I’m inclined to think of George Orwell and F. A. Hayek at the same time. Both showed great courage in writing the truth, undaunted by the consequences. Both valued freedom, though they understood it differently.

Orwell, a man of the “left,” could not remain silent in the face of the horrors of Stalinism. Twice—during the Spanish Civil War and again at the dawn of the Cold War—he refused to permit his comrades to blind themselves to where their collectivism had led and could lead again. For his favor he was called a conscious tool of fascism, a stinging accusation considering he had gone to Spain to fight fascism. (But for a few inches, the bullet that penetrated Orwell’s neck in Spain would have denied us the latter warnings, Animal Farm and Nineteen Eighty-Four.)

Hayek, a man of the “right,” risked ostracism and worse in 1944 by publishing The Road to Serfdom. Writing in England at the height of World War II, this Austrian-turned-Briton warned that central economic planning would, if pursued seriously, end in a totalitarianism indistinguishable from the Nazi enemy. That couldn’t have been easy to write at that time and place—central planning was much in vogue among the intelligentsia. While a good deal of the reception was serious and respectful, a good deal of it was not. Herbert Finer, in Road to Reaction, called Hayek’s book “the most sinister offensive against democracy to emerge from a democratic country for many decades”; it expressed “the thoroughly Hitlerian contempt for the democratic man.”

Not surprisingly, The Road to Serfdom brought Orwell and Hayek together in print. Orwell briefly reviewed the book along with Konni Zilliacus’s The Mirror of the Past in the April 9, 1944, issue of The Observer. The man who would publish Animal Farm a year later and Nineteen Eighty-Four five years later found much to agree with in Hayek’s work: “In the negative part of Professor Hayek’s thesis there is a great deal of truth. It cannot be said too often—at any rate, it is not being said nearly often enough—that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of.”

But true to his left state-socialism, Orwell could not endorse Hayek’s positive program:

[H]e does not see, or will not admit, that a return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State. The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led, and since the vast majority of people would far rather have State regimentation than slumps and unemployment, the drift towards collectivism is bound to continue if popular opinion has any say in the matter.

It’s disappointing to see Orwell give such short shrift to Hayek’s positive thesis. He is glib and dogmatic, which is unbecoming a serious intellectual such as Orwell. His ignorance of economics leaps from the page.

“[A] return to ‘free’ competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State.” It’s hard to believe that someone so familiar with Stalinism could have written that. Even without knowing much economics, could he really have thought that what goes on in market-oriented societies, even during depressions, could be worse than the famine Stalin inflicted on the Ukrainians, the show trials and executions, or the labor camps in Siberia?

“The trouble with competitions is that somebody wins them.” In a market producers compete to better serve consumers. The losers in that competition are not exiled or executed. They find other ways to serve consumers, just as producers are trying to serve them.

“Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led. . . .” Where has monopoly arisen without the aid of the State? We find no market-generated monopoly in England or the United States. There, major business interests actively promoted protectionism and other interventions precisely to tamp down competition and protect their market shares.

“[T]he vast majority of people would far rather have State regimentation than slumps and unemployment. . . .” But that’s a false choice. Slumps and unemployment, as Hayek and his mentor Ludwig von Mises taught, are products of central-bank manipulation of money and interest rates—that is, of government, not of the free market.

I must pause here to focus on Orwell’s disgraceful use of the word “regimentation.” I say “disgraceful” because he committed the sin he himself so eloquently condemned in his justly famous essay “Politics and the English Language”: the sin of euphemism. Regimentation is the least of the State’s crimes.

One wonders how Orwell avoided despair. He misidentified the free market with state capitalism and rejected it, and he saw the totalitarian tendencies of socialism up close. Yet he could write, “There is no way out of this unless a planned economy can somehow be combined with the freedom of the intellect, which can only happen if the concept of right and wrong is restored to politics” (emphasis added).

Hadn’t he just read chapter 11 of The Road to Serfdom, “The End of Truth,” in which Hayek described how a serious commitment to central planning must produce “contempt for intellectual liberty”?

“The word ‘truth,’” Hayek wrote, “itself ceases to have its old meaning. It describes no longer something to be found, with the individual conscience as the sole arbiter of whether in any particular instance the evidence (or the standing of those proclaiming it) warrants a belief; it becomes something to be laid down by authority, which has to be believed in the interest of unity of the organized effort and which may have to be altered as the exigencies of this organized effort require it.

“The general intellectual climate which this produces, the spirit of complete cynicism as regards truth which it engenders, the loss of the sense of even the meaning of truth, the disappearance of the spirit of independent inquiry and of the belief in the power of rational conviction, the way in which differences of opinion in every branch of knowledge become political issues to be decided by authority, are all things which one must personally experience—no short description can convey their extent.”

But of course Orwell had experienced those things in Spain and knew how it was in Russia. He certainly put a heavy burden on that word “somehow.” How restoring the concept of right and wrong to politics would make central planning either decent or practical is a mystery no one has solved. Mises had shown long before that socialism could not be practical because without prices arising out of the exchange of privately owned means of production, the socialist planner could not make rational calculations with respect to what should be produced, in what manner, and in what quantities. As for decency, Hayek addressed that in chapter 10, “Why the Worst Get on Top.”

Related posts:

1. Bretton Woods: 1944-1971
2. Nineteen Neglected Consequences of Income Redistribution

Does anyone still think the “war on drugs” is a good idea?

That may strike some people as an odd question under the circumstances, so let’s take it from another direction. Have you seen the news stories about the violence on the border being perpetrated by the Mexican whiskey and cigarette cartels?

No? That’s probably because there was no such violence and are no such cartels.

So why are there violent cartels in marijuana, cocaine, and heroin but not in whiskey and cigarettes?

All together now: prohibition.

“Our” Fault?

Of course the politicians blame everything and everyone but themselves for this spreading violence. “Our insatiable demand for illegal drugs fuels the drug trade,” Secretary of State Hillary Clinton said. “Our demand”? Including hers? “Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police officers, soldiers and civilians.” Her answer, in addition to sending the Mexican government taxpayer money, is to go after consumers of drugs and manufacturers and dealers of guns she doesn’t like.

Drug users and gun dealers are to blame for drug-cartel violence? That makes no sense. If it did, then drinkers and smokers would be creating violence, too. What’s missing?

Once again in unison: prohibition. Who brought us prohibition? Politicians. Every politician, bureaucrat, and agent who facilitates or enforces prohibition is an accomplice in the violence because he or she helps to create the conditions in which thugs have a comparative advantage in dealing drugs.

For years advocates of free trade in drugs—that is, basic rights to life, liberty, and property for drug consumers, producers, and merchants—have pointed out that prohibition, besides being an immoral invasion of liberty by the state, sets in motion a variety of concrete evils that harm innocent people. (No one has been more consistent and rigorous in this than Thomas Szasz). These evils include the corruption of law enforcement, violent crime, and the expansion of intrusive government. Besides these domestic evils, the U.S. government has alienated farmers in foreign lands by helping to destroy their crops and livelihoods. If that’s not terrorism, nothing is. Crop destruction has been a recruiting tool for guerilla organizations, while black-market profits finance them and others with malign intent.

