John Stuart Mill wrote in his Principles of Political Economy that “what has so often excited wonder” in observers is “the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.”

Mill explained the conditions necessary for this rapid recovery: 1) free mobility of capital and labor, and 2) the survival of some portion of the population and stock of human capital. If these conditions are met, then economic and social recovery do indeed take place very quickly.

Militarization versus Decentralization

This is perhaps a jarring statement in the wake of the tragic human suffering we are witnessing in Japan (or saw last year in Haiti). Of course in the immediate aftermath of a natural disaster, rescue efforts and humanitarian assistance at the basic level require extensive direction. But we must not ignore decentralized coordinating processes. In the aftermath of 9/11 and Hurricane Katrina, for example, various decentralized efforts to provide assistance were vital to the survival of thousands. Though we focus, especially in the 9/11 case, on the government first-responders, in both instances nongovernment people often responded on the spot at critical moments. There is no doubt that police and firemen in New York City and the Coast Guard in New Orleans played significant roles during the first moments after the disastrous events. But after that initial period, government activism more often than not was counterproductive.

Shortly after Hurricane Katrina I initiated a research project at the Mercatus Center to analyze the effectiveness of the voluntary response to the crisis through the market and civil society. Families and communities were strengthened and rebuilt through the cultivation of commerce. To the extent that commerce was impeded, families were weakened and communities remained in ruins. This conclusion runs counter to common intuitions that demand a command-and-control approach in the wake of a crisis.

The language of disaster and recovery efforts is one of centralization—a military effort is presumed to be required to tackle the urgent problem. But the militarization of compassion is not very effective in achieving improvement. As my colleague Chris Coyne (author of After War and a forthcoming book on humanitarian aid) suggests in his paper “Delusions of Grandeur,” imagine you asked the firemen responding to a raging fire at a corporate building to also coordinate the provision of medical supplies and treatment, oversee the reconstruction of the building, and then rebuild the company’s supply chain after the fire was extinguished and the building rebuilt. This is precisely what happens through the creeping militarization of humanitarian efforts.

The militarization of compassion does not help strengthen families, rebuild communities, or cultivate commerce. Instead, it centralizes efforts and ignores the local knowledge that resides in individuals and that is embedded in communities. Our intuition pushes toward command and control, but the science of economics pushes back against this intuition and favors the decentralized, on-the-ground information possessed by individuals—who are capable of embracing the challenges of the “cares of thinking and all the troubles of living” (as Tocqueville argued was required of a society of free and responsible individuals). The militarization of compassion may help those far away to feel they are doing their best to address the crisis, but once we get beyond the initial search-and-rescue phase and on to the second, rebuilding phase, the result is usually planned chaos.

Government Roadblocks

What emerged from our studies of the rebuilding after Hurricane Katrina was the vital role that both civil society and commercial life, as opposed to government direction, played in successful efforts to bounce back from the disaster. Whenever government attempted to guide individuals in their decisions rather than allow them to base those decisions on their local knowledge and to follow their private motivations, roadblocks to recovery arose. Mill’s observation about the amazing rapidity of recovery was confirmed in those areas where the free movement of labor and capital was permitted, and frustration was produced by restrictions on the freedom to choose.

What we have learned from the study of disasters and recovery is that efforts to provide immediate humanitarian aid will always have elements of chaos. The chaos is alleviated not through the militarization of compassion, but rather through the market mechanism that takes over the allocation of resources and signals the required adjustments through relative prices and the feedback of profit and loss.

I have been asked what was my first introduction to libertarian thought. I find that hard to answer, involving as it does looking back nearly three quarters of a century. But if I had to make a guess, I would conjecture that it was John Stuart Mill ‘s Essay on Liberty, which I must have read in my first or second year of college.

Herewith are my five favorite libertarian books.

Adam Smith’s The Wealth of Nations

First, Adam Smith’s The Wealth of Nations. This book, published in 1776, founded economic science. It introduced the notion of the “invisible hand” and explained how free trade could produce cooperation among people in achieving economic productivity. It remains a book well worth reading, full of wonderful comments to warm a libertarian’s
heart.

Mill’s Essay on Liberty

Second, John Stuart Mill’s Essay on Liberty. The most concise and clearest statement of the fundamental libertarian principle, “The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others …. ”

Dicey’s Lectures on Law and Public Opinion

Third, A. V. Dicey’s Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century. A remarkable work initially presented as lectures at Harvard in the 1890s and reprinted with a new and very important preface in 1914. Dicey saw clearly the ultimate outcome of initial social welfare measures in the first decade of the twentieth century. He essentially predicted the emergence of the full-fledged welfare state. More than a century ago, Dicey explained why the rhetoric in terms of the general interest is so persuasive: “The beneficial effect of state intervention, especially in the form of legislation, is direct, immediate, and so to speak, visible while its evil effects are gradual and indirect and lying out of sight …. Hence the majority of mankind must almost of necessity look with undue favor upon governmental intervention.”

Hayek’s The Road to Serfdom

Foutth, F. A. Hayek’s The Road to Serfdom. This profound book was highly influential in the immediate post-World War II period when it was a lone voice presenting the case for libertarian philosophy and pointing out the consequences of an increase in the role of the state. It was certainly one of the most effective works leading people to take libertarian principles seriously.

My Own Favorite: Capitalism and Freedom OR Free to Choose?

Fifth, I have been asked to include one of my own books. I am torn between Capitalism and Freedom, published in 1962 with the assistance of Rose D. Friedman, and Free to Choose, published in 1980 jointly with Rose D. Friedman. Both present the same philosophy and cover many of the same topics. Capitalism and Freedom is more succinct, scholarly, and abstract; it was a product of a series of lectures that I gave in June 1956 at a conference at Wabash College directed by John Van Sickle and Benjamin Rogge [a long-time FEE trustee] and sponsored by the Volker Foundation.

Free to Choose, based on the television program of the same title, is more popular, less abstract, more concrete. It presents a fuller development of the philosophy that permeates both books; it has more nuts and bolts, less theoretical framework. The TV program on which Free to Choose is based is available in videocassette and, if I were to consider it as a book, would clearly be my favorite.

*Excerpted from an insert that appeared in the April 2002 issue of The Freeman.

That the Obama administration based its policy on the assumption that every dollar of government expenditure has $1.50 worth of impact is a remarkable testimony to Keynes’s observation in that book: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

So it is that Keynes’s false expenditure-multiplier argument, severely criticized by his contemporaries, can now be invoked in support of massive spending.

The argument is founded on two key assumptions that turn out to be false. First is the notion that savings are not spent but rather are withdrawn from the expenditure stream. That assumption prompts stimulus proponents to believe that taxation or government borrowing expands total spending, while leaving the money in the private sector retards it. The flaw is the equation of saving with hoarding. People save their unconsumed income in bank deposits and mutual funds, purchase bonds (private or government) and stocks, or some combination of all of these. Thus savings are the sources of funds spent by borrowers. And as the classical economist most admired by Keynes declared: “No political economist of the present can by saving mean mere hoarding.”

That was Malthus, who was reaffirming Adam Smith’s explanation in The Wealth of Nations that “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people.” Note that “to consume” does not only mean “to eat.” It also means to “use up.” Thus John Stuart Mill elaborates Smith’s explanation: “The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and while hoarded, is not consumed at all.” And when savings are borrowed by businesspeople, they are “all consumed; though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid in wages to productive laborers, who consume it for their daily wants; or if they in their turn save any part, this also is not, generally speaking, hoarded, but (through savings banks, benefit clubs, or some channel) re-employed as capital, and consumed.”

