In a cold and snowy land there lived the people of the North Country.  Some of them made a living by plowing and disposing of the snow that seemed to fall endlessly from the skies between November and March.  Though the work was hard, and often took place in the dark hours of the early morning, they frequently prospered, since the snowfalls came each year and the people of the North Country needed their driveways and parking lots free of the beautiful white flakes.  The Snow Plowers were happy.

But in the winter of 2011-12 the snows seemed to stop.  Oh there was a little ice and some snow, but not really enough to plow: Warmer temperatures quickly melted the little that fell.  The Snow Plowers were not happy.  They gathered the people of the town and complained that the lack of snowfall was devastating the economy of the North Country.  Without the income they earned from plowing, they told their fellow citizens, they would have no money to spend at the local grocery store or bars or restaurants.  And their fellow citizens who owned those fine establishments (and worked there too) would see their income fall, leading quickly to an economic disaster.

Saving the Economy

At first the people of the town nodded along in agreement.  “Yes,” they said, “we must save our economy. But how?”  The Snow Plowers suggested a petition to the Clouds, begging them to bring the snow that would save their business and, through the Magic Multiplier, save their town’s economy.  And so a petition was created.

But then a wise old man stepped forward and declared this was foolishness.  When asked by the townspeople to explain, here is what he said:

It is true that the lack of snow hurts our friends the Snow Plowers, and that is truly unfortunate.  However, just because they have lost income and therefore cannot spend it in the town and beyond, that does not mean the town as a whole is suffering.  Consider your own situation.  Most winters you spend perhaps $300 to pay the Snow Plowers to clear your driveways.  This winter you have spent but $50.  What has happened to that other $250?  You have presumably spent it (or perhaps put it in the bank to be lent to others who have spent it).  And where did you spend it?  On the exact same things the Snow Plowers would have spent it on.  You have been able to eat out a few more times, buy some extra beers, or a nicer steak at the grocery store, or even some candles.  The economy hasn’t been harmed; the flow of spending has just been altered.  You must, in the words of a wise man, “see the unseen.”  And what is unseen is what you have done instead of pay the Snow Plowers.

The Difference It Makes

One young man raised his hand and asked, “If this is true, then what you are saying is that it doesn’t make a difference whether it snows or not to our local economy.  So why should we not ask for more snow and help out our friends the Snow Plowers?”

The wise man responded:

Ah, but it does make a difference.  The rest of us are better off when it doesn’t snow.  Think of it this way: Each time it snows we must spend $25 to get the thing back we value: a usable driveway.  So in snowy winters we give up $300 and have a clean driveway — and that is all.

This winter, by contrast, we have both the clean driveway and the $300.  And we are free to spend that $300 on other things we might want, such as a new flat-screen TV.  This winter we are able to have both a new TV and a clean driveway, while in past years we’ve  had only the clean driveway.  Are we not all better off as a result?   It is unfortunate that our Snow Plower friends are worse off, but would we really prefer a world where we spend $300 to get us right back where we were before the snow?

The people pondered his wisdom, and they understood.  Some of them suggested that if their Snow Plower friends were truly suffering, the rest might use some of the money they saved by not plowing to help them through winter, perhaps by asking them to do some other sort of much-needed work around their homes or around the town.  After all, painting a room or installing new thermal windows would make them better off in a way that unnecessary snow plowing would not.

So the Snow Plowers’ petition to the Clouds was ripped up, and the people of the town rejoiced in the windfall created by the absence of snowfall.

(Thanks to Sarah Skwire for some stylistic suggestions.)

Frédéric Bastiat exposed the fallacy more than 150 years ago, and yet many people who should know better apparently never got the memo. One of the latest examples of “the blessings of destruction” analysis comes from Paul Krugman, the 2008 Nobel winner in economics:

[T]he nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole. If this sounds crazy, well, liquidity-trap economics is like that — remember, World War II ended the Great Depression.

So Japan is hit with three catastrophes, a massive and powerful earthquake, a tsunami, and radiation-spewing meltdowns at a nuclear power plant — and this is considered “expansionary”? If one wishes to understand the intellectual bankruptcy of modern macroeconomic thinking, Krugman provides material.

Krugman Not Alone

However, what the great Walter Williams calls “economic lunacy” is not limited to Krugman. Others are following suit, claiming that the destruction of property in Japan actually is a positive thing, economically speaking. Williams first points out what other “respected” economists have written:

Economic lunacy abounds, and often the most learned, including Nobel Laureates, are its primary victims. The most recent example of economic lunacy is found in a Huffington Post article titled “The Silver Lining of Japan’s Quake” written by Nathan Gardels, editor of New Perspectives Quarterly, who has also written articles for The Wall Street Journal, Los Angeles Times, New York Times, and Washington Post.

Mr. Gardels says, “No one – least of all someone like myself who has experienced the existential terror of California’s regular tremors and knows the big one is coming here next – would minimize the grief, suffering and disruption caused by Japan’s massive earthquake and tsunami. But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia…. By taking Japan’s mature economy down a notch, Mother Nature has accomplished what fiscal policy and the central bank could not.”

Harvard University’s Professor Larry Summers, former Obama economic adviser and Bill Clinton’s Treasury secretary, said the disaster “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

Williams quotes Bastiat:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Williams then asks:

Would the Japanese economy face even greater opportunities for economic growth had the earthquake and tsunami also struck Tokyo, Hiroshima, Yokohama and other major cities? Would the 9-11 terrorists have done us an even bigger economic favor had they destroyed buildings in other cities? The belief that society benefits from destruction is lunacy.

Impeccable Logic

Williams’s logic is impeccable, yet time and again such wisdom is overlooked in favor of the folly of Keynesian “logic” on the alleged benefits of spending. As we have seen from those supposedly most learned in economics, formal graduate study of the discipline in some of our most august academic institutions is no guarantee that sound economics will be learned.

No, Japan is not experiencing the blessings of destruction. The Japanese people are going through sheer horror. To spin this tragedy into economic triumph is not just bad economics; it’s an obscenity.

“Nudged” by federal policy, the previous owners accepted a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency. The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four- to nine-miles-per-gallon (MPG) improvement in fuel economy, and $4,500 if the yield was ten or more MPG.

In all, according to Bloomberg, some $2.88 billion in tax money helped buy some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks. These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle. The program was wildly popular.

Taken together the trade-ins had an average fuel economy of 15.8 MPG, while the replacements averaged 24.9 MPG. And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.) This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.” Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.” LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.” Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

Long-Term Costs

Obama’s Council of Economic Advisers (CEA) predicted the economy would be spurred as the auto industry geared up to meet inspired demand.

The program was predicted to raise third-quarter GDP 0.3–0.4 of a percentage point and lift year-end employment by 42,000. August auto sales did indeed reach to the sky, but September sales plunged back into the basement again. The program stole sales from the future; it did not fertilize future sales.

Considering final costs, there’s serious doubt that the program was successful even in the short term. The doubt arises for at least three reasons. First, the program got political support primarily for its much-touted environmental benefits. Carbon emissions would be reduced—but at about ten times the cost of alternate ways of removing carbon. Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth. A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points.

University of California-Berkeley economist Christopher Knittel developed a rigorous assessment of the implied cost of carbon emissions under the clunker program (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program,” www.tinyurl.com/mrmtuy). Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers. Eventually, of course, the clunkers would have died a natural but less dramatic death. Knittel then estimated the carbon reduction gained by replacing the large fleet of clunkers with a new fuel-efficient fleet. When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables. That fell to $237 per ton under best-case conditions. And what does this tell us? The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates it costs $28 to reduce a ton of carbon across U.S. industries. Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured. Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes. Think of the roofers that become employed.

But Bastiat’s key lesson is that a window has been destroyed—and it had value. Before touting the total benefits of the program we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms. One of these has to do with conservation of wealth. “Waste not, want not,” we are told. “A penny saved is a penny earned,” we are reminded. Using politics to pay people to destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction. Considering all this, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Even though a sorry idea, the Obama administration will soon go forward with a cash for old refrigerators program. Unlike the clunkers program, the appliance plan will not require destruction of the old refrigerators and other items involved. The transaction costs are just too high. Nevertheless, let’s stop Cash for Refrigerators before the idea spreads further.

