How did it happen? How could so many smart people be struck dumb simultaneously? And what does any of this have to do with Bootleggers and Baptists?

My Bootlegger/Baptist theory was born in 1983 when I was working at the Federal Trade Commission and doing my best to understand the political forces that bring us so much federal regulation. I recalled how my kinfolk explained why Georgia and other states closed down the liquor stores on Sunday: The states that went dry on Sunday—meaning they did not allow the legal sale of alcoholic beverages—were those where the local Baptists and bootleggers lobbied for the same end. The good Baptists just wanted the Lord’s Day to be relatively alcohol-free. And the bootleggers just loved the idea of having one day without competition from the legitimate sellers.

The Baptists did the highly visible lobbying and preaching, while the bootleggers paid the politicians, or so the story goes.

“Bootleggers and Baptists” is now part of the body of theory used by economists and political scientists to explain political behavior. Let’s see if the B&B theory can help explain the subprime crisis.

Anatomy of the Subprime Crisis

The subprime crisis became part of national consciousness in the early fall of 2007. First described as a real-estate bubble that somehow got pricked, the crisis got its name from a category of mortgages that had been made to unqualified borrowers. Lending activity by banks, savings and loans, and mortgage lenders had been expanded to reach families without the means to scrape together a down payment or even make the monthly payments normally required for fixed-rate mortgages. To accommodate the less-qualified borrowers, lenders creatively offered mortgages with adjustable rates and balloon payments at the end. With billions of dollars of subprime loans being generated, U.S. mortgage lenders packaged the loans and sold them to America’s backstop mortgage lenders, Fannie Mae and Freddie Mac, two massive quasi-private firms formed by Congress to help make real the American dream that every family would own a home on its own precious plot of land. From there, the mortgage paper went to the four corners of the earth.

We have just identified the Baptist theme and some of the Baptists. The theme is achieving the American dream of home ownership. What could be more noble than this? And the Baptists? The politicians who pride themselves on helping ordinary people and even the helpless to achieve the dream. But it is also possible that these Baptists are really bootleggers in Baptist clothing. Think about it.

This highly condensed story has more than a grain of truth in it. Indeed, the broad outline is gospel truth. But there is something strange about the story so far. Where did the money come from? Why would smart bankers make loans to unqualified borrowers? And how could the lenders find a market for bonds backed by subprime mortgages?

Mr. Bush Enters the Story

There is obviously more to the story. Government was committed to making homes affordable to all Americans. That commitment took the form of banking regulations that required financial institutions to make loans in high-risk regions of cities. Added to this were special HUD (Housing and Urban Development) programs that favored lower-income families as well as long-standing programs like the FHA-insured mortgages that assisted families in purchasing homes.

The affordable-housing program took a serious turn in December 2003, when a smiling President Bush put his name on the American Dream Downpayment Act. The accompanying HUD press release described the legislation this way:

“There is a reason why many American families can’t buy their first home—they can’t afford the downpayment and other upfront closing costs required to qualify for a mortgage. For as many as 40,000 low-income families, that will change as President Bush today signed The American Dream Downpayment Act into law.”

Congress authorized $200 million to bring assistance to some 5.5 million families by the end of the decade. On signing the law, President Bush said:

“Today we are taking action to bring many thousands of Americans closer to the great goal of owning a home. These funds will help American families achieve their goals, strengthen our communities, and our entire nation.”

HUD Ups the Ante

While $200 million is a lot of money, it didn’t go far enough to satisft the baptist urge. To extend the reach of the taxpayer money, Congress instructed HUD to expand the affordable-home program. HUD put pressure on Fannie Mae and Freddie Mac to open the money valves.

Reporting on the subprime crisis in 2008, Washington Post writer Caroline Leonnig explained the process this way:

“In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending. Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.”

Leonnig goes on to describe HUD’s reaction to those accusations:

“HUD officials dispute allegations that the agency encouraged abusive lending and sloppy underwriting standards that became the hallmark of the subprime industry. Spokesman Brian Sullivan said the agency and Congress wanted to increase homeownership among underserved families and could not have predicted that subprime lending would dominate the market so quickly.

“Congress and HUD policy folks were trying to do a good thing,” he said, “and it worked.”

Indeed.

Of course, those who have followed the subprime epoch know how this part of the story ended. On September 7, 2008, CBS News described the demise of two secondary mortgage lenders this way:

“For decades, Fannie and Freddie fulfilled the American dream, reports CBS News correspondent Tony Guida. Consumers took out loans from banks, which in turn sell those loans to Fannie or Freddie. Then the mortgage giants repackaged those loans and sold them to investors, guaranteeing the mortgages would be repaid.

“As home ownership grew universal, Fannie and Freddie prospered. Their CEOs, Daniel Mudd and Roger Syron, together earned around $30 million in 2007, reports Guida.

“But as they fattened, critics say they got greedy, underwriting too many home loans that never should have been made.

“Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.”

Now we have found two more bootleggers: Mr. Mudd and Mr. Syron, along with countless unnamed Wall Street executives who prospered mightily while designing, packaging, and handling the new mortgage-backed instruments that the world seemed eager to purchase. To these we might add some realtors and developers who supported affordable-housing programs.

How Do You Fool That Many People?

There is yet another important piece to the story. We still need to understand how major financial institutions worldwide simultaneously could be fooled into buying paper that turned out to be trash. What does due diligence mean?

It turns out that by U.S. law, all credit instruments associated with mortgage-backed paper must be rated by one of three rating agencies. These are Moody’s, Standard and Poor’s, and Fitch. No competing rating agencies are allowed to enter the market. These three widely-respected rating agencies often assigned their highest rating to mortgage-backed products that contained subprime loans. By mixing pieces of subprime with high-quality mortgages, the mortgage packers were able to obtain the highest possible credit rating for instruments that were not 100 percent high-quality paper. When the default avalanche started, international buyers and sellers could no longer rely on the credit rating that had been given to the mixed-bag products. Credit markets fell into a deep sleep.

Of course, there is far more to the story than just this part about subprime mortgages and the American dream. The money for making it all happen had to come from somewhere, and from where else but the Fed along with an inflow of funds from international lenders? A long period of Fed credit easing during 2000-2004 laid a foundation for interest rates so low that people were practically paid to borrow money. That’s right: At times, interest rates were lower than the inflation rate. At other times, the cost of borrowing—especially with federal assistance—was less than the expected price appreciation of the property, or so it appeared. It seemed too good to be true. And sadly, it turned out that way.

With easy money and subsidized lending, the great mortgage-making machine had nowhere to go but up—that is, until inflation reared its ugly head and the Fed reversed course.

