But is the sector too small? In an article titled “Yes, American Manufacturing Really Is in Trouble” (Huffington Post, February 11), free-trade critic Ian Fletcher says it is.

To judge whether a sector of the economy is too small, we need criteria. Fletcher writes: “Unfortunately, the only rational standard for how much America should produce is how much Americans wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it” (italics in original).

But if that were the only way, Fletcher should be content—yet he’s not. Why not? Because, as he well recognizes, it’s not the only way, and that’s why he wrote his article. He notes two ways that we consume what we get from foreigners besides selling them goods and services: 1) by selling them assets (these assets are produced, but that’s not what he means) or 2) by borrowing. He objects to both.

He writes: “And this is where American manufacturing is clearly falling short, because America is running a huge trade deficit in manufactured goods, and we don’t produce enough of anything else (raw materials, services) to cover the gap. So instead we borrow and sell off existing assets to pay for imports.”

Fletcher’s ideal is becoming clear: The “right” amount of manufacturing is achieved when the amount the United States spends on other countries’ manufactured goods (and I think he means to include raw materials and services) just equals the amount foreigners spend on our manufactured goods, services, and raw materials. In short, Fletcher’s ideal is a zero trade balance.

He’s almost right that if we have a trade deficit, which we do, we will have to borrow from foreigners or sell assets. Why almost? Because Fletcher leaves out two other possibilities. First is that foreigners will want to invest directly in the United States. Second is that they will want to hang on to some dollars: The U.S. dollar is still the closest thing there is to a world currency.

It’s true that the increases in foreign direct investment in the United States and in dollars held are substantially smaller now than the sale of assets and the increase in borrowing. So let’s grant that most of the trade deficit will be paid for with borrowing and asset sales. What’s wrong with that? In a later article, “The Biggest Bubble of All Has Yet to Pop” (Huffington Post, February 17), Fletcher explains: Americans will own fewer assets. That does seem like a problem, doesn’t it? Let’s dig further.

If the capital stock is growing quickly enough, even if foreigners own more of it, Americans might own more too. It’s true that private investment has declined, something likely due to President Obama and Congress making investors unsure about health care and other regulations in the future. Between 2008 and 2009 the value of the U.S. capital stock fell by about 2 percent. By the end of 2009 foreigners owned about $21.1 trillion of the $48.5 trillion U.S. capital stock–over 40 percent. Sounds scary, right? But it overlooks that Americans own $18.4 trillion of the rest of the world’s capital stock. So the U.S. “net international investment position” was negative $2.7 trillion, or less than 6 percent of the U.S. capital stock. Interestingly, even though “our” ownership of “their” capital is less than theirs of ours, in 2009 “we” made $121 billion more on them than they made on us. That suggests the U.S. government’s data underestimate the value of U.S. investments abroad or overestimate the value of foreign investments here, or both.

Bonds and the Trade Deficit

One of the main U.S. assets that foreigners invest in is Treasury bonds. If the federal government reduced its budget deficit, now running at more than $1 trillion annually, there would be fewer bonds for foreigners to buy. That wouldn’t necessarily cause our trade deficit to fall because if foreigners see private U.S. assets—corporate bonds, for example—as good substitutes for U.S. government bonds, they might simply shift to buying more. Still, private assets are unlikely to be a perfect substitute for government debt, and so reducing the budget deficit would probably reduce the trade deficit somewhat.

It’s also true that if we Americans increased the percentage of our income that we save, we would buy some of those bonds and buy fewer foreign goods and services, again reducing the trade deficit.

Fletcher recognizes these facts. In his February 17 article he writes: “It is indeed true that if we take our low savings rate as a given and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better.”

But Fletcher doesn’t want to take this low rate of saving as given. He wants a higher rate. Fine. There are two ways to accomplish this. The first is to reduce the budget deficits of the U.S. federal, state, and local governments. In 2009 they totaled a whopping $1.272 trillion, which exceeded net private saving (personal and corporate) of $945 billion. The result: a negative saving rate for the economy as a whole. Have the government spend less, and the net saving rate would probably increase. It’s still not clear, though, that we would manufacture more.

The second way to increase saving and thus reduce the role of foreign investment is for us individually to spend less and save more. Fletcher seems to like this idea, asserting that “domestically-financed investment is obviously better because then Americans, rather than foreigners, will own the investments and receive the returns they generate.” But how can he know whether it’s better for you to buy an iPhone or to put more money in your IRA? He doesn’t. Neither do I. I’m more humble than Fletcher: I want you to be able to choose. Do I trust your choice? Not necessarily. But I think you have the right to make even bad choices.

So what is my criterion for the “right” size of the manufacturing sector? Simple. The right amount of manufacturing is the amount that would be achieved if the government did nothing to distort people’s choices. Let’s focus on getting rid of government distortions and not attack the symptoms, if they are indeed symptoms, of those distortions.

This perception is misguided. In fact capitalism is fueled by creativity and makes possible a level of individuality never before seen in human history. The anthropologist Grant McCracken recently wrote that “capitalism is art, a transformational exercise that turns meaning into value and value back into meaning.” I think he’s onto something there, and viewing capitalism as creating meaning, like art, is a useful way to respond to the criticism noted above.

Creation of Value

That capitalist production is a “transformational exercise” should be fairly obvious: What entrepreneurs do is to take inputs and attempt to transform them into an output that is valued more highly than the sum of the values of the separate inputs (accounting for the time involved in production as well). A ladder is more valuable than a bunch of wood, some nails or screws, and some tools. Profit is the creation of value.

Note too the idea of “turning meaning into value.” The simplicity of the ladder example might hide it, but the hard part for the entrepreneur is figuring out what people value. One way of expressing this is that producers need to know what has meaning for potential buyers.

The goods and services we purchase are not really the ends we seek in the market — they are means for satisfying our various wants. The challenge for producers is to figure out what those wants are. This requires producers to try to understand the things that have meaning to consumers and then find ways to create them out of available resources. As McCracken says, producers try to transform meaning into value, which requires some elements of art in figuring out what carries meaning and how best to provide people with objects or services that embody it.

On the consumption side, the reverse is true. Capitalism makes it possible for us to better differentiate ourselves from others by providing an enormous variety of goods and services. This variety not only enables us to better fine-tune our purchases to our particular wants — which is itself a way of creating meaning in our lives — but it also lets us create and define who we are by the kinds of products we buy. As entrepreneurs create value by trying to anticipate what we want, we turn that value back into meaning by the patterns of consumption we undertake.