Few listened to these Cassandras against the anti-drug crusade. Maybe people will listen now.

Government Impotence

While violent gangs that make their money selling drugs in the black market are murdering and kidnapping people, invading homes, and committing other atrocities, the politicians have nothing to say but the same bromides they’ve been repeating for years. Thinking we’re either simpletons or amnesiacs, they expect us to be comforted by their words. (Will they be right?) They promise to defeat the cartels, crack down on drug use, and disrupt the gun trade. It won’t work. It’s never worked. It can’t work. Black-market operators are always steps ahead of the plodding bureaucrats. Break up one gang and another emerges. The drugs keep flowing (there’s plenty of bribe money), and consumers will have what they want when they want it. The profits made possible by the black market are powerful incentives to keep the industry going. Government is impotent. (They can’t even keep drugs out of prisons!)

Yet the gangs could be put out of business overnight. How? By removing the criminal penalties for the production, trade, and consumption of all drugs; by bringing the black market into the open, so disagreements can be resolved through civil channels and a talent for violence is no longer an advantage; by dissolving the extraordinary profits that illegal industries always reap.

Yes, it is that easy.

People will recoil. We can’t do that! No? Then accept as normal the unspeakable violence that is starting to spread from city to city, because that is the alternative to the stubborn refusal to end the “war on drugs,” which is really a war on people. Even full police-state tactics will not be able to control it, though that won’t stop demagogic politicians from giving them a try.

The Drug War Finances Government Careers

I don’t expect the multitude of officials who depend on the drug war for their livelihoods and power to endorse an end to prohibition. They have shown themselves more than willing to accept the violence (against others) as the price of their ambition. The new threat to us is an opportunity for them to amass more power, bigger budgets, and higher salaries.

But the rest of us have no reason to support the complex of government and “private” tax-financed agencies that grow fat prosecuting this war. The worn-out rationalizations can’t stand examination. Prohibition keeps no one from getting any drug he wants at an affordable price. On the contrary, it encourages the creation of cheaper, more potent drugs, just as alcohol prohibition replaced wine and beer with hard liquor. (More bang in a more compact form.) Prohibition doesn’t keep our children safe. It makes drugs into enticing forbidden fruits and pushes the trade into less-visible channels. Drugs aren’t “dangerous,” though people are capable of doing harmful things with them—and many other things. (Jacob Sullum’s Saying Yes is an eye-opening book that I highly recommend.) Addiction is not a disease; it’s a choice.

Everything the drug warriors have said is wrong—and often a conscious lie.

Drugs are to our society what Eurasia and East Asia were to Oceania in Orwell’s 1984: a convenient conjured-up demon to justify expansion of power and the usurping of liberty—in the name of keeping us safe.

What will it take, if not the current violence from Mexico, to make people see through the scam?

Look around. It’s our self-proclaimed protectors from whom need we protection most.

Related posts:

1. How to End Mexico’s Deadly Drug War
2. Bought and Sold: Drug Warriors and the Media
3. Book Review: The Crisis In Drug Prohibition edited by David Boaz

Make no mistake: The collapse of Fannie and Freddie is government social engineering predictably gone bad.

In a free society supply and demand would govern markets. The demand for houses would be determined by people’s preferences and the resources at their disposal. Supply would be determined by relative profit expectations—which is to say, by the demand for housing and the competing demand for the necessary inputs.

A distortion occurs when government planners and rent-seeking corporate allies, under cover of humanitarian social policy, engineer a deviation from natural market outcomes. Dressed up as promotion of the American Dream through home ownership, the planners used political means—ultimately, the threat to imprison uncooperative taxpayers—to channel wealth to the construction, real-estate, and financial industries. The primary instruments of this social engineering were Fannie Mae, created as a government agency during the New Deal and—cough—“privatized” in 1968 to get it off budget, and Freddie Mac, created as a “private” GSE in 1970.

The GSEs don’t make mortgage loans. Rather, using borrowed money, they buy mortgages from original lenders, encouraging banks to make more loans. Pooling lots of mortgages together, the GSEs create mortgage-backed securities (MBS). In fact, Freddie and Fannie created the secondary mortgage market that has come in for criticism since the subprime problem developed.

As economist Arnold Kling writes, “Whether it retains or sells the security, the GSE bears the default risk of the mortgages, which is the source of the recent crisis.”

Freddie’s and Fannie’s activities were designed to channel money to mortgage lenders so that they could loan widely, especially to people who might have been priced out of a fully private mortgage market. The system inevitably lowered lending standards and interest rates.

If these activities had been performed not by GSEs but by real private companies, they would have been subject to market checks. But they were not. They’re not called government-sponsored enterprises for nothing. As such they have special advantages over private companies, permitting them to do things on a scale larger than would have occurred in a free market.

They don’t pay local and state taxes like other companies do, and they can get government loans. Moreover, as Kling puts it, “In both the mortgage insurance business and the portfolio lending business, the GSEs have two important advantages . . . [:] a lower risk premium and lower capital requirements.” In brief, Fan and Fred could borrow money for less than private companies could because “investors believed that the GSEs would not be allowed to fail,” Kling writes. This is the “implicit guarantee.” (With the wink of an eye, the GSEs say their paper is not guaranteed. So why not hold their creditors to the letter of the contract?)

As for the lower capital requirements, Kling writes, “When banks engage in the mortgage insurance business or the portfolio lending business, they are required by their regulators to put more of their shareholders’ funds at risk than the GSEs are. This makes it difficult for banks to compete with GSEs.”

The result was a far more concentrated lending market and hence greater vulnerability to adverse changing conditions. Fan and Fred hold or insure $5.4 trillion in mortgage debt—half the national total—making the taxpayers ultimately responsible now that the GSEs are under federal conservatorship. Three-quarters of mortgages written these days are GSE-backed. So the government has just become the country’s major mortgagee. It’s ironic that after making the GSEs dominant, the government now wants to shrink their role in the mortgage industry beginning in 2010.

Not Greed But Incentives

We can see, then, that the GSEs’ privileged status, which was intended to distort the housing and mortgage markets, did exactly that. The whole shaky structure was vulnerable to a deterioration in home values, to which the GSE system itself contributed. (Other things contributed to the run-up and collapse of home values in particular parts of the country, such as a broad social policy of encouraging banks to lend to un-creditworthy borrowers.) As of September, the GSEs had lost well over $10 billion since the mortgage meltdown occurred, and they were getting close to being unable to borrow enough money to roll over their debt. This and fear of a more general economic meltdown are what prompted the government to step in, exposing the taxpayers dramatically. The bailout was to begin with a billion-dollar infusion. Up to $200 billion has been promised. It will no doubt be more. Of course, the treasury secretary now has the authority to buy $700 billion worth of dubious mortgage-backed securities from struggling banks. Rev up those printing presses.