The sheriff is patrolling his town one day when he walks between the general store and the window shop, across the street from each other, and sees that the latter is in shambles, while the former is thriving. This situation strikes him as quite unfair. Why, he asks himself, should the proprietors of these two stores, who (he presumes) spent comparable amounts of time and money in building their businesses, be separated by a large and growing disparity in their wealth and consequently their living conditions?

The sheriff decides he will take it upon himself to remedy the situation—to level the playing field—so he puts a brick through each of the general store’s windows. The window store is immediately flooded with business replacing all the general store’s damaged property. The sheriff is satisfied. He has succeeded in spurring the business of a struggling entrepreneur. His town is once again in harmony.

A month or so later the sheriff is walking the same beat. He notices that once again the general store, having recovered from the vandalism of the previous month, is maintaining a healthy business, while the window store is once again struggling. He decides to repeat his previous actions, once again tossing a brick through each of the former’s windows. And once again, the window store’s business surges as it is charged with replacing the damaged panes in the general store.

But the sheriff realizes that, left to its own devices, the general store will once again recover and resume its thriving business, while the window shop will again falter. So he decides to repeat his window-breaking routine every so often. By doing so, he reasons, he will be supporting an industry that would otherwise fail. He acknowledges the price that the general store will have to pay, but immediately dismisses this thought, realizing that such a thriving business certainly has the money to replace its windows every now and again.

Before this rampage of vandalism by the community’s civil servant, the owner of the general store had been contemplating ways in which to reinvest the revenue that his business was creating. He boiled the situation down to two options. On the one hand, he had been considering an expansion of his facilities. His business had been doing so well that he began to buy more products of more varieties, and, after a while, needed additional storage and shelf space. On the other hand, he thought, he owed much of his success to the hard work of his dedicated employees and felt they deserved a pay raise.

But before he could decide which of the alternatives suited him better, someone had begun to break the windows of his shop regularly. Although his business was not at risk, the costs associated with replacing the windows added up. He had to forgo his plans either for a physical expansion of his business or a bonus for his employees. (See Frédéric Bastiat’s discussion of the “broken-window fallacy.”)

After numerous occasions of vandalism at his shop, the owner of the general store goes to the sheriff and explains to him that the costs of replacing his shop’s windows are hampering his business and that he would like the sheriff to investigate. Much to the shopkeeper’s surprise, the sheriff admits that he, in fact, has been wreaking the destruction on the general store. The sheriff explains his logic, telling the owner that if those windows had not been broken, the business across the street would have gone belly up. As an officer of the law, the sheriff continues, he is charged with safeguarding the public—providing not just physical protection, but financial protection as well. He says that he cannot very well sit idly by and watch as members of the community who have entrusted their well-being to him are driven out of business and forced into poverty.

The general-store owner protests, but what can he do? Under threat of force (that is, of the law) he is told that he must endure the violation and destruction of his personal property for the benefit of the community. The sheriff continues to hurl bricks through the general-store window, and eventually the owner learns to live with this nuisance. Rather than expand his business—and the public service that it offers—or pay his employees more, he is forced to endure the oppression of the law for the sake of a business that could not survive on its own.

This is the crime of the state. Pragmatically, taxation is the enemy of innovation, the broken window in the general store. Philosophically, taxation is the moral—and universalized, or at least nationalized—equivalent of the sheriff’s vandalism. The state feels, in the service of the public, that it must violate the property of some for the benefit of others.

One need not advocate anarchism, however, to see the problems inherent in such a policy. Taxation arguably serves its purpose in providing public services. If the sheriff had restricted his duties to the physical protection of the community’s citizens, he would have been doing his job aptly. Likewise, the role of government must be restricted to the protection of the life, liberty, and property of its citizens. The state oversteps its bounds, however, when it violates one of those three rights—as the sheriff did, and as the federal government of the United States does—even for the benefit of others.

If the sheriff had not intervened, the owner of the window store may have realized that the community did not provide sufficient demand for his product for him to run a successful business. He could then have opened his own general store and competed with the one across the street. He could have vacated the building and rented it to the general-store owner, who needed additional space. But the sheriff’s violation of the right to property, actions that embody the spirit of welfarism and coercive equality espoused by so many in our own government, cannot be justified on any terms.

The United States is moving dangerously close to (and has maybe even arrived at) a system under which those charged with protecting and trusted to honor our rights regularly violate them in the name of mindless rhetorical utopianism and forceful egalitarian mediocrity.

The progress of freedom depends more upon the maintenance of peace and the spread of commerce and the diffusion of education than upon the labour of Cabinets or Foreign Offices.

—RICHARD COBDEN (1804–1865)

In a 1944 review of F. A. Hayek’s Road to Serfdom, George Orwell declared, “Capitalism leads to dole queues, the scramble for markets, and war.” Indeed, if we look at the past century, we see significant advances in markets, but we also see an era plagued by war. Do capitalism and conflicts go hand in hand? Are the military and markets complements? Indeed, many conservative advocates of markets also passionately support the military, and many people who oppose war also oppose markets.

Nineteenth-century writer Richard Cobden, however, maintained that the military and markets were substitutes: More military entails less market. Although the ideas in The Political Writings of Richard Cobden (1903) are a century and a half old, Cobden considered many arguments for military interventionism still made today. He discussed whether military spending was beneficial to the economy, to commerce, and to peace, and in all three cases he answered no. Both conservatives and left-liberals can learn much from Cobden’s discussion of commerce, markets, and peace. As he demonstrated, the advocate of markets must be an advocate of peace.

Cobden began his 1835 pamphlet England, Ireland, and America with a quote from George Washington’s farewell address to the American people: “The great rule of conduct for us in regard to foreign nations is, in extending our commercial relations, to have with them as little political connection as possible.” Whereas Washington made the political case for trade with all and entanglements with none, Cobden outlined an economic case; he was not a pacifist on principle.

Cobden emphasized first the opportunity costs of military spending. Unlike later economists influenced by John Maynard Keynes, he did not fall victim to the “broken window” fallacy. He recognized that each million the government spent was necessarily a million (or more) not spent by private parties. When the government devotes resources to armies and navies, those resources have an opportunity cost.

Cobden did not view all government expenditures as promoting the public good. As the government consumes more resources, fewer resources can be devoted to private wealth-generating activities. Government agents may gain from increased public spending, but the public loses. Cobden drew a distinction between the interests of the productive class and the interests of government. “Our history during the last century may be called the tragedy of ‘British intervention in the politics of Europe’; in which princes, diplomatists, peers, and generals, have been the authors and the actors—the people the victims; and the moral will be exhibited to the latest posterity in 800 millions of debt.” When the state directs resources, its beneficiaries certainly gain, but unfortunately the public foots the bill.

Cobden on Military Adventurism

Cobden viewed Britain’s military expenditures as wasted resources. Rather than encouraging commerce, the army and navy were a drain on the economy. He maintained that the productive citizens did not profit from the British government’s activities around the globe. He wanted to educate members of the business class that they had to pay for all of the government’s projects. When the government creates programs around the world, he argued, the bureaucracy can only grow. Although this activity may look good for government, the average person receives little benefit when government exerts its influence abroad.

Although the public’s benefits are murky, its costs are crystal clear. Cobden recognized that taxes constitute a weight on the economy and that decreasing military spending abroad would result in significant savings: “[W]e know of nothing that would be so likely to conduce to a diminution of our burdens, by reducing the charges of the army, navy, and ordnance (amounting to fourteen millions annually), as a proper understanding of our relative position with respect to our colonial possessions.” Although England’s international affairs were conducted under the pretext of enhancing the public good, Cobden believed that much of public policy benefited only special interests: “The honours, the fame, the emoluments of war belong not to [the middle and industrious classes]; the battle-plain is the harvest-field of the aristocracy, watered with the blood of the people.”

At the time Cobden wrote, Britain had more than ten times more ground soldiers than the United States maintained and a significantly larger navy as well. He hypothesized that American enterprise had become so important in such a short time because it was relatively unburdened by heavy taxes. “It has been through the peaceful victories of mercantile traffic, and not by the force of arms, that modern States have yielded to the supremacy of more successful nations.” He upheld the Americans’ lesser military spending as a model to be followed: “The first, and, indeed, only step towards a diminution of our government expenditure, must be the adoption of that line of foreign policy which the Americans have clung to, with such wisdom and pertinacity, ever since they became a people.” Cutting back government spending is the easiest way to improve economic performance.