In the West most of us are wealthy enough that our day-to-day needs for food, clothing, and shelter are not pressing concerns. One consequence is that we can afford to make purchases that satisfy not just some particular want, but also the desire to create meaning in our lives. We spend money on our hobbies and interests, no matter how unusual they might be. We buy product lines that say something about who we think we are, or who we want to be, such as Apple products, hybrid cars, all kinds of clothing, and things like tattoos and hairstyles. We are artists creating ourselves through individualized consumption decisions.

Idiosyncratic Tastes

Market economies also produce goods that cater to the most idiosyncratic of tastes. Those with “minority” tastes, such as wearing Hawaiian shirts all the time or ties that look like fish, can find products that satisfy those tastes in the market. Imagine instead that we had to vote on what to produce according to majority rule. Much of what markets now produce to satisfy strange, unusual, or weird wants would never get produced. Markets make possible forms of creative individuality that alternative systems would not, and do not, tolerate.

Consumers take the values that entrepreneurs create and transform those products back into meaning for themselves. In some fundamental sense the creation of value and the creation of meaning are just two ways of looking at the very same process of production and consumption in a market economy. In other words, both entrepreneurship and consumption are acts of creativity, imagination, and art.

In that column I argued that the key to a healthy economy is production not consumption, and that the attention paid to increasing consumption during downturns is misguided.  I was accused of holding a naïve version of Say’s Law because I appeared to claim that “supply creates its own demand.”  However, I have written several pieces (examples here and here [pdf]) arguing that this is a misreading of Say’s Law.  His actual text shows the law is better rendered as “production is the source of demand”:  We cannot exercise consumption demands without having first produced value (or getting resources from those who have).

This argument hardly aligns me with the “interests of rich people and powerful business executives,” as Yglesias claims.  It applies to all producers of wealth, from minimum-wage workers to midlevel managers to the rich and powerful.  In a depoliticized, freed market, individuals cannot consume without having first produced (or having received voluntarily transferred resources from others). Yglesias is the one seeing sides where there are none.  Producers aren’t a distinct group — everyone in the market is both a producer and a consumer.

The ultimate source of wealth in society is producers who create value.  The hourly worker creates value by providing a marginal product whose value is greater than the real wage she is paid (though competition tends to compete this differential to a minimum).  The firm as a whole creates value by producing an output that consumers value more than the sum of cost of the inputs used by the producer, including the value of the time the production process takes.

Constant Innovation

All this value creation can be seen as forms of innovation.  As Deirdre McCloskey argues in her new book, Bourgeois Dignity, capitalism is best understood as a system of constant innovation.  Firms that figure out a better way to get consumers what they want, either by producing it with less-valuable inputs and/or changing making the final product more valuable to consumers, are innovators who create value and wealth.  Ongoing acts of successful innovation (as judged by genuine market profit) create wealth for both the innovator and the consumer.

The wealth for the innovator is the profit she earns.  The wealth created for the consumer comes as either lower prices through lower-cost production or improved and hence more-valuable goods.   In addition, workers who produce more-valuable goods and services see increases in their wages and hence their wealth. The value-creation that comes from the ongoing innovation of the market is what creates the wealth that makes consumption possible.

Notice that even though the producer clearly is thinking about the consumer when she innovates, wealth-creation does not require an already-existing increased power to consume.  An act of innovation alone produces wealth by cutting costs or adding value to a product.  Thus to suggest that my argument is undermined by the fact that the goal of production is consumer satisfaction is to miss the point.  Yes, producers produce because there are consumers who consume, but it is production not consumption that creates wealth.

Why Is Labor Idle?

This is no less true in a recession or during high unemployment.  The problem is not getting consumption power directly in the hands of idle labor.  The problem is whatever is making labor idle. Why is this wealth-creating potential lying around unused by owners of capital.  Again, consumers need not have additional wealth for firms to profit from innovation.  Why, then, do firms think they cannot do so?

There are several possible answers to this question, and just about all of them, in my view, are related to the misguided government policies of the last several years that have created an environment in which the private sector is pessimistic about the prospect of creating wealth.  Getting people back to work and returning the economy to wealth-creation will happen because production revives and not because we “stimulated” consumption.

Innovation by producers, not consumption, is what creates wealth in a market economy.  Producers know that simple truth, and I think most citizens know it deep down as well.  But sometimes the simplest truths are the hardest for the self-proclaimed elite to understand.

(Yes, the poem came out two years before publication of Keynes’s General Theory, but one can see that Keynes’s way of thinking already was already in vogue.)

The lad tells the bishop:

“I want to be a Consumer,”
The bright-haired lad replied
As he gazed up into the Bishop’s face
In innocence open-eyed.
“I’ve never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a consumer, Sir,
And help the world along.

“I want to be a Consumer
And work both night and day,
For that is the thing that’s needed most,
I’ve heard economists say,
I won’t just be a Producer,
Like Bobby and James and John;

I want to be a Consumer, Sir,
And help this nation on.”

The poem is meant to be farce, but it also is a theme of Paul Krugman’s columns. If one can sum up all the present Keynesian claptrap into one sentence, it would be this: Americans need to consume more.

Should one doubt the close association of the poem with what the Keynesians are declaring, read on:

“I want to be a Consumer
And live in a useful way;
For that is the thing that’s needed most,
I’ve heard economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further trade.

“I want to be a Consumer,
And do my duty well;
For that is the thing that’s needed most,
I’ve heard Economists tell.
I’ve made up my mind,” the lad was heard
As he lit a cigar, to say;
“I want to be a Consumer, sir,
And I want to begin today.”

Last year, Hillary Clinton visited China and urged the Chinese central bank to continue to purchase U.S. government debt because “We are all in this together.” Clinton stated (in other words, of course): China is the producer, and the United States is the consumer, and this keeps the perpetual motion machine of a world economy going.

(Once upon a time, international trade involved the exchange of real goods, but today’s sophisticated economy has done away with that necessity. Paper for products will do.)

Clinton, in essence, was claiming that the responsibility of U.S. citizens is to consume Chinese products, and the Chinese should gratefully accept U.S. dollars. What do Americans receive? Why they receive computers and cell phones, clothing, and a million other items.

What do Chinese get for all of this? Why, they get jobs. (For lack of space, I won’t go into the current brouhaha about the value of China’s currency, which I will address in a future column.)

Never mind that Clinton advocated something akin to real exploitation, in which one group of people works for minimal compensation and another class of people receives goods without having to work for them.

If anyone really wants to understand the mentality behind the “stimulus” plans of former President Bush and President Obama, it is this: The United States must become first and foremost a nation of consumers, and the way to do it is for the government to provide dollars, Americans to quickly spend them, and people overseas to accept the dollars and keep working.