Keynes’s lack of formal training in economics, besides his eight weeks of tutorials from Alfred Marshall, may explain his failure to interpret correctly Marshall’s own restatement of the meaning of saving, which Keynes himself quoted: A man “is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

The Government Spending Shuffle

The multiplier’s second incorrect premise is that government expenditures are “autonomous”; that is, government spending does not depend on current income. It may be true that politicians pay hardly any attention to the level of income in the economy when they choose how much government should spend. That it planned to spend $787 billion when the economy was in a recession is ample testimony to such an inclination. But the amount the government spends comes primarily from taxes paid out of the public’s current income. Furthermore, government expenditures above tax receipts have to be paid for through the sale of bonds, purchased out of the public’s savings. Thus increased government spending simply shuffles around currently earned incomes and savings without adding anything to total spending. And when government shifts more of current income toward its favored expenditures, the economy’s future functioning is impaired because such spending yields less than would have resulted had the income earners spent the money themselves.

Borrowing from the rest of the world may add to total spending in the United States at the expense of spending in some other countries. But it is hard to conceive of foreign savers eager to send their unspent incomes to the United States when their own economies are experiencing recessions. Besides, the Keynesian multiplier idea is supposed to hold in every country. Thus it is unrealistic to expect that all governments would be able to increase their borrowing from “the rest of the world” in order to increase total world spending.

Borrowing from a central bank (inflation) may increase total spending beyond currently generated incomes. However, the stimulative effect can only be temporary, until nominal wages adjust to the resulting rise of prices and participants in the capital markets have taken measures to hedge against future capital losses. This is the classical forced-saving doctrine that Keynes read but failed to interpret correctly, thinking it applies only to an economy operating at full employment.

Indeed, David Ricardo described as an “absurdity” the belief in the ability of a central bank to promote lasting economic prosperity by issuing paper money. The belief, he said, attributes “a power to the circulating medium which it can never possess.” Keynes encountered a similar warning about the futility of a central bank’s money creation to promote prosperity in Ricardo’s Principles but unwisely dismissed it as having relied on the assumption of full employment. The Federal Reserve evidently has been attempting to prove Ricardo wrong with its reckless money creation, especially since the third quarter of 2008. It has lost so far.

Production Drives Economies

A fundamental flaw of the Keynesian multiplier argument, besides the two faulty premises, is its failure to recognize that consumption spending follows production and the earning of income. It is incorrect to think of spending as one consumer handing over a fraction of her income to another to spend. Rather, individuals engage in production from which they earn incomes by selling what they do not consume. From the incomes thus earned, individuals purchase goods and services they themselves do not produce. The remaining income may be held in cash (hoarding) or turned over to others through purchasing interest- or dividend-earning assets (saving). That is why the classical economists emphasized that production, rather than consumption, drives an economy, another explanation Keynes encountered from Mill but could not interpret correctly:

What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because everybody would have twice as much to offer in exchange.

Before Keynes borrowed Richard Kahn’s formulation of the expenditure multiplier, founded on consumption expenditures, other analysts had argued the “multiplying effect” of production, as Mill explains above. The argument is that increased productivity or a surge in production within one sector of an economy stimulates increased production in others as a result of the additional demand or income generated by that sector. Thus the discovery of high-yielding varieties in agriculture or the introduction of more advanced information-processing technologies into computers may have multiplying effects on production in other sectors of an economy. That explanation is a far cry from the Keynesian belief that by taking some of the public’s income to subsidize the arts, pay the unemployed over an extended period, or cover children’s health care, government will stimulate increased production in the rest of the economy. Even necessary expenditures on infrastructure entail forgone production. For a correct analysis, one always has to keep in mind the displacement effect of government spending.

Among Keynes’s contemporaries who criticized his multiplier argument most consistently was R. G. Hawtrey, who declared it variously as “practically untenable, . . . nonsense, . . . [and] fallacious,” and said that it does not represent “a correct account of the sequence of events.” (See more of such criticisms in my “On the Mythology of the Keynesian Multiplier,” American Journal of Economics and Sociology, October 2001.) Evidently, those who recommend massive government spending have paid little heed to previous criticisms of the multiplier argument. They presumably were impressed by its expression in algebra and geometry in modern macroeconomics textbooks. They also have not learned from the failure of former President Bush’s tax cuts of 2008, which were meant to stimulate consumer spending and spare the economy from a downturn. Cutting taxes, only to borrow from the public to fund the increased deficit, could not have increased production. Perhaps the failure of the so-called stimulus to bring economic recovery will finally teach the right lesson on the impotence of increased government spending.

Economic recessions typically are the result of a mismatching of production with consumer demand. Given the incentives of producers to correct their own mistakes to recover profitability, economies sooner or later recover from recessions on their own. But recovery can be forestalled when governments undertake expenditure or regulatory measures that frustrate the corrective actions of private producers and consumers. Massive, diversionary spending by government does not help the recovery process.

The spirit of improvement is not always a spirit of liberty, for it may aim at forcing improvements on an unwilling people; and the spirit of liberty, in so far as it resists such attempts, may ally itself locally and temporarily with the opponents of improvement; but the only unfailing and permanent source of improvement is liberty, since by it there are as many possible independent centres of improvement as there are individuals.

First, it uses measures such as government spending as a proportion of GDP or the share of total income taken in taxation. Figures such as these show a dramatic rise in the size of government during the twentieth century.

The second element concerns how much economic activity, broadly defined, the government should undertake, whether directly or indirectly. Here there has been a shift in focus in recent years. Until the later 1980s it was often argued that a large part of actual production should be directly controlled by government through the “public” ownership of productive assets. That argument is now seldom heard. Instead we hear that government should intervene in the distribution of income and should provide, or at least fund, key services such as health and education.

All this is very familiar. What we may not realize is that the contemporary debate concerned only a part of a larger, more general argument. Moreover, while debates about the nature and appropriate role of government have been going on since at least the 1760s, the one described above, with its focus on measurable size and the government’s economic role, has only really been a feature of the last 120 years or so. It began originally with the transformation of public administration during the nineteenth century and the rise of socialism and modern theories of economic management toward the end of that century and during the early twentieth century. Before then the debate was much wider ranging and was concerned with more fundamental issues having to do with the very nature of government and the relation between the individual and society. We may define this earlier and more fundamental debate as one between individualism and collectivism.

The crucial point is that the size of government, as defined above, is not the same thing as its scope or extent. The wider and more basic question is: what should the range or scope of government be? What areas of life should be of interest to government and the subject of collective choice, and which areas should be purely private and a matter of individual, personal choice? It is perfectly possible to have a government that is active and concerned with a large part of human life and yet is small in terms of its share of GDP. The main reason why contemporary governments are so large is not just because their scope has grown but also because the areas they have become involved in require employing large numbers of people, which is costly. The fundamental choice is between a government that is concerned with only a small part of human affairs and one that is concerned with a large part. In the second case there is a further choice between an extensive government that is large in terms of the resources it consumes and one that is extensive and active but small. (The fourth possibility, that of a government that is restricted yet large, is unlikely.)