Cobden’s hypothesis seems to be corroborated by empirical work by Malcolm Knight, Norman Loayza, and Delano Villanueva (“The Peace Dividend: Military Spending Cuts and Economic Growth,” International Monetary Fund Staff Papers, 1996, 1–37), which indicates that the greater the military spending in an economy, the worse the economic performance. These analysts hypothesize that “military spending adversely affects growth; namely, through crowding out human capital investment and fostering the adoption of various types of trade restrictions.”

Markets and the Military

Although all able economists recognize military spending as costly, these costs may be necessary for the existence of markets. If so, opposing military spending would amount to opposing markets, as many conservatives contend. Commerce certainly has beneficent characteristics and war does not, but perhaps society has to take the bad with the good. The only choice might be to accept both markets and militarism or to oppose both. To Cobden, however, this union was a false marriage: Markets and military do not go hand in hand; the success of an economy depends on the achievements of free enterprise, which do not depend on military spending.

We can see this reality by looking at where the government devotes military resources. Discussing how much trade occurred between England and the United States, Cobden asked, “Now, what precaution is taken by the Government of this country to guard and regulate this precious flood of traffic?” Although the commerce certainly had great importance, the merchants who conducted it were for the most part on their own. With great passion, Cobden argued that commerce did not depend on the navy:

How many of those costly vessels of war, which are maintained at an expense to the nation of many millions of pounds annually, do our readers suppose, are stationed at the mouths of the Mersey and Clyde, to welcome and convoy into Liverpool and Glasgow, the merchant ships from New York, Charleston, or New Orleans, all bearing the inestimable freight of cotton wool, upon which our commercial existence depends? Not one!

Similarly, he asked about the army: “What portion of our standing army, costing seven millions a year, is occupied in defending this more than Pactolus—this golden stream of trade, on which floats not only the wealth, but the hopes and existence of a great community? Four invalids at the Perch Rock Battery hold the sinecure office of defending the port of Liverpool!” The world is too big for any nation to police every mile of it, so merchants were left to themselves.

But our exports to the United States will reach . . . more than ten millions sterling, and nearly one half of this amount goes to New York: —what portion of the Royal navy is stationed off that port, to protect our merchants’ ships and cargoes? The appearance of a King’s ship at New York is an occurrence of such rarity as to attract the especial notice of the public journals; whilst, all along the entire Atlantic coast of the United States—extending, as it does, more than 3,000 miles, to which we send a quarter of our whole yearly exports—there are stationed two British ships of war only, and these two have also their station at the West Indies. No! this commerce, unparalleled in magnitude, between two remote nations, demands no armament or safeguard.

The trade between the nations was immense, but British merchants simply could not depend on their navy to defend their every journey. The British military, although significant, was not devoting its resources to protecting merchants.

The Legacy of Mercantilism

Why then are so many arguments for the military made in the name of commerce? One reason is the legacy of mercantilism, under which the government played an active role attempting to manage the economy. This intervention included the establishment of foreign trading monopolies by law. Because the government maintained these commercial monopolies with armed forces, the discussion of commerce and the military went hand in hand. To Cobden, however, mercantilist policies conflict with free trade. The military should not be used to enforce monopolies.

Cobden favored abandoning military conquest for the benefit of “commerce” and adopting instead a system of free trade. The entire military involvement with commerce was unnecessary, so superfluous spending could be cut without harming the market.

If the spread of trade increases the risk of incurring greater costs—due, for example, to thievery or extortion by governments or by pirates—the simple solution is to implement policies friendly to business. Triumph in the world market hinges on successful private enterprise, which depends not on military superiority but on lower costs. By cutting the military drastically, the savings can be passed on to productive enterprise. “By this course of policy, and by this alone, we shall be enabled to reduce our army and navy more nearly to a level with the corresponding burdens of our American rivals.”

Markets Foster Peace

Not only does free trade require little military backing, but, moreover, markets should substitute for the military. Replacing military relations with commercial relations would lead to significant tax savings, as well as to more peace. “[B]esides dictating the disuse of warlike establishments, free trade (for of that beneficent doctrine we are speaking) arms its votaries by its own pacific nature, in that eternal truth—the more any nation traffics abroad upon free and honest principles, the less it will be in danger of wars” (emphasis in original). Thus rather than creating antagonistic relationships, trade encourages peaceful relations between nations. Nothing encourages cooperation so much as a mutually advantageous enterprise. Manufacturing, not naval strength, is the key to prosperity.

Cobden believed that trade would flourish as long as manufacturers lowered their costs. When trading partners specialize according to their comparative advantage, they produce increased output and consumption for all traders.

The dilemma concerning international trade is that it requires more than one party. If one country adopts policies inimical to markets, it reduces others’ opportunities for trade. Can liberating such a country benefit both its citizens and its liberators? Citizens would have their government overthrown, and the liberators would have newfound trading partners, so might the outcome be a win-win situation? Cobden considered such justifications for military involvement abroad, recognizing that appeals for military involvement were made in the name of promoting good. He favored the preservation of peace, but he disputed that military involvement was an effective means to that end. In his view military intervention served the interest of neither the intervening nation nor the distant country.

Foreign Policy of Non-Intervention

Cobden made a case first by appealing to the self-interest of his fellow citizens. He argued that a country embroiled itself in other people’s affairs only at its peril: “Our sole object is to persuade the public that the wisest policy for England, is to take no part in these remote quarrels. . . . We shall claim the right of putting the question upon a footing of self-interest.”

Although many problems exist in the world, becoming involved in each one would be futile. “Upon what principle, commercial, social, or political—in short, upon what ground, consistent with common sense—does the foreign secretary involve Great Britain in the barbarian politics of the Ottoman Government, to the manifest risk of future wars, and the present pecuniary sacrifice attending standing armaments?” (emphasis in original). Moreover, not only are such endeavors costly, but they also risk full-fledged war. Why should a country be surprised when it is attacked after its government has involved itself in far-off concerns? Cobden believed countries that do not maintain an international military presence would be less at risk.

Even though other governments may well be in the wrong, why chance the further muddying of already roiled waters? Viewing British involvement with foreign nations as a problem, Cobden argued that the British had no business interfering in overseas politics. “If we go back through the Parliamentary debates of the last few reigns,” he observed, “we shall find this singular feature in our national character—the passion for meddling in the affairs of foreigners.” With sufficient problems at home, why worry about the entire world’s problems? “Public opinion must undergo a change; our ministers must no longer be held responsible for the every-day political quarrels all over Europe.” Intervention struck Cobden as counterproductive: “Again we say (and let us be excused the repetition of this advice, for we write with no other object but to enforce it), England cannot survive its financial embarrassment, except by renouncing that policy of intervention with the affairs of other States which has been the fruitful source of nearly all our wars.”

A second type of argument for military involvement abroad is humanitarian. Yes, military intervention entails costs, but when a country is blessed with more liberty, compassion requires helping others to attain such liberty. Although Cobden favored liberty throughout Europe, he did not believe that British military action could establish it.

Exporting Liberty by Force

He questioned whether war can advance markets. Simply deposing and replacing a country’s leaders will not lead to more liberty. Cobden wrote: “[L]et it never be forgotten, that it is not by means of war that states are rendered fit for the enjoyment of constitutional freedom; on the contrary, whilst terror and bloodshed reign in the land, involving men’s minds in the extremities of hopes and fears, there can be no process of thought, no education going on, by which alone can a people be prepared for the enjoyment of rational liberty.” Liberty requires enlightenment, which can come about only by means of education and persuasion, not military force.

Public opinion must undergo a change toward respecting private property rights; otherwise, a market economy cannot function. Cobden described how the French were having so many difficulties precisely because of war: “[A]fter a struggle of twenty years, begun in behalf of freedom, no sooner had the wars of the French revolution terminated, than all the nations of the continent fell back into their previous state of political servitude, and from which they have, ever since the peace, been qualifying to rescue themselves, by the gradual process of intellectual advancement.” Cobden viewed the transition to liberty as a learning process that cannot be imposed by brute force. If we want markets, the public has to be convinced, not forced, to support them.

Because war does not advance liberty, foreign nations must be left to sort out their own affairs, no matter how difficult their problems. A desire to step in and control the situation is a natural feeling, but Cobden opposed such intervention. Rather than trying to fix every problem using might, England should stay out. With so much strife between European nations, Cobden wrote, “it becomes more than ever our duty to take natural shelter from a storm, from entering into which we could hope for no benefits, but might justly dread renewed sacrifices.” Precisely at a time of so much discord, the best policy is nonintervention. Rather than venturing into the storm, a nation, instead, should focus on free trade. Rather than acting as the world’s policeman, England should devote its energy to commerce.