A fundamental tenet of economics is that the end of production is consumption. Unfortunately, Keynesian economists seizing the public microphone claim the purpose of consumption is to clear the shelves so producers will have something to do in the future.

So the lad apparently was right. The purpose of consumption is consumption, and the purpose of production is, well, production. Just ask the Keynesians.

While I have openly criticized this strategy before, today I wish to take a different path. I want to go after the fundamental concept of what Keynesians and their followers call “spending,” because I wish to show that this whole idea is wrongheaded, demonstrating a deep-seated misunderstanding of economic processes.

The Austrian view sees an economy as a complex web of various structures of production, with entrepreneurs making decisions based on what they believe consumers will wish to purchase. The capital structure is interrelated with the rate of interest and relative prices of factors of production and final goods.

Furthermore, an economy exists because people are acting purposefully to fulfill their various needs. As Adam Smith so aptly noted, all production ultimately is for consumption, and I often return to Lawrence Reed’s classic “7 Fallacies of Economics,” which lists “production for its own sake” as one of the fallacies that governments often pursue.

The larger point is that production and consumption are related. Furthermore, within the means-end framework of Austrian economics, production is a means to consumption, not an end in itself. Thus it, like production, is purposeful and serves a larger end for individuals. (I am reminded of this when I read criticism from leftists of the “mindless consumption” that Walmart supposedly has engendered. Consumption is not a “mindless” activity.)

Buying Back the Product

On the other side is the view that consumption is merely “buying back the product” that was made. Socialists (as well as Keynesians) believe that because individuals generally do not spend all their income at once, capitalism has the chronic problem of underconsumption. That is, if people are not willing to spend enough to purchase everything that was produced at prices that will equal their cost of production, then a “surplus” of goods will arise and firms will have to lay off workers.

When this situation comes about, with consumer spending not being robust enough to “buy back the product,” then government must fill the “spending hole.” Thus the economy simply is a circular flow in which people produce goods, others buy them, and the process repeats itself.

If we step back and take a hard look at these two competing (Austrian and mainstream) views, we cannot help but notice that the popular (read: vulgar Keynesian) way of looking at an economy is mechanistic at best and absolutely impersonal at worst. In this view, the “purpose” of an “economy” is to clear goods from shelves so people can be employed making things to put back on the shelves. Consumption is reduced to “spending,” and to make things worse, people are supposed to “spend” as their “patriotic duty” to “support the economy.” What “economy”?

Professor Higgs writes:

He [the vulgar Keynesian] supposes: if only the government stepped in and used its own deficit spending to make up for the reduced private investment and consumption spending, then business would be restored to profitability and workers reemployed without any economic restructuring.

Indeed, anyone who believes an economy is nothing more than a mechanical operation in which some people produce, others spend, and then government makes up the difference really does not understand economic processes. Consumption and production are not two independent and unrelated activities; they are intricately tied together to reflect how people meet their needs. Unfortunately, many of today’s “great minds” in economics do not understand that simple point of economic logic. The economy – and real people – suffer because of that.

After all, Ehrlich made those claims in 1968, and that was a long time ago. But in 1990 he published The Population Explosion, a sequel to his first bestseller.¹ Yet again time has proven that Ehrlich’s premises, on which his projections are based, are severely flawed. If an excess of three decades worth of statistics contrary to his theories do not dent his reputation, then Ehrlich deserves the title Teflon Prophet.

It is not the facts that compel Ehrlich’s supporters as much as a fanatical adherence to his solutions: global central economic planning more ambitious than anything Marx ever dreamed of. Ehrlich says he “can’t really see any truly insuperable barriers to reorganizing our society so that virtually everyone could lead a more pleasant, productive, satisfying life.”² As he sees it, our choice is to abandon the market for an “orderly, planned way to a sustainable human life-support system or to be brutally forced into that shift by nature.”³ When he wrote so wistfully about “reorganizing our society” did he envision himself as one of the reorganizers?

Ehrlich recognizes that reorganization would mean “giving up many things that we now consider to be essential freedoms.” While the costs would be great, so would the supposed benefits, which include “avoiding the total collapse of civilization and the disappearance of the United States as we know it.”⁴ Ehrlich is serious, and he’s taken seriously by the anti-capitalist coalition. His perceived sainthood rests not on acumen or accuracy, but on the fact that the solutions he offers are ideologically in tune with his supporters.

The most recent major study to disprove the theories of Ehrlich came from the International Food Policy Research Institute (IFPRI). In its book Global Food Projections to 2020, the IFPRI looks back at the last 30 years of world food production—coincidentally the period since the publication of Ehrlich’s first book. With the advantage of hindsight the Institute finds “that most regions have made substantial inroads against poverty and averted widespread famine in recent years.”⁵ The result has been a significant drop in the numbers of malnourished children. In high-risk developing countries malnutrition rates declined from “an aggregate rate of more than 46 percent in 1970 to 31 percent in 1997.” That translates “into an absolute decline of 20 million malnourished children since 1967.”⁶

In 1990 Ehrlich had a very different view of Latin America. He lamented: “Since 1981, per-capita food production has also been lagging” there and that “population growth is already outstripping food production.” Yet the IFPRI says that per capita cereal production increased from 225.3 kilograms in 1967 to 253.4 kilograms in 1997. During the period of 1990–1997 cereal production was growing at an annual rate averaging 1.9 percent, compared to a population growth rate of 1.7 percent.⁷ Ehrlich’s book was already wrong by the time it was printed: per capita food production, instead of lagging, grew by 11 percent over the next decade and cereal production increased faster than the population.

What the IFPRI has to say is good news all around, but more so for the developing countries. Instead of heading toward global famine, food supplies are increasing for the vast majority of the world’s population. The IFPRI found:

• “caloric availability per capita rose in developing countries between the 1960s and the early 1990s by 400 kilocalories, reaching nearly 2,700 kilocalories per day by 1997″;⁸
• per capita cereal production, from 1967 to 1997, “rose substantially”;⁹
• per capita gains in cereal production “rose from 176 kilograms in 1967 to 226 kilograms in 1997, an increase of 28 percent.”¹⁰

No Malthusian Crisis

The IFPRI is not alone in its conclusions. Tim Dyson, professor of population studies at the London School of Economics, wrote in the British Medical Journal that “a global malthusian crisis is unlikely to occur during the next few decades.”¹¹ Dyson surveyed the various regions of the world and found a healthy scenario regarding food and population. He said that famines on the Indian subcontinent “will be things of the past” provided the region remains politically stable. In China he found “no cause for alarm,” and both “Latin America and the Middle East have a record of progress in feeding their people and this is likely to continue.”¹²

Ehrlich, who projected massive famines in his first book, ignored his original projections in his second book. Instead of admitting he was wrong he wrote: “Of course, [as if he knew this all along] food production worldwide has continued to increase somewhat faster than the population for the last four decades.” But while some people believe this will continue for the foreseeable future, he says, “all signs point in the opposite direction.”¹³

Dyson wrote that the trend, instead of reversing, has continued unabated: “Food production should be able to keep up with the growth in world population that is projected to occur over the next 25 years. An important reason for this is that the worldwide growth in cereal yield shows no sign of slowing down.”¹⁴

Data from the U.N. Food and Agricultural Organization (FAO) shows worldwide cereal yields to have increased from just over one ton of cereal per hectare in the early 1950s to about 3 tons by the late 1990s.¹⁵ And worldwide averages are significantly below those of the developed world, implying room for a great deal of growth.