When the Fed hit the money brakes in 2006, interest rates rose, adjustable-rate mortgages reset monthly payments, and people at the family-budget margin found they couldn’t make the payments. The American dream turned into a nightmare. Mortgage defaults followed. Glutted housing markets followed that. Falling prices followed that. And Fannie Mae and Freddie Mac found themselves in a heap of trouble—along with everyone else who had purchased mortgage-backed securities, including Lehman Brothers, Morgan Stanley, UBS, and a host of other international lenders. Obviously, not all banks and lending institutions were caught in the American-dream squeeze play, but enough large ones were caught for “too big to fail” to become the lobbying cry in national capitals.

Bailouts and Lobbying

Fallout from the Bootlegger/Baptist story brought massive cash flow to major banks and delivered mergers that would not likely pass antitrust muster under other circumstances. The acquisition of Countrywide by the nation’s largest bank, Bank of America (BOA), is a case in point. This was followed by BOA’s acquisition of Merrill Lynch, the nation’s largest brokerage firm. Countrywide’s merger was arranged by the Federal Home Loan Bank (FHLB) with funds provided by FHLB member banks. The stronger banks that did it right were taxed to assist a competitor who didn’t. Ayn Rand must be turning over in her grave.

Along the way, BOA and eight other major banks were tapped by the secretary of treasury to become part of the nationalized U.S. banking system. They were hardly in a position to turn down the invitation. With Washington now the center of the financial universe and the home of the agents of taxpayer equity owners, bankers who previously were not so engaged decided to invest more in lobbying the politicians.

This is hardly the end of capitalism, but it is another case of “Crisis and Leviathan,” the model of political behavior told so well by economic historian Robert Higgs. Once again a crisis has emerged, driven partly by Bootlegger and Baptist interest groups. And once again, a crisis has fed the leviathan, and the leviathan has taken a larger bite from the market economy.

Will Robert Higgs’s forecast come to pass?

Higgs predicts that once a crisis has passed, the fattened leviathan continues to hold sway. The agencies that emerge to manage the nationalized banks will become a permanent part of the government landscape, and those quasi-private businesses supported by government will continue to be important players in a Bootlegger-and-Baptist saga.

Betting on Higgs would be a safe bet for sure.

by Lynne Viola

Oxford University Press • 2007 • 278 pages • $30.00

Reviewed by Richard M. Ebeling

In The Harvest of Sorrow (1986), historian Robert Conquest estimated that in the early 1930s as many as nine million people may have died during the forced collectivization of land in the Soviet Union. They were shot, tortured, or starved to death. Peasant resistance to the state’s seizure of their farms was dealt with by Stalin through a planned famine that finally broke all countryside opposition to the march into the bright and beautiful socialist future.

In 1931 Lady Astor of Great Britain was privileged with an audience with Stalin in the Kremlin. She point-blank asked him, “And how long are you going to go on killing people?” Stalin calmly replied, “As long as it is necessary. . . . The violent death of a large number of people was necessary before the Communist State could be firmly established.”

One of the few Western journalists of the time who was able to get outside Moscow to visit some of the famine areas in southern European Russia and Ukraine was William Henry Chamberlin. In a series of articles that he wrote on his return to the United States in 1934, he reported seeing skeleton-like undernourished children, adults barely able to walk from hunger, and hushed whispers of cannibalism in a gruesome attempt by some to stay alive. Red Army detachments and units of the secret police attempted to block all roads into these areas to prevent any of the victims from escaping or their friends and family members in the cities from bringing food to those condemned to this terrible fate.

The main target of Stalin’s wrath was the supposedly richer peasants known as kulaks, who were said to be the main opponents and resisters of collectivization. They were labeled the countryside “capitalist class” and therefore the primary “enemies of the people.”

Stalin’s other method of dealing with the kulaks was compulsory exile to some of the harshest and least inhabitable parts of northern European Russia. These victims are the subject of Lynne Viola’s book, The Unknown Gulag, the tragic details of which have never been thoroughly studied before. She estimates that between 1930 and 1933, well over two million people were transported to these faraway regions of the Soviet state.

Hundreds of young Communist Party members from the cities, who knew nothing about the peasantry or farming, were sent to the rural areas to assist in the collectivization. Indoctrinated by the party’s propaganda that the kulaks were the stumbling block to “building socialism,” these communist thugs intimidated and violently abused people when and how they wanted. Inspired by the idea of production quotas under the newly instituted five-year plan, they set up quotas for killing and exiling peasants as quantitative indicators of breaking the resistance to state-run collective farming.

Like much in the Soviet planned society, the details of exiling millions of people had not been thought out beforehand: how to transport and feed hundreds of thousands of families, how they would build shelter, what types of work they would be required to do once they reached their assigned locations. But trains were arranged, and these hapless people were crowded into cattle cars with barely room to stand, little or no food, and no hygienic facilities. The journeys would take two or more weeks to the north Russia territories around the towns of Archangel, Vologda, and Kotlas, or across the Ural Mountains to northern Siberia.

Only slowly were party commissions appointed to decide what was to be done with the exiles. In their secret reports to senior party officials, the heads of these commissions admitted that disease, starvation, and bitter cold weather were decimating the kulak families. It was reported that during a two-month period in 1931, more than 3,000 children who succumbed to the harsh conditions were buried in the Vologda area.

Stalin’s dream was to use the vast army of slave laborers to work in the deep forests of the north to supply lumber for construction projects and to mine for the rich minerals buried above the Arctic Circle. The exiled families were to be divided into groups of 1,500 people and made to construct permanent settlements for themselves in the forest and mining areas. Their sentences would be indeterminate so they might be used for as long as it served the interests of the state. If in the process many died, the multifamily barracks in these settlements would simply be filled with the next group of slave laborers.

Violence was the main tool to maintain order. One of these exiles said, “Here they beat us horribly. . . . They beat us with revolvers while we slept. The commandant broke one man’s skull. . . . There is no defense from anyone. We will likely perish here.” Some attempted to escape; by 1933 the authorities estimated that several hundred thousand had tried. But most either didn’t make it through the frigid land or were recaptured and usually sent to a camp worse than the first one.

By the end of 1931 “the plan” for the design and construction of these settlements and the work to be done there had been drawn up to the smallest detail. But as Viola explains, “It represented an ‘imagined future’—laid out in endless plans, reports, memos, figures, tables, graphs, and budgets—superimposed on the present-day realities of the Soviet hinterlands. . . . Reality was vastly different—untidy, unmanaged, and shaped more by geographical, economic, and cultural realities than by Moscow ‘s seeming omnipotence.”

These “imagined” exile-populated settlements, which she reminds us were nothing more than “a shoddily constructed institution of forced labor,” were brought down by the nationwide government-caused famine of 1933–1934. Because of the failure of “the plan” and the shortage of food and materials, most of them were closed.

But the human cost was horrific. Out of the more than two million exiles sent to these areas, by 1934 only 973,000 had survived. Subtracting those who succeeded in escaping, close to 50 percent had died. Sometimes, however, there is a perverse justice in the world. Two of the leading party officials responsible for the planning and initial execution of this forced-labor system were themselves arrested during Stalin’s Great Purges and executed in 1937 as “enemies of the people.”