The Humanitarianism of Liberty

Would eschewing foreign political squabbles be tantamount to abandoning everyone else and refusing to help those in need? To Cobden, the answer was no. He recommended laissez faire as the most humanitarian course of action. A policy of nonintervention would actually help other nations more than activist policies. Serving as a model for foreign nations would help them far more than becoming embroiled in their conflicts.

Consider the trade between the United States and England in the nineteenth century. Despite the lack of political reunification, peaceful relations existed because the private sectors of the two economies were so closely connected. “England and America are bound up together in peaceful fetters by the strongest of all ligatures that can bind two nations to each other, viz., commercial interests; and which, every succeeding year, renders more impossible, if the term may be used, a rupture between the two.” Much of England’s manufacturing depended on raw materials imported from the United States. When groups are interdependent, aggression is less likely. Where no trade exists, in contrast, both countries have less to lose by resort to warfare.

Conflict often occurs where trade barriers are present. Have embargoes ever brought about more cooperation or produced more liberty? Empirical evidence demonstrating the effectiveness of these policies is scant. Government interference with trade jeopardizes peace. With each new trading relationship under free trade, a bond comes into existence between otherwise separate parties. By expanding trade around the globe, nations develop more such peaceful relations. In this realm, government relations are superfluous.

England . . . has . . . united for ever two remote hemispheres in the bonds of peace, by placing Europe and America in absolute and inextricable dependence on each other; England’s industrious classes, through the energy of their commercial enterprise, are at this moment influencing the civilization of the whole world, by stimulating the labour, exciting the curiosity, and promoting the taste for refinement of barbarous communities, and, above all, by acquiring and teaching to surrounding nations the beneficent attachment to peace.

Cobden was right: Trade is “the great panacea.” To promote a world of peace, we must promote a world of free markets.

Advocates of liberty face an invisibility problem, first identified by nineteenth-century French libertarian Frédéric Bastiat in the appropriately titled essay “What Is Seen and What Is Not Seen.” Through a simple story, Bastiat exposed the fallacy that later underlay Keynesian economics.

A young boy breaks a shopkeeper’s window, initially sparking outrage from the townspeople. When the locals begin to discuss the incident, they conclude that there is a positive side. The glass will need to be replaced, making work for the glazier. The glazier will spend the money he makes on bread. The baker will then spend that money, and so on. The townspeople offer consolation to the victim: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Wait! Bastiat says. “Your theory stops at what is seen. It does not take account of what is not seen.” The mistake in their reasoning is that the townspeople do not consider what use the shopkeeper would have put his money to had he not spent it fixing the window. Perhaps the shopkeeper would have purchased a new hat, giving work to the local haberdasher, or placed the money in a bank, which would then lend it as capital for an entrepreneur. The poor reasoning of the townspeople has become known as the broken-window fallacy.

The Persistence of the Fallacy

Critical reflection should make it clear what is lost through the youth’s vandalism, and yet the broken-window fallacy seems ever present in our society. Paul Krugman even used it to suggest that the September 11 attacks would boost economic growth because of the costs of reconstruction. (“The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending,” “Reckonings; after the Horror,” New York Times, Sept. 14, 2001; http://tinyurl.com/32h7hy.)

Bastiat’s title clearly identifies what lies behind the persistence of this fallacious reasoning. The importance of visuals for argumentation has only grown since Bastiat’s time. Much effort has been expended by libertarians in making the case for how the market could address any number of potential problems. This is important work, but presenting a brilliantly argued case for libertarianism only means success in a world of completely rational people. If we were living in that world, libertarianism would have prevailed long ago. The charts and graphs (the seemingly lone visual aids) trotted out by economists to make the case for laissez-faire economics are more likely to put audiences to sleep than inspire them to action. Defenders of the free market need new visual rhetorical strategies that highlight the human costs of intervention.

Emmanuel Lévinas, a French philosopher who wrote extensively on ethics, rooted the ethical obligation between human beings as one that stems from direct viewing of the human “face.” The case of Jessica McClure seems to confirm Lévinas’s theory. Jessica fell into a well in 1987. Her plight drew massive attention and resources that could have saved countless more lives if put to other uses. The visual image of a child stuck at the bottom of a well created an irrational prioritization of her case. A review of the relevant psychological literature by Paul Slovic, president of Decision Research, offers a more comprehensive confirmation. He found that individuals were more likely to donate money to individuals rather than groups, and smaller groups rather than larger ones. Researchers attribute this to human beings having an easier time empathizing with small groups, combined with smaller groups contributing to a stronger feeling of being able to create actual change. Slovic also found individuals were much more willing to donate money to a cause if a picture of those suffering was available. He concluded his review of the literature by saying that statistics of human suffering have had and will continue to have a terrible track record of promoting action. As Stalin is often alleged to have said, “One death is a tragedy; a million is a statistic.” The innate human desire to prioritize the visual gives a strong rhetorical edge to opponents of the free market.

Modern-day statists seem incredibly adept at commanding the attention of the public. Have you ever noticed how there exists an unending stream of documentaries criticizing the free market? Roger and Me, Wal-Mart: The High Cost of Low Price, This Is What Democracy Looks Like, and Sicko are some of the titles that immediately pop to mind. I can’t remember ever seeing a libertarian documentary being widely promoted, despite the fact that libertarians make up roughly 13 percent of the American population, according to research by David Boaz and David Kirby.

Is there an American over the age of 25 who does not remember the terrible images from the Exxon Valdez oil spill? These images evoke strong anti-corporate feelings even though the company has now spent over $3 billion to alleviate the environmental impacts and has paid restitution to the affected fishing industry.

How many individuals have seen pictures, much less heard of, the Milwaukee disaster? Over 400 times as much pollution was knowingly dumped in Lake Michigan in 2004 by local governments that understood they would not be held accountable. Americans have been inundated with pictures of melting icecaps, but have they seen pictures of the children starving because of our energy policies? Numerous studies show that government policies pushing ethanol as a solution to global warming act to raise food prices, leaving the world’s poorest to starve. This on top of the fact that most scientists believe the corn ethanol being pushed by the government will have no effect on warming. Many Americans have been confronted with images of children working in factories; however, they do not see the images of the 5,000 Nepalese girls forced into prostitution because of U.S. trade sanctions against child labor. These facts are not secret, but their lack of visual presence means they are all but invisible to most Americans.

The Effectiveness of Imagery

Imagery is effective, especially when combined with skillful storytelling. If you can honestly tell me that you watched Roger and Me without being overcome with deep grief and anguish, then you must have a heart of stone. And recall what images stay with you from Roger and Me. Although Michael Moore offers statistical representations of the economic downturn of Flint, Michigan, it’s the images of individuals evicted from their homes that haunt me. It is only by removing myself from the movie and viewing it in the larger context of the positive effects of outsourcing that I can see the flaws in Moore’s logic. Unfortunately, I don’t think most Americans have the patience or a strong enough background in libertarian thought to be able to take on this task. (I know I didn’t until many years after seeing the film.) Libertarians can cry “unfair” and write all the scathing reviews they want, but both history and the relevant scientific data indicate that it will do little good.

Instead they need to take up the tactics long deployed by the statists. Although we have a late start, we also have the enormous advantage of having a much stronger position to advocate. Historically, libertarians have used this great strength against themselves by assuming that truth alone would be enough to win the day. Libertarians must learn a lesson that the marketplace has taught the business community over and over again: having the best product is not enough. This does not mean ending the scholarly work that delves into the nitty-gritty of what a world free of statist policies would look like. Nor does this mean ending the statistical work that so effectively makes the case for free markets. (Both of these things were instrumental in converting me and many others to libertarianism.)

Instead it means recognizing that a comprehensive case is not always as valuable in swaying public opinion as having effective case studies that take visual form. This sad fact has been proven time and time again when isolated incidents of highly visible “market failure” (Enron, Exxon Valdez, and so on) are taken as opportunities to usher in sweeping regulation. Initial forays into visual argumentation by libertarians have already proven largely successful, whether Ron Paul’s enormous presence on YouTube or John Stossel’s investigative journalism on “20/20.” Libertarians need to open a third front that tackles the statists in the visual realm, where they have too long held a dangerous monopoly.