Public as a Whole

The debate started with the appearance of a new way of thinking about government that appeared in Europe following the Treaty of Westphalia in 1648 and more particularly in the years after about 1740. Its main exponents came from the German-speaking parts of Europe, although they also drew on the ideas of French thinkers. Known collectively as Kameralists, their argument was that rulers and governments should be concerned with the interests of the public as a whole rather than their own personal interest or that of a small group. They saw government as having three main aspects. The first was public finance, the funding of the state. The second was “oeconomy,” which meant more than what we now call “economics.” It implied that the whole political society was like one large household, with government aiming to run its affairs in an orderly manner and to maximize the wealth and prosperity of the whole by direct action. The third was “polizei,” or public policy. This meant that governments should be concerned with anything and everything that had a bearing on the well-being of the public, from health to education to morals to security.

The All-Embracing State

The implications of this way of thinking were profound. It meant that in theory any part of life was a proper concern of government, from the kinds of clothes people wore to the way they brought up their children. Above all this was a collectivist approach that saw society as a collective whole rather than seeing the individual as primary and society as the product of the interactions of individuals. This meant that human flourishing was a collective good rather than an individual and personal one. It meant also that the whole (the nation or society) was an entity with a real existence and real interests, which were prior and superior to the existence or interests of the individuals who comprised that whole. The logical conclusion was that, if necessary, the interests and desires of individuals could be properly sacrificed to those of the whole.

The Kameralists and others did not favor anything like socialism. In fact they were strong supporters of private property and markets, but on the grounds that they served the collective interest.

These ideas became the orthodoxy in most parts of Europe during the latter years of the Ancien Régime and, if anything, became even more influential after the French Revolution and the rule of Napoleon. However they also provoked a response from thinkers such as Adam Smith and Wilhelm von Humboldt. The latter’s major work, The Sphere and Duties of Government, was a direct response to Kameralist ideas as found in his native Prussia. (Paradoxically, in his capacity as a civil servant he was a major practitioner of the ideas he opposed, particularly in the sphere of government-run education.) The ideas of the U.S. Declaration of Independence can also be read as an attack on this view of government. This alternative view, which was perhaps best expressed by John Stuart Mill, is that individuals were primary and were the best judges of their own interests, that each individual had to pursue his own personal and distinctive kind of happiness, that consequently government was the servant of individuals and should exist only to enable people to pursue happiness by providing a framework of impersonal rules, and that each individual should have a large and extensive sphere of personal autonomy. In other words, personal choice rather than collective choice should be the default position.

This division between a collectivist view that led to an extensive role for government (but not necessarily a large state) and an individualist one that led to a highly restricted and diminishing role was at the heart of political argument in most of the nineteenth century. Both sides triumphed in some areas and lost in others. Thus religion was moved from the public to the private sphere, a huge victory for the individualists, while education became a central government responsibility. With the rise of socialism the argument came to focus specifically on government’s role in narrowly defined economic matters.

Since 1989 we have reverted to the older argument. We are now bombarded with assertions that the lifestyles, diets, childrearing practices, and cultural choices of people are the proper concern of politics and government. The kinds of arguments made by Kameralists are once again the staple of many of our public intellectuals and politicians. Time to dust off those copies of Humboldt and Mill and make the case for individuality and personal autonomy.

When you say a literary work is “dated” you mean that either its ideas or the manner of their presentation are outmoded. In this case, the professor was referring to Mill’s ideas, not his style, insisting that in the light of modern thought these were of little force or value. Since I was brought upon Mill, and always held that Mill was a pretty good thinker, I pulled down my copy of On Liberty and reread it, just to see whether I too am “dated.”

Briefly, Mill held that a vigorous and healthy social order is one in which the individual is permitted to work out his destiny according to his capacity. . . . Political and social restraints on the individual, said Mill, tend to retard his development, and if carried far enough will induce an inclination toward servitude. Society, which is a collective of individuals and takes its character from them, will deteriorate accordingly.

This line of thought still touches a responsive chord in me and, therefore, I presume I am “dated.” And so is everybody else who is convinced that a good society will be achieved when people are free to do pretty much as they please, provided they do not please to step on one another’s toes. If you call yourself a libertarian or an individualist, whether you ever read On Liberty or not, you are in Mill’s camp.

The deficiency of being “dated” is shared by many ideas that are rooted in the past and, if modernity is the test of value, ought to be discarded. For instance, there is the Decalogue, authored some six thousand years ago according to the Jewish calendar. This is definitely out of line with the “latest thing” in political science, which insists that it is quite proper and beneficial to steal from Peter and give to Paul. Very few up-to-the-minute professors maintain, with the Commandment, that private property enjoys divine sanction.

For another example of “dated” thought, I offer the Declaration of Independence. There may be a few philosophers in these nuclear times who accept the doctrine of inalienable rights, but the most forward-looking ones will tell you “there ain’t no sech animule”; and if you call upon the Creator to bear witness for the doctrine, they will tell you condescendingly that you are woefully “dated.”

So, the question whether Mill is “dated” resolves itself into another question: whether an idea has deteriorated in value simply because it contradicts “the latest thing.” The new might be shinier, but is it intrinsically better?

As I said, the article appeared in a conservative journal—which brings up the question, just what is a conservative? I imagine that a conservative is one who wants to conserve something—maybe something that is “dated.” At the time of Thomas Hobbes, in the seventeenth century, a conservative was one who did not want the “divine right” of kings to go out of fashion; in the nineteenth century, when Cobden and Bright were plugging for free trade, a conservative was for protectionism, and Prince Metternich was a conservative because he thought monarchism better than the republicanism then coming into vogue. But, what is a modern conservative? Some people who follow the libertarian line of thought are pleased to use it to describe themselves. But, now we find a conservative paper giving its blessing to a repudiation of John Stuart Mill, from whom libertarianism derives much of its thinking.

International Wheat

America has no monopoly of the farm problem. . . . Every nation whose government undertakes to “help the farmer” is plagued with this problem. “Enlightened “governments everywhere are knee-deep in the business of succoring the “poor agriculturist,” thereby making things worse for him and everybody else.

As this is written (on the birthday of George Washington who advised his fellow citizens against foreign entanglements) representatives of various nations, including our own, are assembled in Geneva debating whether or not to conclude a new International Wheat Agreement. They could readily solve this matter by dropping their respective interventions and allowing competition in the market to function as the equalizer of supply and demand. But the very fact that governments are assembled is evidence enough that controls will not be abandoned—not at the instigation of these controllers.

Meanwhile a group of atomic scientists, working under a grant from the government of the United States, are looking into the possibility of applying their discoveries to the improvement of agricultural production. Every agricultural school in the country, with subsidies from the government, is striving to increase the quantity and quality of the very commodities, the abundance of which—at fixed prices—constitutes an international headache.

All of this underlines the fact that whenever government undertakes to solve an economic problem, it simply creates other problems. This is because the laws of economics operate without regard to political “expediency.”

As [Albert Jay] Nock observed in Our Enemy the State: “Every intervention by the State enables another, and this in turn another, and so on indefinitely; and the State stands ever ready and eager to make them, often on its own motion . . . .”

On Automobiles and Houses

The economic year 1956 was ushered in on two sour notes: the building boom is showing signs of leakage, the sales of automobiles are dropping. The pundits have come up with the verdict that the country is “saturated” with houses and automobiles; the consumers of these products are surfeited, and production has to be slowed down accordingly.

