The Freeman 1984 - Foundation for Economic Education · Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational

the

FreemanVOL. 34, NO.3 • MARCH 1984

Unemployment-A Page on Freedom, No.4 Hans ~ Sennholz 131

The cure is to restore freedom in the labor market.

Natural Liberty: A New Version Perry E. Gresham 132The spell of Marxism still hangs over us, but must give way to man'snatural love of liberty.

The Early History of FEE Henry Hazlitt 143One of the original Trustees recalls the origin in 1946 and the earlyhistory of The Foundation for Economic Education.

Our Fair Share Ridgway K. Foley, Jr. 147Our fair share consists of that which we create and acquire in nonaggressive manner.

Dime Store Economics Jerry Ellig 156A helpful example of productive activity to serve consumers.

The Case of the Stock Market:Freedom vs. Regulation S. David Young 159

A look at the market alternatives to SEC rules and regulations.

How to Reduce Crime Morpn O. Reynoltls 168Make punishment swift, sure, and severe under a firm but limitedgovernment.

Unions and Government Employment Dennis Bechara 175Coercive "bargaining" versus keeping the peace.

Book Reviews: 184"The Case for Character Education" by Frank Goble and B. DaviaBrooks"Nation, State, Economy: Contributions to the Politics and History ofOur Time" by Ludwig von Mises"Natural Resources: Bureaucratic Myths and Environmental Management" by Richard L. Stroup and John A. Baden

Anyone wishing to communicate with authors may sendfirst-class mail in care of THE FREEMAN for forwarding.

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~ FreemanWA MONTHLY JOURNAL OF IDEAS ON L1BERlY

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A Page on Freedom Number 4

Unemployment

UNEMPLOYMENT is one of the mostsenseless and unnatural phenomenaever to descend on man. Any improvement in the arrangement anduse of resources in the world depends on human labor. Man mustsustain his life through labor. Thatis as certain as day and night. Andyet millions of people are unemployed.

The news media announce it, theeducators lament it, politicians condemn it, and governments allocatepublic funds to eradicate it. No othereconomic phenomenon receives asmuch public attention as unemployment. Despite such popular condemnation, unemployment persists,holding millions of Americans in itsdeadly grip.

Unemployment is a political disease which springs from the primitive but popular notion that government can improve everyone's incomeand working conditions by legislation and regulation, and that laborcombinations can exact higher incomes and better conditions throughcollective bargaining. It is an affliction that stems from misinterpretation and misinformation about workand income and from an undaunted

f.aith in collective force and coercion.As such, it clearly reflects the spiritand mentality of our age.

The rate of unemployment is directly proportional to the force applied to raise the cost of labor. Forcernay be applied by the victims themselves acting collectively throughproperly certified labor unions, or by~~overnments enacting laws and imposing regulations that raise labor(~osts. But in final analysis, unemployment descends from the vaguesupposition that collective force is(~apable of improving the economic(~onditions of working people.

There are no "instant" solutionsto the phenomenon of unemploylment, no painless recipes or politicalprescriptions. There are no coercivecures or remedies that create jobs forthe jobless. Labor will be· fully employed when its application is profitable and adds value to production.

The way to alleviate unemployment is to reduce the coercion of:minimum wage legislation, fringebenefit mandates, and union ratesand rules. It is to restore freedom inthe labor market, which permits thecost of labor to readjust to the truelevel of productivity. i

---llansF.SennhohTHE FOUNDATION FOR ECONOMIC EDUCATION, INC.IRVINGTON-ON-HUDSON, NEW YORK 10533 131

Perry E. Gresham

NATURAL LIBERTY:A New Version

WHEN Good Queen Bess defended herrealm from powerful and gold-richSpain by means of a superior Navyand a powerful fleet of merchant adventurers, she gave out monopoliesto certain traders and exemplified,thereby, the mercantilist system. Astime went by, the astute practices ofSir Thomas Gresham, my distantkinsman, kept her modest empiresolvent, even though her kingdomwas always on the brink of disaster.The Low Countries with which shetraded were in even more desperatecircumstance. The Spanish and Portuguese explorers lived with themercantilist presumption that precious metal is wealth.