Most of the kulaks who survived were merely transferred to the larger and far more terrifying and lethal Gulag system of labor camps that stretched across the entire length of the Soviet Union and consumed tens of millions of lives during the nearly 75 years of the nightmare socialist experiment.

* * *

In Our Hands: A Plan to Replace the Welfare State

by Charles Murray

AEI Press • 2006 • 140 pages • $20.00

Reviewed by Michael Tanner

If, as Richard Weaver famously wrote, “ideas have consequences,” then Charles Murray is a truly consequential man. Only a handful of thinkers over the past quarter century have had as much impact on public policy. It was his 1984 classic, Losing Ground, that led to a bipartisan consensus about the failure of the Great Society welfare state. Now, ten years after the welfare reform that owes its existence to Murray ‘s ideas, he is back with a thought-provoking approach to government antipoverty policies.

Murray ‘s latest book, In Our Hands: A Plan to Replace the Welfare State, provides a blueprint for doing just that.

By Murray’s estimate, federal, state, and local governments spend roughly $522 billion per year on antipoverty programs, yet poverty rates have barely budged over the past 40 years. As he notes, “Only government could spend money so ineffectually.” His answer, therefore, is to take the money away from the government and give it directly to the people.

Murray would abolish all welfare programs. He would also terminate all other government transfer programs: Social Security, Medicare, and even agricultural price supports. In their place he would provide every American citizen with an annual grant of $10,000 to do with as he or she pleases. The grant would be untaxed for those earning less than $25,000 per year, thereby establishing a floor of national income, and entirely taxed back for high-income earners. There would be no work requirements or other restrictions. All Americans would get that check—but nothing else.

This, of course, wouldn’t actually abolish welfare. In fact, Murray’s proposal would initially be more expensive than current programs. Yet it would sweep away the vast edifice of the modern welfare state—not just the agencies and bureaucrats who administer the dozens of overlapping aid programs, but the rules, regulations, and restrictions that make the welfare state as much the overseer of the poor’s behavior as a dispenser of alms. At a time when big-government conservatives seek to use welfare as a weapon to micromanage the lives of the poor, this comes as a breath of fresh air.

For example, it is widely acknowledged that existing welfare laws act as a disincentive to family formation. Recipients are frequently penalized for marrying. Big-government conservatives would counteract this by creating federal programs to teach the poor about the benefits of marriage, or even bribe welfare mothers into marrying with the offer of additional benefits.

Murray ‘s plan avoids all this. Those who act responsibly, who marry, save for their retirement, purchase health insurance, and so on would be better off. Those who make irresponsible choices would be forced to fall back on private charity. Murray accepts the inevitability that modern societies will redistribute income, but doesn’t want them to run people’s lives.

Yet Murray ‘s proposal is undermined by one simple flaw. His plan would establish as both a legal and philosophical concept that every American citizen is entitled to a minimum income—exacted from the taxpayers. Once that “right” is established, the political process will inevitably expand it. Murray argues that $10,000 is the correct amount. But how long before some politician comes along and says, “No one can live on $10,000. We need to make it $11,000.” Soon another politician, not wanting to be thought less compassionate than the first, will propose $12,000. Look to the current debate over “a living wage” to see how this would work.

The book is not a casual read. It packs a great deal of information into a short space, and sometimes the numbers and programmatic interactions fly by in a blur. Murray can unexpectedly veer off to discuss subjects such as tort reform or expected future stock returns. These are topics that have consumed volumes in their own right. It is hard to do them justice in the few pages Murray devotes to them. Many of the details are designed to show that Murray has thought through all the implications of his proposal. This is a testament to his excellence as a scholar, and a treasure trove to policy wonks, but of marginal utility to the average reader.

Also, there’s a general assumption that the reader shares Murray’s view that the current welfare state is a failure. Consequently, the book is unlikely to persuade anyone who starts from a different premise.

Murray says he conceives of his proposal as a “thought experiment.” It fulfills the role brilliantly. His solution is dubious, but if Murray can once more get us to question traditional wisdom, he will have again proven how consequential ideas can be.

* * *

Actual Ethics

by James R. Otteson

Cambridge University Press • 2006 • 349 pages • $75.00 hardcover; $25.99 paperback

Reviewed by Tibor R. Machan

More and more books sympathetic to classical liberalism and libertarianism are coming on the market from publishers that haven’t offered such works until recently. Cambridge University Press has started to take on such works regularly.

This is important because in the contest of ideas, it matters where the ideas are published. It influences their use in classrooms, the promotion of the authors, and so forth, so when a certain line of thinking gains a forum at the more prestigious publishing houses, that can be identified as an advance. Thus James Otteson’s Actual Ethics is a triumph, and all those who value individual liberty should rejoice.

Having said this, I should also note a small quibble, namely, with the idea that classical liberalism and libertarianism are ethical rather than political stances. It is not new, of course, to believe this. Murray Rothbard and quite a few of those who discuss the constitution of a free society suggest that this is a matter of ethics proper, not only of political theory. Yet prominent classical liberals, such as Milton Friedman and F. A. Hayek, have held that no commitment to any kind of ethics is involved in championing the free society. (I myself have argued that there is but a minimal ethical substance in such a political position.) This is supported by the idea that ethics addresses the question of how we ought to live our lives, day in and out, while politics is about how human communities are best organized.

Otteson, who has been teaching philosophy at the University of Alabama but is moving to Yeshiva University, contends that ethics is directly relevant to the politics of classical liberalism. In his own words, he is advancing “the simple and . . . inspiring vision of free and independent individuals who take no and brook no violation of personhood, who thus meet each others as equals in personhood, and who seek to provide for themselves and for those they care about a good and happy life.” For him this is an ethical claim, not so much one concerned with politics or law.

Actual Ethics is a work with a unique approach, one that reminds me of John Hospers’s way of philosophizing—common-sense philosophy. Otteson says he is concerned with “how you should live,” yet the book is more often than not about how you should not live, as well as about the important notion that one needs to figure out for oneself the details of how one should live. For Otteson government’s purpose is “to secure people in their lives,” although this could imply a far more extensive role for law than Otteson supports—for example, universal health care. That is why the American Founders’ notion that government is about securing our rights (to life and so on) is, I believe, more precise. But I think Otteson agrees with that position.

Otteson’s achievement here is to make a persuasive case for classical liberalism based on the moral superiority of individual freedom and responsibility. With so much philosophy these days tending to support the expansion of the state, this book is a gust of fresh air.

Actual Ethics has a lot of provocative and well-executed discussion about all the problem areas that critics of the free society keep mentioning—welfare, health care, child care, poverty, education, and so forth. These are all dealt with in admirably accessible fashion, free of the kind of jargon that often mars philosophical discussions of human affairs. For example, Otteson considers various reasons for placing education in the hands of government and although his idea of inviolable personhood would render any kind of state schooling indefensible, he patiently examines most of the justifications and finds them wanting.