Perhaps their analysis is correct. But one cannot be sure that “overproduction” has set in until one runs a bargain sale. And then one finds that what is called overproduction is really over-pricing. For, if the glut on the market disappears when prices are lowered you have proof enough that the desire for these commodities has not yet been satiated, that at the higher prices some people had to go without. So, before we can say for a certainty that everybody has more housing space or more automobiles than he wants, we must consider the possibility and the consequence of a drop in prices.

To a buyer, of course, the price of an item means its cost to him. A seller also thinks of the price in terms of what it costs him to produce the item. And one of his largest items of cost is wages, the price that labor asks for its contribution. A decision that too many houses and automobiles have been produced might well mean, then, that wage demands by construction and automotive workers have exceeded what the consumer is willing to pay.

Taxes are the second largest cost of production. The multitudinous exactions of the government—federal and local—on the builder and his suppliers must be passed onto the would-be home owner or user. Likewise with the automobile. So a decision that there are too many buildings and too many automobiles may be only the reflection that taxes are too high on those particular items. . . .

Whatever the cause, . . . all these are areas of government interference with a free market. And if a slump occurs in housing or automobiles, the government must bear the responsibility. Political leaders may well be concerned that these chickens of their meddling seem about to come home to roost.

In one brief section Hayek points out that the socialists wish to substitute a new morality for the one that underpins the market order because they are dissatisfied with a moral code that does not give each person “what he deserves in light of his perceived merits or needs.” In the few paragraphs that follow, Hayek brilliantly shows what the socialists have never understood: that private property and inequality in rewards make all people richer than they would be otherwise.

The root of the misunderstanding is the belief that it’s unimportant how wealth got here and that all we have to do is figure out how to distribute it. Hayek quotes John Stuart Mill (author of “The silliest sentence ever penned by a famous economist . . . an incredible stupidity”): “once the product is there, mankind, individually or collectively, can do with it whatever it pleases.” In a trivial sense Mill was right. The critical question is: will the product be replenished regardless of the manner of distribution?

Hayek disposes of the matter by arguing that “a process which tells us how to reward the several contributions to this product is also the indispensable source of information for the individuals, telling them where they can make the aggregate product as large as possible. It is the relative [remuneration] of all the different factors of production by the market which alone can show us how we must arrange them to make the product as large as we can.”

In other words, if we want the greatest array of wealth possible, producers will need signals indicating how they can best satisfy consumers. Those signals are prices. But the same system that generates prices also generates unequal incomes.

Thus inequality of incomes promotes human well-being. Private property, Hayek wrote, “in the means of production is . . . an indispensable condition for the existence of this product in anything like its present condition. Socialists offer us as a superior moral [sic] what is, in fact, a very inferior morality, yet alluring because they promise great pleasure or enjoyment to people they would be unable to feed.”

* * *

Adam Smith said, “There is much ruin in a nation.” But the news media lead one to believe that’s all there is. Stephen Davies enlists the grand old liberal Herbert Spencer to explain why disaster is nearly all we hear about.

What happens when a bureaucrat is actually called on publicly to defend a set of proposed regulations? You’d be surprised. James Payne relates a firsthand experience.

Countries emerging from the long night of socialism could do no better than to look to one of America’s Founding Fathers for political and economic guidance. James Dorn describes one of the most influential men in history.

You can tell much about a country from whether rewards are allocated according to status or achievement. Thomas Wilson discusses the importance of this distinction.

Theoretically, governments were instituted to avert conflict. Yet they seem to spend most of their time instigating it. Nicholas Kyriazi takes a look at this side of the state.

The reasons for separating church and state are well known. What is not so well known is that they are identical to those for separating school and state. Barry Loberfeld demonstrates.

China apparently subscribes to the view that economic liberalization can only be purchased at the cost of political authoritarianism. Even some Westerners buy it. Christopher Lingle, however, does not.

Risk is a part of life, yet much of what government promises to do is diminish risk. Christopher Mayer points out that the Law of Unintended Consequences always has the last laugh.

When a student asked his teacher why immigrants tend to own stores in the inner cities, he got an important economics lesson. Richard Marcus was there.

If foreign aid improved economic conditions, Africa would today be a haven for investment and high incomes. What went wrong? Jim Peron counts the ways.

In Canada the government is allowed to open mail without a warrant. But don’t worry; it’s just to combat crime. Adam Young is worried anyway.

Here’s what our columnists found to write about this month: Donald Boudreaux reminds us of the importance of reading history. Lawrence Reed has no faith in President Bush’s plan to subsidize religious social-welfare organizations. Doug Bandow stamps the monopoly post office. Dwight Lee says command-and-control is no way to reduce pollution. Mark Skousen pens a paean to Hayek. Charles Baird reports on attempts to unionize temporary workers. And Joseph Salerno, reading two Nobel laureates’ argument for not cutting taxes, protests, “It Just Ain’t So!”

The book reviewers ponder volumes on work and home, health care, privacy, race, higher education, and the telephone for the hearing impaired.

—SHELDON RICHMAN

Mainstream economics uses the upward-sloping supply and downward-sloping demand curves simply to reflect the basic self-interested pursuit of net gains by market participants: sellers looking for higher prices in order to offer more quantities for sale per unit of time, and buyers looking for lower prices in order to purchase more quantities per unit of time. All such bargains are made by the market participants with as much knowledge as they may possess, but there is no insistence on complete or perfect information on the part of sellers or buyers.

Thus to say that there is an upward-sloping market supply curve for “capital” or savings in the financial market simply means that people or financial institutions would be willing to offer more funds on loan if offered higher interest rates. Similarly, to draw a downward-sloping demand curve for “capital” or savings is to suggest that more loans would be taken by borrowers if they were offered at lower interest rates. It is from such contrary tendencies of lenders and borrowers that classical and neoclassical economists explain that the rate of interest is determined by the supply and demand for “capital” or loanable funds (an explanation many Austrians fail to recognize^[3]). The same model of supply and demand may be used to explain the determination of wage rates in different occupations or rental rates in different housing markets, but without invoking the assumption of perfect knowledge.

Few mainstream economists believe that the model of price determination in a “perfectly competitive” market is a satisfactory representation of real market situations, and few invoke the assumption of perfect knowledge. Rather, they consider oligopolistic and monopolistic competition as the norm. As George Stigler points out, “it seems improper to assume complete knowledge of the future in a changing economy. Not only is it misleading to endow the population with this gift of prophesy but also it would often be inconsistent to have people foresee a future event and still have that event remain in the future.”^[4] Several textbooks now talk about price-taking firms rather than perfectly competitive firms. Paul Samuelson and William Nordhaus, after teaching the perfect competition model and without invoking the assumption of perfect knowledge, also remark, “By the strict definition, few markets in the U.S. economy are perfectly competitive,” and “If you look out the window at the American economy, however, you’ll find that such cases [of perfect competition and complete monopoly] are rare; you are more likely to see varieties of imperfect competition between these two extremes. Most industries are populated by a small number of firms competing with each other.”^[5]

Marshall and Mill

Classical economists and such early neoclassical economists as Alfred Marshall also discussed equilibrium market-price determination by the forces of supply and demand but without invoking the assumption of “perfect competition.” Thus, summarizing classical value theory, J.S. Mill notes that:

if a value [price] different from the natural value [long-run average cost, including normal profits] be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time; for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit; which, under free and active competition, cannot long continue to be the case.^[6] (emphasis mine)

Marshall talks about “free competition, or rather, freedom of industry and enterprise” and by “competition” means “the racing of one person against another, with special reference to bidding for the sale or purchase of anything.”^[7]

It is also well known that the modern perfectly competitive model is one in which firms or sellers do not compete—they can’t change prices or product quality, two of the principal means of competition: “it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition.”^[8] Moreover, “the theoretical concept of [perfect] competition is diametrically opposed to the generally accepted concept of competition.”^[9]

For his strictures to be useful, Kirzner needs to justify his insistence that the use of market supply and demand curves to illustrate equilibrium price determination in mainstream economics always must entail the assumption not only of perfect competition but also of perfect knowledge.