However, contradictions and excesses inherent in government monopoly of trade administered throughcartels and licensed subordinatemonopolies soon brought disenchantment to those involved. Thetyranny ofthe governments and theirplundering agents left many peoplein penniless squalor. The urgency ofchange became a drumbeat.

At just this moment came the wiseintellectual leadership of AdamSmith. He was a quaint and charming absentminded professor who for-

132

mulated a new approach to politicaleconomy. He called it "natural liberty." He saw wealth not as bullion,but as a prospering economy whichgave hope to the poor and liberty tothe common person. His classicbenchmark volume, An Inquiry intothe Nature and Causes of the Wealthof Nations, published in 1776,marked the end of mercantilism andushered in the new order which wassoon known as "liberalism."

This somewhat slippery designation for a particular approach to political economy was intended to emphasize the freedom of the individualto act without restriction of statemonopoly. While supply and demand are as old as any form of human commerce, it received its mostadequate presentation in AdamSmith. In a somewhat desultoryfashion, Smith covered such issuesas the division of labor, the formation of capital, and the self-regulating nature of the market which madeits own allocations, set its own prices,

Dr. Gresham is President Emeritus and Distinguished Professor of Bethany College and PresidentPro Tempore of the Foundation for Economic Education. This paper was delivered by him at the LeonardE. Read Memorial Conference on Freedom, November 18, 1983.

NATURAL LIBERTY:: A NEW VERSION 133

developed its own labor force, andbrought on amazing prosperitywithout the interference of government intervention.

The natural liberty of Adam Smithmeant freedom of initiative and resourcefulness to find economic opportunities and lift the common people out of their poverty. The marketworked so well that the industrialrevolution ensued.

Webster's Unabridged Dictionarydefines "liberalism" as "A theory ineconomics emphasizing individualfreedom from restraint, especially bygovernment regulation in all economic activity, and usually basedupon free competition, the self-regulating market, and the gold standard (the decline of mercantilismproduced a period characterized notably by the ideas and policy of liberalism)-called also economic liberalism."

The free market, however, is notmerely economic. Among otherthings, it is political. Economic considerations imply political activitiesofa certain kind. In all Scotland thereis no university course in Economicsand none in Politics; it is always Political Economy. Only the politics oflimited government with an inclination toward laissez faire madepossible the liberalism of AdamSmith. John Stuart Mill wrote hisessay on liberty as a sort of politicalequivalent to The Wealth ofNations.While Mill got himself confused into

some proposals of socialist economics, he was crystal clear in his demand for liberty in government.

Critics ofnatural liberty appearedin spite of the obvious success of itsdrive toward prosperity. ThomasMalthus, demographic genius whoserved as a priest at the Cathedralof Bath, worried that people wouldgrow thrifty and savings would destroy the economy. David Ricardo,the stock broker who was a friend ofthe poor, fretted about rents and formulated his iron laws. But the realchallenge to Adam Smith came withthat angry curmudgeon who waswriting endlessly in the British Museum. The Das Kapital ofKarl Marxgave the name of "capitalism" to theeconomy of the free market. He usedthe word as a pejorative term; nevertheless, it gained respectability inspite of him. Capitalism powered theamazing development of that nascent republic which we call TheUnited States of America.

In the first half of the 20th century, the winds of opinion changed.The 1930s were marked with a verydifferent attitude toward liberty. Thewhole meaning of the word changed.John Maynard Keynes was a truegenius at investments who tripledthe endowments ofKing's College atCambridge by studying its portfolioeach morning before he finished histea and dressed for the day. An ardent patron of the arts, he was President of the Covent Gardens Society.

134 THE FREEMAN March

Bertrand Russell called him thegreatest mind he had encountered.Keynes became interested in economics and wrote some books aboutmoney and about economic theory.He had great confidence in the government to manage the economy bystimulating aggregate demand.Much of the Pandora's box of government intervention was opened byJohn Maynard Keynes. His adviceto the American leaders involved inthe Great Depression resulted in theNew Deal.

