To many, the Austrian and Chicago economists seem to be saying the same thing: markets are an efficient way of using scarce resources to best serve consumers; individuals know their own interests and circumstances better than government regulators and planners; political controls tend to distort supply and demand and the price system through which markets are kept in balance. In addition, members of both schools of thought have long warned that inflation and its negative consequences stem from government monetary mismanagement.

As a result, on the surface there seems not to be much difference between the two schools. Yet anyone fairly familiar with the Austrian and Chicago approaches knows that in fact they not only look at the world through significantly different conceptual lenses, they often are extremely critical of each other.

In his recent book, Vienna and Chicago: Friends or Foes?, Mark Skousen tries to explain the history of the Austrian and Chicago approaches, and critically evaluate their strengths and weaknesses. Skousen explains the beginnings of the Austrian school in the last decades of the nineteenth century, during which Carl Menger, Eugen von Böhm-Bawerk, and Friedrich von Wieser developed the theory of marginal utility and opportunity cost; formulated a theory of capital, investment, and interest; and undermined the foundations of Marxian economics. He then traces the contributions of such leading twentieth-century Austrians as Ludwig von Mises and F. A. Hayek in the areas of monetary and business-cycle theory, their insightful criticisms on socialist central planning, and their conception of the market as a dynamic competitive process.

The Chicago school developed later, in the 1920s and 1930s, out of the writings of Frank Knight, Jacob Viner, and Henry Simons, who were early critics of some aspects of Keynesian economics and of government planning. But the Chicago school only really flowered in the postwar era out of the contributions of Milton Friedman and George Stigler, who challenged, respectively, some of the rationales for macroeconomic and regulatory management of market activities.

For the remainder of the book, Skousen contrasts the two schools on a variety of topics, including methodology; inflation, business cycles and the monetary system; and government regulation and intervention. Somewhat irritatingly, Skousen concludes each section by declaring which school “wins the debate,” using the language of tennis: “advantage” Vienna or Chicago. While seeming to be a cute way to evaluate the two schools, it comes across as rather sophomoric. Also, it often seems that Skousen’s decision reflects his judgment about which school has been more influential among economists or in the policy arena. But the correctness of an idea is not measured, per se, by the number of its adherents. Alchemy and astrology have had wide followings, after all.

The core of the differences between the Austrian and Chicago schools is the question of how one tries to understand the world, including the market. Imagine that two objects are observed moving toward each other at a certain velocity. What can we predict about what will happen? Well, we can attempt to estimate their respective speeds and calculate when they are likely to collide, given the measured space between them.

There is nothing wrong with doing this. But if the two objects happen to be human beings, limiting the “facts” or “evidence” to these quantitative dimensions will leave out crucial features of the situation. For example, do these individuals view each other as friend or foe? The answer to that question alone will greatly influence what we predict as the likely sequence of events as they come closer to each other. (If foe, one of them might suddenly stop dead in his tracks and run in the oppose direction from fear.)

To analyze this situation requires the social scientist or economist to look beneath the quantitative surface to try to determine how the actors define the situation, including the meanings they see in their own actions and those of others with whom they may interact. A voluntary exchange and a coerced transfer may look the same to an observer. But they are certainly not the same when understood from the perspectives of the actors.

Unlike the Chicago-school economists, the Austrians have always insisted on emphasizing this “subjectivist” approach. This is partly due to the Chicagoans’ continuing belief (a subjective state of mind, for sure!) that “science” should be defined narrowly as the quantitatively measurable and predictable.

Skousen tries to reduce and ridicule the Austrian view by making it into a caricature of an “a priori deductive” approach that is both incorrect and unjust to the actual arguments that Austrians like Mises developed in great detail. Nor does Skousen do justice to the fact that Austrians, too, believe in “applied” economics, historical studies, and factual evidence. They just do “empirical” work differently from the Chicago economists—the Austrian approach tries not to forget that it is the course of human events that is being investigated.

He therefore too easily gives “advantage” to the Chicago school when comparing their contributions, for instance, in the area of government regulation. The Austrians focus on the entrepreneurial element of innovation and market coordination; they think of competition as a creative discovery procedure; and they view markets as processes of change and adjustment through time. To appreciate the power of the unregulated market, none of these aspects of the real “empirical” world can simply be reduced to econometric coefficients of correlation without losing essential qualities of the subject. It would be like trying to study man by looking only at the skeleton and ignoring the flesh, blood, muscles, nerve endings, and most especially, the mind that guides what the body does.

Skousen finds the most important Austrian contributions in the areas of money, inflation, the business cycle, and monetary institutions. This should not be surprising since these are the areas in which he has written the most over the years from an Austrian-oriented perspective. Friedman’s monetary contributions have basically followed in the Keynesian footsteps. While rejecting most of Keynes’s assumptions about the power of fiscal policy for stimulating the economy, Friedman accepted his “aggregate” approach of looking almost purely at money’s impact on prices, wages, and output in general.

The Austrians, on the other hand, have always focused on the more insidious effects of monetary expansion on relative prices and wages, and on demand, effects that can give a wrong twist to the entire economy.

Unfortunately, while an easy read and even entertaining in places, Vienna and Chicago fails to give the reader a fully balanced understanding of the Austrians or a sufficiently critical appreciation of the limits of the Chicago school.

David Henderson and Jeff Hummel have written a remarkably pro-Greenspan article, “Was Money Really Easy Under Greenspan?” (www.tinyurl.com/cuf3ug).  The authors overlooked several points that would undermine their portrayal of Fed chairman Alan Greenspan as an anti-inflationist and the best Fed chairman ever. (Better than Paul Volcker?) To conclude that Greenspan “oversaw relatively low and stable inflation” is surely missing the mark. Granted, the Consumer Price Index (CPI) rose “only” an average 3.1 percent a year during his tenure as Fed chairman (1987–2006), but I’d hardly call it anti-inflationary. Moreover, the CPI is a notorious price index aggregate that largely ignores price bubbles in areas such as real estate and the stock market. If you judge Greenspan by the value of the dollar—and certainly one of the missions of the Fed chairman is to defend the nation’s currency—then Greenspan witnessed a substantial overall decline in the value of the dollar against the hard European currencies and the Japanese yen. The gold price, another bellwether, declined during most of the Greenspan years—a plus—but then took off, doubling in price during Greenspan’s final years.

Messrs. Henderson and Hummel also largely ignored the frequent changes in monetary policy, from easy to tight and back again. As measured by the Fed’s discount-rate policy, he switched policies seven times in 19 years. A stable non-inflationary monetary policy is surely the sign of a good Fed helmsman.

Clearly Greenspan’s worst period was the cheap interest rate policies of 2002–04. The authors fatally underplay the role Greenspan played in cutting rates far below the natural rate, due to his unwarranted fear that the United States was facing a deflationary collapse a la Japan. As a practitioner on Wall Street, I witnessed firsthand the malinvestments that were caused by the Fed’s deliberate plan. (I find it remarkable that Messrs. Henderson and Hummel made no reference in their article to the Wicksellian “natural” rate of interest hypothesis, a fundamental factor in the Austrian theory of the business cycle.)

Mortgage rates and real estate prices were clearly affected by this Greenspan cheap money policy, and so were the pricing of REITs [real estate investment trusts], closed-end income funds, and the carry trade, which sold at huge premiums as a result of 1 percent interest rates. Investment bankers and hedge-fund traders were constantly borrowing short and investing long during this 2002–04 time period. Then when the Fed started raising rates sharply, REITs and closed-end income funds collapsed very quickly, and the economy fell apart.

In short, the authors failed to disaggregate, as the Austrians are always emphasizing.

But their biggest sin of omission was to ignore the monstrous excessive monetary growth in the BRIC countries [Brazil, Russia, India, China] and emerging markets. The monetary aggregates rose much faster in China and the emerging markets than the G8 nations. We live in a global economy, and that money had to go somewhere, and it not only went into the BRIC economies, but also they bought a large amount of securitized U.S. mortgage securities, and profited from the yield spread.

Did Greenspan’s low interest-rate policy contribute to the artificial mortgage boom? Despite his denials, it did very definitely. As the Economist states (“A Tale of Two Worlds,” May 8, 2008), “Apart from the Gulf states, few countries still peg their currencies to the dollar, but most try to limit the amount of appreciation. This means that as the Fed cuts rates there is pressure on emerging economies to do the same, to prevent capital inflows pushing up their exchange rates.” The worldwide easy money policies lead to worldwide asset bubbles, commodity inflation, and unsustainable economic growth.