Works Used

1. Frédéric Bastiat, “What Is Seen and What Is Not Seen,” (1850), http://tinyurl.com/ydasa2.
2. David Boaz and David Kirby, “The Libertarian Vote,” Policy Analysis no. 580 (2006), http://tinyurl.com/y4wfby.
3. Paul Krugman, “Reckonings; after the Horror,” New York Times, Sept. 14, 2001.
4. Emmanuel Lévinas and Seán Hand, The Levinas Reader, Translated by Seán Hand and Michael Temple, Blackwell Readers. Oxford, UK; Cambridge, Mass.: B. Blackwell, 1989.
5. Phil McKenna, “Corn Biofuel ‘Dangerously Oversold’ as Green Energy,” New Scientist (2007).
6. Johan Norberg, In Defense of Global Capitalism, Washington, D.C.: Cato Institute, 2003.
7. James R. Otteson, Actual Ethics, Cambridge, UK; New York: Cambridge University Press, 2006.
8. C. Ford Runge and Benjamin Senauer, “How Biofuels Could Starve the Poor,” Foreign Affairs (2007).
9. Paul Slovic, “ ‘If I Look at the Mass I Will Never Act’: Psychic Numbing and Genocide,” Judgment and Decision Making 2, no. 2 (2007): 79–95.

It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. The reason is that the demagogues and bad economists are presenting half-truths. The answer consists in supplementing and correcting the half-truth with the other half. But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds the chain of reasoning difficult to follow and soon becomes bored and inattentive. 

Frédéric Bastiat has shown that an effective weapon against boredom and bad economics is humor and satire. It is in this spirit that I present my own letter to a congressman full of half-truths and partially correct analyses. I invite the reader to try to catch them all. 

My Dearest Congressman, 

I, a humble economics professor, congratulate you on becoming our newest and youngest member of Congress. There are many important problems that need to be addressed, and it is your idealism to which I wish to appeal. I submit to you a proposal that should benefit us both and develop our society to heights not yet imagined. It is a proposal for a government program that will allow us to achieve those goals that have eluded us. For too long we have been laboring for only ourselves. There simply isn’t enough good in the world. That is why I am proposing that we create a new program called the PCGDF. The PCGDF is, of course, the Paul Cwik Good Deeds Fund. Before you dismiss this out of hand, please hear me out. 

The PCGDF would collect one dollar from each person in the United States each year. That would be approximately $300 million. No one would protest the loss of a measly dollar over the course of a year. What would they do? Travel to Washington, D.C. ; get a hotel room; create signs; and march in protest all over a single dollar per year? Not even the students who don’t like my classes would ever do that! Would they organize against you and support your political opponents? Hardly! The loss of a dollar wouldn’t motivate anyone to do anything. 

On the other hand (a phrase we economists are very fond of), think of all the benefits that could be created with $300 million. I would start slowly by simply committing random acts of kindness and then build up to doing great works. Since the expense of the PCGDF would be spread out over a large group of people, no one (at least no one worth worrying about) would notice or get upset. Since the goodies would be bestowed on a small but highly visible group, they would capture the headlines and please the recipients. 

We economists call this dispersed costs and concentrated benefits. 

When we concentrate these benefits we will improve the economy in ways that we are not normally able to. Let me explain it this way: if there is a light, diffused rain, it’s nice, especially during the hot summer months. However, if a heavy rain is concentrated in a central location we can see its power. The same is true with money and good deeds. When money is diffused nice things may arise, but it is only when it is concentrated that great things can be achieved. Do you think that the pyramids were created by small-mindedness? By pooling $300 million, great works can be done. Shelters can be built. Large-scale construction projects can be undertaken. Many jobs can be created, and poverty can be dramatically reduced. Only by concentrating wealth and resources can we build things to last the ages. 

An additional benefit must be considered: the impact this concentration of spending will have on the national income through the multiplier. When a person spends a dollar in a shop it becomes someone’s income. The shopkeeper will spend that money, which will become someone else’s income. The spending is multiplied throughout the economy. It is better for organizations such as the PCGDF to spend tax money, because the fund will not set any of it aside. In contrast to the PCGDF, most people don’t spend all their money—they save some of it. This precautionary act is reasonable from the individual’s point of view, however from a macroeconomic point of view this unspent money is a brake on our ability to grow. Spending money is why we see GDP increase after a hurricane and why Germany and Japan grew so quickly after the devastation of World War II. Imagine if money were spent as if there were an emergency but without all the destruction. Imagine how much better off we could become from only a dollar a year. 

As you know, economics is a value-free science. It does not tell people how to behave. It can only serve as a guide to good policies. Economic science clearly shows us the power of multiplying spending. It would be silly to ignore this potential. Furthermore, do you really want the random chaos of the market to guide progress or would it not be better instead to have sensible and rational planning? 

As the PCGDF begins its mission of good deeds, it will of course have to recognize the generosity of its creators and benefactors. In addition to all the direct benefits the PCGDF would bestow on the needy, I would definitely use a (large) portion of the funds to support the supporters of the PCGDF. That means I could fund your PACs, reelection campaign, and the think tanks and the “527” committees that support your interests. 

Majority Rule? 

Some may argue that only those programs that the majority supports should be adopted—that politicians are public servants and should follow the will of the people. Naturally, I fully agree and would never advocate against this principle. Yet think of all the public good you could do if you are able to be reelected. Your seniority would increase; your status as a statesman would flourish; and your committee assignments will be closer to the center of power. In fact, I could use a portion of the PCGDF to spread the word that you’re such an effective congressman. 

Perhaps you are worried that others may attempt to form their own Good Deeds Funds. But not all good deeds are noble, kind, or generous enough to be associated with your name and reputation. You of course should carefully consider each request. Determine whether the deeds to be done are meritorious. Thus the applicants would have to explain the details to you and your colleagues. However, one can only listen to so many proposals in a committee hearing room before becoming numb to the whole process. Perhaps the applicants could explain the details in more comfortable settings—like over dinner or maybe, if the proposal is large enough, at a fashionable resort over the weekend. Since your time is limited (and there are only so many weekends that you can get away) they would have to compete for your attention. They would have to send you gifts. Who could refuse to talk to those who donate such generous gifts to you and your charitable causes? 

Please consider this proposal carefully. The cost is only a single dollar per taxpayer per year, yet the good deeds that could be achieved are enormous! The PCGDF is only the beginning of a glorious future. 

Yours truly, 

Paul Cwik 

A humble economics professor

The line of attack might be seen as an application of Bastiat’s “broken window” fallacy.

As Murray Rothbard warned us, there are a great many “broken window fal­lacy mongers” about. If nothing else, their activities will keep us on our toes. A handful of examples may suffice and should help demonstrate that a basic understanding of econom­ic principles is critical if we are to understand important causal connec­tions in history and politics.

Let us begin with something that is supposed to be good: the much-heralded Keynesian “multiplier effect.” This is a second-level broken-window fallacy. Here a sophisticated fallacy-monger arrives, just after the free‑market economist has dispelled a first-order fallacy by expounding the “seen” versus the “unseen.” The second­ary fallacy-monger then says, “Oh sure, that sounds good, but there are many things the free-market econo­mist hasn’t told you.”

One such thing is the joyous world of the multiplier. This holds that any money invested in productive enter­prises will stir up great waves of activity throughout the economy at some mathematically constant rate, resting on some functional relationship between big economic aggregates (consumption, investment). Therefore, the state ought to expand the money supply (inflate) to make additional money available. At the end of the happy process, to paraphrase an old song, the solar radiation will be unwontedly great and there will be no precipitation.

Austrian-school economist Rothbard performed a great takedown of this notion with his suggested “personal multiplier.” Faith­fully following the mathematical form of the multiplier principle, he “proved” by reductio ad absurdum that a sum of money given to any reader of his book would, when spent, “prime the pump of a 100,000-fold increase in the national income.”¹

So it appears the Keynesian multi­plier is a theoretical bust. There is, however, a bureaucratic “multiplier effect.” Political scientist Tom Burns writes that kings created bureaucracies so as to govern more effectively and in time found themselves displaced by these officials. Republics and, later, democracies inherited the bureaucracies and ran with them.

As a result, civil society now exists only “as a vast residue from which power and authority have been extracted and distilled into sovereignty.” This works for the state because “Renaissance bureaucracy”—the ancestor of modern bureaucracies—“was a great chain of command” and “[d]ispersing sovereign power through the many chains of command of a bureaucracy multi­plies power.”