It’s really an anticlimactic chapter in this story of putrid rent-seeking and political opportunism. The bailout of the GSEs’ creditors creates a new round of the same moral hazard—encouraging recklessness by insuring it—that brought on the calamity in the first place. No one believed it would be the last bailout of those who are “too big to fail.”
The current problems are commonly attributed to greed and irresponsibility. But this won’t do. As Lawrence H. White notes, “Greed is a constant.” Why did the consequences take so long to show up?

There was irresponsibility—but only because the government for decades has pursued a policy of relieving big companies of the responsibility that otherwise would have been imposed by market discipline and competition. Any promise to bail out companies, and any regulatory, tax, or trade policy that raises the barriers to entry for new competitors, sews the seeds of crisis.

Focusing on greed and irresponsibility misses the most basic point: incentives. In a truly free market—when business people know they must face the consequences of their actions—“greed” (whatever that may be) tends to create general benefits. (“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”) In a government-regulated and government-guaranteed environment, “greed” can inflict harm on innocents. Institutions determine whether self-serving action benefits or damages others. Institutions that respect freedom, property, and self-responsibility promote the general welfare. Institutions that forcibly transfer risk to the taxpayers, punish responsibility, and reward irresponsibility promote social and economic catastrophe.

The New York Times was wrong. This was not “an extraordinary federal intervention in private enterprise.” It is the state bailing out statism. As Oliver Hardy might have said, “Well, government, this is another fine mess you’ve gotten us into.” Let’s hear no more about the “laissez-faire” Republicans. That myth serves only to protect advocates of state intervention regardless of party.

Related posts:

1. Bailing Out Statism
2. Nationalization of the Mortgage Market
3. What Happened to Market Discipline?

Language, economic activity, and law did not begin when someone published a grammar book, an economics text, or a political treatise that people then used to guide their actions. On the contrary, the books were written after the fact to codify what people had long been doing. And, importantly, the books could never fully describe what people had been doing or would do in the future. At best they were imperfect codifications that couldn’t possibly capture all the details involved in applying the rules to the varied circumstances of everyday life. In truth, they weren’t rules—in the formal, self-conscious sense—until the books were written. Yet they “governed” behavior.
“For not only do we not think of the rules of usage—of definitions, etc.—while using language, but when we are asked to give such rules, in most cases we aren’t able to do so,” Wittgenstein writes. Think how children learn something as complex as language and social roles.

Ryle puts it this way: “Rules of correct reasoning were first extracted by Aristotle, yet men knew how to avoid and detect fallacies before they learned his lessons, just as men since Aristotle, and including Aristotle, ordinarily conduct their arguments without making any internal reference to his formulae. They do not plan their arguments before constructing them. Indeed if they had to plan what to think before thinking it they would never think at all; for this planning would itself be unplanned.”

Important Implications

This fact about rules has important implications for the struggle for the free society. The belief that basic rules and social institutions are and can be the product of conscious design leads to the social engineer’s conviction that society can be redesigned according to a detailed plan. That conviction easily leads to intolerance of those who won’t go along with the plan. It’s a short step to proposing that the uncooperative be liquidated—for the common good.

If in fact society could not have been successfully designed, it follows that it cannot be successfully redesigned. Societies are too complex, and people will stubbornly cling to their tacit rules even in the face of draconian penalties.

What might this tell us about the classical-liberal notion of individual rights? It seems to say that no society went from illiberal to liberal the day some political philosopher read his treatise of government to the assembled masses in the public square. By the time the treatise would have been written, the customs of ordinary people would already have largely embodied what we call natural rights. It is even possible—perhaps likely—that the formal expression of those rights got them wrong. Something was lost in the transcription.

This is largely what the legal philosopher John Hasnas is getting at in his remarkable paper “Toward a Theory of Empirical Natural Rights,” published in Social Philosophy and Policy in 2005. The juxtaposition of “empirical” and “natural” only appears contradictory. What Hasnas sets out to do is to show how individual rights could “evolve in the state of nature,” that is, “in the absence of established government, [but] not in the absence of any mechanism of interpersonal governance.”

How might that happen? In the state of nature there are problems to be solved. A small number of people use violence in attempting to live off the productive efforts of others. Besides that, disagreements over contracts and ownership arise among even the peaceful. In response, and contra Hobbes, “Various methods of providing for mutual protection and for apprehending or discouraging aggressors are tried. . . . Simultaneously, nonviolent alternatives for resolving interpersonal disputes among the productive members of the community are sought. . . . Those [methods] that effectively resolve the disputes with the least disturbance to the peace of the community continue to be used and are accompanied by ever-increasing social pressure for disputants to employ them.

“Over time, security arrangements and dispute settlement procedures that are well-enough adapted to social and material circumstances to reduce violence to generally acceptable levels become regularized. Members of the community learn what level of participation in or support for the security arrangements is required of them for the system to work and for them to receive its benefits.”

Self-interest impels these developments. The overriding aim of the trial-and-error process is to minimize violence so the business of flourishing through social cooperation may proceed. Rights are thus born of problem-solving.

From Theory to Practice

Now this is a nice theory, but what about practice? Hasnas illustrates the validity of his story by pointing to two “state of nature” episodes in history: Anglo-Saxon and early Norman England, and the rise of the Law Merchant in medieval Europe. In the first instance, “The process of negotiating settlements of potentially violent conflicts and repeating and eventually institutionalizing successful resolutions gradually produced a broad body of customary law that served as the basis for the England common law.”

In the second, beginning in the eleventh century, and in the absence of a transnational government, merchants from different cultures and language groups who were engaged in global commerce looked for a way to protect themselves from predation and conflict when away from home. “[M]erchants sought arrangements that provided the needed assurance. . . . The merchant courts that evolved in this way eventually grew into a European system of commercial courts in which merchant judges quickly applied the tenets of the Law Merchant to resolve commercial disputes.”

In both of Hasnas’s examples, effective law respecting individual freedom was generated apart from the state and only later was absorbed—with state-serving distortions—into a formal governmental system. Today we think law is something only legislatures produce, but that is not the case. Strictly speaking, legislatures do not produce law at all. They issue decrees.

The “rights” that grew out of these spontaneous processes are recognizable as the rights to life, liberty, and property. Yet, Hasnas acknowledges, they did not perfectly match the natural rights of the philosophical treatises. Nevertheless, the process Hasnas describes gets us a long way down the road to freedom.

No law book will ever be able to describe rights and their application down to the minutest detail once and for all. As noted at the outset, rules are not of that nature. Conflict-resolution procedures that address particular disputes between particular parties as they arise will always be necessary, and such resolution will produce (or identify) additional law. The question is whether we want competition or monopoly in the production of law.