Each chapter ends with a long list of relevant publications that would be of great use to anyone wishing to develop some of the nuances of the questions that Otteson is exploring.

I would like to end this brief review by commending Otteson for invoking the ideas of the late Julian Simon, especially the extremely important notion that the greatest resource for making advances in our lives is the individual’s initiative, the creative mind. I would also like to take exception to Otteson’s calling me something of an anarchist. His list of those who are supposedly in the anarcho-capitalist school is debatable. But that debate will have to await another book. Actual Ethics has so much value to offer that this minor mistake can be set aside.

* * *

Black Americans and Organized Labor: A New History

by Paul Moreno

Louisiana State University Press • 2006 • 325 pages • $49.95

Reviewed by George C. Leef

Among the virtues of free markets is that they provide all who wish to compete the opportunity to do so. Free markets are not burdened by coercive interference that favors some groups and shuts others out. That is particularly beneficial for people who are of a religious sect, nationality, race, or other group that is widely disliked. Even if most people choose to discriminate against them, they can still succeed by working for or selling to those who don’t share the general prejudice, or at least who will put prejudice aside in favor of good-quality work.

On the other hand, where a market is subject to government regulation, unpopular groups are often excluded or handicapped. That is because dominant groups are able to exercise their political power to pass laws that stamp out competition from outsiders.

Black Americans have suffered a great deal from official discrimination in the labor market. For example, under the Jim Crow laws enacted in southern textile-producing states, it was illegal for a mill owner to employ black workers in better-paying positions. The job of loom fixer, among others, was by law a whites-only job. Many owners would have been glad to hire or promote people for that job just on the basis of work quality, but racist politics dictated otherwise.

Labor unions have long used both legal and illegal means to secure for their members higher pay than they would be able to get in a free market. In the early years of America, virtually every labor union admitted whites only. Racist sentiments teamed up with the desire for economic advantage to produce overwhelming hostility toward any blacks who had the temerity to try to compete. In his book Black Americans and Organized Labor, Hillsdale College history professor Paul Moreno gives a detailed account of the one-sided battle between blacks and unions. It’s a “warts and all” picture that reveals much about the ugly, coercive side of organized labor that is usually kept hidden from the public. Moreno quotes Samuel Gompers, who once ranted that “Caucasians are not going to let their standard of living be destroyed by Negroes, Chinamen, Japs, or any other.” The early civil-rights leader A. Philip Randolph clearly understood what the unions were all about when he said that the American Federation of Labor was “the most wicked machine for the propagation of race prejudices in the country.”

In the nineteenth and early twentieth centuries, violence was often used by white unionists against black workers and white-owned businesses that employed them. Moreno gives some revolting instances. What he labels “the bloodiest race riot in American history” took place in New York City in 1862 when white workers rioted against a tobacco-manufacturing company that had hired black workers. Hundreds were killed and injured before the riot was put down by army troops. Violence was illegal, of course, but the unionists were certain that they could get away with it.

One of the key themes in the book is that black workers and white business owners were allies against the attempts to cartelize the labor market by unions. In the post-Civil War South, Moreno writes, “industrialization could have undermined the region’s racial hierarchy, but segregation forced business to conform to it.. . . Railroad owners balked at enforcing racial segregation and fought the laws in court—joining Homer Plessy, for example, in challenging the requirement of separate accommodations in New Orleans streetcars.” Frequently businesses that chose to employ black workers were targeted by unions with violence.

Nor was racial animosity confined to the South. In Northern states unions used their power to ensure that skilled trades remained exclusive white preserves. One favorite tactic was to get occupational-licensing laws passed, and then to use their control over apprenticeship programs to keep anyone they didn’t like from learning the trade.

Eventually some unions began to soften their stance against blacks, a combination of receding racial hostility and self-interest. (The money of black union members was just as good as that of whites.) Political pressure was building for legislation to forbid racial discrimination by unions, and most union officials supported it, although there were some who opposed it and even declined to comply until forced to do so.

Unionists like to talk about what they call “labor’s bitter struggle”—which is their rhetoric for efforts at establishing legally protected cartels—but the really bitter struggle was that of black (and other minority) workers to be allowed to compete freely in the labor market. Paul Moreno’s book beautifully tells the story of that struggle but also makes a bigger point, namely that society must not allow interest groups to use the law as a sword to cut down competition from other people.

* * *

It’s tempting to think the military budget is different from the rest of the government’s budget. Politics surely would not intrude on such an important matter. But we know better. The Pentagon is as much a part of the bureaucracy as any other department. We may hate to accept it, but weapons systems, military aircraft, and naval ships have been built solely because they created or maintained jobs in an important congressman’s district. If de Borchgrave is right, this is more popular than ever.

Classical liberals have long warned of this practice. Milton Friedman criticized it in his book from the 1980s The Tyranny of the Status Quo. Liberals further back have sounded the same tocsin. For example, John Bright, the great peace-and-free-trade activist and member of Par­liament, in 1858 condemned the British government’s “excessive love for the ‘balance of power’ [as] neither more nor less than a gigantic system of out-door relief for the aristocracy of Great Britain.”

A similar point was made in the twentieth century by the liberal journalist John T. Flynn in his 1944 book As We Go Marching, the classic study of the rise of fascism in Italy and Nazism in Germany. Long before Mussolini, Flynn wrote, Italian governments had increased expendi­tures, taxation, and debt through programs intended to please constituencies and keep the economy going. Even before Keynes published his General Theory in 1936, politicians feared that without big government spending, depression and destabilizing unemployment would be the rule. So they spent, taxed, and borrowed.

“But this policy does run into resistance—and resist­ance in very influential quarters,” Flynn wrote. “The large taxpayer is against it. He acquiesces reluctantly. And as the debt grows and he looks with growing fear on its future proportions he begins to exert his full influ­ence against it. In different countries the basis of resist­ance takes different forms, but it comes chiefly from the conservative groups. Hence it becomes increasingly dif­ficult to go on spending in the presence of persisting deficits and rising debt. Some form of spending must be found that will command the support of the conserva­tive groups. Political leaders, embarrassed by their subsi­dies to the poor, soon learned that one of the easiest ways to spend money is on military establishments and armaments, because it commands the support of the groups most opposed to spending….

“Thus it was because the government could get pub­lic agreement for loans for this purpose and because such loans were essential to the policy of spending which kept the floundering economic system going that the militaristic policy remained so vital and vigorous an institution in Italy—and in every other continental country….

“I must not leave this whole subject of spending and the means employed to spend, including militarism, with­out observing that there is nothing new in it. It is as old as civilized government. And what is more, the protago­nists of it have understood precisely what they are doing.”