Contemporary AmericanLiberalism

John Kenneth Galbraith has become an apostle of the contemporaryso-called "liberal" tradition with itsemphasis on the public sector of theeconomy and its high regard for government as arbiter, manager, and insome respects, even owner. He is abold proponent of government planning, a defender of transfer payments to promote equality, an exponent of government regulation forbusiness, industry and finance. Heargues that high taxes are necessary for civilized living. He has described the liberalism of Adam Smithas "the conventional wisdom." Someof the facts add plausibility to hisargument. Businessmen have run togovernment to reduce competition,to find protection from foreign trade,and to gain monopoly, if possible.Some of their rhetoric in favor of free

enterprise is rhetoric and nothingmore. They talk of individual libertywhile cozying up to government fortheir own advantage. Galbraith wasright in calling their free enterprise"conventional wisdom."

By standards of contemporaryAmerican liberalism, as exemplifiedby some public figures such as Senator Edward Kennedy, Presidentialcandidate Walter Mondale, HouseLeader Thomas P. "Tip" O'Neill, ormost of the media gurus such as JohnChancellor or Jack Anderson,equality as an ideal for our societyis viewed as absolute, rather than"the equality of opportunity" asmentioned by Thomas Jefferson.Quite oblivious to the fact that people are not equal and cannot be so,they make strong egalitarian appeals that are powerful vote-getters.They would pass laws that wouldtake from some and give to others inorder that all might be equal, or asmuch so as possible.

The contemporary American liberals, whether they are professors,news people, authors or politicians,argue that the present world economy is much too complicated to operate without planning and management. They believe in biggovernment and high taxes. Economist Allan Meltzer has observed,"Governments grow because thebenefits are concentrated and thecosts are diffused." Large interestgroups organize to win special fa-

1984 NATURAL LIBERTY: A NEW VERSION 135

vors for themselves and the cost isso widely distributed that the votersdo not organize to oppose the specialinterest legislation. In line with thiseffort, some leaders favor socializedhousing and transportation. Intellectuals are slow to learn what haslong been known as economic truththat not everybody can live at theexpense of everybody else.

The New Deal

The Franklin Delano RooseveltNew Deal marked the effective finish of the free market economy inAmerica and brought in the arrangement which I have describedas "interest group interventionism."The state has taken on a vital rolein all economic affairs, even thoughthe relationship is less than socialism. The politicians and the bureaucrats feel responsibility to regulateindustry and commerce, protect consumers, provide safety regulations,spell out the basis for economic action by controlling mergers, protectthe environment and provide for thegeneral welfare by· means of transfer payments. Government grows,taxes become onerous, and individuallibertyerodes.

The contemporary "liberal" inAmerica is inclined to look to thegovernment for solutions to nationalproblems such as unemployment orhighway safety. He is liberal in contradistinction to conservative. Theearlier meaning of freedom from

state interference and control iscompletely lost. The pejorative useof the term "liberal" by religiousfundamentalists may have contributed to the New Deal meaning of theterm. The name "liberal," is wornwith pride by those who wish to beprogressive; they describe conservative in such disparaging terms as"rightest," "old fogy," "fundamentalist," "reactionary," and "ultraconservative." By the irony oflanguage, the word has been transformed to mean something more akinto mercantilism than to the liberalism of 1776.

"New Deal socialism saved capitalism in America" is a common remark by those who are conscripts ofthe contemporary American conventional wisdom. There are severalvariations on this remark, such as"President Roosevelt saved capitalism" or "Keynes. was the economistwho observed the self-destructivetendency of capitalism in The GreatDepression and provided a theoretical basis to restore the economy."Such efforts at explaining change inpolitical and economic theory arenaive. The New Deal dash of socialism did not end the depression, norcorrect the conditions which broughtit on. The Great Depression endedonly when that dreadful war lashedthe economy into a fury of production. The conventional "liberal" wisdom contributed to the failure ofcapitalism rather than to its sal-


vation. Government interventionspawned a whole new batch ofproblems. Muddled legislation and bureaucratic excess were pronouncedgood and baptized both liberal andhumane. The stark facts are thatliberty was diminished, productionrepressed, inflation stimulated, andtaxes multiplied to oppressive proportions. For documentation seeBusiness, Government, and the Public by Murray Weidenbaum.