Related posts:

1. Lost Articles
2. Congressional Lost Opportunities
3. The America We Lost

In response to severe problems in the credit markets, thanks to years of government intervention, the Federal Reserve—the government’s counterfeiter and chief culprit in the current crisis—has opened its discount window to the investment banks. Interest rate: 2.5 percent. Until recently, only commercial banks could borrow money from the Fed. But now investment banks may also—and here’s the kicker: They can put up shaky mortgage-backed securities as collateral. That means the American people are potentially on the hook for those loans. Should they go bad, we will pay either in inflation-induced higher prices or in higher taxes.

Investment banks that may have invested in bad mortgages are already taking advantage of the new opportunity. Is this a great country or what?

The Wall Street Journal says the banks’ willingness to borrow comes as a relief to government officials “who had worried that the stigma of borrowing from the Fed could keep firms away.”

Yes, that would have been a shame. Thank goodness the stigma of high-rolling Wall Street firms’ going on the dole has disappeared.

The opening of the loan window was the first shoe. The other shoe is the demand for new regulations on the investment-banking industry in return for the Fed’s help. Democrats Representative Barney Frank and Senator Charles Schumer say that if the investment banks are going to have the same access as commercial banks to the Fed’s discount window, they should have to live by the same, or similar, rules as commercial banks. Those rules would govern things like reserve requirements but would likely go beyond that and include new oversight by regulators.

“If investment banks are able to borrow from the Federal Reserve’s discount window, then they must be subject to greater regulatory scrutiny,” Schumer wrote in the Wall Street Journal.

“A central bank acting as a lender needs to be able to evaluate the solvency and liquidity of a borrowing institution,” said Eric Rosengren, president of the Federal Reserve Bank of Boston. “Knowing how likely it is that an institution’s sources of funds will evaporate during times of financial stress requires a significant understanding of the institution’s liabilities and its counterparty relationships.”

What can the banks say to Frank, Schumer, and Rosengren? If one accepts the principle that the government agency ought to be ready to rescue these institutions, how can one also object to the quid pro quo of regulation? Granted the premise, the logic is sound.

It’s the bailout premise that has to be challenged. The Fed should not have opened the window to the investment banks if for no other reason than that new regulation would inevitably follow. (Of course, there should be no Fed in the first place. But that’s for another column.)

Widening the Fed’s scope for rescue and regulation only asks for trouble. Government rescues breed irresponsibility. This is the moral-hazard principle. Rescued once, why wouldn’t a lending institution expect to be rescued again—especially if it saw itself as too big to fail?

Second, the quid-pro-quo regulations will make things worse. People prone to blame deregulation and even laissez faire (!) for the current economic mess point out that the evolution of complicated investment instruments occurs so quickly that people in the industry itself have trouble understanding them. Maybe so. Will the regulators understand them better? No way. Markets move too quickly for regulators to keep up with because the participants make spot decisions in part using tacit knowledge that is never articulated.

The only way for bureaucrats to even attempt to keep up would be to assert the authority to approve innovations before they are introduced. But that would be destructively inhibiting. Wealth creation would be stymied, and we’d all be poorer. Why should anyone believe that regulators know what they would need to know before they could pass judgment on new ideas?

This is not to deny that reckless—and even shady—activity can take place and hurt innocent bystanders. The point is that regulation makes such activity more, not less, likely. Adam Smith famously wrote in The Wealth of Nations that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He wasn’t calling for regulation of economic affairs, because he immediately added, “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.”

Significantly, he continued, “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

What most critics of free markets overlook is that the corporatist state in fact does facilitate such assemblies. Regulation, which forces standards across an industry, reduces the vigor of the competitive process by removing the factors subject to regulation from contention. A regulatory regime to some extent cartelizes industries.

Yet anything that reduces competition is harmful to the public because competition is what disciplines market participants. To the extent the competitive process is blunted, businesses are licensed to engage in the activities Adam Smith had in mind.

Deregulation All The Way Down

Here’s the response to those who blame financial deregulation for the current predicament: Deregulation has been only partial and therefore rigged. Remember the S&Ls? They were deregulated too—but not all the way. Restrictions were removed from the kind of investments they could make, but deposit insurance guaranteed that the taxpayers would cover the losses. That’s not real deregulation; that’s corporatist favor-granting by another name.

Today, establishment voices of “capitalism” (which is not to say the free market) have little credibility when they oppose new regulation of investment banking. That’s because they are all too content with the current deeply rooted network of subsidies, bailout promises, and competition-suppressing interventions. If these are the only voices against new regulation, we will surely have it. This will mean a greater burden for smaller and yet-to-be-formed companies.

Finally, favoring government bailouts for connected Wall Street players but not for individual homeowners is a sure path to dismissal for callous hypocrisy. “Subsidizing these firms is an insult to Main Street. Many families are losing their homes as part of the mortgage crisis. If they had access to 2.5 percent financing that would not be happening,” Thomas Palley of the Economics for Democratic & Open Societies Project writes. The only position that is internally consistent and consistent with justice is the no-bailout position. Banks and homeowners should work things out among themselves, aided if necessary by private philanthropic institutions.

Bailouts at the expense of unwilling third parties (taxpayers) are either proper or improper. (I say improper.) Those embracing the business-subsidy program should have the courtesy not to call themselves advocates of the “free market.” (Listening, Mr. Kudlow?) Some of us are trying to keep that label clean. They already have “capitalism.” Aren’t they happy with it?

Related posts:

1. Unions and Antitrust: Governmental Hypocrisy
2. Of Human Hypocrisy
3. Third Bailout for GMAC on the Way

A better reason to study economics is to avoid being deceived by politicians; they are the far greater threat to life, liberty, and the pursuit of happiness. When you consider that the typical political campaign is little more than a series of confidence games, understanding basic economics is a matter of survival. Without such an understanding one is an easy mark.

Case in point: How would one see through the flimflam served up as health-care policy without a working knowledge of economic principles? When politicians promise “universal and affordable” medical care and insurance, how else are we to know that those promises can’t be kept? Indeed, attempting to keep them would gravely damage our medical care (even more), our prosperity, our liberty.

What we call medical care/insurance is a bundle of goods and services that have to be produced. They aren’t found superabundant in nature. Production of those things entails real opportunity costs in terms of resources (labor, intellectual capital, machinery, and more, which could be used in alternative ways. The people engaged in this production are (so far) free to do other things if they choose. They can’t be compelled to practice medicine, run hospitals, invent medicines, or offer insurance policies. This sobering thought should be kept in mind when analyzing politicians’ plans for medical “reform.” Any proposal that would drive medical service providers and resources into other lines of work could hardly be said to be in the general interest.