We have learned from the Public Choice school of political economy that benefits from government spend­ing are concentrated on relatively small self-conscious interest groups, while the costs are spread thinly among the mass of taxpayers. Hence the beneficiaries have far more incentive to work the halls of government than do the preoccupied taxpayers. No wonder interest groups have the advantage. When the label “national security” is affixed to a spending bill, so much the better for the rel­evant group, and so much the worse for the taxpayers, who are in no position to verify the claim.

What’s the moral here? That anything called defense is bogus? Of course not. The moral is that given the coercive and expansive nature of the political process, the appropriate attitude of the taxpayer is skepticism, or as Jeffersonput it, “jealousy,” rather than confidence.

* * *

Any advocate of separating school and state is imme­diately hit with the challenge: “But what about the poor?” Up until now we could draw on theory and his­tory for an answer. But now we have contemporary examples from the poorest countries of the developing world. James Tooley reports on his path-breaking research.

Ludwig von Mises was arguably the greatest econo­mist and advocate of free markets in the twentieth cen­tury. In this first of two articles, Richard Ebeling details Mises’s contributions to sound economic thinking and the cause of liberty.

Elections in Germany and Japan could herald an end to their experiments with the Third Way. Norman Barry looks behind the headlines.

During his long career F. A. Hayek wrote volumes not just on economics, but on broader social philosophy as well. After a rare chance to examine Hayek’s private notes, Steven Horwitz discusses the great thinker’s worldview.

The standard bill of indictment against the free mar­ket has a curious feature: all the alleged offenses have their roots in government intervention. Joseph Stromberg has the particulars.

FEE is celebrating its 60th anniversary this year. Whom better to turn to for an early history than Henry Hazlitt. He provides this month’s Timely Classic.

The Freeman‘s columnists have hit on another set of fascinating topics. Richard Ebeling revisits Keynes’s Gen­eral Theory. Lawrence Reed recounts his favorite free­dom-oriented movies. Thomas Szasz explores psychiatry’s concepts of mental illness and brain disor­der, and their relationship to freedom. Robert Higgs examines U.S. economic policy before Japan’s attack on Pearl Harbor. Charles Baird looks at a dispute between organized labor and the National Organization for Women. And David Henderson, reading a case for med­ical rationing, responds, “It Just Ain’t So!”

Books coming under review this issue scrutinize Russian conservatism, the miracle of electronic transac­tions, the “new new left,” and economic sense.

—Sheldon Richman(srichman@fee.org)

Last year’s election results in Japan and Germany are not only important for those countries but also have wider lessons, for they herald a decisive defeat for a once-fashionable doctrine—the Third Way. This was adopted by socialists in despair of the abject failure of “really existing socialism” but desirous to pre­serve their anti-capitalist credentials. They assumed we could secure all the benefits of the free market, in terms of its higher productivity and liberal social framework, without its unpleasant concomitants—excessive individualism, companies’ concern with shareholder value, the use of the takeover mecha­nism for industrial reorganization—all summed up by the morally loaded term “greed.” Fortunately for Third Wayers there were two economies that appar­ently evinced different virtues and were highly successful, the second and third biggest economies in the world, Japan and Germany. Indeed, at one time all America was frightened of Japan’s stu­pendous economic virility. The Japanese car industry, spearheaded by Toyota, Nissan, and Honda, was on the brink of taking over from Detroit, and although the Japanese were not great innovators, they could copy and make cars, washing machines, and com­puters more efficiently than the West. And Germany was the dominant economic power in Europe, whose industries, like Japan’s, were heavily geared toward exports. In both countries the shareholders were squeezed out of running companies they nominally owned and industry was geared toward serving the community more than the owners’ interests. Thus the huge Japanese corporations played a significant welfare role, and nobody ever lost his job. Even though private ownership was sedulously maintained, Germany and Japan did not have Anglo-American capitalism as exem­plified on Wall Street and in the City of London.

But both economies have been mired in recession for the past two decades and have begun to question their own economic models, as was seen in the election results, Japan more than Germany. What went wrong? Briefly, both countries became dominated by interest groups that used the political system to divert income created by others to themselves (“rent-seeking”); both had too much state welfare; and neither economy was flexible enough to cope with the demands of globalization. Overall, Japan and Germany have political systems that offer every incentive for political parties to preserve the current inefficient system and none for anyone who tried to break out of it. It was a classic “social dilemma”: everybody knew they would all eventually be better off if they dumped the obstructive labor laws, cramping regulations, and costly welfare, but political parties were beholden to interest groups that benefited from the preservation, indeed expansion, of the prevailing system. Mancur Olson, who analyzed the dilemma in immense detail and sophistication once suggested that it could only be overcome by a national catastrophe such as defeat in a major war.¹ And Japan and Germany had their economies devastated by defeat in World War II yet managed to make amazing recoveries in the early postwar years, while among the victors Britain languished until Margaret Thatcher. Britain, of course, was dominated by interest groups, especially trade unions.² I shall look at Japan first, and in more detail, because it appears as if it is getting over the aforementioned social dilemma better than Germany.

Japan has had a dominant party, the Liberal Demo­crats (LDP), which has been out of power only once since 1955, briefly in the 1990s.Yet it has no coherent program. It is really a bunch of pressure groups that profit from the bur­geoning state. There is no serious socialism in Japan, and it still has a rel­atively small public sector, but the Democratic Party of Japan, formed by disenchanted LDP members, is slight­ly more left-wing and under the influ­ence of trade unions. They know where the rents are.

Japan has always had a market economy, but it was not Anglo-Amer­ican. Shareholders were paid derisory dividends and kept out of annual meetings; companies were run by “stakeholders,” that is, managers and banks. Firms were also more interested in market share than profit, and the whole nation was mobilized to promote exports, not consumption. Companies themselves, if not socialistic, were certainly communitarian: they provided welfare benefits and lifetime employment. It was a rigid and inflexible system, but it worked well enough to make Japan the second biggest economy in the world—until 1990, when the stock market began to fall—from a high of 39,000 on the Nikkei to below 10,000, its nadir. The real economy went into a steady relative decline. Investors originally benefited from capital gains, but mil­lions of Japanese housewives, who had spent the family income buying up stocks, were badly hit by the fall in the 1990s. The country was at the same time building up a huge government debt—now 160 percent of GDP.

Prime Minister Junichiro Koizumi although from an establishment Japanese political family, knew something had to be done if the country were to get out of the stagnation of the 1990s. Japan had been very good at copying Western electronics, but he realized it would have to copy Western economic models too. Elected in 2001, he set his sights on the Japanese postal system. It is not only important in itself, but is also indicative of the Japanese malaise. He wanted to privatize it. His plan was defeated by the upper house of the Japanese Diet (Par­liament) early in the summer of 2005 (the lower house had barely approved it), which was the immediate cause of the election.