Consequently: “Emerging economies were partly to blame for America’s housing and credit bubble. As China and Gulf oil exporters purchased American Treasury bonds in order to hold down their currencies, this pushed down bond yields and helped to fuel the housing boom. Low yields also encouraged investors to seek higher returns in riskier assets, such as mortgage-backed securities.”

Finally, I find it incredible that Messrs. Henderson and Hummel would defend Mr. Greenspan’s indefensible record as a bank regulator. The Fed’s charter requires the chairman to oversee bank management policies, and the reckless way that banks promoted subprime and Alt-A mortgages can be laid at the feet of a complacent Federal Reserve Board. Contrast his approach to Canada’s strict banking regulations, which categorically prohibited these shameless banking policies north of the border.

David R. Henderson and Jeffrey Rogers Hummel respond:

Mr. Skousen would “hardly call” Alan Greenspan’s average annual inflation rate of 3.1 percent “anti-inflationary.” Neither would we. Nor did we. As Mr. Skousen admits, we wrote that Greenspan “oversaw relatively low and stable inflation.” This is not perfect, as we noted in our article.

Mr. Skousen points out that the consumer price index “largely ignores price bubbles in areas such as real estate and the stock market.” True. The CPI measures the cost of living, not the value of assets. As for gold, the price on August 11, 1987, when Greenspan became Fed chairman, was $461.20 per ounce. It had risen to $568.75 by January 31, 2006, the day he left office. That’s an increase of 23.3 percent, or an annual average of only 1.2 percent, far below the average inflation rate.

Mr. Skousen insists on measuring Fed policy by the discount rate. We argued that even the federal funds rate, which commentators other than Mr. Skousen tend to use, is not a good measure and that the best measure is the growth of the monetary aggregates. Mr. Skousen does not challenge our argument; he ignores it.

As for the real estate boom, we never denied it. Nor do we deny that low interest rates contributed to that boom. Rather, we questioned the role of the Federal Reserve in bringing about those low rates, an argument that Mr. Skousen does not grapple with.

Mr. Skousen claims our “biggest sin of omission” was to ignore the “monstrous excessive monetary growth” in other countries. Well, yes. We were evaluating Greenspan’s policy, not the policy of other central banks.

Finally, Mr. Skousen faults Greenspan for not regulating banks more. Although we did write that Greenspan contributed to the “too big to fail” doctrine, our preference is still deregulation and, as we noted, ending the Federal Reserve.

Those who wish to read an extended reply to our critics can go to www.tinyurl.com/csuae8 for details.

Americans have lived with the welfare state for so long—more than 70 years—that for most, it is simply a fact of life. Asking whether it is justified would seem about as pointless as asking whether rain is justified. Furthermore, among the relatively few people who might be inclined to ponder the ethics of the welfare state, most subscribe to philosophies (for example, egalitarianism, positive-rights liberalism, and communitarianism) that find no fault with our panoply of welfare programs. Indeed, they generally favor expanding welfare.

Those of us who oppose the welfare state therefore have a Herculean task before us if we want to see voluntary programs replace coercive government ones. Fortunately, we have just gotten some help.

Professor Daniel Shapiro’s book, Is the Welfare State Justified?, makes a strong effort at persuading nonlibertarians that, based on their own philosophical principles, they ought to give up their support for government programs such as Social Security and Medicare. It is a first-rate effort that should get intellectually honest defenders of the welfare state saying, “Well, that is a good point. . . .”

Readers should understand, however, that this is a work of scholarship. If you’re simply looking for a few anti-welfare anecdotes to use against political opponents, you will have to go elsewhere. Throughout his analysis, Shapiro’s writing displays a refreshing humility; he isn’t looking for quick “gotcha!” points, but grapples earnestly with opposing perspectives.

Perhaps the reason Shapiro is so successful is that he used to be one of those liberal welfare advocates. But then he began to consider the libertarian critique. He writes, “Once I realized how free markets really worked, and how government programs that were supposed to realize their seemingly compassionate or just goals didn’t really do so, I realized that the attitude of distrust I had toward government power and the view I had about the value of individual freedom applied to economic as well as personal matters.” For quite a few years Shapiro (who teaches philosophy at West Virginia University) has been writing articles with titles like “Why Rawlsian Liberals Should Support Free Market Capitalism.” In this book he brings decades of professional thought to bear on this important project.

All right, then—is the welfare state justified? No, but a short review can’t do justice to Shapiro’s work. He covers a great array of philosophical arguments, objections to arguments, and rejoinders to objections.

Let’s briefly consider health care. Overwhelmingly, those on the political left reject free-market provision of health care, contending that everyone has a right to “adequate” medical services and concluding that we must adopt some version of a single-payer system to effectuate that claimed right. Shapiro responds that every sort of health-care system must deal with the rationing problem, then strongly argues that the free market more fairly solves that problem than any politically driven system can.

Similarly with old-age insurance and support for the indigent, Shapiro carefully shows why voluntary and market-based systems are preferable for meeting the needs of people—preferable from the standpoint of those who are inclined to believe that government does a better job.

In my view, Shapiro’s most devastating argument against all forms of government welfare is his observation that there is no such thing as a governmental welfare guarantee. Here is what he writes:

Exactly! It is merely an illusion that government can create rights to welfare. All that politicians can do is to promise that they (including future officeholders) will use their coercive powers in an effort to deliver money, medical care, or other things to certain members of the population. But political promises are completely unenforceable, unlike contracts. That’s one of the main reasons why Shapiro regards individual saving for retirement, medical care, and other needs as better than reliance on the state. With respect to money you have earned and saved, you really do have rights—contractual rights. You aren’t just a supplicant begging politicians to tax others for your benefit.

A splendid book that throws welfare state advocates on the defensive.

George Leef is book review editor of The Freeman.

In Milton Friedman: A Biography, Lanny Ebenstein presents a highly readable account of Friedman’s life and an introduction to his economics, including his advocacy of libertarian ideas and government reform. The book is based on published material and personal interviews, and it was completed shortly before Friedman’s death in late 2006. The appendix contains a “Bibliographical Essay” further elaborating on Friedman’s life, work, and influence.

The first chapters describe Friedman’s youth and early career. His family life, the TV program and book Free to Choose, his Nobel Prize, the Friedman Prize, and his work as adviser to Barry Goldwater and Presidents Nixon and Reagan are all discussed, but the book’s major focus is on Friedman’s mature career (1946–1976) at the University of Chicago. This is followed by a discussion of his life as a public figure following retirement.

Personal interviews reveal a number of interesting tidbits about him that will be new to most readers. For example, his family was apolitical and for much of his early life he was not much interested in politics.

Friedman is known worldwide now for his view that “Inflation is always and everywhere a monetary phenomenon.” His early views on inflation, however, were quite different. In congressional testimony on how to avoid inflation during the early years of World War II, he focused on taxation as a way to reduce consumer spending.

Early on he proposed the free market as the most suitable vehicle to achieve “political freedom, economic efficiency, and substantial equality of economic power,” even though he supported the welfare aspects of Roosevelt’s New Deal as a young man. At the time the conventional wisdom among the public, as well as economists, was that government could manage the economy better than the market order could.

Friedman identified the Chicago school of economics with three attributes—efficacy of free markets, skepticism of government regulation, and emphasis on quantity of money in producing inflation. He contended that the University of Chicago was never primarily free market in outlook, but only seemed so; the distinguishing characteristic of Chicago “was not the presence of market-oriented scholars at Chicago but rather the absence of them elsewhere.”

Friedman’s A Monetary History of the United States, 1867–1960, coauthored with Anna Schwartz, was a major critique of Keynesianism. That work suggested that the economic turmoil of the 1930s was not due to excesses in the market order, but Federal Reserve policy that allowed the money supply to fall, which turned what might have been an ordinary recession into the Great Depression. This book had an important effect on economists’ views on the appropriate role of government generally, but Ebenstein says little about the policy implications drawn by Friedman from the pathbreaking work in A Monetary History.

For much of his professional career Friedman was viewed as a heretic on the fringe of economics. It is hard to overstate the hostility to his policy ideas when Capitalism and Freedom—a libertarian guide to public policy—was published in 1962. It was reviewed only by the American Economic Review, even though accessible to a wide audience.

Ebenstein stresses Friedman’s philosophical debt to F. A. Hayek, a colleague at Chicago from 1950 to 1962. Friedman considered Hayek the most important intellectual figure in the worldwide movement toward freer markets. Although each favored freer markets and less government, Hayek disagreed with Friedman’s monetarism and his positivist approach to economics. Friedman, in contrast, considered his work in positive economics to be his primary intellectual contribution. Ebenstein discusses the shortcomings of the Hayekian subjectivist approach to economic analysis, but a similar discussion of the limitations of Friedman’s positivist approach would have been informative.