Areas that Ehrlich once said were hopeless are today feeding their own people. In his 1990 book Ehrlich claimed that food production in India, which had increased contrary to his prior warnings, had finally “lost momentum.” But the IFPRI data shows Ehrlich to be inaccurate yet again. Instead of losing momentum, rice production in India grew from 3.7 metric tons per hectare in 1990 to 4.2 in 1997. In addition, wheat production increased from 2.2 tons to 2.6, and maize increased from 1.5 tons to 1.7 tons.¹⁶ India, which was importing over 9 million metric tons (mmt) of cereals in 1967 was exporting almost 2 mmt by 1997.

Ehrlich had even less hope for the entire South Asia region. Yet the Institute’s data show that its food production increased throughout the ’90s and surpassed India’s in percentage terms. In 1990 Erhlich said Vietnam, once “a rich food exporting region,” was suffering from ecological destruction.¹⁷

In 1967 Vietnam imported 1.5 mmt of cereal. By 1982 imports were down to 0.6 million, and when Ehrlich’s book was released, Vietnam was exporting 1.2 mmt. By 1997 exports were up to 2.8 mmt.¹⁸

There are two fundamental reasons that Ehrlich has consistently, and substantially, erred with his projections. All his calculations are based on two false factors: he assumes food production must decrease while population growth rates remain steady. As we’ve seen, food production has continued to increase for the three decades since he first sounded his warnings. But Ehrlich felt such declines were inevitable and said the “tragedy” would be compounded by the fact “that the world population seems committed to a growth rate of closer to 2 percent for the next few decades.”¹⁹ While “few” is indeterminate, it is safe to assume he meant more than a couple; say, 30 years—until 2020.

But instead of remaining near 2 percent population growth rates had already declined by the time Ehrlich wrote his book. Population growth peaked around 1970 at 2.1 per cent. By 1980 it was down to 1.73 percent, and when Ehrlich’s book was published it had dropped to 1.7 percent. In 1995 the Institute for Demographic Studies said the rate had declined even further, to 1.5 percent.²⁰ And it continued to plummet so that by 2000, at 1.3 percent, it was closer to 1 percent than to Ehrlich’s projected 2 percent. Even the United Nations, which usually overestimates population growth, says that growth levels by 2015 will be down to 1.03 percent.²¹

Point of Agreement

There is one area on which Ehrlich, Dyson, and the Institute all agree: sub-Saharan Africa. There cereal-production rates declined almost from the day the colonial powers pulled out until today. In 1967 per capita cereal production was 127.9 kilograms but by 1997 it had dropped to 124.6 kilograms. This production rate is only one-fifth that of the developed countries and is about half the average for the developing countries. In spite of being the least populated continent, perhaps partially because of it, Africa’s per capita food production is significantly lower than that of South Asia, the next poorest region in the world.²²

In August 2000 the FAO warned that 17 countries faced severe food shortages, all in sub-Saharan Africa.²³ But what is clear is that in the majority of these cases, 12 countries by my count, political problems and war are the main cause of food shortages. Almost all the “basket cases” of the world from 30 years ago are now well on their way to feeding themselves, but not Africa. That raises the question why. If we look at the successes we see some dramatic changes. From 1958 to 1962 an estimated 30 million Chinese starved to death under an artificial famine created by socialist economic and agricultural policies.²⁴ Market reforms were instituted after Mao’s death, and food suddenly became more plentiful. The late political scientist David Osterfeld noted that after reforms, food production increased by 40 percent.²⁵ Since the early ’90s, when Osterfeld wrote his book, cereal production in China has increased by a further 17 percent.²⁶ In addition, market reforms have vastly increased the wealth of nonfarmers in China, making it relatively easy for them to afford to import the surpluses of food being produced in much of the rest of the world.

India, which Ehrlich had written off, has also turned into a food exporter. Again market reforms predated the rise in production. The late Julian Simon noted in Atlantic Monthly that “Most price controls were lifted, and price supports were substituted for controls. Indian farmers had a greater incentive to produce more, so they did. They increased production by planting more crops a year, on more land, and by improving the land they had. They also introduced higheryield strains and improved fertilizers.”²⁷ Since Simon wrote those words cereal production in India has increased 50 percent further.²⁸

But Africa has continued down the road of state intervention. What market reforms have been instituted have been half-measures and often repealed later. In many cases, such as Zimbabwe, the government has waged war on private markets intentionally, undermining private property rights and the incentives to produce. Reforms in Africa have been so half-hearted that the IFPRI produced a paper on the subject titled The Road Half Traveled.²⁹

Throughout Africa state marketing boards often hold a monopoly on critical foodstuffs. Frequently these boards will pay farmers below-market rates and then sell the produce on the world market with all profits going to the government or to individuals in the government. It remains true that Africa is a bastion of state control over agriculture. But it is not enough that the state withdraw from agricultural matters. The rule of law and the sovereignty of individual property rights must be upheld. It is difficult for any business, let alone farmers, to plan for the future if they cannot enter into secure contracts or if they have no legal claim to the property they use.

Other factors that undermine agricultural production include the periodic influx of “food aid” to Africa, which destroys local production. Often such aid is given to the central government and is used to expand state activities that attract human capital from the private sector. Paradoxically, one factor in Africa’s lack of development may be that the continent, on the whole, is underpopulated. Agricultural production needs to get to markets, and for that to happen, infrastructure is needed. But infrastructure cannot be built if the numbers of people it will serve are few. One simply does not build multimillion dollar highways to villages of 200 people.