Privatization was not to improve the delivery of letters and parcels. I can speak from extensive personal experi­ence that, despite being state-run, the postal system is efficient. The real rea­son for privatizing the post office is that it is also a huge savings bank and provider of nationalized insurance. The Japanese have a legendary propensity to save, and they tend to put their sav­ings in the post office—at present it controls assets of $3 trillion. And where does that money go? It funds huge and mainly unnecessary public works. There is a medium-sized town near Tokyo that has two airports, which together have ten flights a day. All this is a gift to the LDP, which benefits from the useless jobs and wheels out the votes at election time. The post office has 400,000 employees. What Koizumi wants to do is to free up all this capital to be invested in the still-productive private sector.

Of course, all this upset the LDP establishment, and it defeated Koizumi’s first attempt at privatization. But he daringly called an election last September, fired dissi­dent LDP members, and sent in “assassins,” handpicked glamorous media personnel, to fight them at the elec­tion. He won an overwhelming victory: even if the upper house continues to oppose post-office privatiza­tion, he has enough votes from the lower house, with his coalition partners, the Komei, to use the constitution and override it.

Public Choice Defied

Koizumi’s victory was remarkable because it defied the lessons of Public Choice theory: it is normally impossible to defy an electorate that consists largely of rent-seekers. The future benefits of necessary reform are insufficient to compete with the attractions of short-term advantage. But Koizumi is an astute, possibly hon­est, politician, and he campaigned as if the election were a referendum on the privatization. If he had run on a regular manifesto it is almost certain his opponents could have defeated him on a rent-seeker’s program. He also has some charisma, unusual in Japanese politics.

But progress is likely to be slow in Japan—the priva­tization is not scheduled for completion until 2017. And the rent-seekers are likely to defeat him if he tries to reform the costly welfare system. The immediate problem is that Japan has an aging population and a declining work­force. That will also bring forth the need for increased health expenditure. Fur­thermore, Koizumi has to leave his post by next September; the LDP rules limit the leadership of the party to two terms, and there does not seem to be anybody with the drive and commitment to reform to take his place. However, there are already moves underfoot to persuade him to carry on. If Japan is to continue to defy the well-established theorems of Public Choice, the country will need somebody of his determination.

Germany

Germany has the world’s third biggest economy, and it has gone through an experience not unlike Japan’s. From being the powerhouse of Europe the economy is now almost shrinking, with over 11 percent unemployment. After World War II Germany established the “social market economy” under Ludwig Erhard, first as finance minister, then (unsuccessfully) as chancellor.³ The “social market economy” seemed to combine mar­ket-led economic progress with compassionate welfare policies, though in the last 30 years the social element has inexorably displaced the economic element in the model. (It is not at all clear that Erhard himself would have approved of this.) The original Bismarckian welfare state was extended, first to expanded pensions (unfund­ed and dependent on a rising birth rate) and then to conditions of employment. But the German birth rate has dramatically fallen; private pensions are virtually nonexistent; and rising nonwage labor expenses have made the costs of doing business unsustainable—much German capital is leaving the country. This can only worsen under globalization. German business is like Japan’s, with powerless shareholders. Takeovers are rare.

All this has been known for a long time, but entrenched interest groups made the political system more or less immobile. No political party dare risk offending these groups with serious reform. The parties are in an unconscious cartel, but while cartels are nor­mally overcome in private competitive markets, it is not so easy in the ersatz competition of representative democ­racy. Germany is in an insoluble social dilemma, and Erhard has been virtually forgotten.

Some progress was made, however, with the emergence of Angela Merkel as leader of the Christian Democratic Union (CDU). Unable to form even a tiny majority in alliance with the small but more free-market Liberal Demo­cratic party, Merkel has been forced into a “grand coalition” with the Social Democrats. That means the same inter­est-group immobility will continue for some time. A good example is tax reform. Merkel’s pro­jected finance minister is an obscure academic, Paul Kirchhof, who achieved notoriety by suggesting replacement of the complex German tax system, with its myriad exemptions, with a lowish flat tax of 25 percent. Immediately all those groups that benefited from the prevailing system protested and the scheme was quietly forgotten during the campaign. No German commen­tator seemed to realize that a carefully designed flat tax will actually increase government revenue through less tax avoidance and tax evasion, and the operation of the Laffer curve. A flat tax is not just for the rich, but bene­fits everybody, except tax accountants. It is a way of get­ting over the social dilemma.

Frau Merkel has suggested that laws on hiring and firing will be relaxed so that it will be easier to dismiss redundant workers, and her welfare reforms would remove the temptation not to work, the bane of German welfare policy. However, even the Social Democrats under Gerhard Schroeder offered tame versions of these policies, only to water them down even further after relentless opposition from Germany’s still powerful trade-union movement. Of course, Germany has certain unique problems, especially the cost of reunification, but this should not dis­tract us from the fact that the country illustrates all too well the universal problems of representative democracy, especially the ability of entrenched groups to prevent the pursuit of the genuine public good.

The experience of both Japan and Germany should alert us to the seductive but ultimately lethal properties of the Third Way. By locking ever more people into the state, especially through generous welfare policies, it only strengthens powerful interest groups and makes reform almost impossible. Perhaps only by the Swiss system of referenda on particular issues can the dilemma be got round. Indeed, the fact that Koizumi almost turned the Japanese election into a referendum on the post-office privatization supports this position. It is possible that if the flat tax were put to a referendum in Germany it would be approved.

And by restricting the power of shareholders the Third Way weakens the corrective mechanisms of the mar­ket and strengthens the managements of companies and banks, neither good defenders of free markets. There is only one form of successful capitalism, that is free-market exchange with a very limited state. As the president of the Czech Republic, Václav Klaus, once famously said: “The Third Way is the Third World.” Japan, which is on its way to recovery, might have resisted Public Choice tem­porarily, but Germany certainly has not.

Notes

1. See Mancur Olson, The Rise And Decline of Nations (New Haven, Conn.:Yale University Press, 1982).
2. See Norman Barry, “What Kind of Conservatism?” Margaret Thatcher’s Revolution, ed. Subroto Roy and John Clarke (New York: Continuity Books, 2005).
3. See Norman Barry, “The Social Market Economy,” Social Philosophy, vol. 10, 1992.

Liberals invariably say they have humanitarian goals and therefore must turn to political means for their swift and certain accomplishment. They want people to have higher incomes, better medical care, greater security, and so forth. Not to clamor for political solutions is, in their minds, tantamount to indifference. Waiting for voluntarism to work is unthinkable. Anyone who suggests that political means will be inappropriate or counterproductive is apt to have his motives impugned.

But what if this mindset is a mistake? What if the objectives to which liberals proclaim their dedication, such as the reduction of poverty, could be better achieved through nonpolitical means? If that could be shown to be the case, honest liberals should abandon politics and side with those of us who wish to depoliticize society and restore government to its proper role as protector of life, liberty, and property. Dishonest liberals–those who use humanitarian politics as cover for their desire to dominate and plunder others–would remain firmly in the camp of political action.