The book’s shortcomings mainly relate to what is omitted—discussion of Austrian, Keynesian, and other critiques of Friedman’s work. It would have been interesting, for example, if Ebenstein had queried Friedman on his response to the Austrian position that governmental control over the supply of money and credit is so dangerous to economic stability that we would be better off if we could replace the Federal Reserve with some market alternative. Friedman once said that the gold standard led to the waste of resources in mining gold, but even if that is a waste, how does it compare with the damage done by governmental manipulation of money and credit?

Friedman’s libertarian ethical view of the world was rooted in John Stuart Mill’s On Liberty. Most readers will be surprised to learn that Mill put forth the idea of school vouchers almost a century before Friedman. Friedman’s views on the financing of education evolved over time, and eventually he came to view vouchers as a means, not an end; by 2005 his ideal was government completely out of education.

Readers interested in Friedman’s ideas, work, and personal life will gain by reading this book.

E. C. Pasour, Jr. is Professor Emeritus of Agricultural and Resource Economics at North Carolina State University.

“If you’re depressed about the state of politics these days, read The Commanding Heights. . . . Step back and look at the big picture, a picture that spans the whole planet and comes into focus over decades. Look at the big picture and see that our side—the side of human freedom—is winning.” This review, written by Brink Lindsey in Reason in 1998 could be the first paragraph of his The Age of Abundance, a book that celebrates the virtues of liberty.

Lindsey, vice president for research at the Cato Institute, documents the advances in human freedom that Americans have enjoyed during the past century. He sees this age as one in which “most Americans were insulated from nature by an enormous edifice of human-created technologies and institutions.” America’s “age of abundance,” he contends, is a product of and a contributor to Western modernity, whose four key elements are: reliance on open-ended experimentation rather than received knowledge; reliance on free markets and the trust required for their functioning rather than on command and personal ties; a political system in which government (at least in principle) arises from and answers to the people rather than despotism; and a social life in which individual and group advancement challenges traditional stratification.

In one of the book’s many felicitous phrases, Lindsey asserts, “Despite all of the talk of raging ‘culture wars,’ most Americans are nonbelligerents.” He concludes that most Americans are libertarians, happy to enjoy the economic fruits of the market system and willing to accept, if not embrace, the social diversity that system engenders.

Lindsey acknowledges the existence and importance of the culture wars. Indeed, he states the dilemma of the libertarian majority in an unpromising fashion: “The prevailing ideologies of left and right are mirror images of one another. . . . The . . . left celebrates mass affluence’s diversity and inclusiveness, while lacking due appreciation for the institutional and moral framework that sustains and advances progressive values. The right . . . defends that framework, but does so on the basis of dogmatic beliefs that remain unreconciled to mass affluence’s cultural openness. [Politically, those in the libertarian majority must] choose which illiberal bedfellows they dislike least.”

The disproportionate influence of voices on the left and right militates against the articulation of the liberal position that Lindsey thinks those in the upwardly mobile middle class would favor.

As a result, “the modus vivendi that has emerged . . . is an unspoken and unloved compromise rather than a well-articulated and widely embraced consensus.”
Here the author might have fruitfully incorporated some insights offered by Bryan Caplan in his book, The Myth of the Rational Voter. Caplan’s analysis warns that the problem is not just lack of confidence. Rather, the average voter’s economic sophistication compares to the average flat-earther’s geographic sophistication. This endemic lack of sophistication, coupled with the strength with which statists hold on to their views, suggests that Lindsey’s admirable attempt to show the way to a truly liberal society will convince too few.

The book’s generally excellent review of history suffers from a related pair of weaknesses. His treatment of labor reads like New Deal court history. “Confrontations between capital and labor were frequently bloody,” says Lindsey. Then he cites cases that actually show that the violence was among laborers: “On May 3, 1884, labor trouble . . . sparked a confrontation between locked-out workmen and strikebreakers.” The ingrained notion that workers and capitalists are opponents is an obstacle to a more liberal society, but unfortunately Lindsey gives it some support.

A second point is that much of the advancement by minorities before 1950 is underplayed. Thomas Sowell has shown that economic progress among blacks was substantially greater prior to the Great Society programs aimed at assisting them, but he isn’t mentioned. This early progress strongly backs Lindsey’s thesis that freedom works.

Readers, libertarian or otherwise, will find The Age of Abundance a pleasure to read. Almost every page contains at least one phrase that either amuses or enlightens—sometimes both. Entertaining anecdotes and witty writing pepper the book throughout. On a single page, for example, Marilyn Monroe, Hugh Hefner, Peyton Place, Brigitte Bardot, and “Itsy Bitsy Teenie Weenie Yellow Polka Dot Bikini” appear. Lindsey also weaves together disparate and seemingly unrelated events, such as the “Human Be-In” in Berkeley and the founding of Oral Roberts University in 1967. These and other memorable illustrations add to the considerable enjoyment of this book.

J. Wilson Mixon is Dana Professor of Economics, Emeritus, Berry College.

It is a rare book that treats readers—even those who’ve never taken economics—to a comprehensive understanding of the forces and policies that ultimately determine prosperity and liberty for themselves and future generations. The Big Three in Economics by Mark Skousen accomplishes that, supplying essential historical perspective on the best-known names and evolutionary developments in economics.

This fascinating study focuses on the luminaries that have dominated economic conversations and debates since 1776. Adam Smith’s eighteenth-century Wealth of Nations inquires into and documents the causes of wealth and prosperity. Karl Marx’s nineteenth-century Das Kapital is a treatise on victimization by an economic system rooted in individual property rights and “natural liberty.” It calls for centralization of authority in government that would facilitate redistribution of income and wealth. J. M. Keynes’s twentieth-century General Theory outlines a framework to justify specific policy prescriptions for reestablishing systemic stability and maintaining economic security during business cycles.

Not only do Skousen’s succinct examinations of the “Big Three” clarify the principles of economics for unsophisticated readers, they also furnish insights into and resonate marvelously with 2008′s election-year polemics. The entire book crystallizes basic economic issues and delivers the intellectual tools to differentiate rhetoric from reality. For example, during 2008 alone, we’ve had the spectacle of one presidential candidate labeling the oil industry’s barely average profit margins “egregious,” while the other candidate (along with Congress and various regulatory bureaucracies) fingers so-called “oil speculators” for possible criminal investigations. Thanks to Skousen’s research and dozens of prescient quotations, the curious investigator—layman or Ph.D. economist—can separate hyperbole and scapegoating from objective analysis.

Equally enlightening, Skousen surrounds Smith, Marx, and Keynes with their contemporary and historical disciples, who served to reinforce the message. An excellent example of this “reinforcement” effect, which helped Adam Smith’s economic principles win the day, is the work of Jean-Baptiste Say.

Despite its title, the book isn’t exclusively about Smith, Marx, and Keynes. It describes the influence of David Hume and the French Physiocrats on Adam Smith; the impact of Reverend Thomas Robert Malthus, David Ricardo, and Friedrich Engels on Marx; and the works of Alfred Marshall plus the English marginalist school, which provided the broad shoulders on which Keynes stood.

Skousen is at his best when he describes the lives of the three economists. For example, we learn the personal story of Marx and his life as a writer-agitator-
theorist. At one point, Skousen quotes Marx’s mother who complained: “If only Karl had made capital instead of writing about it!” Several documents from Marx’s pen are so shocking they cannot be reproduced in this review.

By acquainting us with the dichotomy between what Marx envisioned and modeled versus how he behaved, Skousen’s manuscript becomes a true guidebook. Beware hypocrisy, the author seems to say. Scrutinize those who expound elaborate economic theories and then violate them at their earliest convenience. Marx condemned stock-market trading yet indulged fully in the buying and selling of shares. While excoriating the capitalist system, he exploited the accumulated wealth of his in-laws, father, and closest associate.

An important spin-off from this three-century tour of economic thought is the growth of and respect for economics as a science. A particular strength of the book is how Skousen traces the continuity of economic challenges and problem-solving across the centuries. Readers will see how advances in economic thinking made it possible for later economists to resolve questions that befuddled Smith, Marx, and Keynes. Moreover, readers will be surprised by how many of today’s populist political campaign slogans (such as “change” and “race to the bottom”) were common parlance more than 150 years ago.

Of the many moments of delight and edification, I especially enjoyed Skousen’s elegant construction of Milton Friedman’s refutation of Keynesian theory and its so-called “revolution.” Contributions largely from Friedman’s Chicago School disciples and other Nobel laureates conclude the final chapter on a hopeful note. With overwhelming relevance to our nation’s current economic challenges, Skousen recapitulates Adam Smith’s fundamental theme underscoring the prescription for growth and material well-being of nations: “Peace, easy taxes, and a tolerable administration of justice.”