Burns quotes the German sociologist Niklas Luh­mann: “Thus power takes on a hierarchic, i.e., reflexive, form in order to be able to accomplish a multiplicity of influences simultaneously. …This extension of power is put through with the aid of such actions as representa­tion, transfer or delegation, which quite innocently sug­gest that the power which is being exercised remains what it was, while they actually multiply its effective­ness.” Luhmann adds: “To apply power to the reinforce­ment of power amplifies the total power available in a social system, by means of a sort of relay technique.”²

So there is a multiplier effect and, even if it isn’t mathematically constant, the state can answer for it.

Then there are claims about “cutthroat,” or “predatory,” competition in business, which is said to lower the moral tone of society and yield sundry zero-sum games. But competition can involve degrees of voluntary coop­eration within an industry, friendly relations between competitors, or it can run to personal rivalries, depend­ing on the personalities involved. It need not become a serious problem until or unless one party brings in the state to strengthen his hand. Even a businessman who loses out to competitors is not annihilated; he can find other work in the same industry or try his hand at some­thing new.

In some cases, fierce competition with outbreaks of violence may arise where property rights are unclear or unenforced, as in the famous “wars” in the Old West between the ranchers and the farmers, not to mention the beleaguered sheep herders. These conflicts were fair­ly manageable, however, compared to real, eliminative competition between states, which we call war. In these competitions, which are indeed predatory, one state may cease to exist altogether, or lose territory to another state.

Economist Jörg Guido Hülsmann has proposed a political “progression theorem.” He argues that states are driven to expand territorially, when possible, in order to gain more revenue, in order to expand further, gain more revenue, and so on. The drawback is, as noted, that losing a major war can mean the “death of a state” (to use Rothbard’s phrase). After two destructive world wars, European states still seek to enlarge their incomes, but having reached the limits of politically feasible taxa­tion, they must enhance their revenues indirectly through inflationary fractional-reserve banking and public debt. As each central bank reaches its limits of monetary expansion, each state’s only hope is to have some even higher jurisdiction prop up its money (since the whole point has been to evade the normal penalties markets finally inflict on counterfeiters).

Expansion by Stealth

With war off the agenda, the bureaucracy of the embryonic pan-European state tries to expand its revenues and jurisdiction by peaceful, indirect means— more carrot than stick—by conning additional states into entering the EU,³ while deliberately failing to address fundamental “constitutional” questions such as withdrawal from the union, an expansion by stealth that nicely recapitulates the strategy of the Federalists in the United States in 1786–1787.

Historians Bruce Porter, William Hardy McNeill, Charles Tilly, and many others have treated eliminative state competition, with its attendant wars, as the main engine of rapid state building.⁴

Thus an inherent, irrational growth dynamic attach­es to states. Businesses, unlike states, know when to quit expanding because of the inbuilt profit-and-loss test. States can be said to expand “irrationally” because they have no such test, in part because the costs involved are not paid by the decision-makers themselves. Their only risk, as noted, is gambling and losing in some armed struggle with another power. This may be a restraint, but it is not as decisive as red ink on the quarterly report.

This is not to say that a state will always and contin­uously strive to expand externally. A state may be unable to extract sufficient resources from production, and cul­tural factors may intrude as well. A state unable to expand outward will certainly be tempted to make more work for itself at home. Successful states like the United States may do both simultaneously. In the case of a suc­cessful imperial state, a real synergy can get underway through institutional “blowback” from overseas policing methods, and such.

However we may sort this out, it seems that states are generally driven to expand in a way that business is not. Business competition is not very much like war at all, except in the realm of bad metaphors. Of course if the state’s regulatory branches shape the environment in certain ways that spread moral hazards everywhere, we can have something like the savings-and-loan scandal of the 1980s. But that came to an end when the free ride ran out; even here the message to quit arrived sooner than such messages seem to come to the state.

While on the subject of irrational growth, I should at least mention the complaints made in the 1940s that the market economy, because of inbuilt defects, could not produce enough growth, whereas Soviet communism doubtless could do so. By the late 1950s the complaint was that there was “too much” growth. Such shifts in attack suggest there is much truth to the famous com­ment of Joseph Schumpeter that, as far as most intellec­tuals are concerned, the guilty verdict against the market is already in, although the details of the indictment may change.⁵

One more item might be mooted before we leave the topic of competition and war. It is that militarism itself generates high time-preference and lowers the social (mar­ket) rate of saving.⁶ In her essay “The Iliad as the Poem of Force,” Simone Weil remarks in passing on the severe foreshortening of time as the fight-keen Achaeans approached Troy. Not knowing how much longer he may live, each Greek’s value-scale shifted dramatically toward present consumption and away from concern for the future.⁷ It is almost superfluous to mention the seedy material culture near any large military base, with pawn shops, strip clubs, and the like, as the dominant businesses.

The Inevitable Trend Toward Monopoly

The idea of an inherent expansionist dynamic brings us to the claim that competitive capitalism inevitably means the “eating up” of smaller enterprisers and the rise and persistence of giant private “monopo­lies.” This charge has been kicking around since the late nineteenth century in the United States, and the failure to address it adequately has led to all manner of histori­cal misunderstanding and bad legislation. Rothbard did address the matter, rather conclusively.

In a hundred-page tour de force,⁸ Rothbard reduced“monopoly” to its proper bulk and resurrected Lord Coke’s seventeenth-century definition of monopoly as “a grant of  special privilege by the State, reserving a certain area of production to one particular individual or group.”⁹ On this understanding, without legal-political barriers to entry even the largest business is not a monopoly; it is simply very good at satisfying the consumers and/or unchal­lenged by good competitors for the moment. But there is genuine monopoly: first, the state itself, which asserts a monopoly of initiating force within a given territory; second, enterprisers working under a grant of exclusive privilege from the state.

Here is how Rothbard describes the evils of monop­oly:

All the effects that monopoly-price theorists have mistakenly attributed to voluntary cartels, therefore, do apply to governmental monopoly grants. Produc­tion is restricted, and factors are released for pro­duction elsewhere. But now we can say that this pro­duction will satisfy the consumers less than under free-market conditions; furthermore, the factors will earn less in the other occupations.¹⁰

Once again, a problem said to arise on the market is to be found in the orbit of the state.

The Market Fosters Disorder and Social Disruption

The charge here is that the market economy, as such, leads to social disruption, social decay, “atomiza­tion” of society, alienation, and the rest. The decline of small towns and businesses will be highlighted. We are all doomed, it seems, to deal endlessly with dizzying and unwanted “social change.” The critics of course often have their own list—of desirable social changes—to be imposed by the state, but that is another matter.

Everyone from the tamest “liberal” centrist to the wildest Marxist or feudal reactionary feels free to make these charges. Paul Baran and Paul Sweezy’s fundamen­talist-Marxist tract, Monopoly Capital, which blamed lit­erally everything deplorable in American life on late, or “monopoly,” capitalism, is just a sample of this genre.¹¹ Nice work, if you can get it; but it seems likely that these critics don’t have the right target in their sights.

I now introduce the Interstate Highway Theorem. It flows from the safe assumption that no capitalist or con­sortium of capitalists would have risked their own money on this “eighth wonder of the world.” The theo­rem simply states that, on their own, free-market partic­ipants would never have put together such a highway system, and of course they did not. We would have had roads of some kind, but not this particular public-goods boondoggle.

The interstate highways grew out of congressional pork-barrel politics and Cold War military-industrial considerations, and were popular because they “made work” for certain contractors and allied unions. Any losses to small towns, or to picturesque American ways of life dependent on those towns, caused by the build­ing of interstates may be addressed to whatever federal departments presided over their construction, enforced eminent domain on wicked “hold-outs,” and subsidized the usual corporate suspects to build those roads. They may not be addressed to the free market.

Another aspect of this alleged problem is the claim that social conditions in market-based societies render people “inauthentic,” cutting the ground out from under true friendship and treading all true fellow-feel­ing under foot. Leaving Jean-Jacques Rousseau, a pio­neer of this attack, to one side, it is enough to consider what the Scottish Enlightenment writers said on the matter in rebuttal. Sociologist Allan Silver points out that for Adam Smith “instrumental” friendships based on exchange (What have you done for me lately?) were actually “more pervasive before commercial society instituted the distinction between markets and person­al relations.” Further, in pre-capitalist societies, as understood by the Scottish thinkers, “the space between friend and enemy was not occupied, as in commercial society, with mere acquaintances or neutral strangers, but charged with uncertain and menacing possibilities.”