However, one group can be compelled to participate in a government plan: the American people in their dual capacities as taxpayers and consumers of medical services. This is the key to any political “solution.” That’s why Hillary Clinton insists against Barack Obama that any program must be mandatory. Given the premises both candidates share, Clinton has logic on her side. Without compulsion, any government program must fail even on its own terms. You might think that’s a good argument against government programs, but politicians and most other people don’t believe physical force perpetrated by government is objectionable. Go figure.

Candidates who promise universal and affordable medical care don’t really believe they can lower the true costs of the relevant goods and services. Instead, their plans contain methods, overt and covert, to shift some people’s expenses to others. The overall price tag won’t shrink—indeed, it can be expected to grow—but the money price to selected individuals would diminish. (Nonmonetary costs, such as waiting times, would increase.)

The problem for those who promise universal and affordable health care is that medically we are not all created equal. Because of genetics and lifestyle, some people are more likely to get sick than others, and some people are already sick. This upsets the politicians’ plans, and they must do something about it. Clinton declares, “I want to stop the health-insurance companies from discriminating against people because they’re sick.”

One doesn’t know whether to laugh or cry at a statement like that. Is it ignorance, stupidity, or demagoguery? Real insurance lets people hedge against financial ruin by pooling their risk of misfortune with others. For reasons that shouldn’t need explaining, people who present a low risk for whatever is being insured against would reasonably be charged less for coverage than people who present a high risk. For one thing, low-risk customers would be unwilling to pay premiums that overstated their perceived risk. I recall reading that the fire-insurance company founded by Benjamin Franklin set premiums according to how fire-resistant a building was. Was that a reasonable or outrageous thing to do?

The depth of the lack of understanding about insurance is on stark display whenever someone demands that the terms of coverage for a sick person be the same as those for a healthy person. Risk grows out of uncertainty. But if someone is already sick, there is no uncertainty about his need for medical care. “Insurance” in this case would not be real insurance but rather a subsidy provided by others or prepayment for future expenses.

The Real Story

To be actuarially sound, insurance must discriminate on the basis of risk. If the government bars insurers from such price-discrimination, they really wouldn’t be in the insurance business at all. It would be more accurate to call their activity a forced subsidy. We should at least call a thing what it is.

Where would the Clinton principle of nondiscrimination lead if the government seriously enforced it? If an “insurer” is allowed to charge only one price regardless of risk, it would have to set the price high in order to be able to cover the riskiest customers. But that would not honor the politicians’ promise of affordable coverage. Moreover, young, healthy people would opt out, preferring to spend their money otherwise or to save it in order to self-insure. So the government could not let this stand. To “fix” things, it would compel everyone to participate and force the taxpayers to subsidize low-income people.

Even with subsidies the politicians wouldn’t let insurers charge market prices for long because this would anger voters and break the budget. So inevitably, the Clinton principle must lead to price controls.

We know what price ceilings bring: shortages. Why would a company that cannot charge enough to cover its costs and earn a competitive profit continue in business? Thus the principle of nondiscrimination combined with price controls would inevitably dry up the supply of private “insurance.” At that point, the politicians would declare that the “free market” failed and that government must step in to be the sole health insurer. Then government could have full control over who gets what kind of medical attention. It would be in the triage business, a terrifying prospect for sure. It would also dictate prices to doctors, hospitals, and drug companies, speeding up the exodus from that profession and those industries. As supply withered and demand inflated (because of the illusion of low prices), government would impose more and more draconian controls.

There’s a lesson here. When the government seeks to enforce a counterfeit right—such as the “right” to medical care—no expansion of freedom results. Instead, government power expands—to everyone’s detriment.

One way for politicians really to keep their promise of lower medical costs would be to uncover all the ways the government artificially raises costs today. It does this in a variety of ways: restricting supply through licensing and patents, boosting demand by lowering the apparent price of services, promoting third-party payment for even expected routine services, raising drug-research expenses, imposing coverage mandates on insurers, forbidding interstate competition in insurance, and on and on.

But politicians don’t talk about those things. They presumably wouldn’t get credit merely for repealing destructive interventions and letting the competitive free market provide universal affordable medical care—as it has provided so many other things universally and affordably.

Related posts:

1. CBO Says $849 Billion Senate Health Care Bill Will Cut Deficit
2. Nationalized Health Care Will Cut Costs? It Just Ain’t So!
3. Mandated Health-Care Socialism

We might think those words—or words to the same effect—are in the U.S. Constitution. But they are not. They are from Article II of the Articles of Confederation, America’s first constitution. They could have been placed in the U.S. Constitution but were deliberately left out in 1787.

After the Constitution was ratified, something like Article II was added to the Constitution as the Tenth Amendment. Unfortunately it is like Article II in the same sense that a whale is like a fish—superficially.

The Tenth Amendment says: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The most significant difference is that Article II qualifies the word delegated with expressly. The Tenth Amendment does not. The difference was no oversight. This suggests that while the Articles of Confederation was a document of express, enumerated congressional powers, the Constitution, contrary to widespread belief, was not.

Professor Calvin H. Johnson of the University of Texas Law School published a paper in 2006 that sheds light on this subject. “The Dubious Enumerated Power Doctrine” presents formidable evidence that the framers had no intention of limiting the national government’s powers to the 16 items listed in Article I, Section 8, of the Constitution.

“In carrying over the Articles’ wording and structure, they removed old Article II’s limitation that Congress would have only powers ‘expressly delegated’ to it,” Johnson writes. “When challenged about the removal, the Framers explained that the expressly delegated limitation had proved ‘destructive to the Union’. . . . Proponents of the Constitution defended the deletion of ‘expressly’ through to the passage of the Tenth Amendment. That history implies that not everything about federal power needs to be written down.”

The Constitutional Convention operated on the assumption that more, not fewer, powers were needed for the national government than were allowed under the Articles. Johnson quotes some of the framers to indicate this attitude. “The evils suffered and feared from weakness in Government have turned the attention more toward the means of strengthening the [government] than of narrowing [it],” Madison said to Thomas Jefferson.

When the convention began its work the delegates passed resolutions to guide the committees that were drafting particular sections of the document. Johnson writes that one such binding resolution specified that the new government would have every power enumerated in the Articles and an additional power (quoting the resolution): “to legislate in all Cases for the general Interests of the Union.”

This is contrary to the common view that Article I, Section 8, of the Constitution necessarily exhausts the national government’s powers. That view is undermined by several inconvenient facts. For example, the first clause of Article I, Section 8, states, “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States. . . .” That’s a hefty grant of power that does not appear to be further restricted by any subsequent language. (Jefferson and Madison disagreed. See Federalist 41 by Madison, keeping in mind that the Federalist Papers were essentially ad copy for the Constitution and against the Anti-federalist opposition.) The 16 specific powers that follow don’t appear to be limits on the taxation clause but rather coequal provisions.

But then why include a list of powers? Johnson writes: “Reading the Constitution as giving a general power to provide for the general welfare means that the enumerated powers of clauses 2 through 17 are illustrative of what Congress may do within an appropriately national sphere, but are not exhaustive.”