David Littmann is senior economist with the Mackinac Center for Public Policy.

To the Editor:

I liked Scott McPherson’s article ["Private Road to Freedom," April] but was somewhat surprised that he made no mention of the fact that private toll roads were all this country had when roads were first developed. It was only when local governments started to interfere by insisting that certain politically connected “friends” be granted free passage and . . . limiting the amount of toll charged that toll companies started to lose money, eventually causing most to go out of business or into bankruptcy, “forcing” states to take over. This is how government roads came about.

-William Vandersteel

Alpine, New Jersey

Scott McPherson replies:

Mr. Vandersteel raises some excellent points that only strengthen the one I made in the piece: “Ideally, government would never have been in the road construction business in the first place.” The point about local governments’ using road construction to help their “friends” is also well taken. When the issue of private roads is raised in the context of legitimate government functions, opponents can always be counted on to say that the interstate highway system was built “for national defense.” It is more likely that the interstates were constructed to appease trucking interests. The issue of government road construction’s forcing private roads out of operation is another major factor. Like any other endeavor, the private sector cannot adequately compete with government, as it must work for its customers while government can just tap the taxpayer. Eminent domain also allows government to create a situation favorable for its roads over private alternatives. A private road constructor would have to work hard to acquire the land to build his road, while government just takes what it wants. Hardly a level playing field. In the final analysis, it is not at all in question that roads–good, quality, affordable roads–would be in place without government interference.

Private Drug Testing and Freedom

To the Editor:

An excellent article on privacy and I appreciate the info on the Financial Privacy Report [Mark Skousen, "The Right to Be Left Alone," May]. One question, however. How in the world did “Mandatory drug-testing of students and employees is becoming commonplace,” without any reference to the constitutional principle of “probable cause” get included? Employment is a private contract and does not involve the government. Although there is no reason to test my employees, some employers that hire for positions of drivers and equipment operators (and other positions, as well) have every right to require tests if it will enable them to reduce accidents, worker comp costs, self-insured medical costs, and liability costs, if they so desire. It is a private contract and the employees can choose to work elsewhere, if the terms are not satisfactory. By the same token, if the tests are too expensive from a cost/benefit standpoint or if enough potential employees do not wish to voluntarily relinquish their privacy for employment, the testing would not be required. This would also hold true if employed by the government.

Unfortunately, government education is, in essence, compulsory so a problem exists for students. However, the same concept would apply to private schools and the policy should be left to the discretion of the schools. The parents and adult students would have a choice as to which schools had what policies and would make their decisions accordingly.

-Doug Davis

Jacksonville, Florida

Mark Skousen replies:

Well, you do have a point. Drug testing by private companies should be their right without regard to “probable cause.” However, I suspect that many companies’ policies are mindless imitations of government policies, and that’s tragic. How many company officers are aware of the Fourth Amendment and the concept of probable cause? I would suggest that after they are trained in the basics of individual rights, if they still want to impose universal drug testing, then fine, let them do it. But I suspect that fewer companies would do so if they were properly educated in constitutional rights.

Serious about Recycling

To the Editor:

As a libertarian who also recycles, I want to respond to Donald Boudreaux’s May column, “I Recycle.” If recycling something actually causes more damage to the environment than dumping it in a landfill, I would agree with not recycling it. However, monetary costs, especially labor, should not be a consideration since they are arbitrary and artificial when compared with true impact on the planet. Using paper plates to make your case was unfair since no one proposes to recycle them. Try picking on the huge volumes of newspaper that are dumped in landfills every day or cans and bottles. It’s just not right to use something one time and then throw it into a landfill when it could be used many times or recycled. It’s not an elegant system for a civilized people. If it’s cheaper to use virgin materials than to recycle, it may be that government is subsidizing the virgin-material business. Even if it is not, sometimes the cheapest way is not the wisest.

-Nick Kyriazi

Pittsburgh, Pennsylvania

Donald Boudreaux replies:

Nick Kyriazi argues that relying on market prices to guide people’s recycling decisions leads to poor environmental outcomes because such prices are “arbitrary and artificial when compared with true impact on the planet.”

I disagree. It is easy to catalog reasons why actual market prices diverge from what they would be in a world that is textbook-ideal. But sound theory and experience tell us that market prices remain by far the best available guides on how to act and use resources. Mr. Kyriazi assumes he knows the true impact from failing to do more recycling and that this impact justifies more recycling. But he cannot know these things. It is fundamentally impossible to make that determination in the abstract-impossible to know how much space is appropriately used for landfill, how much each person’s time is worth, how scarce are the other resources used to recycle materials, and how scarce are the countless inputs used to produce outputs.

As arbitrary and artificial as market prices might be, they are much less arbitrary and artificial than the hunches and even engineering evaluations of the costs and benefits of recycling. Market prices remain the best available guides for recycling decisions.

Of course, we should do what we can to improve prices by ridding markets of political interference. But the fact remains that regardless of how imperfect market prices might be, only they can provide a reasonable idea of how to act with respect to the environment.

To the Editor:

[The March column opposing insurance parity for psychiatric treatment by] Thomas Szasz . . . shocked and disappointed me. . . . Any close relative (myself included) of a person who was formerly seriously mentally ill—with all the unwanted auditory and visual cacophony—and was returned to normal rational thought (after years of “talk therapy”) in a short time by one of the newer “atypical” antipsychotic products would be hard-put to be persuaded that there was no cause and effect relationship in the brain between disease and treatment.

I am a retired physician, though not a psychiatrist, but have practiced in other fields long enough to recognize pathological abnormality when I see it. I would submit that the same relationship is also seen by the majority of practicing psychiatrists in this day and age. . . .

It should be pointed out that many illnesses have been around for years before the cause and treatment—through research—have been uncovered. . . . To claim that mental illnesses were factitious constructs of some psychiatrist’s desires for greater incomes (as some opponents of medical management declare) is . . . specious. . . .

The brain in a living human being does not lend itself to easy exploration and experimentation for obvious reasons. The newer technologies such as MRI and PET scans and perhaps spectrographic analysis of chemical neurotransmitters in the brain however are making great strides and hold great promise in not only clarifying etiological aspects of brain disease but also in refining methods of treatment.

Alan B. Fidler, M.D.

East Troy, Wisc.

Thomas Szasz replies:

I do not doubt that many persons, whether diagnosed as mentally ill or not, suffer and make others suffer, or that taking drugs can change a person’s behavior. Anyone who has taken a drink knows that. However, with due respect to Dr. Fidler’s medical skills, I disagree with his statement: “[I] have practiced . . . long enough to recognize pathological abnormality when I see it.”

As a physician, Dr. Fidler must know that there are no objective diagnostic tests to confirm or disconfirm the diagnosis of any mental illness. The diagnosis of the illness, as well as recovery from it, rests solely on the patient’s self-report or the reports of others about him.

Furthermore, if an objective blood or other biological test were developed to ascertain the presence or absence of a “mental illness”—such as there is, for example, for malaria and melanoma—then the condition diagnosed would cease to be a mental illness and would be classified, instead, as a bodily (infectious, neoplastic, neurological) disease. In which case the patient could no longer be incarcerated and treated against his will for having the disease; the illness would be diagnosed and treated by infectious disease specialists, radiologists, neurologists, or surgeons, not psychiatrists; and the debate about “parity” would disappear: Health insurance policies would cover the treatment of such newly discovered brain diseases the same way they now cover the treatment of brain abscess, glioblastoma, Parkinsonism, and other diseases of the central nervous system.

Is Economics a Science?

To the Editor:

Milton Friedman writes in Ideas on Liberty/FEE Today (“My Five Favorite Libertarian Books,” April 2002): “First, Adam Smith’s The Wealth of Nations. This book, published in 1776, founded economic science.”

Economics is not a science. . . . Mortimer Adler wrote: “The conduct of human life and the organization of human society depend on our answers to such questions as what happiness consists in, what our duties are, what form of government is most just, what constitutes the common good of society, what freedom men should have, and so on. Not one of these questions, nor any questions like them which involves right and wrong or good and bad, can be answered by science, now or ever.”

. . . Economists and psychiatrists study human behavior. The study of human behavior is not a science. Ideas on Liberty is not a scientific journal!