Notes

1. See Israel M. Kirzner, “The Law of Supply and Demand,” Ideas on Liberty, January 2000, pp. 19-21.
2. See Israel M. Kirzner, “Entrepreneurial Discovery and the Law of Supply and Demand,” Ideas on Liberty, February 2000, pp. 17-19.
3. James C.W. Ahiakpor, “Austrian Capital Theory: Help or Hindrance?” Journal of the History of Economic Thought, Fall 1997, pp. 261-85.
4. George J. Stigler, “Perfect Competition, Historically Contemplated,” Journal of Political Economy 65 (1) 1957, pp. 1-17.
5. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: Irwin-McGraw-Hill, 1998), pp. 155, 170.
6. John Stuart Mill, Collected Works, vol. 3, J. M. Robson, ed. (Toronto: University of Toronto Press, 1965), p. 457.
7. Alfred Marshall, Principles of Economics, 8th ed. (Philadelphia: Porcupine Press, 1990 [1920]), pp. 10, 4.
8. Paul McNulty, “Economic Theory and the Meaning of Competition,” Quarterly Journal of Economics 82 (4) 1968, p. 641.
9. S. Charles Maurice, Christopher R. Thomas, and Charles W. Smithson, Managerial Economics, 4th ed. (Homewood, Ill.: Irwin, 1992), p. 431.

For the last three years, beginning at age fifteen, I have taught myself philosophy straight from the great works of Western thought, and have formally and informally studied economics. Fortunately, my background shielded me from some highly volatile rhetoric being espoused at the state university where I took a philosophy course last year.

The course, entitled Classics in Ethics, was taught by a professor who made no attempt to disguise his liberal views from the class. Normally, I dismissed his personal opinions as secondary and inconsequential to the course, but one particular claim he repeatedly made prompted me to respond. The professor took it upon himself to add yet another accusation to Michael Milken’s list of indictments. He accused Milken of being, at best, a simple hedonist, greed-driven to seek only short-term, selfish pleasures. I could not let this charge go unquestioned. I resolved to create a moral defense of Milken using the professor’s own tools of the ethical systems of Aristotle, Thomas Hobbes, Immanuel Kant, and John Stuart Mill. I chose these four philosophers because each is unique in his perception of mankind. This diversity of opinion and viewpoint creates the most challenging and complete rubric of testing morality.

Milken revitalized Wall Street by introducing new methods of investment through high-yield (junk) bonds. In his own words, he and colleagues were matching capital to entrepreneurs who could use it effectively. We were creating investments that money managers needed in volatile markets.^[1] Milken and his associates at Drexel Burnham Lambert succeeded in raising over ten billion dollars in capital for various companies. Yet for all of Milken’s successes, he is still thought of as an immoral cutthroat. His actions have been subject to much debate and speculation, but one interesting test has yet to be applied.

The Pleas

Michael Milken pled guilty to five counts of equity technicalities and one count of tax fraud, but to many people he was also guilty of insider trading, fraud, and generally cheating people out of money. These allegations, however, do not even begin to correlate with the six crimes for which he pled guilty. The charges, which at best are technicalities, include ugly words like fraud, conspiracy, and aiding and abetting. The first charge is a general conspiracy charge that Milken planned or thought to engage in a series of unlawful security transactions. (It was my understanding that only Big Brother ever prosecuted someone for their thoughts.) The next charge involves tax fraud, but the most obvious thing to note is that the taxes are not Milken’s. The charge relates to Ivan Boesky’s false 13-d statement. The next two charges are also based upon Boesky’s testimony. Milken’s transgressions were to suggest that Boesky buy MCA stock to hide that Golden Nugget was selling and to assure him no loss in a sale to Drexel. Both of these actions are common in business and attention was only called to them long after the fact. These first four charges are all based on the charge that the ownership of stock was not properly documented in a stock-parking agreement. However, none of these charges created any injury to MCA, Boesky, the federal government, or anyone else involved in the transactions. The fifth charge is equally harmless. Milken pled guilty for failing to disclose in written form an agreed-upon adjustment in transaction prices between Drexel and a client. The final crime is that Milken helped a client reduce his income tax liability by selling him two investments and then buying them back at a lower price.^[2] Yet even here, the real economic loss that the client incurred was picked up as a gain by Drexel, and all profits were certainly taxed by Uncle Sam, somewhere along the line.

Now that his six crimes have been examined, his everyday actions must be considered. The four philosophers provide an excellent opportunity to evaluate the actions of an entrepreneur and businessman. Aristotle, Thomas Hobbes, Immanuel Kant, and John Stuart Mill take very different approaches to morality. They differ in their perceptions of man, concepts of virtue, and ideas of how to apply ethics. These three characteristics define how each philosopher might well judge and weigh Milken’s actions. From their teachings and perceptions, Milken will receive a new trial.

Aristotle

Aristotle deemed that actions were moral if they promoted actualization, or, to be more specific, the total actualization of potentiality in all being. He defined virtues as either intellectual, maintaining prudence and wisdom; or moral, the control of emotions and desires in obedience to reason.^[3] In this way, man could achieve his fullest potential and be considered moral. Did Milken’s actions fulfill the ideal of total actualization, yet still remain virtuous? Milken’s job at Drexel Burnham Lambert was to provide financial advice to clients and to find profitable investment opportunities. His investment strategies bailed out companies in need of capital and provided enormous profits for investors. Ultimately, his work helped to better the economy as a whole, thus fulfilling Aristotle’s need for total actualization. Milken fulfilled Aristotle’s two requirements for virtue, by engaging in intellectually challenging activities and succeeding in opening an entirely new arena of opportunity and investment in his field. The proof of his ability in prudence and wisdom is quite evident in the numbers he generated in profits. Milken’s wealth was the result of a job well done.

Proponents of Aristotle will be quick to point out that Aristotle was very specific concerning wealth and its use only as an intermediate end, useful merely as a means to something else. Though it could be argued, let us assume for argument’s sake that Aristotle was correct in his assessment of money. Then we must look to how Milken has used his money. Milken has always lived relatively modestly, refraining from ostentatious spending and extreme indulgence in luxuries.^[4] Milken obviously did not use his wealth for simple hedonistic pleasures, but he did use his wealth to achieve other ends. Milken used his income to establish the Milken Family Foundation, which contributes millions of dollars every year to fund education and charities, to underwrite cancer research, and to invest in promising companies. It appears that any allegations of pure greed are groundless from the evidence of Milken’s lifestyle. Milken has satisfied Aristotle’s criteria and has passed this test.