The battle to feed humanity is not over. And while the fight is still being waged, it does appear that, contrary to Ehrlich, humanity is winning. Throughout the world, market forces have vastly expanded the ability of mankind to feed itself. And as a result, food per capita has continued to grow for the last few decades. Nations that only a few decades ago were pronounced hopeless now produce surpluses because of market reforms. Endemic starvation is essentially limited to one corner of the world where markets are not embraced and where private property is not secure. Of course, this does not stop the anti-capitalist coalition from blaming capitalism. Nor does it prevent the coalition from suggesting new forms of socialism, on a global scale, as the solution.

But the evidence, which grows daily, indicates that the fight over food is more illusionary than real. Substantial progress is intentionally ignored and starving children are used as propaganda to persuade the world to adopt global economic planning. A phony crisis is being invented in the hope that it will persuade people to adopt a counterfeit solution.

1. Paul and Anne Ehrlich, The Population Explosion (London: Hutchinson, 1990).
2. Ibid., p. 184.
3. Ibid., p. 44.
4. Ibid., p. 181.
5. Mark Rosegrant et al., Global Food Projections to 2020 (Washington, D.C., International Food Policy Research Institute, 2001), p. 3; www.ifpri.cgiar.org/pubs/books/globalfoodprojections2020.htm. See also Bjørn Lomborg, The Skeptical
Environmentalist: Measuring the Real State of the World. (New York: Cambridge University Press, 2001), chapter 9.
6. Ibid., p. 4.
7. Ibid., pp. 5, 8.
8. Ibid., p. 5.
9. Ibid.
10. Ibid.
11. Tim Dyson, “Prospects for Feeding the World,” British Medical Journal, October 9, 1999, p. 988.
12. Ibid., p. 989.
13. Ehrlich, p. 68.
14. Dyson, p. 990.
15. Ibid.
16. Rosegrant et al., p. 22.
17. Ehrlich, p. 73.
18. Rosegrant et al., p. 10.
19. Ehrlich, p. 109.
20. Jim Peron, Exploding Population Myths (Chicago: Heartland Institute, 1995), p. 35.
21. Per Pinstrup-Andersen, Rajul Pandya-Lorch, and Mark Rosegrant, The World Food Situation: Recent Developments, Emerging Issues and Long-Term Prospects (Washington, D.C.: International Food Policy Research Institute, 1997), p. 28.
22. Rosegrant et al., p. 5.
23. Report can be read at www.fao.org/WAICENT/faoinfo/
economic/giews/english/eaf/eaftoc.htm.
24. Jasper Becker, Hungry Ghosts: China’s Secret Famine (London: John Murray, 1996).
25. David Osterfeld, Planning versus Prosperity (New York: Oxford University Press, 1992), p. 64.
26. Based on data in Rosegrant et al., p. 22.
27. Julian Simon, “The State of World Food Supplies,” The Atlantic Monthly, July 1981, pp. 72–76.
28. Based on data in Rosegrant et al., p. 22.
29. Mylène Kherallah et al., The Road Half Traveled: Agricultural Market Reform in Sub-Saharan Africa (Washington, D.C.: International Food Policy Research Institute, n.d). It can
be found at www.ifpri.org/pubs/pubs.htm#fpr.

The key to understanding deflation is to realize that it comes in three forms: the Good, the Bad, and the Ugly. To make sense of these three forms we need to be clear on some terminology and definitions. First, the word “deflation” itself requires additional clarity. Normally, the definition is something like “a sustained decline in the average level of prices.” That definition immediately raises the question of why anyone would think deflation is bad. After all, what could be bad about things getting cheaper? For one thing, “prices” are normally understood to include “wages” (although in the Ugly version we’ll see what happens when this isn’t the case), so whatever gains one gets from lower prices are likely to be offset by lower wages. For another, that definition says nothing about whether the process by which prices fall is a painful one. (Could not one say of inflation: “What’s the big deal? Sure, prices are going up, but your wages will too, so aren’t you just even?” We know enough about the process by which prices rise to know it’s not that simple and the same is true of the process by which they fall.)

With that common definition in mind, we then need to make a further distinction about the cause of falling prices. A decline in the general level of prices can come from two broad sources: improvements in economy-wide efficiency (the decreased relative scarcity of some large number of goods) or a deficient supply of money. We might further distinguish between these two by referring to the first as “price deflation” and the latter as “monetary deflation.” Price deflation, as it turns out, is the “Good” of the Good, the Bad, and the Ugly. Monetary deflation is the “Bad” and can lead to the “Ugly.”

Price deflation, sometimes called “benign deflation,” is, or at least should be, the normal by-product of a growing economy. To see why, we need one last digression, this time into monetary theory. Understanding both inflation and deflation requires that we recognize that the demand for money is a demand to hold real cash balances: We demand money when we hold balances in our wallets or our checking accounts. When we spend money we actually reduce our demand for money as we shift how we hold our wealth from money to whatever we buy. Think of a wallet or checking account as part of a larger portfolio of assets we choose to hold at any given time. We want a certain portion of our wealth in the form of housing, some in the form of food, some in the form of clothing, and some in the form of money. Thus our demand for money is a demand to hold money balances, and we care about the real purchasing power of those money balances—what they are capable of buying, not just what number is stamped on the bills.

A correct understanding of the demand for money helps us to understand why sometimes people can have either more or less money than they would prefer. For example, during inflation the monetary authority has created more money than people wish to hold at current prices, so they spend those “excess” money holdings on goods and services, driving up their prices. During a monetary deflation, as we shall see, a deficient supply of money means that people do not have large enough money balances and will act to get more.

All of this implies that a good monetary system is one that supplies exactly the amount of money the public wishes to hold at the current level of prices. It is worth noting that this view, called “monetary equilibrium theory,” implies that not every increase in the supply of money is inflationary. Should the demand for money rise, it is the appropriate response of the monetary system to increase the supply to match it. In our discussion of monetary deflation below, we will see why monetary equilibrium theorists make this argument. This argument also distinguishes those Austrian economists who work from the monetary equilibrium tradition from those who work from a more Rothbardian tradition, in which any increase in the money supply not matched by an increase in the quantity of gold is necessarily inflationary and the ideal monetary system is not one that matches changes in money demand with changes in the money supply.

The Good

If the monetary system is doing its job and matching changes in money demand with changes in supply, the long-term trend of the price level will be gently downward as economy-wide productivity rises. Put differently, increased productivity will cause benign price deflation as the real cost of goods and services falls. This sort of deflation is not only not harmful; it is beneficial because the cost of living is lower. In the United States this is precisely what happened to the price level during the last few decades of the nineteenth century, since the pre-Federal Reserve banking system based on gold was reasonably effective at getting the money supply right much of the time and productivity gains caused a steady, slow fall in the price level. Over the last few decades the same downward pressure on prices from productivity gains has been taking place, but it has been outweighed in the aggregate by the inflationary policies of the Fed, so the price level continues to climb in spite of these productivity-induced deflationary pressures.