—David Herman
by e-mail

Mark Skousen replies:

Your statement, “Economics is not a science,” reminds me of the Methodenstreit debate between the German historical school and the Austrian school of economics in the nineteenth century. According to the Germans, there could be no scientific economic “laws” outside of politics, custom, and the legal system. In his classic work, Grundsätze, translated as Principles of Economics, Carl Menger demonstrated that economics should be a science and that universal laws of economics do exist. In his book, he enunciated the law of imputation and the principle of marginal utility, among others. It was a tour de force. Eugen Böhm-Bawerk, Ludwig von Mises, F. A. Hayek, and later the American economists Murray N. Rothbard and Israel M. Kirzner, extended Menger’s scientific breakthroughs into capital theory, monetary policy, business-cycle analysis, and other fruitful studies.

Of course, the Austrians do not have a monopoly on scientific laws and analysis. Other economists, including Adam Smith, Alfred Marshall, and Milton Friedman, have made extensive use of economic analysis and principles to come to significant conclusions about human behavior. The Chicago School, led by Frank H. Knight, Milton Friedman, and Gary Becker, has made amazing advances in the application of economic laws to human behavior, especially the use of the downward-sloping demand curve as an incentive/disincentive tool. Chicago economists have demonstrated clearly that raising the cost of criminal behavior reduces crime, that lowering the price of divorce increases the number of divorces, and so on.

Austrian economists have noted correctly that the science of human action (what Mises called “praxeology”) is distinct from the physical sciences. Economics may be more subjective and qualitative than the physical sciences, but it is still a science.

Having said that, I agree with Mortimer Adler that true science cannot define happiness, justice, and morality. As Max Weber noted, economics must be “value free and objective” if it is ever going to succeed as a pure formal science. Economics may tell us the effects of a higher minimum wage on the employment of the poor and minorities, but it can’t say whether such a law is good or bad. Economics may tell us how to get rich, but it can’t guarantee happiness.

Insurance and the Price of Drugs

To the Editor:

[William L. Anderson's March article, “Prescription Drugs and Advertising,” is an] excellent article with one small error. Third-party insurance payments in the private sector do not drive up the price of drugs, any more than third-party insurance payments on auto, home, business, or life insurance do. The cost is shared, paid for by the premium payments. The overall amount of dollars available is the same. There are no extra dollars to bid up the price of prescription drugs.

—John Hodde
Colville, Wash.

William Anderson replies:

Mr. Hodde raises an interesting point, but one that is mistaken, I believe. For one, the purchase of drugs is not the same as purchasing insurance. We purchase insurance in the hopes of not having to use it. However, if third parties such as employers are paying for insurance, there is no doubt that we will purchase more of it than we would if we were expending our own personal funds.

The advent of third-party payments in medical care, be they for drugs or other medical treatments, has had the effect of funneling more money into the system than otherwise if individuals were spending the money directly. The incentive structure is different, and we can expect different behavior.

Who Should Vote?

To the Editor:

Though I virtually always concur with Walter Williams, it is my disagreement with him that has motivated me to write. . . . (“Who Should Vote,” January 2002). The analogy between the corporate stockholder as voter and the citizen as voter is misleading and borders on fallacious. That both may have financial considerations in their voting patterns says nothing about the intensity of those considerations. While growth in earnings is likely to be the prime motivator for the voting patterns of corporate stockholders, growth in personal handouts is not necessarily what primarily motivates citizens’ voting behavior. Anecdotal and concrete evidence abounds suggesting that many citizens vote on what the voters perceive to be non-financial issues: abortion, religion, free speech, ethnicity, etc. In short, there are myriad reasons why citizens vote in particular ways.

Though no doubt true that some individuals vote for candidates who the voters perceive will enhance their own pocketbooks, this is not a phenomenon possessed only by the non-taxpaying public. The poor are not the ones sending armies of lawyers and lobbyists to Washington in search of favors. Removing some citizens from the voter rolls would not end wealth redistribution; it would merely alter the patterns of distribution.

The non-taxpaying voting public is not the problem. Leaving the decisions to taxpayers will solve nothing. For every taxpaying Reagan, there is a taxpaying Kennedy. The problem, which Williams ultimately recognizes, is a Congress that doesn’t care if it passes unconstitutional laws and a judiciary that doesn’t care to enforce the Constitution.

We may not all have a stake in whether or not General Motors returns a profit next quarter but, as citizens, we all have a stake in our freedom and the direction our government takes.

—Claire Bessonette
Key Biscayne, Fla.

To the Editor:

While I do not favor eliminating the Electoral College per se, Lawrence Reed (“Ideas and Consequences,” March 2001) is incorrect in a major point—and it defines the need to modify the rules by which the College operates.

Mr. Reed states, “[T]he fact that a candidate must win a majority in the Electoral College means that he cannot focus all his resources in only a few large states.” This was very much put to the lie by the last election. By just looking at the state and county breakdowns of both electors and election results, it is painfully obvious that a candidate need win far less than half of the 50 states to “win” a majority in the Electoral College, a situation nearly mirroring a straight democratic/popular vote. By specifically focusing on and creating a win in the east- and west-coast populous states (hardly “non-regional” ideologically), a candidate can utterly ignore everyone else but Texas.

No, we do not need to, nor should we, eliminate the Electoral College. Mr. Reed’s reform would be a good legalism to address, but to adequately prevent an election dictated of, by, and for the coastal elite during a “close” race, we should also caveat the process to include a provision for shifting the balance of the vote in favor of the candidate who won a plurality of states (or perhaps counties, should there not be a plurality of states). In those circumstances, such a systemic change would provide a better “sense of the nation” and better “national” (versus “coastal”) representation in the electoral process. To do otherwise, either with the abolition of the College or maintaining the status-quo, courts the specter of leaving the heartland with no practical say in electing an executive.

—Bryan Potratz

Spokane, Wash.

Lawrence Reed replies:

In hindsight, given what we now know of how the election turned out, Mr. Potratz’s point has merit, but our difference is more one of degree than of substance. The Electoral College does not eliminate the temptation for candidates to focus on a few large states, but it does ameliorate it greatly. Indeed, not knowing how the electoral count would ultimately fall, neither one of the major party candidates actually ran a campaign aimed at only a handful of states. Both of them spread their attention across the great majority of states. Eliminate the Electoral College and you would vastly accentuate the value of a strategy that focuses on only a few.

A Question of Pensions

To the Editor:

My job as a pension actuary consists of calculating the liabilities of private-sector defined-benefit pension plans, such as those criticized by Mark Skousen in his article “Social Security Reform: Lessons from the Private Sector” (March 2001).

While I believe that there is a place for 401(k) plans, I also believe that a 401(k) should generally be a supplement to a defined-benefit pension plan, which should be the “anchor” of any medium or large employer’s retirement program. Briefly, here are my reasons:

1. In a defined-benefit plan, the employer bears the investment risk. In a 401(k), the employee bears this risk. While this may seem a disadvantage during periods when investment returns are high (such as the recent past), we may be about to see just how much of an advantage (to the employees) a defined-benefit plan can be to employees when the market goes south.

2. While Mr. Skousen is correct that an employee leaving his job can take his 401(k) money with him to an IRA, he fails to mention that the employee can also take this money in cash (admittedly, after paying hefty taxes) and spend it, which hardly helps to make his retirement secure.

3. Mr. Skousen’s point about short-service employees possibly not having “vesting rights” when they terminate employment is as true for a 401(k) plan as for a defined-benefit plan. While the employee’s own contributions to a 401(k) are always 100 percent vested (as are his own contributions, if any, to a defined-benefit plan), this is not the case for employer contributions. (Many, if not most, 401(k) plans consist of both employee and employer contributions.) The rules (set out in the Internal Revenue Code and ERISA) are exactly the same for employer contributions to a 401(k) plan as they are for defined-benefit plans.

4. Even if a retiree (or an employee who leaves employment before retirement) uses his 401(k) money for the purpose for which it is intended, there is the distinct possibility, given today’s increasing longevity, that he will outlive his money. This cannot happen with a defined-benefit plan, which promises a monthly income for life (and perhaps beyond, in the form of a pension payable to the employee’s spouse after his death).

I agree with Mr. Skousen that the rules surrounding defined-benefit plans that have been propounded by government are more complex and detailed than they need to be. However, arguing from that that defined-benefit pension plans are always and everywhere inferior to 401(k)-type retirement vehicles is equivalent to throwing the baby out with the bath water.