Thus the “Scots understand commercial society as limiting instrumental exchange to the newly distinct domain of the market…. Before commercial society, the purpose of friendship, as the Scots see it, was to help friends by defeating enemies….” So it turns out, on the Scottish thinkers’ analysis, that we can see “commercial society, far from ‘contaminating’ personal relations with instrumentalism, as ‘purifying’ them by clearly distin­guishing friendship from interest.”¹²

While we are still on the theme of social disruption, we may ask who causes the bulk of it. Political scientists Youssef Cohen, Brian R. Brown, and A. F. K. Organski have pointed out that a good many Third World conflicts “are defensive in nature: they are all brought about by the aggressive expansionism of the state,” especially where “states are still involved in the primitive accumu­lation and centralization of power resources.” These writers suggest that “over a relatively long period of time state expansion will generate violent conflict” and thus “it is the progression toward greater order itself that pro­duces much of the relatively greater violence we find in new states.”

They conclude that “the evidence strongly suggests that the rate of economic development is related to both the rate of state expansion and collective violence in a way that runs contrary to the way postulated by the dominant view on such matters.” Further, “state expan­sion seems to produce much more violence than economic growth…. Rather than state expansion being an antidote for the violence produced by economic modernization, our rather limited evidence shows that it is economic modernization which is the antidote to the violence produced by state expansion.”¹³

State-building may itself be the fundamental error and so-called “failed states” may well have earned their plight. Of course an array of stupid Cold War tricks played by the great powers in those countries can answer for part of the outcome as well. But this consideration leaves us yet within the realm of state action.

To put matters another way, markets work well at what they are supposed to do; governments work badly at what they are supposed to do. Governments do, how­ever, work well at other things: creating violence, disor­der, and disrupting orderly social life. Since they do so while imposing something they call “order”—by threats, intimidation, and violence—most people are content to imagine that governments are the source of order.

Inflation

Many writers see inflation, especially where it refers to any set of rising prices, as another problem inherent in the market economy. The state must there fore be ever watchful and ready to resort to various stern measures to “fight inflation.” Some critics—for example, the conservative historian John Lukacs—like to talk vaguely of general social inflation: of values, grades, esthetics, and everything. And while he does not lay these ills directly at the feet of the market economy, oth­ers do. For many critics, market relations as such are sup­posed to render everyone radically unstable, rationally self-centered, and prone to go deeply into debt so as to have the whole panoply of consumer goods sooner.

But leaving to one side the cultural question of the inflation of the American ego by Emerson, Whitman, and others, price inflation would seem the primary cul­prit and it comes from the state. If individual rates of time preference are lowered by easy credit, leading to the consequences of which many writers complain, we must inquire into the origins of the easy credit. Obviously, I take it as having been thoroughly shown by Ludwig von Mises and Rothbard, among others, that inflation is the expansion of the supply of money through state-con­trolled central banks, which, if taken far enough, is the cause of economic depressions.¹⁴

The cultural history of the late nineteenth and early twentieth centuries is badly in need of rewriting by a historian who can analytically separate out new methods of mass marketing (for example, by Sears and Roebuck), installment buying, “Fordism,” and the like, from mone­tary expansion by the Federal Reserve. Once this is done, we may expect to learn that “inflationary” excess­es in culture, consumption, education, and so on arose crucially from expectations grounded in easy money.As noted, easy money leads us straight to the state, the cen­tral bank, and their social allies in business and academe who believed that an expanding money supply was the key to prosperity. The unhampered market, once more, may plead innocent.

Market Failure

Dear old “market failure” must necessarily be mentioned here. This notion is basically the obverse of the public-goods problem. Suffice it to say that in the view of some observer, “the market” has failed to do X, or provide much-needed service Z. Part of the problem stems from the tendency to reify the market and then fault this monolithic mechanism or super-mind, or whatever it is supposed to be. But the market is not a thing or a person, but is instead a com­plex and extensive network of bilateral exchanges, which for convenience we call the “market.”¹⁵ Another variant is to complain that exchanges are being blocked by excessive transaction costs or the like, when on the face of it, a particular “market” hasn’t come into being simply because, as things stand, no one wants to exchange the things some observer would like to see exchanged.¹⁶ I don’t know who is supposed to keep track of missing markets that should exist, unless of course it is the state.

But we must leave this topic for now, since it is large enough to justify treatment elsewhere.

The alleged “atomization of society” brings us to the grave problem of “social action.” It is interesting that whenever successful social action takes place, as it does all the time, governments and their apologists immedi­ately denounce it as a dreadful evil, because the people cooperating do not do what these observers would like them to do. Actually occurring social action always turns out to be the wrong kind, and is reinterpreted as a social problem.

One thinks of the gathering attack on societies in which kinship relations help structure business relations and markets—as in East Asia, for example. This, appar­ently, is the most wicked “crony capitalism,” which, lack­ing transparency and the like, must be corrected by whatever superpower happens to be in the neighbor­hood. But from a free-market standpoint, what is actual­ly wrong with doing business with your cousin, if the state as such is not in the picture?

Stamping out “ethnic” allegiances in trade in the name of market freedom, “transparency,” and fairness might sound good to some people, but who exactly would do the stamping? Obviously, it would have to be the state, which is the indispensable culprit in crony cap­italism to start with. (This is a key in Russia and China, where it is often the former communist bureaucrats who are today the state-connected crony capitalists.)

During the Vietnam War, well-placed American social scientists studied the supposed failure of social action in South Vietnam. What this seems to have meant is simply that such social cooperation as existed failed to generate much support for the South Vietnamese state sponsored by the United States. Given the alleged absence of a properly functioning social structure, one theorist suggested that the South Vietnamese state sub­stitute itself for the missing intermediate structures.¹⁷ We cannot resolve here the obvious problem that if the state provides the structures, they will no longer be very intermediate.

It is probably not market relations that have leached away people’s personal autonomy, thereby reducing their ability to cooperate and undertake social action. Once again, I would suggest looking in the direction of the state.

Tying of Services and Products

Another complaint is that businesses attempt to “tie” goods and services to one another, rendering the poor consumer dependent on one product line. They may well try, but other actors in the market and con­sumers themselves will find ways around this practice.

It is otherwise with the state. As Sheldon Richman has mentioned to me, states “tie” their “products” and “services” all the time. As a precondition of driving on government roads, you get to patronize the govern­ment-sponsored insurance cartel. In some states you get to have your car checked by a government-sponsored mechanic. Go to a government airport and you get a taste of the government’s idea of providing security.

And your Social Security number, which Congress swore would never become a national ID, is fast coming to resemble a Soviet-style internal passport.

Even on the most pessimistic reading of this issue, the market remains well ahead of the state.

Now we come to the claim that business corrupts politics. Well, yes and no. Politics does not seem to require much corrupting.

Naturally, there are plenty of actual businessmen who are happy to enlist the state to restrain trade for them, grant them subsidies and bounties, and the rest. They try to use the state for their economic advantage. This is the “instrumentalist” view of the state, which holds true across a wide range of activities and which is, despite what some writers think, entirely compatible with a great deal of state “autonomy.” After all, if the state did not have independent power, it wouldn’t be much of an aid to these interest groups, would it?

There is indeed plenty of business-government col­laboration around, enough to justify calling it by its own name: corporatism.¹⁸ Since such practices are the antithesis of laissez-faire liberalism, it is hard to see how the free market can rightly get the blame for them. We are back in the ballpark of the state again, this time with some of its allies.

I have long believed that if a given society had suf­fered, successively, a drought, a famine, and a flood, fol­lowed by a popular revolt set off by grinding taxation and, finally, a foreign invasion, the typical historian would lay primary blame for the unhappiness of the people on the failure of the market economy. We have just seen this kind of judgment made in relation to the disaster in New Orleans.

Even if we were somehow to blame the sinking of New Orleans on politicians who talk a lot about free markets, this has nothing to do with any real chain of causation that would reach back to the free market. The talkers currently in office have famously spent hundreds of billions of dollars on misbegotten war in Iraq, which suggests that their talk about frugality, free markets, and the rest is so much eyewash. There is no disembodied “free-market ideology” stalking the country and forcing the poor government to leave levees in disrepair or unimproved.