In other words, Congress can’t do whatever it wants. It can only act on behalf of the common defense and general welfare. Thus in the eyes of the framers, the government would be limited, but not nearly as limited as today’s constitutionalists believe. The view among the framers was that Congress’s jurisdiction covered all matters national in scope, leaving local matters to the states. But, as Johnson writes, “both Madison and Hamilton argued that the division between the federal and state governments was a legislative or political question that would be set in the future by competition between those governments for the loyalty of the people.”

Implied Powers

We know that the Constitution must have contained implied powers from the beginning. Article I, Section 9, expressly prohibits Congress from doing certain things, such as passing ex post facto laws and bills of attainder, granting titles of nobility, and interfering with the slave trade until 1808. Why would such prohibitions have been thought necessary if Congress could exercise only the enumerated powers? Another example: The Fifth Amendment limits the power of eminent domain, but the Constitution itself does not enumerate any power of eminent domain. It must be implied.

Johnson’s argument would not be news to the Anti-federalists, that group of early Americans who feared the proposed Constitution would create an imperial national government with virtually unlimited power. (It should be noted that southern Anti-federalists like Patrick Henry objected to an expanded national government in part because they feared the taxing power might be used to free their slaves. Thus was a good cause, decentralization of power, perhaps permanently stained by a link to the abomination of slavery. Samuel Johnson had it right, “How is it that we hear the loudest yelps for liberty among the drivers of negroes?”) When advocates of the proposed Constitution advertised the document as containing express, enumerated powers, the Anti-federalists and fellow travelers such as Thomas Jefferson scoffed.

For example, James Wilson said: “The congressional authority is to be collected, not from tacit implication but from the positive grant expressed in the [Constitution]. . . . [E]verything which is not given [to the national government], is reserved [to the states].”

To which Jefferson replied: “To say, as Mr. Wilson does that . . . all is reserved in the case of the general government which is not given . . . might do for the Audience to whom it was addressed, but is surely gratis dictim, opposed by strong inferences from the body of the instrument, as well as from the omission of the clause of our present confederation [Article II], which declared that in express terms.”

How the Constitution was intended to be interpreted and how it was in fact interpreted under the pressure of public opinion were initially two different things. As historian and economist Jeffrey Rogers Hummel explains, “To oversimplify only slightly, the Federalists got their Constitution, but the Anti-Federalists determined how it would be interpreted.” For a while anyway.

Calvin Johnson is happy the Constitution has implied powers. No libertarian would be. But we must separate what the Constitution appears to say and how we evaluate it, and resist the temptation to let our political-moral views warp our reading. As Lysander Spooner in 1870 wrote, the Constitution “has either authorized such a government as we have had, or has been powerless to prevent it.” Liberty’s champions have to come to terms with that logic.

Related posts:

1. The Constitution Within
2. Constitution Day
3. Book Review: Liberty, Property, and The Foundations of the American Constitution Edited by Ellen Frankel Paul and Howard Dickman

Alas, it says nothing about knowing American history.

Good thing for Sen. Lindsey Graham (R-S.C.). He’d have to find honest work.

Interviewed after last January’s State of the Union address, Graham was asked about the situation in Iraq. Trying to put the difficulties in perspective, he said the United States did not get its constitution until 1789.

Buzz! Wrong answer, Sen. Graham. But as a consolation prize you get to take home a copy of Merrill Jensen’s book, The New Nation: A History of the United States During the Confederation, 1781-1789. We’ll also throw in a copy of Herbert Storing’s What the Anti-Federalists Were For. And thanks for playing our game.

Seriously, I realize that children learn virtually nothing about the eight years before 1789 during which the United States existed under the Articles of Confederation. But shouldn’t someone who holds himself qualified to be a U.S. senator know that what we call “the Constitution” was really America’s second constitution?

The Articles were adopted by the Second Continental Congress on November 15, 1777, and took effect after ratification on March 1, 1781. That was seven months before Cornwallis surrendered at Yorktown on October 19, 1781, and two and a half years before the Treaty of Paris was signed on September 3, 1783.

They remained in effect until “the Constitution” displaced them in 1789. The process by which the Articles were scrapped—rather than amended—in favor of an entirely new blueprint was dubious. As the Anti-federalist “Federal Farmer” (most likely Melancton Smith of New York) wrote in October 8, 1787, had the people known that a new constitution creating a strong central government was to be written, “no state would have appointed members to the convention.”

Eight years is a significant period for a nascent country to endure after breaking away from an empire. Sen. Graham’s remarks were meant to suggest that what took place in the United States during that time was similar to what’s taking place now in Iraq. But that is ridiculous. The 13 states did not embroil themselves in civil war or sectarian violence—neither internally nor with one another. Quite the contrary.

How was life under the Articles of Confederation? As Merrill Jensen writes, “Americans fought against and freed themselves from . . . coercive and increasingly centralized power. . . . They did not create such a government when the Articles of Confederation were written, although there were Americans who wished to do so. . . . Thus the American Revolution made possible the democratization of American society by the destruction of the coercive authority of Great Britain and the establishment of actual local self-government within the separate states under the Articles of Confederation.”

Under the Articles, Congress had no power to tax or to erect trade barriers. If it needed revenue it had to petition the states. There was no separate executive branch.

People in the new states, Jensen writes, were full of optimism about the possibilities ahead. Criminal codes were made more humane, with the death penalty removed for all crimes but murder and, in some cases, treason. Property qualifications for voting were abolished over time. Charities and mutual-aid societies were formed, along with library, scientific, and medical associations. Schools were founded. The union of church and state was increasingly opposed.

Of course there was slavery, which contradicted the philosophy espoused in the Declaration of Independence. But “[w]ithin a few years after 1775, either in constitutions or in legislation, the new states acted against slavery. Within a decade all the states except Georgia and South Carolina had passed some form of legislation to stop the slave trade,” Jensen writes. New England states and Pennsylvania took steps toward abolition, and anti-slavery societies flourished.

What about the economies of the states? We can infer much from the fact that those who wanted to overthrow the Articles for a new constitution warned of coming economic turmoil if the central government were not fortified. Hence turmoil was a prediction not a description. Although individuals (white males) were free to a hitherto unknown extent, the states were no models of laissez faire.

Rent-seeking (political entrepreneurship) was rampant in the states, as it has been in every real-world system. Subsidies, loans, trade restrictions, and land giveaways were common. In this largely agrarian society, Jensen writes, “the dominant note was sounded by American merchants and business men who lived mostly in the seaport towns. . . . Their power was born of place, position, and fortune. They were located at or near the seats of government and they were in direct contact with legislatures and government officers. They influenced and often dominated the local newspapers which voiced the ideas and interests of commerce and identified them with the good of the whole people, the state, and the nation.”