—Kenneth T. Pawulski

Amarillo, Texas

Mark Skousen replies:

I’m afraid Mr. Pawulski is letting his professional interest as an actuary overrule common sense about corporate defined-benefit plans. They just can’t compare to the simplicity, cost, and flexibility of 401(k) plans. He is correct in saying that the employer bears the investment risk in a defined-benefit plan, and that with such a corporate-funded plan, the employee/retiree cannot outlive his money. But that’s the very source of the problem I raised—the potential huge unfunded liabilities corporations (and the federal government) suffer from with these defined-benefit plans. That’s why corporations are switching in droves to defined-contribution plans, such as 401(k) plans. I should also add that 401(k) plans do offer some advantages to employees over defined-benefit plans; for example, they offer the possibility that an individual employee can vastly outperform the extremely conservative investment strategy corporate fund managers traditionally take. Instead of investing solely in blue-chip stocks and bonds, employee investors can often invest in more aggressive growth stocks.

We will print the most interesting and provocative letters we receive regarding Ideas on Liberty articles and the issues they raise. Brevity is encouraged; longer letters may be edited because of space limitations. Address your letters to: Ideas on Liberty, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533; e-mail: iol@fee.org; fax: 914-591-8910.

To the Editor:

Mark Skousen’s “Imperial Science” (January 2001) dismissed the great impact of co-operative efforts between economists and researchers, scientists, and authors from other disciplines. In fact, such cooperative interdisciplinary work is now commonplace. Economists have at least as much to learn from, as they have to contribute to, other disciplines—a sentiment omitted in the target piece.

“Imperial,” as relating to empire, domination, and subjugation, is a word that doesn’t contribute to an understanding of the depth of shared knowledge emerging from the interplay among economic, evolutionary anthropology, biology, cognitive psychology, and neuroscience disciplines. These other disciplines use economic concepts developed independently of the economics profession. Examples include optimal foraging and cultural and biological notions of fitness, the latter also recognized by F. A. Hayek.

In evolutionary biology, the study of primate communities (in the wild and in captivity) provides parallels with the study of incentive structures and patterns of interaction in humans. The work of John Tooby and Leda Cosmides, evolutionary psychologists who are investigating aspects of cooperation in two-person exchanges and in small groups, suggests the innate human tendency to punish those who are regarded as cheaters on implicit social exchange contracts. We interpret these strategies as showing the spontaneous emergence of property-right enforcement (the endogenous policeman). Evolutionary anthropologists such as Kristin Hawks, Hillard Kaplin, and Kim Hill are studying extant hunter-gatherer societies and are documenting the extent of exchange based upon reciprocity when an obligation is not discharged with immediate payments in money, but deferred voluntarily to a later time when favors are returned.

Experimental economists refer to this as “personal exchange,” the importance of which Doug North recognizes as “minimizing the need for formal rules and complaint procedures.” Much of the work in other disciplines supports our understanding of specialization and the conditions under which it developed in humans tens of thousands of years before money, organized markets, or Adam Smith emerged.

In learning from and working with those in other disciplines, experimental economists have discovered behaviors demonstrating Hayek’s insights into the realms of personal and impersonal market exchanges that “If we were to apply the unmodified, uncurbed, rules of . . . the small band or troop or, of say, our families to the . . . wider civilization, as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So, we must learn to live in two sorts of world at once” (The Fatal Conceit, p. 18).

Dealing with impersonal exchange, many economists do not understand the growing field of experimental economics, and tend to believe that experiments simply verify what is assumed or believed about markets by economists. What is not well understood is that experimentation tests means (rule systems, processes, and information requirements), not abstracted ends, such as the generic value of competition. For experimentalists, free-market ideology is not sufficient to fashion, test, and subject to an ongoing discipline the property right details necessary to organize markets in the electronic age.

In many industries, markets have not been allowed, and in fact have long been considered to be “natural monopolies,” tightly controlled by special interests and the state. How, for example, can the simple call for “market solutions” provide concretely specified alternatives to what the ten western governors are asking us to do with price controls in the electric power industry? A market that defines forms of efficient electric power decentralization is not going to emerge without a great deal of trial-and-error modification based on test bedding in both the laboratory and the economy. Practitioners and engineers within these industries contribute specialized knowledge that assists in the development of the experimental designs, and without their cooperation, new markets that work could not emerge.

The attitude portrayed in Mr. Skousen’s article regarding the “invasion” the “overrunning the whole of social science,” and the “domination of the other professions” by economics does not resonate with the philosophy of freedom, nor does it recognize the importance and extent of learning by economists from disciplines that have much to contribute to broadening economic understanding.

—Vernon L. Smith
Economic Science Laboratory
University of Arizona

Mark Skousen replies:

Vernon L. Smith is absolutely correct in citing examples of interdisciplinary cooperation between economists and other scientists, particularly biologists, anthropologists, and psychologists. No question it was a serious omission. I left out these examples for two reasons: (1) I plan to write a future column on behavioral economics, and did not have space to include it in this column, and (2) I still think economics is the “queen” of social sciences; its concepts and methods have expanded into other spheres more rapidly and more extensively than other disciplines—in finance, accounting, law, crime, and analyses of drug abuse, discrimination, marriage, education, religion, and government; the list goes on and on. My only regret is not mentioning experimental economics, dominated (if I may use that adjective) by Vernon Smith, as an example of my thesis. (I do mention experimental economics prominently in my new book, The Making of Modern Economics.)

I should also agree with Vernon Smith who implicitly suggests that the concepts of organic evolution have had a tremendous impact on the social sciences, including economics. It certainly governed the thinking of F.A. Hayek, as evidenced by such terms as “spontaneous order” and “unintended consequences.” But let us not forget that both Charles Darwin and Alfred Russell Wallace—co-discoverers of the theory of organic evolution—perceived the idea of natural selection and the struggle for survival upon reading An Essay on Population by Thomas Robert Malthus, an economist!

I can understand Vernon Smith’s distaste for the term “imperial science,” with its implied anti-freedom, almost Marxist overtones. It probably doesn’t engender empathy with other social scientists. If he can come up with a better term, I’m all for it. But something needs to replace the old derisive epithet “dismal science.”

Are Free Education Markets Possible?

To the Editor:

In the February issue of Ideas on Liberty, Andrew Coulson makes the following claim: “[E]ducation systems driven by the unfettered choices of parents have systematically avoided [social conflicts over curriculum, goals, and methods] by allowing diverse communities to simultaneously satisfy both their varied personal needs and their shared social goals.” Coulson implies that there have been (numerous?) examples of education systems in which all levels of government have stayed out of the business of education. What are these examples? Are they also examples of advanced industrial societies such as ours, characterized by the division of labor, a market economy, and some form of democratic government? I would be curious to know what these examples are, since I had thought that state-funded primary and secondary schooling has been coterminous with the rise of modern economies and political systems.

The comparative public policy question of which level of government in fact has responsibility for education may be important for Coulson’s review of Leon Botstein’s piece, but that question does not get at the heart of current debates over the privatization of primary and secondary school education. One of the legitimate questions regarding public-school funding seems to me to be whether local control of schools funded primarily through property taxes exacerbates inequality of educational opportunity. Compared to what? you might ask. Compared to centralized state-level funding (as in Hawaii, as far as I know)? Compared to national systems (Japan?)? Compared to what would have been the case in the United States without decades of state-sponsored racial segregation? These are difficult empirical questions, compounded by the problem of even determining what “equal educational opportunity” would mean in a country with substantial inequality in a variety of aspects of well-being. That the question does not point in the direction of national funding is irrelevant for the broader issues at stake.

In general it’s not clear to me where Coulson stands on two important real-world questions. First, what happens if a voucher plan is instituted, and for whatever reason the data no longer support the conclusion that private schools provide more equal educational opportunity than public schools? Normatively, Coulson would seem to have no problem with the result: after all, freedom trumps equality. Second, given that we’re likely to get neither full privatization nor full public control over primary and secondary education, what kinds of reforms should we support?

—Brett Marston
New Haven, Connecticut

(The writer is a graduate student in political science at Yale University.)

Andrew Coulson replies:

Though education, in its broadest sense, has been around since the dawn of humanity, mass formal education is more recent. It is difficult to find conclusive evidence for it prior to the fifth century BCE. In the 2,500 years since that time, a great variety of different school systems has been implemented by a great variety of different cultures. Both state-run “public” schooling and free-market “private” schooling can be traced back to classical Greece, with Sparta and Athens being prime examples, respectively, of each.

The Athenian free-market approach to education was mirrored in the early medieval Islamic empire of the seventh through the eleventh centuries CE, began to gain a brief and modest foothold in Germany just prior to the Reformation, and existed in modified form in England and the United States from the late 1700s up through the mid-1800s, when it was squeezed out of existence by competition from subsidized (and eventually “free”) tax-funded state schooling.