These thoughts were triggered by the book The Power of Productivity by William W. Lewis (University of Chicago Press, 2004). It’s a fascinating examination of the reasons why some nations’ economies are so much more productive than are others. Lewis understands that low production means a low standard of living, which sets a strict limit on how much anyone can do to improve the lives of the people, no matter what means is chosen. Poor nations simply don’t have the resources to improve health care, for example; trying to do so through politics is as futile as trying to turn lead into gold. He also understands that when nations distort their markets to pursue “social objectives,” the result is a sacrifice of the productivity that alone can make the pursuit of those (or any other) objectives possible.

Several features about the book make it particularly thought-provoking. Lewis is not a free-market economist, or even an economist at all–at least by training. (It is, of course, quite possible for someone to learn a great deal about economics outside formal classroom settings; we should abandon the notion that only individuals with Ph.D.s can have expertise in a field of knowledge.) His academic background was in physics, and he eventually found his way into the position of director of the McKinsey Global Institute, which does international economic analysis and consulting work. There, he figured out one of the central tenets of good economic thinking, namely that you must look at incentives and behavior at the micro level rather than surveying macroeconomic data if you want to comprehend a nation’s economic problems. What’s more, Lewis politically is a modern liberal. He enjoyed close ties to the Clinton administration and takes credit for having steered Clinton’s economic policy away from the heavily authoritarian path that many Democrats wanted and toward somewhat freer markets. Therefore, the book can’t be readily dismissed by liberals with their usual tendency to brush off any argument that comes from the hated “right wing” camp.

Lewis and his researchers carefully studied the economies of a dozen countries ranging from the most advanced (the United States, Japan, Britain) to the struggling (Russia, India, Brazil) and came to the conclusion that productivity is the crucial ingredient in economic success. The more a nation chooses to pursue “social objectives” through policies that distort its markets, the less it will produce and the less economic progress it will make. In short, Lewis condemns the infatuation with politics as the means of “solving problems”. (That condemnation, however, is not complete, as I’ll note later.) Far from aiding the poor, big government and its numerous economic interventions make it impossible for them to escape their poverty.

The most telling chapters of the book are those dealing with the poorest countries. In Brazil, for example, there is a vast chasm between the small percentage of the population that lives in comfortable circumstances and the large percentage of the population that lives in squalor. Why is that the case? Lewis answers that the obstacle to the economic progress that would benefit the Brazilian poor is the enormous, bloated government. To rake in the revenue the state needs to feed its minions, taxes must be high on “legal” businesses. High taxation, however, makes it impossible for such enterprises to compete with the “illegal” and therefore untaxed businesses that provide most of the items of commerce that the poor need–food, clothing, shelter, and so on. The problem is that the small-scale illegal businesses are inefficient. Prices are high and quality often low. Efficient production and marketing firms, such as we find in the United States, have no chance of gaining any traction in Brazil.

Most liberals would say that Brazil needs its big government to provide “needed government services” like formal education, but Lewis disagrees. Poor Brazilians don’t need public education or other services from the state; what they need is for the state to get out of the way of free-market competition in the production and distribution of goods. Everything else is a costly distraction.

Competition Stifled in India

India is another fascinating case. Government regulation of the economy is pervasive. Competition is stifled at almost every turn. One of many examples Lewis cites is the “Small-scale Reservation” law, which restricts investments in fixed assets to a maximum of $200,000 for firms producing more than 50 percent of their output for the domestic market. This is the sort of protective legislation that liberals generally applaud–shielding “the little guy” from the “cutthroat competition” of big business. But the law has devastating economic consequences, Lewis observes, in that it prevents the growth of efficient, American-style businesses. India’s many small-scale producers don’t have to face competition, so the nation is stuck with businesses that are unchanged from the nineteenth century. Most Indians remain desperately poor because of political interference with the free market.

Sadly, after much excellent analysis of the reasons why politics is the obstacle to progress (and not just in the Third World nations), Lewis shrinks from applying the lesson to the United States. Yes, government in the United States has grown vastly over the last century; but, he says, “we wouldn’t want to go back even if we could.” I won’t speculate as to why he declines to drive home the point that market distortions through politics have the same bad consequences here as anywhere else and that if you truly care about the plight of poor people, you ought to favor a radical scaling back of laws and policies that interfere with the efficient use of resources and maximization of production.

I will simply say that anyone who is troubled by poverty should want to go back to minimalist government, here and abroad. Liberal social objectives will not be achieved through market-distorting laws or tax-and-spend welfare programs. Relying on politics is a foolish infatuation.

Consider just a few of the “products” of politics. Thanks to politics we have a host of laws that artificially boost the price of basic foods––milk, fruits, and sugar to name just three. You would have to look far and wide to find any liberal politician or academic who vigorously supports the elimination of such laws, but they undoubtedly make it harder for poor families to get by.

Thanks to politics we have occupational licensing that simultaneously drives up the cost of many services and reduces the number of employment opportunities for people who would like to improve their lot in life. One might think that the elimination of licensing statutes would be a high priority among liberals, but it is not.

Thanks to politics we have a host of laws that drive up the cost of housing for poorer people. Zoning, building codes, rent controls, and more all work to depress the number of inexpensive homes and apartments available on the market. Opposition to those laws from liberals? The silence is deafening.

And thanks to politics we have a system of “public education” that is so busy with matters like teacher pay and tenure, multicultural posturing, and self-esteem that large numbers of young people now graduate (or drop out) without even the ability to read or do elementary arithmetic. But while many liberals individually choose to have their children educated in private schools or at home, as a political force, liberalism is irrevocably committed to the defense of public education.

Interest-Group Domination

The great blind spot of modern liberalism is its inability to see that strong interest groups will always dominate the political system in order to obtain more for themselves than they could get in a free, unpoliticized society. That “more” almost always hurts the poor. In the realm of politics, all the real or feigned compassion is no match for the concentrated lobbying power of dairy farmers, labor unions, producer cartels, the education establishment, government officials, and so forth. If liberals even acknowledge that political machinations can have adverse effects on the poor, they prefer, as Lewis does, to use the redistributive power of the state to try setting things right. The trouble is that the crumbs of government largess (Medicaid, for example) are dwarfed by the damage done by other political interventions.

There is an enormous gap between the United States and countries like Brazil and India, and William Lewis has made it clear that the chief reason for that gap is political intervention that upsets the efficient functioning of markets. What he and other liberals fail to see is that there is an equally enormous gap between the United States as it is, with its vast governmental apparatus that interferes with productivity and soaks up resources like a black hole, and the United States as it would be if we had been able to stick with Thomas Jefferson’s advice: That government is best which governs least.