Talk is cheap, not frugal.

After all, despite the alleged outbreak of frugality, bil­lions upon billions of dollars still flow into the federal treasury and bureaucrats still manage to spend them. Neither the people nor the free market—conspicuous by its absence–should answer for bad decisions made by officials allocating money taken from the toiling masses. Probably if you have a levee, you ought to maintain it. This is entirely separate from the question of whether government should have been in the levee-building business in the first place, or whether people should live in flood zones. Tackling these questions would involve us in an historical regression into the remote origins of a situation significantly shaped by government, a situation fraught with peril if the government should ever let its own creations slide.

The buck still stops with the federal government because it took the bucks, some of which could have fixed its levees, and then did not do so. Leaving aside the ethics of how governments get their money, the United States had plenty of it, and chose to squander much of it on a night out in the Middle East. The left is right to point this much out.

But the left will not follow us further along our path of analysis. This particular mixture of state activity and inactivity—Iraq versus New Orleans—goes to such questions as whether governments are very good at managing anything and whether states can even calcu­late rationally. Our best evidence says, no. As Rothbard puts it, “[T]he costs of government are bound to be much higher than those of the free market…. [T]he State cannot calculate well and therefore cannot gauge its costs accurately.”¹⁹

So, no, the free market did not sink New Orleans, nor did its shambling cousin, the disembodied and selective free-market talk found in and around the Republican Party.

A Parthian Shot

The last topic broached reminds us that the Repub­lican Party habitually proclaims its fervent wish to put government “on a businesslike basis.” Democrats usually favor putting business on a government-like basis. The difference between the two programs is this: the second is possible and it could go forward, up to the point that social cooperation and markets collapse; the former is literally impossible.

Government cannot be put on a businesslike basis because it lacks the profit-and-loss test available to busi­nesses on the market. Thus it doesn’t know when to stop doing something, short of a disastrous setback, cannot calculate its costs, and so on. But enough about govern­ment; I think we can agree that for the topics just can­vassed at least, the market is not guilty and the state is about to enter the witness box.

Notes

1. Murray N. Rothbard, Man, Economy and State, vol. 2 (Los Angeles: Nash Publishing, 1970 [1962]), p. 759.
2. Tom Burns, “Sovereignty, Interests and Bureaucracy in the Modern State,” British Journal of Sociology, December 1980, pp. 494–95.
3. Jörg Guido Hülsmann, “Political Unification: A Generalized Progression Theorem,” Journal of Libertarian Studies, Summer 1997, pp. 81–96.
4. Bruce Porter, War and the Rise of the State (New York: Free Press, 1994), William Hardy McNeill, The Pursuit of Power (Chicago: University of Chicago Press, 1982), and Charles Tilly, “Warmaking and Statemaking as Organized Crime,” in Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cambridge: Cambridge University Press, 1985), pp. 169–91.
5. Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1950), p. 144.
6. On war and time preference, see Hans-Hermann Hoppe, “Time Preference, Government, and the Process of De-Civilization,” in John V. Denson, ed., The Costs of War (Auburn, Ala.: Ludwig von Mises Institute, 1999), pp. 455–508.
7. Si^an Miles, ed., Simone Weil: An Anthology (New York: Weiden­feld & Nicolson, 1986), pp. 174–75,181.
8. Rothbard, chapter 10, “Monopoly and Competition,” pp. 560–660.
9. Ibid., p. 591, Rothbard’s wording, not Coke’s.
10. Ibid., p. 789.
11. Paul Baran and Paul Sweezy, Monopoly Capital (New York: Monthly Review Press, 1970).
12. Allan Silver, “Friendship in Commercial Society: Eighteenth-Century Social Theory and Modern Sociology,” American Journal of Sociology, May 1990, pp. 1481–82,1484, and 1487.
13. Youssef Cohen, Brian R. Brown, and A.F.K. Organski, “The Paradoxical Nature of State Making: The Violent Creation of Order,” American Political Science Review, December 1981, pp. 904, 907–909 (italics added).
14. Rothbard, pp. 745–47.
15. For all that has been said against nominalism, sometimes we are dealing with a name.
16. One could almost call this the Chicago School variant.
17. Charles A. Joiner, “The Ubiquity of the Administrative Role in Counterinsurgency,” Asian Survey, August 1967, p. 553.
18. See Robert Higgs, Against Leviathan: Government Power and a Free Society (San Francisco: Independent Institute, 2005).
19. Such problems are in a way the socialist calculation problem writ small; see Rothbard, pp. 803 and 825–26, where he notes that under socialism “each governmental firm introduces its own island of chaos into the economy; there is no need to wait for full socialism for chaos to begin its work” (p. 826). Obviously, the principle applies in its prop­er degree to government “firms” or departments under present-day “mixed-economy” corporatism.

Here, in a mere seven words, is the fallacy Frédéric Bastiat identified in the nineteenth century and Henry Hazlitt re-identified in the twentieth. It consists in neglecting “what is not seen” and is best illustrated by Bastiat’s broken-window fable. (See page 26 for its application to war.) Let’s see how USA Today and its news sources fell for it.

The report begins by focusing on one company: “The phone at Dale Yeager’s Pennsylvania firm has been ringing off the hook in recent weeks, thanks to a trio named Ivan, Frances and Charley.” Those, of course, were destructive hurricanes that hit the southeastern United States late last summer. Thanks to an angry Mother Nature, “Yeager’s expertise in corporate emergency preparedness analysis and training” was much in demand.

The newspaper notes that many other businesses were seeing similar boosts: “Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.”

No surprise there. Devastation will surely be followed by recovery efforts. That’s what people do.

But the newspaper steps on shaky ground when it attempts to generalize, guided by sources it refers to as “economists.” “For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry.”

One of those economists is Steve Cochrane, an economic consultant in Pennsylvania. As he sees it: “It’s a perverse thing . . . there’s real pain. But from an economic point of view, it is a plus.” USA Today says Cochrane estimates that “in Florida, the state hit hardest by the storms, 20,000 jobs will be created that otherwise would not have been.” Most of those jobs will be in construction, with others created in insurance, business services, utilities, and retailing.

Another consulting economist predicted that the expected slight dip in GDP will be outweighed by the construction boom. USA Today then listed other examples of benefits from the storms: increased sales of bottled water, juices, and walkie-talkies; more work for locksmiths; and new clients for business planners.

The key phrase in the story is “tallying the numbers.” That refers to the visible economic activity in the wake of the hurricanes. The fallacy lies in ignoring what you can’t tally numbers on: the goods and services not bought, the investments not made, the projects not undertaken because people must repair the storm damage.

The bottom line is this: Before the storm season people possessed intact homes and businesses and their money; their insurance companies’ cash was invested in productive enterprises. After the storm season people possessed destroyed or damaged homes and businesses, which they had to spend their money to replace or fix. Their insurance companies had to liquidate investments to pay the claims. That money would have been spent or invested to produce additional things. Instead, it will be used simply to put things back the way they were the day before the storms.

How that can be good for society generally defies explanation.

* * *

The “Star Trek” television series and movies attracted huge followings for their stories of adventure and heroism in other worlds. Gardner Goldsmith suggests that you not learn your economics from them.

All around the country bicycle trails are being built on abandoned railroad beds. There’s only one problem: sometimes the landowners object. Kirk Teska has the details.

Productivity increases are apparent everywhere throughout the economy, except for one of the fastest growing parts: the licensed professions. Lewis Andrews investigates.

Ambrose Bierce is best known for the Devil’s Dictionary, his cynical redefinition of the English vocabulary. Less well known is Bierce’s demolition of socialism. Daniel Hager does his part to fix that.

As noted, Bastiat’s “broken window” fallacy is widely committed by those who see silver linings in storms and earthquakes. As Thomas Woods points out, looking for an economic stimulus from war is the same fallacy writ large.

Our columnists spent the last month searching for the most arresting topics: Richard Ebeling relives the Great Chinese Inflation. Lawrence Reed says beware democracy. Thomas Szasz dissects “therapeutic jurisprudence.” Stephen Davies celebrates the life of Richard Cobden. Russell Roberts suggests a reason why we don’t have more freedom. And, stumbling across the argument that taxing and regulating charities would bring social benefits, your editor bellows, “It Just Ain’t So!”

Books reviewed this issue scrutinize the creation of Iraq, the history of violence, and teachers unions.

—Sheldon Richman