In the United States, prior to the spread of modern state schooling in the 1850s, private venture schools coexisted with semi-public schools, which by today’s standards were more similar to nonprofit private operations than to state schools. Finally, one of the most vibrant examples of a free education market is alive and thriving today in Japan’s multibillion-dollar-a-year for-profit “juku” industry.

These examples, and the others on which I have based my conclusions about school governance, cover the full gamut of social, economic, cultural, technological, and political organization. That is precisely why those conclusions are so persuasive. Parent-driven free markets have not proven themselves superior to state-run monopolies in one or a few different times and places, but rather throughout history under a multitude of differing conditions. When one system consistently outshines another despite wide variations in setting, it argues that the superiority in question is more likely due to intrinsic qualities of the system itself rather than to repeated accidents of circumstance.

In moving on to the issue of educational equality, Mr. Marston wraps up his first point by referring to the “question of which level of government . . . has responsibility for education.” This is understandable coming from a student of political science, but is grossly counterproductive for someone trying to determine the best way of organizing schools to serve families. To presume, a priori, that education must be under the control of some level of government connotes a failure to even consider the market alternative. Given the historical evidence I have summarized all too briefly above, you have eliminated the best solution before even beginning your investigation.

I, too, have studied the issue of educational equality, though from a somewhat different perspective. Having examined public-opinion data, and the concrete actions of parents in this and other countries, I have found that the public does not so much seek absolute equality of opportunity as it seeks universal access to good education. The public is committed to ensuring that every child has access to a good education, but does not seem committed to ensuring that all children have exactly the same opportunities. The real public outrage comes not from the fact that Bill Gates could afford to hire the world’s leading minds to teach his children, but rather that millions of children, usually the most disadvantaged, are not even being taught to read by the public schools. There is little support for imposing “education caps” on the children of the wealthy, but there is a mountain of support for ensuring that a quality education is available to all.

Parents, for instance, will generally seek to do more for their own children than they will for the children of others. So while Japan may indeed have one of the world’s most uniform public-school systems, it also has one of the world’s densest and most vigorous free education markets. That market exists for the sole purpose of allowing parents to get the best possible education for their particular children, tailored to their children’s educational strengths and weaknesses.

Having based my entire study in this field on what the public actually wants, rather than on what philosophers or theorists think it should want, I have compared school systems to determine which have the greatest ability to provide universal access to a good education. My conclusion is presented in the final chapter of my book, Market Education, and is described in more detail in a forthcoming paper I have written for the Cato Institute. In short, that system is a free market in education supplemented with need-based financial assistance (provided through an integrated system of tax-credits and private scholarships). This will allow all families to participate in the educational marketplace.

If, however, you would like to pursue the idea of true equality rather than the public’s goal of universal access to good education, then you should study the system of the ancient Spartans, which came nearer to equal education than any other system in history. Unlike the modern Japanese model, the ancient Spartans had no private education market to provide the diversity and flexibility needed to make up for the uniformity of the state system.

Mr. Marston will find Spartan schooling to have been an integral component of a pervasively totalitarian state, entirely at odds with liberal ideals. Without these totalitarian controls, equality could never be approached, given the already discussed propensity of parents to want the best for their own children, and the differing means parents are likely to have at their disposal.

Mr. Marston asks how I would react if “a voucher plan is instituted, and for whatever reason the data no longer supports the conclusion that private schools provide more equal educational opportunity than public schools?”

This question is somewhat misdirected. I am not advocating vouchers, and while I would like to see a reduction in the inequality caused by our existing state school system, my recommendations are geared toward the public’s goal of ensuring universal access to good schools.

He then states his belief that I would prefer any system that maximizes individual parental freedom, no matter the harm to the disadvantaged. I am an empiricist who entered this field from a background in the hard sciences. My work has been aimed at finding the best way of meeting the public’s avowed goals, not on promoting my or anyone else’s philosophical preconceptions. I have taken all of the public’s goals seriously, including the goal that all children should have access to a good education. The conclusions I have reached are based on the best and broadest array of evidence from around the world and across two-and-a-half millennia. Should new data come to light that indicate a different course, I would study and act on them accordingly.

Mr. Marston closes by saying, “given that we’re likely to get neither full privatization nor full public control over primary and secondary education, what kinds of reforms should we support?”

I can only recommend that you support what you conclude to be right and true. Dramatic political and institutional changes do happen. Jefferson didn’t settle for writing a Declaration of Codependence.

Economic Logic is Mark Skousen’s new principles of economics text, which is intended to teach introductory economics in a consistent, integrative fashion. That is a worthy goal. I am not alone in being weary of the current texts that offer a buffet of economic theories. My discontent has developed for a simple reason. Often, when people learn I am an economics professor, they tell me about their miserable experiences in a required economics course.

How is it possible that basic courses in economics are so boring and convoluted that they leave a bad taste in people’s mouths? Like Skousen, I believe that the main problem is that those courses keep most people from seeing the relevance of economics to their lives. Commendably, Skousen has written a principles text that is not guilty of that offense.

His introductory chapters deal with the fundamentals of economics, the nature of human action, and the importance of production and trade as the chief means of creating wealth. In fact, the explanation of the creation and destruction of wealth is central to the book. He distinguishes carefully between wealth and money, and systematically discusses the various stages of production. Throughout, Skousen focuses on entrepreneurial insight as a key component of economic progress.

My enthusiasm for the book grew when I read the chapter on profit and loss. Skousen emphasizes the dynamic nature of the free market and points out how change is prompted by new products, innovations in production, and other kinds of entrepreneurial actions that drive the market process. He does this by stressing that profits and losses are the ultimate signals of market success and failure. As he states, “Profits and losses are the sine qua non of economic existence. They determine what is produced, when it is produced, how much is produced, and how it is produced.” Thus from the outset, profits are regarded positively.

I also like the fact that Skousen integrates managerial theories into his discussions. For example, he presents the notion of Economic Value Added (EVA). EVA has become a common part of financial management texts in recent years, and Skousen uses it to demonstrate how successful business decision-makers approach their jobs—as entrepreneurs. This approach makes economic theory relevant to students whose main interest lies in business.

Skousen continues to develop microeconomic theory with chapters on prices and output, supply and demand, and costs. Among the highlights, the chapter on supply and demand begins with an excellent illustration of the pitfalls of government regulation and intervention. Skousen uses the case of West Germany after World War II to illustrate how people free from government interference were able to achieve a stunning economic recovery. This provides a powerful admonition to those who misguidedly believe that human problems are best solved politically.

When Skousen turns to the issue of monopoly, however, I detect a shift in position. He begins by presenting the prevalent welfare economics that arises from a static, structural view of the economy. This approach typically portrays profit as bad. The reader waits patiently for Skousen to begin a critical attack of this theory. However, even though he makes some of the criticisms that have been lodged against structural analysis, anyone who finds D. T. Armentano’s Austrian critique of neoclassical monopoly theory compelling will be less than satisfied with this chapter.

Skousen then turns his attention to the factors of production. The discussions are useful and full of excellent examples. In the chapter on labor Skousen provides strong critiques of comparable-worth laws and minimum-wage legislation, and an honest assessment of union activity, which aims to garner special privileges by way of political activism. In the chapter on capital, Skousen demonstrates the importance of capital accumulation in promoting economic progress. The only downside here was that he omitted any discussion of how government policies hinder that accumulation.

Skousen’s goal was to write an introductory economics text that would cut through the complexities of theory while providing a good understanding of economic principles. He has largely succeeded.

Paul Cleveland is professor of economics at Birmingham-Southern College.

To the Editor:

Lawrence Reed argues against taxation of Internet sales in his recent article “Don’t Tax the Internet” (June 2000). There is an evil worse than excessive taxation: that of selective taxation . . . . Exemption of Internet-originated sales from taxation, while still allowing taxation of phone-originated sales taxes, amounts to a form of discrimination. Indeed, arguments in Congress for the temporary moratorium on Internet sales taxes always talk about trying to support the nascent industry.

A better solution is to allow jurisdictions to levy sales taxes based on the source point of the sale (rather than the destination). This would encourage competition between taxing entities as merchants move from high-tax states to low-tax states in order to offer best prices to consumers.

—John Shelton
Redwood City, California

Lawrence Reed replies:

Mr. Shelton is right that “selective taxation” is bad because it involves government’s creating an unlevel playing field by picking winners and losers and bestowing discriminatory special privileges. But it’s important to remember that government indirectly taxes some Internet purchases already (those made through dial-up connections) via the taxes it imposes on telephone service. Also, Internet firms do pay all relevant taxes in the respective states where each is physically located, just like other companies.

One could argue that allowing jurisdictions to levy sales taxes based on the source of thesale rather than the product’s destination would be the fairest solution, but that would require the five states that do not currently levy a sales tax to begin doing so.