One implication of this last observation is that consumer price index figures may well understate the real degree of monetary inflation in a given economy. For example, if productivity increases are pushing prices down 3 percent per year, but excesses in the money supply are pushing prices up by 3 percent per year, the common measures of inflation would show stable prices. However, on the monetary equilibrium view, that stable price level is disguising underlying inflation of 3 percent, as prices should have fallen by 3 percent. Austrian economists have long argued that something like this may well have been at work in the 1920s, where relatively stable prices concealed a multiyear inflationary boom that culminated in the recession and then the stock market crash of 1929.

To the extent that a fall in the overall level of prices reflects increased productivity, it is Good. Similarly, a decline in the price level caused by the decreased relative scarcity of key goods is not problematic. The dramatic fall in oil prices in the autumn of 2008 was enough to cause the average level of prices in the United States to fall, which is the source of much of the concern about deflation. However, this sort of deflation is not the type to be concerned about, and certainly does not warrant the comparisons to the Great Depression. In fact, falling oil prices in this case probably did much to prevent the early months of the recession from being any worse than they were, as lower gasoline prices eased financial pressures on many households.

The Bad

The “Bad” sort of deflation arises from an insufficient supply of money. When people do not have as much of their wealth in the form of money as they would like, they will make attempts to increase those money balances. Assuming that in the short run additional income is not possible, people have essentially only two other options: sell off other assets or reduce their expenditures. Either one will work, but selling off assets is problematic for two reasons. First, it is not totally under the individual’s control since it requires a buyer, and second, if everyone is short on money, finding a buyer will be especially difficult because everyone else is looking to sell. Therefore, the most likely result of a deficient money supply is that people will restrict their expenditures to allow more of their income to build up as checking account or currency balances.

As everyone reduces spending, firms see sales fall. This reduction in their income means that they and their employees may have less to spend, which in turn leads them to reduce their expenditures, which leads to another set of sellers seeing lower income, and so on. All these spending reductions leave firms with unsold inventories because they expected more sales than they made. Until firms recognize that this reduction in expenditures is going to be economy-wide and ongoing, they may be reluctant to lower their prices, both because they don’t realize what is going on and because they fear they will not see a reduction in their costs, which would mean losses. In general, it may take time until the downward pressure on prices caused by slackening demand is strong enough to force prices down. During the period in which prices remain too high, we will see the continuation of unsold inventories as well as rising unemployment, since wages also remain too high and declining sales reduce the demand for labor. Thus monetary deflations will produce a period, perhaps of several months or more, in which business declines and unemployment rises. Unemployment may linger longer as firms will try to sell off their accumulated inventories before they rehire labor to produce new goods. If such a deflation is also a period of recovery from an inflation-generated boom, these problems are magnified as the normal adjustments in labor and capital that are required to eliminate the errors of the boom get added on top of the deflation-generated idling of resources.

Over the course of U.S. history the economy has been subject to a number of deflationary episodes, all of which were the consequence of a variety of government interventions in the monetary system. In each of those cases before the Great Depression, policymakers largely allowed the economy to repair itself by standing by and doing little to nothing while prices and wages fell sufficiently to get the demand for money back into alignment with the supply. No doubt these were painful recessions that could have been avoided by having a banking system that responded to changes in money demand by more quickly adjusting the money supply, rather than allowing the price-level adjustment process to cause the problems noted above. However painful they were, these recessions did not become the “Ugly” version of deflation precisely because policymakers allowed the necessary downward adjustments to take place, which was the correct thing to do given the monetary system’s errors that caused the monetary deflation in the first place.

The Ugly

During the Great Depression, what should have just been a Bad deflation became an Ugly one. This deflation was unlike earlier ones for two reasons. First, the scale of the deflation was unmatched. The U.S. money supply fell over 30 percent between 1929 and 1933, a period in which the demand for money was actually rising as a consequence of the stock market crash and the bank failures that followed it. The combined effect was a massive downward pressure on prices. The Fed did not actively reduce the money supply during this period; it failed to react strongly enough to actions the public and banks were taking, such as the public’s holding more currency rather than bank deposits, which caused a multiplied reduction in the total money supply. As Milton Friedman and Anna Schwartz’s A Monetary History of the United States describes it, there was a great deal of internal debate within the Fed over whether it had the power to respond as we now believe it should have and whether, even if it had the power, such a response was the right one. Those who argued in favor of doing nothing won the day and substantially worsened the depression in the process.

The second difference from earlier recessions was that policymakers adopted the view that the key to recovery was to “maintain” prices and wages at their pre-deflation levels. Both Presidents Hoover and Roosevelt strong-armed business leaders into keeping prices and wages up and pushed laws that directly or indirectly did the same.

The effects of these misguided attempts at price and wage maintenance were devastating. Firms continued to pay unjustifiably high wages, while watching sales slacken because prices also stayed high; they covered their losses out of their profits, causing some firms to fail and others to see severe declines in their stock prices. This contributed to the low levels of private investment that prolonged the depression since firms did not have profits to recycle back into their own activities. More brutally, keeping wages so high led to the horrific unemployment rates of the Great Depression, which peaked at around 25 percent in 1933. Only by around 1934 did prices and wages fall enough to start bringing unemployment rates back down. However, unemployment remained at historic highs because even with the declines in prices and wages, private investors were hesitant to take risks in light of the policymakers’ earlier mistakes and the constantly shifting political environment. During the Great Depression, unemployment stayed above 14 percent from 1931 through 1940.

Current observers are quite right to point to the Great Depression as an example of what can go wrong from deflation. There is no doubt that the very large monetary deflation of the early 1930s made the recession that began in the summer of 1929 much deeper and more severe than it would have been otherwise. But even so, had prices and wages been allowed to adjust, that recession would have been Very Bad, but not Ugly. Attempting to keep prices and wages high during the monetary deflation prevented the cleansing price adjustments from taking place and forced sellers to make “quantity” adjustments in the form of reduced production and historic levels of unemployment.