Thomas Hobbes

Milken’s actions fall nicely into Thomas Hobbes’s conceptions of morality. Hobbes believed the ethical man acted in enlightened self-interest. None would disagree that Milken acted out of self-interest, but some might disagree as to whether his actions were enlightened. This enlightenment demands that Milken’s actions not have been centered in pure selfishness, but also consist of a desire to seek higher goals. Economically, it is simple to prove that Milken’s actions benefited everyone else either directly or indirectly, but to prove his case morally we must look elsewhere.

Milken sees himself as a social scientist, one who looks at what is happening in society, what society needs.^[5] Milken’s investments in telecommunications, Latin America, and education certainly demonstrate his ability to anticipate what society needs. Companies such as Time Warner, MCI, and Turner Broadcasting were able to become highly successful businesses thanks to over $5 billion in financing from Milken. He believes that talented and trained people are the key to the future, and the best investment for the future lies in education. Milken fulfills the role of Hobbes’s enlightened, self-interested man perfectly. Milken invested both for himself and for the world in which he lived.

Immanuel Kant

Immanuel Kant developed one of the strictest forms of determining moral actions. Moral maxims or rules, Kant claimed, must fit within the categorical imperative. One should act only on that maxim through which you can at the same time will that it should become universal law.^[6] In other words, you should act in a way that you would want everyone else to act. For example, theft would be immoral because you would not want everyone else to steal as well. After the maxim or rule of behavior is determined, it must then be put to the tests of universality and consistency. Only Milken himself truly knows which moral maxims he employed; however, from his actions a maxim can be hypothesized.

This maxim is that one should have a strong work ethic and pursue profit through fair means. None can disagree that Michael Milken had a strong work ethic; it is clearly evidenced in his high profits. And his lack of harm, intentional or otherwise, meets the demand for fairness. It would be logical to apply this maxim universally, because there is nothing inherently wrong with it. Profit is the result of payments exceeding costs in a legal transaction. It is the successful by-product of free trade, and through market transactions makes people better off. One could also consistently will or desire that everyone have a strong work ethic, as the end result would create no internal logical flaws, nor would it create undesirable ends. Ultimately this maxim would only benefit all, by improving efficiency, allocation of resources, and the quality of life, even for those not earning high profits.

J. S. Mill

John Stuart Mill’s theory of utilitarianism is the final challenge that Milken faces. Utilitarianism defines the moral rightness or wrongness of an act in terms of the balance of good or bad consequences. Mill held that actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness. Milken’s actions must be evaluated both in terms of consequences and in happiness created, as the results prove to be different.

There is a common myth that wealth is generated only at the expense of others. Wealth actually creates more wealth through voluntary trade. It provides an incentive that encourages new ideas and economic growth. Economic expansion only occurs when entrepreneurs like Milken take chances in order to gain profits. From a purely economic standpoint, Milken’s actions had no net negative results. He managed to forge an entirely new way of thinking about investment. Leveraging helped to free up badly needed capital that allowed companies to expand and improve faster and more efficiently.

If Milken never actually harmed anyone coercively or fraudulently, what made him the object of so many negative emotions from the public? Many claimed he was greedy and undeserving of his wealth. In a literal definition of utility, Milken fails miserably in the eyes of the masses. However, a closer look at Mill’s theories will prove that in this case, the majority truly had no right to be unhappy with Milken.

The public was guilty of misjudging Milken for many reasons. In addition to being ignorant of Milken’s overall contributions to the economy, people were misled by crusaders against the decade of greed. The government assaulted Milken and others in order to displace public anger over the savings and loan failures, and in the case of at least one special prosecutor, to gain political advantage. Likewise, the corporate establishment and old-liners at Wall Street wanted Milken out of the picture in order to seize his profits for their own companies and eliminate the outsider.^[7] Media hype only increased the animosity toward Milken, and so out of unjustifiable emotions, Milken inadvertently created unhappiness.

Misplaced emotion can hardly be a justification for Milken to be considered immoral. Mill believed that in some cases majority opinion does not constitute utilitarianism. Society . . . practices a social tyranny more formidable than many kinds of political oppression. There needs protection against the tyranny of the prevailing opinion and feeling; against the tendency of society to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them.^[8] How unfortunate that there was no protection for Michael Milken, because by objective utilitarian standards he certainly provided for the greater good of society.

Michael Milken may have pled guilty to six charges, but those so-called crimes hardly account for the enormous amount of success he has had. Milken could not escape the clutches of politics, but higher judges would have found him innocent. Aristotle, Thomas Hobbes, Immanuel Kant, and John Stuart Mill represent the bastions of Western thought, and their philosophies support Milken’s morality.

It seems that my professor was too quick to judge, and wrong in his assessment. Milken should not be thought of as a hedonist or criminal, but rather regarded as a hero. His ideas and innovations created an entirely new direction for investment to grow. Michael Milken may have made enormous profits during the years he worked for Drexel Burnham Lambert, but those numbers pale in comparison to the amount of wealth he generated for everyone else. The only crime Michael Milken is truly guilty of is doing his job and doing it well.

2. Daniel Fischel, Payback (New York: HarperCollins, 1995), pp. 163-164.

3. Aristotle, On Man in the Universe (New York: Random House, 1971), p. 87.

4. Fischel, p. 159.

5. Milken, p. 20.

6. Immanuel Kant, Groundwork of the Metaphysics of Morals, p. 6.

7. Fischel, p. 300.

8. John Stuart Mill, On Liberty, p. 3.

There seems to be a consensus that the typical intellectual today is more comfortable than most with the government supply of education. But what of the intellectuals who were also advocates of laissez faire in the eighteenth and nineteenth centuries? They would surely not approve of today’s extensive intervention. I shall argue, nevertheless, that their tendency to compromise seriously weakened the defenses against an all-encompassing state.

From among the early intellectual libertarians I shall concentrate on the political economists. I shall then focus on Adam Smith, John Stuart Mill, and a writer whose characterization as a political economist may be challenged by some: Tom Paine.

The Preliminary Promise

Before proceeding to the inconsistencies in these writers I shall, in fairness, start with the strongest parts of their arguments. Of their main recommendations that distinguish them from current practice in education, the most striking is their insistence that school fees should not be abolished and should always cover a significant part of the cost of education. The main reason for this requirement has either been subsequently forgotten or carefully avoided. Fee-paying is the one instrument with which parents can keep desirable competition alive between teachers and schools. Adam Smith was the most insistent on this point. Most of the later economists in turn upheld Smith’s principle. Thus Thomas Malthus argued that if each child had to pay a fixed sum, the school master would then have a stronger interest to increase the number of his pupils. . . .^[1]

Similarly, James McCulloch thought that the maintenance of the fee system would secure the constant attendance of a person who shall be able to instruct the young, and who shall have the strongest interest to perfect himself in his business, and to attract the greatest number of scholars to his school.^[2] Otherwise, if the schoolmaster derived much of his income from his fixed salary, he would not have the same interest to exert himself, . . . and like all other functionaries, placed in similar situations, he would learn to neglect his business, and to consider it as a drudgery only to be avoided.^[3]

While James Mill also strongly shared this view, the most hesitant of the classical economists to insist on positive fees for schooling was his son, J.S. Mill. But after much deliberation he wrote to Henry Fawcett: I, like you, have a rather strong opinion in favour of making parents pay something for their children’s education when they are able. . . .^[4]

To the twentieth-century liberal such reasoning is profoundly wrong because it makes the degree of schooling of a child a simple function of the size of his or her parent’s pocket or purse. Yet the taxes that pay for free public education derive from revenues collected out of the same pocket. The poor were substantial taxpayers in the eighteenth and nineteenth centuries, the period that preceded the progressive income tax. Indeed in the first half of nineteenth-century Britain, taxes on food and tobacco counted for about 60 percent of all central revenue.

