? If Joe values a pig as equal to three chickens when he trades his pig for three of Mary’s chickens, why wouldn’t he take the pig back in exchange for the three chickens a moment later? Indeed, if exchanges took place when the goods were valued equally, why wouldn’t the parties trade back and forth forever?

Clearly, if Joe trades one of his pigs for three of Mary’s chickens, he must value three chickens more than he does one of his pigs, or he wouldn’t bother exchanging. Similarly, Mary must value a pig more than she does three of her chickens. In other words, exchanges take place only when the parties don’t value the goods exchanged equally. Each party values the goods he receives more than the goods he gives up.

When we apply this insight to an exchange involving money, we can begin to see the problem with the idea that “money talks.” It is true that the laborer must value the wage he receives more than the time and effort he gives up to earn it, or he wouldn’t bother working. But it is equally true that the employer must value the labor he receives more than the money he gives up to buy that labor, or he wouldn’t bother hiring. Both parties are giving up something they value less in order to receive something they value more. Or, as we might put it more colloquially, no one is doing anybody else a favor.

The person offering money for labor is hoping to gain something, every bit as much as the one who offers labor for money. Neither is the other’s benefactor, and neither has an intrinsically superior position in the transaction.

The factory worker might find himself desperate for a job so that he doesn’t lose his house. But the factory owner might find himself desperate for workers so that he doesn’t lose his factory. In fact, in modern economies almost everyone both offers goods and services for money, and money for goods and services.

I worked for a time at Stew Leonard’s in Norwalk, Connecticut, a business that gained renown as “the world’s largest dairy store.” Stew’s successful operation was studied by businessmen from as far away as Japan. His motto was, “The customer is always right.” A customer could return only the bone from a large roast, claim that the roast didn’t taste right, and receive a refund. Stew always believed that he would get more business from the customer in the long run by fulfilling a bogus refund request than by turning the customer down. If someone’s goal is to maximize his monetary profits, that’s not a bad way to do business.

On the other hand, a businessman could also choose to operate like the Soup Nazi on “Seinfeld.” That character knew he had the best soups in Manhattan. He also felt he was an artist when it came to creating soups. If a customer didn’t feel like playing by his rules—for instance, if the customer asked about the ingredients in a soup—he would throw the customer out of the store. There is nothing “irrational” or “non-economic” about such behavior. The Soup Nazi had decided he would sacrifice some potential monetary gain in exchange for an increase in his artistic freedom.

Renaissance Advance

George Mason University economist Tyler Cowen, in his book In Praise of Commercial Culture, notes that just such a decision marked a great advance in artistic freedom during the Renaissance. Throughout the Middle Ages artists had been subservient to their patrons, executing works in whatever manner the patron wanted them. But during the Renaissance, artists began to have their own ideas about what work they were willing to do and just how they would perform it. With Michelangelo, the independent artist had fully arrived. As Cowen says, “Customers paid fantastic fees for the privilege of hiring Italy’s most famous artist.”¹ Even Pope Julius II, “one of the most powerful men of the sixteenth century,” could not force Michelangelo to compromise his artistic standards. When the Pope did not supply the building materials Michelangelo expected for a commission, Michelangelo walked out on him and returned to Florence. “It was the Pope who made concessions to Michelangelo to ensure his return to the project,” Cowen writes.²

Cowen points out that such behavior “does not contradict the economist’s notion of ‘consumer sovereignty,’ properly interpreted; rather, the artist himself is also a consumer bidding for his own time. If the artist prefers to satisfy his own tastes rather than to receive more money from buyers, that also represents satisfaction of a market demand—the artist’s.”³

The idea that the person offering money in an exchange is superior to the person offering other goods is a vestige of an antiquated, status-based way of viewing social relationships. During the Middle Ages, as Princeton historian Theodore Rabb says, “one’s social standing relative to others was determined, at birth, by a web of rights and obligations that depended on land and its products.”⁴

In feudal society it was usually the landed nobility who employed others. The employed were regarded as their social inferiors. As a result, the role of a person hiring another for money was usually seen as socially superior to the role of the person hired.

However, in certain cases the person receiving money might have had a higher status than the person paying him. The continuing effect of such a status-based view is apparent when we consider professions where, unlike at Stew Leonard’s, “the customer is often wrong.” We might include college professors, lawyers, doctors, and skilled tradesmen in such a list. All of those professions had a status above that of an “ordinary” laborer or peasant. To this day, none of those professions treat the customer in the same fashion as, for example, a typical supermarket or restaurant does. Doctors give their customers (patients) orders about how to conduct their lives and make them sit for 45 minutes in a waiting room. College professors do not ask students what they want to learn, but tell them what they must learn. Unlike at most stores, where the employees must park in special areas far from the entrance, saving the best spots for the customers, professors typically get the best parking spots at college campuses. The difficulty of getting a skilled carpenter or plumber to show up for appointments is legendary. These examples demonstrate that it is not the mere fact of being paid that makes the difference, but is instead the status attached to an economic role.

Claims of Exploitation

The lingering belief that the person offering money in an exchange is somehow superior to the person offering other goods is damaging to the case for the market economy. It fuels Marxist claims of exploitation and breeds resentment among people who find themselves considered “inferiors” because they exchange their labor for money.

It is true that in the market economy “money talks.” But so do labor, oil paintings, heads of cattle, and every other good offered for exchange. All offers are attempts to persuade another to trade. We all create the “economic pie,” and we are only “entitled” to those portions of it that we have made ourselves or that we have persuaded others to voluntarily exchange with us. Once we recognize that, we’ll see that we’re all in this together.

Notes

1. Tyler Cowen, In Praise of Commercial Culture (Cambridge, Mass.: Harvard University Press, 1998), p. 93.
2. Ibid., p. 94.
3. Ibid., p. 90.
4. Theodore K. Rabb, Origins of the Modern West: Essays and Sources in Renaissance and Early Modern European History (New York: McGraw-Hill, Inc., 1993), p. 163.

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1. A Rural Minister Insists that Money Talks
2. A Speculator Talks About Free Markets
3. Rudolph Rummel Talks About the Miracle of Liberty and Peace