If the moratorium on new Internet taxes serves to restrain increases in existing sales taxes or even to spur reductions, then we all will benefit.

Defending the Rich

To the Editor:

“In Defense of the Rich” by Mark Skousen (June 2000) is not only an amoral defense of the rich, it is much more sinister than that: It is an immoral defense of the rich. In the article, Dr. Skousen discusses the auxiliary benefits that the rich provide society, as well as some of the moral attributes and undertakings of some rich people. No argument could be made that is more harmful to capitalism, and no argument could more effectively deliver up the rich to their attackers than the one offered in this article.

The only proper defense of the rich is a moral one. In a free society, the people who own a large sum of wealth created it by means of their own toil, and this is why they are entitled to it. The wealth that they created is their own, regardless of whether this is good for the economy, and regardless of what the people who own it spend it on. The argument that is used in the article is in defense of the latter two issues instead of the primary one. This is an egregious error because it abdicates the moral argument . . . . As long as the majority of people think that all wealth is created and owned by society, then an attempt to persuade people in favor of the rich is doomed. Just imagine the implications of such an idea: if society owns the wealth, then it is by the grace of society that any person can own property. An attempt to persuade people that it is better for them not to confiscate the property of the rich and to wait patiently for whatever crumbs the rich people drop their way will convince only a very few people. The implicit argument of the article is as follows: “The rich are good citizens. They pay their taxes, they give to charity, and they have families. And since they create opportunities for the rest of us, let us as a society decide to let them keep their money.” Not only will this fail, but it is immoral because using this type of argument strips the rich of the proper moral defense that is necessary for people to understand if they are ever going to be convinced that capitalism is a just system.

Just as it is in every other aspect of capitalism, it is interesting and useful to examine the reasons it is actually better for the people “as a whole” if they are secure in their property. But the positive attributes of capitalism should not be used as its defense for the reasons stated above. By titling his article “In Defense of the Rich” and then leaving out the moral, i.e., proper, defense of the rich, Dr. Skousen is promoting the downfall of that which he claims to be defending . . . . That having been said, the information contained in the article is interesting to read, but any future attempt to defend any aspect of capitalism needs to include the moral argument.

—Nicholas A. Curott
Colorado Springs, Colorado

Mark Skousen replies:

Nicholas Curott protesteth too much. I agree wholeheartedly with his moral defense of property. Everyone, rich or poor, has a right to his own wealth—to spend, invest, or even waste it as he pleases. The state has no right to tax or confiscate his property without his permission, no matter how egregious his behavior. I did not think such an elementary principle needed to be explained to readers of Ideas on Liberty.

But amoral? Give me a break. If anything, my article is all about high moral standards and how the rich have a responsibility to make money honestly and to spend it wisely. Otherwise, politicians and the media will continue to bash the rich and promote high marginal tax rates and anti-rich policies. My purpose was to debunk a long-standing myth held by the public and the media—that the rich are profligate pigs, womanizers, and “robber barons” who engage in “conspicuous consumption.” I wished to dispel the Marxist view that “behind every great fortune is a great crime.” Early critics such as Thorstein Veblen, Matthew Josephson, and Sinclair Lewis portrayed the wealthy as robber barons who smoked $100 bills, built 25-room mansions, and abandoned their families in favor of trophy wives and frivolous activities. This negative image was far from harmless. It created an age of envy and censure—and inevitably high income-tax and estate-tax rates, and attacks on big business.

My purpose in writing my column was to alert the readers to the growing evidence favoring a better image for the rich and for capitalism, and to diffuse the anti-capitalist agenda of the politicians and the media. Recent evidence from Professor Thomas Stanley and others confirms an unusual statement made by Nassau Senior, the first professor of political economy, who said in his inaugural address at Oxford in 1825, “the pursuit of wealth . . . is, to the mass of mankind, the great source of moral improvement.” Finally, in the year 2000, Professor Senior’s statement is coming true.

This is all good news, and we need to spread the word rather than to accentuate some extreme laissez-faire tenet. If indeed the wealthy are today more actively pursuing the old-fashioned virtues of frugality, modesty, and faithfulness, then the public and our legislators need to know it. They are less likely to attack the rich and engage in anti-capitalist policies. They may even encourage wealth accumulation. I’m happy to report, by the way, that my column has been reprinted around the country and been translated recently into Spanish and published in several Latin American newspapers.

To the Editor:

“Bill O. Reitz” overcomplicates the Y2K situation (“Why Y2K?;” December 1999). I spent over 20 years in the information-processing business from the late ‘60s until the early ‘90s, so I have some knowledge of the genesis and continuation of the so-called Y2K problem. I worked with “magnetic drum” and “core” as well as punched cards, sorting and collating machines, and all the other paraphernalia of the early days. I have no real problem with either of Mr. Reitz’s descriptions of how two digits were used to save space. I can remember programming subroutines in “machine language” to save a few bits (not bytes) of precious room. So I’m just as guilty as anyone, if indeed guilt is the appropriate term.

I start to lose patience when people say that Y2K came as a surprise to the industry and that programmers and analysts are at fault for not correcting the problem before it became critical. When I first went to computer school in the ‘60s it was made clear that the two-digit date was a matter of expediency and would cause problems sooner or later without attention. Anyone in data processing who had a two-digit IQ knew it was a time bomb.

As far back as the late ‘70s and early ‘80s I recall sitting in design and development meetings where the technical people strongly urged that the date fields be expanded because it was becoming apparent that software had a much longer life span than had been thought. In every case it was the managers/bureaucrats/executives at the urging of the “bean counters” who decided that such a change was a budget- and schedule-buster, and they weren’t about to spend the resources. So in fact Y2K came to be in spite of technical protests, and programmers and/or analysts are not to blame.

It’s also my opinion that the job mobility of people in data processing at the time contributed to the problem because the responsible (or irresponsible) managers/bureaucrats/executives could be fairly certain that they would no longer be employed at the same place when the “%&#@ hit the fan” (euphemism for Y2K).

The upshot is that the Y2K problem is the result of bad business decisions, not technical “stupidity and incompetence.”

—Charles Stone
Kissimmee, Florida

Bill O. Reitz replies:

The point of my article was why Y2K came to be in the first place, more than why it was perpetuated. As for overcomplication, as I said, I don’t know if such an analysis (as I included in the article) was done or not; but that if one was done, the programmers (and managers) made what they would have concluded to be the correct decision based on the available information.

I don’t think that Y2K was a surprise to anyone in the know. Even the original programmers no doubt knew of the problem and that someday things would need to be done differently. Mr. Stone implies an interesting point, which I had not considered—that the reason the Y2K “bug” was perpetuated was that software was written incrementally, that is, each new version was derived by modifying the previous version. Given this approach, it is easier to understand why the managers might have acted as Mr. Stone says. This would support Mark Skousen’s idea, which is that people who should have known better took a short-sighted approach for short-term gain. Even then, though, it is possible that the managers simply chose to defer this expense to the future. Unless there is a particular advantage to fixing a problem right away, it might be a reasonable decision to defer the fix. In other words, if the problem had already gotten large enough, there was not necessarily any advantage to fixing it right away.

I don’t think that anyone will ever be able to say with certainty when, or if, things should have been done differently. The point of my article was to get people to think about how the situation came about in the first place. It appears to have done so.

The New Puritans?

To the Editor:

When I read Sheldon Richman’s “Other People’s Business” (December) I couldn’t help but think of H. L. Mencken’s definition of Puritanism as “the haunting fear that someone, somewhere may be happy.” If Galbraith & Co. would mind their own business and live in the world of reality (versus the fantasy world of pure theory), they would be less likely to invent new ways of ordering our lives.

Besides, isn’t Galbraith’s credibility deficient? Does he really expect to be taken seriously after he has been wrong so often? Lest it be forgotten, Galbraith glorified socialism and the Soviet economy for decades. Completely out of touch with reality, he was taken by surprise when that tyranny collapsed.

Of course, many who had “less prestige” and were “less learned” than Galbraith predicted the failure of socialism decades in advance (Mises, Hayek, Friedman, Reagan, and others). Galbraith was still pointing to the integrity and stability of the Soviet economy as a shining example to follow even as East Berliners flocked westward.

As far as I’m concerned, John Kenneth Galbraith and those of similar persuasion have no credibility remaining. I have no doubt that Galbraith’s ideas continue to hold sway over those that refuse to recognize the failure of their long-cherished beliefs. But those of us with less personal investment in such beliefs are under no such compunction to “keep the faith.”

—Michael Koller
Germantown, Maryland