Merchants and manufacturers disagreed on what kind of government intervention should exist, but not on whether it should exist. That’s because they had different competitors. Merchants liked imports but wanted barriers to foreign (especially British) shipping, while manufacturers wanted barriers to foreign goods and didn’t care about shipping. Part of the impetus to a strong central government was business’s desire for a uniform national economic policy, since individual states, acting alone, could hurt themselves by having more stringent restrictions than their neighbors and one state could capture the lion’s share of trade by competitively lowering its barriers. In other words, the consolidation of 1789 was part regulatory cartel.

Regional Differences

There were also regional differences. Most manufacturing was in the North, so protectionist sentiment was concentrated there. The South had little manufacturing and wanted access to cheap foreign goods. Thus high protective tariffs found little support. Northerners who coveted the southern market realized that only a nationwide trade policy would serve their interests. On the other hand, southern farmers wanted as many shipping options as possible and had little interest in restrictions on foreign carriers.

State economies suffered booms and busts—and a depression in 1784–85—thanks to paper money, government banking policies, and other intervention. But the crises were not extraordinary. As Jensen summarizes, “There is nothing in the knowable facts to support the ancient myth of idle ships, stagnant commerce, and bankrupt merchants in the new nation. As long ago as 1912, Edward Channing demonstrated with adequate evidence that despite the commercial depression, American commerce expanded rapidly after 1783, and that by 1790 the United States had far outstripped the colonies of a few short years before.”

Despite the heavy intervention, the states still had virtually an unprecedented degree of economic freedom. A person could easily get a plot of land and take care of his family by farming. There was no distant overbearing central bureaucracy to worry about. Contact with government was minimal. Imagine what the economic growth and the justice of income patterns would have been had the states practiced laissez faire!

Thus contrary to Sen. Graham, pre-1789 America had a constitution, almost no central government, prosperity, and peace. Not too shabby.

The reasons for junking the Articles of Confederation for the Constitution are worthy of study but too big a topic for this column. Suffice it to say, as Jensen did, that “the founding fathers who wrote the Constitution of 1787 were quite a different set of men from those who signed the Declaration of Independence in 1776.”

Related posts:

1. Slick Construction Under the Articles of Confederation
2. Lost in Transcription
3. The Constitution or Liberty

How revealing it is! Did you know that if the government abstains from taxing all your income, you should be grateful for this “congressional generosity”?

To recap the case, Marrita Murphy was awarded $70,000 in compensatory damages for the mental distress and loss of reputation she claimed to have suffered after she acted as a whistleblower against her employer, the New York Air National Guard. She paid about $20,000 in federal income taxes on that money, but later asked for a refund on grounds that the damage award should have been excluded from her gross income under §104(a)(2) of the Internal Revenue Code (Title 26 of the U.S. Code), which states: “gross income does not include—. . . (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness . . . .”

The IRS rejected the request because her injuries were nonphysical and the section specifies “physical injuries.” 

When she sued in federal district court she lost.

Murphy appealed to the U.S. Court of Appeals for the District of Columbia Circuit. She argued that the compensation was covered by §104(a)(2) but if not, then the section is unconstitutional because it would permit the taxation of money that is not included in the constitutional and statutory meaning of “income.”

The government rebutted that Murphy’s injuries were nonphysical—and hence not included in §104(a)(2)—and that IRS policy was consistent with the concept of “income” as used since the Sixteenth Amendment was ratified in 1913.

In August a three-judge panel stunned the government by ruling in Murphy’s favor that §104(a)(2) is unconstitutional: “[T]he framers of the Sixteenth Amendment would not have understood compensation for a personal injury—including a nonphysical injury—to be income.” (Point of historical fact: the Amendment did not delegate to the government the power to tax wages and other income. Under the Constitution, it always had that power.)

In October the Department of Justice petitioned to have the case heard by the circuit court’s entire complement of judges (en banc). However, before the court could rule on the petition, the original three judges announced they would rehear the case themselves. The case was to be reheard this month.

The petition is revealing—and chilling. The Justice Department’s task in the petition was to convince the court that the judges had defined “income” too narrowly, allowing them to exclude compensation for nonphysical injury from gross income. The judges had ruled that compensatory damages for injuries are intended to make a victim whole—that is, to restore something that is not taxable. Since the damage award was not a replacement for something taxable, such as wages, the judges said, the award itself should not be taxable.

What is ominous about the petition is how broadly the Justice Department views the government’s power to tax. Unfortunately, the Department has the Constitution and a long line of cases to back up its position.

Here’s a sample of what the Justice Department argued (internal quotes are from previous court opinions, citations are excised, and all emphasis is added):

“Congress’s power to tax income, like its power to levy non-direct taxes generally, is indeed ‘expansive.’ In Brushaber [v. Union Pacific Railroad, 1916], the Supreme Court emphasized that Congress’s taxing power is ‘exhaustive and embraces every conceivable power of taxation.’ It referred to the constitutional limitations as ‘not so much a limitation upon the complete and all-embracing authority to tax, but in their essence [ ] simply regulations concerning the mode in which the plenary power was to be exerted.’ ”

“In [Commissioner v.] Glenshaw Glass [1955], the Court reviewed the ‘sweeping scope’ of the predecessor to §61(a) [the beginning of the section of the law defining “gross income”] and observed that it had ‘given a liberal construction to this broad phraseology in recognition of the intent of Congress to tax all gains except those specifically exempted.’ The Court held that income includes ‘undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.’”

The Department’s petition proceeds to quote earlier court opinions on the broad range of the government’s power to tax, for example, “We have repeatedly emphasized the ‘sweeping scope’ of [§61, the code section that defines gross income] and its statutory predecessors” and “[Income] extends broadly to all economic gain not otherwise exempted.”

The government’s petition also emphasizes that the decision not to tax something belongs to Congress—and Congress alone:

“Any determination to exclude such damages from income is not required by the Constitution or driven by tax considerations, but is one of policy based upon value judgments. . . . Such determinations are the sole province of Congress, and . . . Congress established its clear intent to tax the type of award (for nonphysical damages) taxpayer here received.”

In this connection, the petition quotes a 1996 Supreme Court case, O’Gilvie v. U.S., which attributed the exclusion from gross income of compensatory damages for personal injury to—“congressional generosity”!

The petition closes with the Justice Department’s claim that even if the damage award is not construed to be income “within the meaning of the Sixteenth Amendment,” the government may still tax it:

“[T]he constitutional restrictions on Congress’s taxing power deal only with how to tax, not what to tax. To conclude that the tax here is unconstitutional, the panel had to determine that it is either a direct tax requiring apportionment, or an indirect excise that is not uniform. . . . The panel wholly failed to perform this critical part of the analysis.”

To boil the petition down to the fewest words: Congress may tax whatever it darn well pleases, thank you. If it abstains from taxing a type of revenue (be it income or not), just be thankful for its generosity. But don’t go thinking you have a right not to have it taxed.