Natural Liberty: A New Version

Sometime around 1975, a newawareness began to sweep the world.Walter Lippmann much earlier hadforeseen this effect when he wrote ofthe sickness of an overgoverned society. Higher and higher taxes withmore and more loss of individual liberty began to catch the attention ofworld leaders. In countries whereopinion can make a difference, theelectorate was ready to accept morefreedom in the political economy.Margaret Thatcher came into powerin Britain; Ronald Reagan waselected in the U.S.A.; and the Scandinavian countries took a sharp turnto the right. France elected a socialist who seems to be leaning towardcapitalism because of the failure ofhis nationalization efforts. The worldseems to be ready for a rebirth offreedom.

As a political economist, I do notpresume to evaluate Mrs. Thatcher,Mr. Reagan, Mr. Mitterrand, or any

other political leader. It is my function to point out the mood of the people with regard to the role of government within a particular nationstate. It is my opinion that Mrs.Thatcher and Mr. Reagan were sweptinto offi~e because they representedmore liberty in the political economy oftheir respective countries. Themodification of the socialism of Mitterrand in France derives, likewise,from the interests of the people whocherish liberty.

The dominant public philosophy,however, continues to be government-centered interventionism. Theplanned and regulated politicaleconomy is the new "conventionalwisdom." Labor leaders expound thistheory, but the rank and file are disenchanted with it. The members havebegun to move with the drumbeat ofa new liberty. There are stirrings toward the liberation of individuals allover the world-even in tightly controlled nation states such as Russiaand China. The people are beginning to reassert themselves and torediscover their individual needs,wants and ideas. Weariness withbeing a mere cell in some collectivesociety is losing its appeal.

The arrival of Aleksandr Solzhenitsyn in America was a massive blowto the Socialist mystique. The almost lyrical appeal of Marxism tomany contemporary American liberals had a rude shock when it became apparent that socialism has a


very high record of abysmal failurealmost everywhere. Indira Gandhi istrying to move India back from leftto center. Chile is in turmoil, but hashad enough of Allende. Many Canadians are sick of Trudeau. Mainland China is adopting capitalisticmethods and ideas. Even Russia isshowing more and more inclinationtoward capitalist ways in domesticmatters.

Nor is economic theory lacking forthe new forms of natural liberty.John Maynard Keynes once said,"The ideas of economists and political philosophers, both when they areright and when they are wrong, aremore powerful than is commonlyunderstood." New and different intellectuals are emerging who givethought and structure, as well as respectability, to the freedom philosophy. Theodore Lowi, political scientist at The University of Chicago,came forth with a new book calledThe End of Liberalism. Writing atthe very end of the 1960s, he outlined in lucid terms the failure ofthe state-centered liberalism of theAmerican mid-century. He markedthe inability of the bureaucracies todeal with the problems ofhuman action. He wrote a convincing chapteron the subject, "Why Liberal Governments Cannot Achieve Justice."He notes the failure of the welfarestate in its effort to deal with poverty. He notes the tragedy of effortsat urban planning. He notes the

breakdown of the law in dealing withhuman issues when the law itselfattempts to make policy.

Lowi is not alone. A whole flood ofcontemporary books of quality showthe disenchantment that comes withtoo much government. The experience of one thoughtful journalist whohas interviewed and dealt with almost every person of prominence inthis 20th century describes his pilgrimage away from contemporaryAmerican liberalism to the freemarket, the free individual, and thefree enterprise. I refer to JohnChamberlain's exciting book titledA Life with the Printed Word. A gurufrom Boston, named Warren Brookes,who wrote The Economy in Mind,comes down hard on the side of thenew liberation from statism. Theamazing popularity of the Friedmanbook, Free to Choose, is a great boostto the new public philosophy of liberty. In his book, The Spirit ofDemocratic Capitalism, Michael Novakhas touched capitalism with a spiritual wand which renders contemporary American liberalism obsolete.