But even today the poor pay taxes—with every cigarette, every can of beer, and every gallon of gasoline they purchase. In other words, if schooling is made compulsory and free, people with low incomes will almost always contribute to its cost from their tax contributions, however modest. But suppose this same sum was collected not, as now, but at the door of their chosen school in the form of a tuition fee. The consequence would be considerable family protection against inferior service. This was the main point urged by the early political economists. Its cogency meanwhile is measured by the anxiety of the current school monopoly to attack it immediately wherever it appears.

The Subsequent Retreats

Having made the first move in favor of family liberty, however, all the classical writers mentioned could not resist making what to them were minor exceptions to the rule.

Tom Paine

In his famous book The Rights of Man, first published in 1791/92, Paine agreed that the quantity of education was insufficient but the shortfall was due not to the unwillingness of parents to educate their children adequately, but to the simple fact of poverty. But poverty, in turn, Paine emphasized, was due almost entirely to excessive taxes on the poor. General taxation, and especially the excise, had been increasing substantially in the late eighteenth century. The land tax, paid by the aristocrats, in contrast had been falling. Just over one half of the total revenue went for servicing the huge national debt. The remainder went for current government expenses that Paine believed to be extravagant. And he insisted that money taken in taxation from average families was much more than enough to finance a basic education for their children. (Much of this revenue, incidentally, came from the poor rates.)

After producing an agenda for radical reduction of government expenditure, Paine set about discussing how to dispose of what he called the surplus. Instead of proposing simple reduction of taxes on the poor, to which the logic of his argument pointed, he advocated instead a conditional remission of taxes. The condition was that parents should send their children to school to learn reading, writing, and arithmetic. And who should monitor such a voucher system? Paine had no qualms in proposing that it be done by the minister of the church parish: The ministers of every parish . . . to certify jointly to an office, for that purpose, that this [educational] duty be performed.^[5]

After speaking up for the average man, therefore, Paine proceeded to indicate that ultimately he mistrusted him. The implication was that if simple tax reduction was resorted to, the people could not be depended on to spend enough of their increased disposable incomes on education. Yet Paine’s initial argument was that it was heavy taxation that was the main obstacle to private purchase of education. He had no evidence that the reluctance was due to basic family preferences. And even if it was, there remained the issue of liberty. Did Paine’s rights of man not extend to freedom to decide the type and amount of education for their children? Unfortunately, however, he failed to address this question.

Paine’s voucher scheme demanded schooling; yet this was not the only vehicle for education. Why then did he superimpose his own choice? And why should ministers of religion have the sole right to monitor the voucher program? Would they not increasingly modify the definition of education to become more and more in conformity with their particular religious creed? What constraints were there on the size of the special office that Paine wanted the ministers to report to? He appears to have paid no heed at all to the counsel of William Godwin. Godwin had warned about the potential growth of bloated bureaucracies that would be encouraged by late eighteenth-century proposals for national education.

Adam Smith

Smith’s famous book The Wealth of Nations (1776) argues that economic growth will best occur when natural liberty is respected and leads to specialization or participation in the division of labor. But when the division of labor reaches its fullest development, Smith tells us in his Book V, the worker becomes as stupid and ignorant as is possible for a human creature to become.

Smith’s forecast of the degeneration of labor is based on one condition: that government fails to take some pains to prevent it. The main task of government, he argued, was to secure the education of the common people. But since Smith explains that government in his own country had for a long time actually taken the necessary pains, the implication is that the road to cultural destruction, in Scotland, at least, was firmly closed and the potential nightmare scenario avoided.^[6] So, just like Tom Paine, Adam Smith reveals his mistrust of ordinary people when it comes to their duties to educate their children.

In his Glasgow Lectures of the 1760s, Smith is even more explicit. Once his market economy fully establishes the division of labor, The minds of men are contracted and rendered incapable of elevation. Education is despised, or at least neglected. . . . Having observed that, in contrast, people of some rank and fortune have money to afford education, Smith also declares: It is otherwise with the common people. They have little time to spare for education. Their parents can scarce afford to maintain them even in infancy.^[7] Here Smith falls into the same trap as Tom Paine. To maintain that poverty is the formidable obstacle tells us nothing about the real tastes of people for education. The only true test is to see what happens when poverty is removed. But in any case even if people would buy less education than Smith would like, his willingness to bring in government would appear to conflict with his famous principle of natural liberty.

Smith is inconsistent in yet another sense. His statement that parents are too poor appears to conflict with his parallel economic argument that wages per capita had been rising for two centuries, and further progress to higher stages of the division of labor via the invisible hand was expected to bring still higher rewards to all ranks of society. But if Smith expected real incomes to continue to rise, so would leisure, and so would the ability to afford and to enjoy more education.

It will now be helpful, momentarily, to step outside of the context of internal logic, and look at Smith’s different forecasts of workers’ fortunes in the light of evidence relating to the half century following his demise. First, his prediction of rising real incomes was clearly borne out. The general conclusion of economic historians is that in Britain in 1850 real wages were about double what they had been in the period 1801-4, which was just over a decade after Smith’s death in 1790.^[8] Also implicit in Smith’s predictions of rises in real incomes, to reiterate, are expected increases in leisure. Subsequent evidence, in fact, unambiguously reveals the steady decline in weekly hours of work since Smith wrote.^[9]

Did the income and leisure improvements of the common people lead them to increase their purchases of education in Britain after Smith’s demise and without substantial prompting by government? The major educational intervention in England and Wales did not come until 1870 when the Forster Act introduced government schools for the first time. Yet by 1869 most people in England and Wales were literate, most children were receiving a schooling and most parents, working-class included, were paying fees for it. And all this was well before schooling was government-provided, compulsory, and free.^[10]

The Scottish Act of 1696, which impressed Smith, laid down that a school should be erected in every parish and that teachers’ salaries be met by a tax on local heritors and tenants. This schooling, however, was not made compulsory by law; and neither was it made free. The parental fees made up a big part of the teachers’ salaries and were paid by every social class. Indeed, the Scots did not have free and compulsory schooling until about the same time the English did in the 1880s. The more Smith championed the Scots parochial school system, therefore, the more the implicit credit he was paying to working parents. Their action in voluntarily paying fees to purchase education at the parish schools was obviously a tribute to them in Smith’s own time despite his contrary statement in the Lectures that education would be despised after the division of labor was established.