Political officials may talk a low-tax, limited-government game, but let a judge suggest there’s something they can’t tax and they show their true colors.

To be sure, Murphy’s attorney, David Colapinto, responded to the petition. (All the documents are online at www.kkc.com/major_cases.jsp.) He too is able to cite Supreme Court cases but in support of Murphy’s position that the three appellate judges were correct.

The Constitution Doesn’t Interpret Itself

Eventually the Supreme Court will pick the winner. But it would be mistake to think there is an objectively “right” answer. In the constitutional game, “right” (in the sense of what gets enforced) is whatever the courts decide. Constitutions and laws don’t interpret themselves. People interpret them.

As Georgetown University law professor John Hasnas has written, “Because the legal world is comprised of contradictory rules, there will be sound legal arguments available not only for the hypothesis one is investigating, but for other, competing hypotheses as well.”

We really have no reason to be shocked by the government’s extravagant claim because we were warned 220 years ago. In 1787 the Anti-federalist Robert Yates (“Brutus”), objecting to Congress’s power to tax under the proposed Constitution, wrote, “[T]his power therefore is neither more nor less, than a power to lay and collect taxes, imposts, and excises at their pleasure; not only the power to lay taxes unlimited, as to the amount they may require, but it is perfect and absolute to raise them in any mode they please.”

Related posts:

1. Congressional Lost Opportunities
2. Is the Income Tax Unconstitutional?
3. Separation of Powers and the Labor Act: 1. Congressional Policies vs. Labor Board Policies

No good grounds at all.

I know why I have preferred the skeptical scientists and science writers, but the reasons aren’t good ones because they aren’t scientific. Instead they are based on extraneous things, such as the environmentalists’ previous faulty record of predictions, or the typical statist approach to dealing with global warming, or the respective sides’ presumed attitudes about industrialism.

It is true that many environmental nightmare scenarios are of doubtful worth because they are based more on bad economics than science. The overpopulation hysteria is one that thankfully has subsided. Likewise, predictions about the depletion of resources are refuted by sound economic theory and the “ultimate resource” arguments deployed by the late Julian Simon.

But a series of bad predictions doesn’t mean the latest environmental prediction is necessarily wrong. For one thing, atmospheric scientists who warn about climate change are not necessarily the same people who warned about overpopulation and resource depletion. Moreover, even someone who has made bad predictions in the past (remember the global-cooling scare) may get the next one right.

More than a few reputable scientists see potential problems in the climate change that is occurring. The presence of shrill alarmists who oppose industrialism shouldn’t overshadow them. Thus the issue needs to be evaluated on its merits. I know of no a priori reason to rule out the possibility that human activity is producing enough greenhouse gases to warm the atmosphere to an extent that will have bad consequences. That doesn’t mean it’s happening, just that it’s not impossible.

For every factoid about ice sheets or sea levels or sun spots I can pull from the skeptics’ literature, someone else can produce a counter-factoid. How is a nonscientist to decide which is accurate?

This is not to say the skeptics don’t raise apparently compelling points. They do, and the believers should address them. But that still leaves the problem of how a layman is to sort the wheat from the chaff.

For advocates of individual liberty it is tempting to believe the skeptics are right because the other side is associated with statist solutions to climate change. Most solutions call for government control over the burning of fossil fuels. No advocate of free markets can be comfortable with a position that entails substantial taxes and subsidies to achieve a political objective—reduction of carbon emissions—especially when the solutions promise no more than negligible reductions in temperature. (Temperature, not emissions per se, is supposed to be the believers’ cause for concern.)

But picking sides in a scientific debate on the basis of proposed remedies is the wrong way to go about things. A believer in global warming could get the science right but the remedy wrong. That government shouldn’t ban smoking doesn’t mean smoking isn’t bad for you. There is nothing incoherent about favoring free markets and thinking that global warming is or may be a problem.

Liberals should be careful about accepting the environmentalists’ package deal. Do we really want to concede up front that there are only statist solutions to the possible threat from climate change? That would betray a lack of confidence in the freedom philosophy and the market process.

Skeptics often portray believers in global warming as anti-industrial, anti-free-market zealots who shelve objectivity because they want to usher in an era of primitivism and totalitarian control. Maybe some of them are and do. But all of them? That’s hard to believe.

Skeptics also attribute the preponderance of research supporting the believers’ thesis to the corrupting influence of government finance. I have no trouble believing that the politicization of scientific research creates an advantage for doomsayers. Power isn’t likely to flow from benign findings. But does that in itself mean all gloomy forecasts about climate change must be wrong? I don’t think so. It strains credulity to think that every scientist who believes hazardous manmade global warming is happening has prostituted himself for a government grant. To prove that unlikely charge you need more than abstract arguments about perverse incentives. Assuming good faith in one’s opponents seems a more fruitful approach.

So we’re back to my question. How can someone without a great deal of atmospheric knowledge cherry-pick from the reams of positive and negative claims about global warming?

Some things seem reasonable to accept: first, that the earth is warming and, second, that human activity is partly responsible. Most scientists associated with skepticism acknowledge these points. The open question in both cases is: how much? Another question is whether the effects of climate change will be good, bad, or a mixture of good and bad. On both questions I am in no position to say. Maybe no one is—not even eminent climatologists—at least not today.

Empirical Questions

This much I know: these are highly complex empirical questions. They are not a political, ethical, or ideological questions. Thus the answers must be left to the scientific process, preferably untainted by government control.

In the meantime, laymen committed to individual freedom have their own question to attend to: If potentially harmful manmade climate change is occurring, how can it be addressed without violating liberty? Our energy should be invested in answering that question. A good start is made in a series of articles by Shikha Dalmia, Donald Boudreaux, and Julian Morris published by the Reason Foundation (online at www. reason.org/roundtable/). I also recommend the thought-provoking paper by Edwin Dolan, published in the Fall 2006 issue of The Cato Journal (online at www.cato. org/pubs/journal/cj26n3/cj26n3-3.pdf).

The free-market literature is filled with reasons to lack confidence in government solutions to environmental problems. Those reasons include the perverse incentives and inadequate knowledge that pervade all political processes. Any bureaucratic program will be corrupted by power, privilege, and incompetence. So now is the time for us libertarians to direct our unique philosophy toward grappling with potential climate hazards in a manner consistent with freedom and the requirements for prosperity.

Why freedom? Because being able to lead a self-directed life is too important to trade away for the faint promise of a cooler climate (assuming we even want that).

And why prosperity? Because poverty kills—we can be certain of that—and wealth makes us resilient.

Related posts:

1. Climate Confusion: How Global Warming Hysteria Leads to Bad Science, Pandering Politicians, and Misguided Policies that Hurt the Poor
2. Global Warming Revisited
3. Book Review ~ The Satanic Gases: Clearing the Air about Global Warming by Patrick J. Michaels and Robert C. Balling