Avoiding the Last Big Mistake

The price level declines seen in the fall of 2008 and early 2009 do not seem to be harbingers of significant deflation. As noted earlier, the decline in oil prices is the leading factor pushing down the overall price level, and this is the benign price deflation that we have labeled Good. In fact, the Fed’s initial response to the troubles in the banking system in the fall of 2008 was to flood the system with reserves, remembering the mistakes the Fed made at the onset of the Great Depression. Given the worries about a cascade of bank failures and the major deflationary effects this would have had on the money supply and the economy as a whole, injecting some additional reserves was probably the right reaction at the time. Two key questions remain, however:

1) Did the Fed overreact and create too many reserves? A look at the Fed’s balance sheet suggests it may well have done so, especially given how many of those new reserves are just sitting in the banks right now (helped along by the Fed, now paying interest on such reserves).

2) Will the Fed be able to withdraw those reserves as the economy recovers and thereby avoid a potentially massive and damaging inflation? If it cannot do so, we will face a much bigger threat in the near future from inflation than from deflation.

All of that said, we do not know for certain what is going on with the demand for money. We know that expenditures are down, which suggests that people are quite possibly increasing their demands for money. But in the absence of the thousands of bank failures that characterized the 1930s and with evidence that banks, on the whole, are continuing to lend (despite scare-mongering media and government stories to the contrary), the concern that any increase in money demand will translate into significant monetary deflation seems remote. As Milton Friedman once said, central banks are always trying to avoid their last big mistake. In this case, that big mistake was the Great Depression, and the Fed has clearly shown a willingness to err on the side of inflation rather than deflation, even at the cost of putting itself in a difficult position once the recovery starts.

What all of this goes to show is that the best way to avoid both Bad and Ugly deflation and to generate the Good kind is to minimize the role of government intervention in both the monetary system and the regulation of prices and wages. A competitive banking system—one without a central bank but with fractional reserves—would avoid both deflation and inflation. Even under a central bank, the effects of a monetary deflation can be minimized by restricting government’s involvement in the setting of prices and wages. In a free economy the only deflation we would see is the slow, long-run decline in prices that results from the productive powers of competitive capitalism. That deflation would be just another Good produced by truly free markets.

Considerable effort goes into these exports. Noble and self-sacrificing on my part? Hardly. Rather, economics exports are a means to an end for me, a self-serving end no less. To wit, my exports enable me to buy—that is, import—things produced by others. An amazing array of things. Things ranging from life-sustaining necessities to frivolous amenities (including leisure activities). Far more of these things, in fact, than I could ever obtain were I producing them myself. The bottom line is that I export in order to import.

Many of my university colleagues, especially liberal arts/humanities professors, indignantly object to an export-to-import description of their efforts. Not surprising. Universities abound with folks whose avocation, if not part-time occupation, is parading their above-the-economic-fray demeanors. Export in order to import? Mercy, that smacks of commercialism, and we’re above that, say these self-styled pillars of economic piety.

If cornered into explaining their motivation, these piety pillars wrap themselves in platitudes such as, “I do what I do for the joy of watching young minds develop” or “The affirmation that comes from pushing back the frontiers of knowledge is what motivates me.” Export/import terminology only applies to them, they intone, if you label them importers of “joy” and “affirmation.”

While high sounding, such labels are disingenuous, if not stupid. Take away these folks’ imported housing, clothing, food, medical care, entertainment, education, along with the countless other things that go into living, and they’re ill-housed, ill-clad, and ill-fed—if not dead—professors. Again, the benefits people reap from the marketplace appear when they import things produced by others. Only workaholics see intrinsic value in their exports.

Does this have implications for “national households”? You bet, even though nations are not literal households. A “national household’s” economic activity is nothing more than a summary of the actions of its residents, each responding to the incentives he or she faces. The question here is whether the foregoing applies with equal force to export/import activity between members of different “national households.” The answer, again, is: most assuredly. Or as Adam Smith put it in his 1776 classic, The Wealth of Nations: “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”

What a “national household” exports corresponds to what its citizens give up in order to import things of greater value from their counterparts in other “national households.” U.S. soybean exports to China, for example, represent forsaken animal feed (meat) for Americans. The exports are worth the forgone meat to the extent they make it possible for Americans to buy yet-more-valuable Chinese-produced goods, say, umbrellas. The worst-case scenario for Americans, in fact, would be exporting without importing—in the soybean case, less meat and no umbrellas.

Connecting the Dots

Unfortunately, pundits and politicians never connect the dots between personal households, including their own, and the “national household.” The result is a business and political culture saturated with advocacy of national workaholism—extolling exports and damning imports. Who hasn’t heard pundit/politician sloganeering about how exports are “good” and imports are “bad?” You know, exports “create” and imports “destroy” jobs? Ditto for imports being “dumped” on Americans or likening imports to “invading foreign armies.” Tracing low-priced imports to “tilted economic playing fields” is another slogan.

But the quintessential connect-the-dot failure, at least to my thinking, is how the pundit/political class describes international negotiations ostensibly designed to increase international trade. To wit, actions that increase Americans’ access to imports are labeled U.S. negotiating “concessions.” That is, permitting Americans to import more is a bargaining chip to secure comparable foreign “concessions” for U.S. exports. That’s like my reluctantly accepting the housing, food, and clothing that my economics exports make possible. Make sense? Yeah, if you’re a workaholic.

So whom should we believe—pundit/politicians at home or pundit/politicians in the public square? At home these opinion makers export in order to import, while suggesting the “national household” imports in order to export. My fifth-grade teacher used to scold me about my actions speaking so loudly that she couldn’t hear what I was saying. The same applies to pundit/politicians. Look at what they do at home. After all, that’s where their own living standards are on the line, a consideration long noted for focusing attention on essentials. Their nostrums for the “national household” are a product of the mental sloth that always ensues when people spend other people’s money for the supposed benefit of someone else.

Nonsense.

Democrats act like the president is national economic manager. Republicans pay lip service to free markets, tax and spending cuts, and less regulation—before proposing big programs to achieve “energy independence,” job training, and a cooler climate.

John McCain says it’s important for government to do something “to sustain our leadership in manufacturing.” Why? Manufacturing jobs are no better for America than other jobs. Some argue that they are worse. How many parents want their children to work in factories rather than offices? Increasing service jobs in medical, financial, and computer sectors while importing manufactured goods doesn’t hurt America. It helps America.

The candidates see the global economy as an arena in which countries compete against one another—an economic Olympiad with winners and losers. Politicians love to promise they will keep America No. 1, as if that matters in a worldwide marketplace.

America as a nation does not compete against China or South Korea or Japan. American companies compete against companies in other countries, but that’s something else. The purpose of production is consumption, and American consumers prosper when foreigners compete successfully with American companies.

Ignorance and Intervention

A president who sees the global economy as a competition among nations will be tempted to intervene on behalf of the “United States” and create “good American jobs.” That’s how governments mess up economies.