Those who are infatuated with politics have a basketful of ear-pleasing terms for what they do, but the truth is that politics boils down to three actions: compelling, preventing, and taking. Supposedly, the will of a few people in government can be counted on to lead society to better outcomes by such actions. Therein lies the great deception. Politics cannot lead to better societal outcomes because those who practice it, even if they have the best of intentions, cannot know enough to dictate the channels that our energy and resources must take. The result of politics is inevitably laws like India’s “Small-scale Reservation” and our minimum-wage law, which interfere with freedom and progress.

If people came to understand that politics as a means to social betterment is a losing game and that it “works” only to enable some to get what they want at the expense of others, we might have a more sensible philosophical division–not between “liberals” and “conservatives,” but between people who approve of state-sponsored compelling, preventing, and taking, and people who do not.

Liability law, no less than war, has become a continuation of politics by other means. When defeated at the ballot box, interest groups dedicated to income redistribution and social engineering now turn to the courtroom. The result is a liability lottery that is simultaneously subverting the market and imposing a de facto tax on all Americans.

The purpose of liability law—reflected in negligent and intentional torts of all sorts—is to support the market by holding people accountable for their actions. Indeed, the principle is fundamentally a moral one: if you, or a product manufactured or sold by you, hurts someone, you are responsible for making that person whole. One can, of course, argue about a lot of legal details. For instance, should the fact that the victim’s negligence contributed to the accident bar any recovery or merely reduce the judgment? But no one seriously disputes the basic precept that someone at fault should pay for the harm he or she caused.

Unfortunately, government has distorted this simple principle almost beyond recognition. One tactic has been to create faux rights, the violation of which make one liable for enormous damages. The most obvious examples are the civil rights laws, which bar private discrimination for any number of reasons, including disabilities that hamper job performance.

Good people in a good society do not discriminate for malevolent reasons, such as race. But the fact that some bad people do doesn’t mean the government should proscribe such conduct. Indeed, in the case of race discrimination the government has transformed the moral principle of nondiscrimination into invidious discrimination. Since it proved very difficult to prove that subjective hiring decisions were animated by racism, the government has made the process a numbers game, imposing liability for failure to meet an arbitrary quota, not for actual discrimination. Agencies like the Equal Opportunity Employment Commission have actually advertised for people to step forward and claim that they might have been discriminated against, even if they never applied to work for the company charged with discrimination.

In other cases discrimination is rational, rather than malign. Companies that depend on responsible employees will naturally shun an alcoholic or drug addict—yet to do so now risks liability under the Americans with Disabilities Act. There are also rational reasons to consider age and sex in hiring decisions. For instance, some jobs create greater health risks for pregnant workers. People might prefer that employers not take such factors into account, but that doesn’t justify government imposing liability on them for doing so.

Equally serious is the steady subversion of more traditional liability rules, eliminating the necessity of both requiring the plaintiff to act responsibly and finding the defendant to be at fault. Attorneys, judges, and juries have ranged throughout society looking for deep pockets from whom to transfer cash to perceived victims. As the risk of large, meritless judgments has risen, so has the incentive to settle, rewarding plaintiffs who merely file suit in hopes of being bought off.

Cases involving irresponsible plaintiffs abound—the burglar who injured himself by falling through a school skylight (the California education district settled); the drunk who stumbled in front of a New York Subway train (he exclaimed what a great country after winning a multi-million dollar jury award); the cigarette smokers suing the tobacco companies (the government has become a plaintiff, too). In all of these cases liability law is being used to reward irresponsible conduct, rather than to hold blameworthy people and companies accountable for their actions.

The pervasive belief in victimhood has led to excessive judgments even when defendants are genuinely at fault. Millions for hot coffee burns and millions more for a mispainted BMW evidence juries acting like politicians, promiscuously giving away other people’s money. Many jurors apparently believe that their job is not to assess fault and harm, but to redistribute wealth—in this case from consumers rather than taxpayers.

More mundane but equally troublesome are cases where courts simply impose liability on the deepest pocket around, irrespective of the evidence regarding fault. This area has been enormously profitable for creative legal minds. Shareholder suits seek to hold liable a company’s board of directors for falling stock prices; medical malpractice suits blame doctors for birth defects. Indeed, lawyers once sued—and won judgments—claiming that bumps from a fall caused cancer. Equally bizarre have been massive lawsuits involving asbestos, Bendectin, electromagnetic fields, and so-called multiple chemical sensitivity. The point is not that plaintiffs in such cases sometimes aren’t hurting. But they too often fail to prove that the person or company being sued is responsible for their ills.

This is evident in the case of silicone breast implants. They came onto the market in the 1960s and were used by a million women—one percent of America’s adult female population. For years there was no evidence of harm, but some women, suffering from various ailments, eventually blamed their implants and sued. Bad publicity followed, along with a power grab by the Food and Drug Administration, which ordered implants off the market in 1992 even though it acknowledged there was no evidence that they caused harm. Panic, inflamed by the trial bar, set in. The result was a deluge of lawsuits, more than 21,000 encompassing nearly a half million women.

The liability surge, not surprisingly, destroyed the silicone breast implant industry. Even manufacturers of other silicone-based products, like cardiac pacemaker wires and artificial joints, became wary of their own businesses. But the primary victims are patients, especially women who’ve suffered from mastectomies. (The American Cancer Society and eight other cancer groups have petitioned the FDA to lift the ban, contending that the agency’s basis for restricting access to silicone breast implants no longer exists.)

All of this havoc has resulted from minimal evidence. (In fact, roughly eight out of ten verdicts have gone for the defense.) Federal District Court Judge Robert Jones recently found that the case purporting to show a link between implants and systemic illnesses did not meet the scientific threshold justifying its presentation to a jury and dismissed 70 claims.

Overall, the research suggests that implants generate something between no and minimal risk. For instance, a 1994 Mayo Clinic study reported no association between implants and connective-tissue diseases. Similar were the results of a Harvard review the following year. In 1996 another Harvard study found no large hazard of disease. It noted a small increased risk, but the researchers emphasized any effect is very small, and acknowledged that this conclusion might reflect women overreporting disease simply because of the massive publicity surrounding implants; the researchers are now attempting to screen out this possible impact.

This is not to denigrate the plaintiffs’ fears. Explains Dr. Marcia Angell, executive editor of the New England Journal of Medicine, and author of the new book Science on Trial, many women have developed symptoms that any woman over 25 could develop. The drumbeat of publicity convinced many of them that breast implants were to blame.

Additional research on the issue is warranted, but it should be carried out in the laboratory, not the courtroom. Damages should be awarded based on probabilities, not possibilities, especially when those are highly disputed. Moreover, evidence needs to be screened to ensure that it reflects science, not sympathy.

A market system will work only if people who’ve been injured by the negligence of others are able to receive redress. But that doesn’t mean turning American courtrooms into legal lotteries, where neither injury nor fault need be shown for the big prize to be won. Then the overall market economy suffers, along with the defendants wrongly held liable. Whether it’s the creation of fake rights or abandonment of traditional standards of negligence, law has increasingly been turned into a tool of politics.