More interesting still, it was the fee-paying private schools that were bearing the main burden of Scottish education in terms of the number of scholars. For every one Scottish parochial school pupil in 1818 there were two non-parochial school pupils. And the latter outnumbered the former by much more than two to one in the growing industrial areas such as Greenock, Paisley, and Glasgow—the very areas where Smith argued there was greater need for schooling.^[11]

John Stuart Mill

Like Tom Paine and Adam Smith, J.S. Mill also has the reputation of a serious advocate of freedom for the individual. In his celebrated essay On Liberty (1859), Mill asserted that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.^[12]

With regard to education, Mill scores many points with modern libertarians with his famous remark in his essay that A general state education is a mere contrivance for moulding people to be exactly like one another . . . in proportion as it is efficient and successful, it establishes a despotism over the mind, leading by natural tendency to one over the body.^[13]

It is usually forgotten, however, that Mill was equally critical of the alternative scenario: the free market in education. His reason was that the uncultivated cannot be competent judges of cultivation.^[14] In other words, market failure occurs in this case because persons requiring improvement, having an imperfect or altogether erroneous conception of what they want, the supply called forth by the demand will be anything but what is essentially required.^[15]

As to the empirical evidence of what the real world education market was like, Mill seems to have been as misinformed as Adam Smith. Mill protested that . . . even in quantity it is [in 1848] and is likely to remain, altogether insufficient, while in quality, though with some slight tendency to improvement, it is never good except by some rare accident, and generally so bad as to be little more than nominal.^[16]

Mill could not have read any national reports on education because the first full census of schooling did not appear until 1851, three years after he had written the words in the previous quotation. It is reasonable, meanwhile, to conjecture that he relied upon his circle of radicals and Utilitarians for his evidence, and especially on his colleague James Kay who had recently founded the Manchester Statistical Society (MSS). I have previously subjected the findings of the MSS on education to close analysis and have concluded that its measure of numerical deficiency in schooling in 1838 was seriously flawed.^[17] As for its findings on school quality, the primary criterion seems to have been moral instruction which, of course, involves considerable subjective and serious individual value judgment. Mill referred hardly at all to one of the major outputs of education, namely literacy. From the copious research on this issue that has accumulated since Mill’s time, R.K. Webb, a leading historian expert on this subject, has concluded that by the late 1830s (i.e., about a decade before Mill wrote his Principles), between two-thirds and three-quarters of the working classes were already literate.

Despite Mill’s dislike of general government provision of education (i.e., in government schools) he, like Paine and Smith, was willing to compromise. The first part of the compromise was his reconciliation to some government schooling. Though a government, therefore, may, and in many cases ought to, establish schools and colleges, it must neither compel nor bribe any person to come to them. A state school should exist: if it exist at all, as one among many competing experiments, carried on for the purpose of example and stimulus, to keep the others up to a certain standard of excellence.^[18]

It is interesting that without any evidence, Mill presumed that the state schools would always be the superior pacesetters. And to openly forbid government to bribe people to come to its schools is to hide the fact that they are financed by taxation. Some indeed would equate this arrangement with hidden bribery of taxpayers.

The second part of Mill’s compromise was his insistence that education should be made compulsory. Notice that he demanded compulsory education and not compulsory schooling. Furthermore, he proposed to support it with a system of enforcement of public examinations to which children from an early age were to be submitted: Once in every year the examination should be renewed, with a gradually extending range of subjects, so as to make the universal acquisition and what is more, retention, of a certain minimum general knowledge virtually compulsory.

Mill advocated Bentham’s system of examinations as the price to be paid for the right to vote. Strictly speaking this solution did not remove the power of the state over education, it only restricted it to the power of those officials who were to be appointed on behalf of the state to set the examinations. Mill thought that this would not matter so long as the examinations were confined to the instrumental parts of knowledge and to the examination of objective facts only.

The fact that Mill did not enter into further details as to what was to constitute a certain minimum of general knowledge, enabled him to escape many of the serious difficulties which lay beneath the surface of his plan. For instance, who was to determine the subjects to be taught? How would one choose between, say, elementary political economy and geography? Could powers of censorship be easily exercised? Suppose that certain individuals had aversions to certain subjects, who would be the arbiter? J.S. Mill himself, for instance, had a particularly strong objection to the teaching of theology and was insistent that national education should be purely secular. We have here, it seems, not so much the libertarian as the intellectual paternalist with noble intentions. Certainly his treatment of other people’s opinions on this subject seemed to contradict the spirit of Mill’s On Liberty as it is popularly conceived.

Finally, in his anxiety to judge ordinary people, John Stuart Mill made exactly the same logical error as his fellow libertarians Tom Paine and Adam Smith. The two latter stated that people were too poor to afford education and at the same time were culpable for not wanting it. Mill’s version of this non-sequitur went as follows: In England . . . elementary instruction cannot be paid for, at its full cost, from the common wages of unskilled labor, and would not if it could.^[19] How did he know?

Conclusion

Where education is concerned, Tom Paine, Adam Smith, and J.S. Mill were not full-blown libertarians. Rather they were liberators. Ultimately, they wanted to liberate the masses into a world of culture (their conception of culture) and into a realm of reason (their reason). In so doing they were all willing to make significant compromises that, for them, legitimized the intervention of government. And while their support of the free market led them to favor maintaining tuition fees at all times, they failed to foresee that the government bureaucracy they were willing to set afoot would swiftly abolish tuition, or rather substitute tax prices for conventional prices.

At this distance in time, another libertarian, and one who was a contemporary of Paine and Smith, seems to have been much more insightful and skilled in the art of prediction. William Godwin, who was a philosopher, not a political economist, wrote the following cautionary words in 1796: “Before we put so powerful a machine [education] under the direction of so unambiguous an agent, it behooves us to consider well what it is that we do. Government will not fail to employ it to strengthen its hands and perpetuate its institutions.”^[20]

1.   Malthus, Letter to Whitbread, 1807.

2.   J.R. McCulloch edition of The Wealth of Nations, 1828, note XXI.

3.   Ibid.

4.   Letter to H. Fawcett, 24 October 1869.

5.   Tom Paine, The Rights of Man (London: Everyman Edition, 1961 [1791]), p. 248.

6.   Smith also recommended government regulation such that proof of some basic level of education was to be the price of entry into skilled trades and professions. But he appears to have been content that the Scottish parochial system had already made most people literate. Smith also advised the inclusion of simple geometry and mechanics in the curriculum. There is no evidence, however, that this was widespread practice in the parochial schools.

7.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, reprinted in two volumes, R.H. Campbell, A.S. Skinner, and W.B. Todd, eds. (London: Clarendon Press, 1976), p. 784.

8.   R.S. Neale, “The Standard of Living, 1780-1844: A Regional and Class Study,” in Arthur J. Taylor, The Standard of Living in Britain in the Industrial Revolution (London: Methuen, 1975), p. 173.

9.   Joseph S. Zeisel, “The Workweek in American Industry 1850-1956,” Monthly Labor Review, 1958, pp. 81, 58.

10.   Edwin G. West, Education and the State (London: I.E.A., 2nd ed., 1970), p. xvii.

11.   Select Committee on the Education of the Poor, Parl. Papers, 1818, III. See also an account of this document in Edinburgh Review XCI, 1827, pp. 107-32.

12.   On Liberty (1962) Fontana edition, p. 135.

13.   Ibid., p. 239.

14.   J.S. Mill, Principles of Political Economy (New York: Augustus Kelley, 1969), p. 953.

15.   Ibid.

16.   Ibid., p. 956.

17.   Edwin G. West, “The Benthamites as Educational Engineers,” History of Political Economy, 1992, 24:3.

18.   Mill, On Liberty, p. 240.

19.   Ibid., p. 959, my emphasis.

20.   William Godwin, Enquiry Concerning Political Justice and its Influence on Morals and Happiness (London: 1796), p. 297.