McCain says, “It is government’s job to help workers get the education and training they need for the new jobs.” Mike Huckabee (who glories in public-works projects as a job-creation machine) and Barack Obama talk in similar terms.

That hardly shows confidence in the free market, which, if allowed, would train and educate workers just fine. But it shows misplaced confidence in the federal government, which, as journalist Jim Bovard has shown, has an unbelievably bad track record at doing it. The endless list of programs, like the Manpower Development and Training Administration, Comprehensive Employment and Training Act, Job Training Partnership Act, STIP, BEST, YIEPP, YACC, SCSEP, HIRE, etc., wasted billions and “distorted people’s lives and careers by making false promises, leading them to believe that a year or two in this or that program was the key to the future. Federal training programs have tended to place people in low-paying jobs, if trainees got jobs at all.”

Sen. Hillary Clinton told the New York Times recently, “I want to get back to the appropriate balance of power between government and the market. You try to find common ground, insofar as possible. But if you really believe you have to manage the economy, you have to stake a lot of your presidency on it.”

Notice that she equates government power and market power. That is absurd. “Power” in a free market means success at creating goods and services that your fellow human beings voluntarily choose to buy. Government power is force: the ability to fine and imprison people.

Politicians who talk about managing the economy ignore the fact that, strictly speaking, there is no economy. There are only people producing, buying, and selling goods and services. Keep that in mind, and one realizes that government action more often than not interferes with the productive activities that benefit everyone. When politicians propose regulations to fix some problem, they should ask if some earlier intervention created the problem and if the new regulations will make things worse. The answer to both questions is usually yes.

The economy is far too complex for any president—no matter how smart—to manage. How can politicians and bureaucrats possibly know what hundreds of millions of individuals know, want, and aspire to? How can government employees fathom what trade-offs to make in a world of scarce resources?

They can’t. That’s why free people are more prosperous than unfree people.

Presidential candidates should promise to keep their hands off the economy.

That’s how George Mason University economist Russell Roberts describes the logic—rather, illogic—of the economic “stimulus” proposals that everyone and his uncle have been proposing.

If we needed further demonstration of the folly that is the American political-economic system, there it is. The leaders of the interventionist state and the candidates who aspire to command it will continue to produce this inanity until people see it for the balderdash it is and resoundingly reject it.

The problem is that most people don’t see it for what it is. When told economic activity is slowing down, they demand that their “leaders” and candidates assure them there is a Plan to keep them safe. The politicians are more than happy to oblige. Details don’t matter much.

The economic-stimulus theory is plainly incoherent. Besides the swimming-pool analogy already quoted, Russell Roberts showed the futility of what’s being proposed in another vivid way. Noting that politicians love to talk about “injecting” money into the economy, like a doctor giving a patient a transfusion, Roberts writes, “But where does the economic injection come from? It has to come from inside the system. It’s not an outside stimulus like . . . the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.”

If the government uses fiscal means to goose the economy, the money has to come from somewhere. The politicians do not propose to cut spending—quite the contrary. So, since the budget is already in deficit, any tax “rebates” and new government spending will have to come from borrowing. But government debt doesn’t create wealth; it only transfers it. The lenders won’t be able to spend or invest the money. And the new debt will have to be repaid with interest through taxation in the future, suppressing economic activity then. Likewise, if taxes are raised to provide the stimulus—well, you can finish the thought.

If the government increases some people’s ability to spend by decreasing other people’s ability to spend, where’s the stimulus? Maybe these measures aren’t really intended to stimulate anything but a candidate’s popularity with appropriate constituencies. The underlying rationale for stimulus is that consumption is insufficient. While the purpose of production is indeed consumption, it doesn’t follow that the government can create economic growth by stimulating consumption. You can’t consume what hasn’t been produced.

Thus giving people money and urging them to spend it won’t improve their economic prospects. As usual, what looks like a political favor to low-income people is just a cruel hoax. Their well-being depends on genuine and sustained economic growth, which would maximize job opportunities and lower prices. But that requires a radical freeing of the economy—which politicians are not wont to favor.

The most objectionable side of the stimulus frenzy is the assumption that government can and should run the economy. The reports of the death of Keynesianism were apparently exaggerated. Most people still believe the economy is a vehicle and the government the driver, precisely adjusting the gas pedal and brake as needed. But really there is no “economy.” There are only people pursuing ends and the property they use and exchange in the process. If the government tries to “run the economy” it has to run us. It is a dangerous mistake to think the would-be driver can know what he’s doing. He can’t possibly know. The system is too complex, the necessary information—much of which is never articulated—scattered too far and wide. In contrast, the market process solves the problem of how to coordinate the productive activities of countless people in order to satisfy consumers.

Those who are biased against freedom will proclaim that our economic problems show that the free market has failed. What free market? Do they mean the “free” market that for ages and in myriad ways the government has straitjacketed and skewed on behalf of favored interests?

We are in our present position because government has burdened us with taxes, spending, debt, regulations, subsidies, guarantees (to banks, for example), trade restrictions, fiat money, and other impositions. Between the endless domestic schemes and war, we are being crushed by the weight of the state. We don’t need a stimulus. We need the weight lifted. We need freedom.

* * *

We’ve all seen those signs in stores bragging that only “fair trade” coffee is sold or served on the premises. Is this a worthy cause for advocates of freedom? Gene Callahan has the scoop.

It’s now uncomfortably common to see reports about abuse of innocent people by police forces resembling military units. Steven Greenhut examines this ominous development.

Condemnation of the profit motive is routine. But as Steven Horwitz explains, the profit motive is ubiquitous. What makes it beneficial or harmful is the institutional setting.

When a government official harms someone and the victim wins a lawsuit, it’s usually the taxpayers, not the offender, who pay the price. Is that justice? Ridgway Foley says no.

Some environmentalists think outer space should be preserved in its pristine state, free from human pollution. Are they kidding? J. H. Huebert and Walter Block ask.

The word “efficiency” is thrown around far too casually in discussions of government policy. It might be good to know what the word means. Gary Galles takes a look.

Here’s what our columnists are serving up this issue: Richard Ebeling dissects the “new happiness economics.” Lawrence Reed tells why a Continental was worth so little. Thomas Szasz points out that being drugged against one’s will is not treatment. Robert Higgs assays the effect of the New Deal on local government. John Stossel is glad that Third World nations are getting richer. Charles Baird documents how the government helps union leaders to plunder. And David Henderson, stunned by the assertion that medical care in the United States is worse than in other places, responds, “It Just Ain’t So!”

Books on democracy, market-based management, pharmaceutical regulation, and wealth-creation come under review.

—Sheldon Richman
srichman@fee.org