The Austrian Influence

All these writers build on a solidbase laid by Ludwig von Mises in hisgreat book Human Action. Comparable to it, and even more widelycirculated, was the first alarmsounded by Friedrich Hayek with hismore popular book, The Road toSerfdom. These two notable scholars


were part of the Austrian school ofeconomics which has growing support in all intellectual circles. Liberty is no longer out of fashion.

This new variety of liberalism isnot just Adam Smith redivivus. It issomething completely new and appropriate to the present position oflife on this little blue planet. For example, George Gilder has correctlypointed to the benevolent nature ofcapitalism. This is a phase of AdamSmith which is frequently overlooked. It was present in his book,Theory of Moral Sentiments, butomitted from The Wealth ofNations.Gilder sees capitalism as a sort ofexemplification of the Biblical injunction, "Cast thy bread upon thewaters."

The new political economy of liberty and hope takes full account ofthe benevolent nature of this system, whether it be called the marketeconomy, capitalism, free enterprise, or by some other name. WhenHenry Ford was building black automobiles and amassing a huge fortune, his primary concern was better transportation for less expenseto the American public. I have knownhis family well. Many'of his originalcolleagues in the enterprise testifyto the fact that he thought ofhimselfprimarily as a benefactor. I have justfinished serving as chairman of acommittee to write the history of theJohn A. Hartford Foundation. As Istudy the lives of John and George

Hartford, I realize that thesefounders of the Great Atlantic& Pacific Tea Company were primarily motivated by a consumingdesire to provide the people of theworld with better food for less money.

Profit Rewards Service

The beauty of the free market isthat service to humanity is rewarded by profit almost in directproportion to the quality of the service rendered. The truly successfulentrepreneur of our times is a person of social awareness, compassionate concern for the people aroundhim, and fully aware of the fact thatthe pursuit of money for its own sakeis self-defeating. The beauty of thefree market is that the person whocorrectly perceives the needs of otherpeople, and meets this need in a resourceful fashion with the necessarydisciplines of good management andthe marketing genius of a successfulpromoter, finds himself rewarded forthe effort. Profit can be a major motive, but it is only possible whenworthy goods are produced andvaluable services are rendered. Theentrepreneur or the corporate executive who cares and serves can liveup to his own inner hero image.

The great founders of Americanbusiness have been lampooned andpilloried as robber barons. Some wererobbers indeed, but many were motivated by true benevolence, andpractically all of them thought of


themselves as heroes. The late T. V.Smith wrote a chapter in his book,Live Without Fear, which begins, "Noman is an s.o.b. to himself. In fact,each person is a sort of hero to himself."

This new approach of a redefinednatural liberty tends to reduce theadversarial relationship between labor and management. I was greatlypleased to hear Douglas Fraser speakapprovingly of the employee stockownership plan at Weirton Steel. Afew years earlier, no union leaderwould have dared consider any arrangement that would reduce unionpower, even though it had obviousbenefit for the people involved. Whilelabor leaders make loud declarations of the conventional wisdomwhich lingers as contemporaryAmerican liberalism, the rank andfile of the people who do the work ofAmerica are enchanted by the possibility of individual initiative andfreedom which might enable themto improve their own position. People like the possibility ofdoing thingson their own without too much dependence on unions and government.

Union influence is waning, and thepopular enchantment with government to solve all human problemshas begun to fade into disillusionment. Many workers are willing towork with their companies on realistic terms to prevent bankruptcy andinsure continuity. They have redis-

covered the wisdom of Samuel Gompers who said, "The company thatdoes not make a profit is the enemyof the working man." The new natural liberty will require more cooperation between management andlabor.

An End to Protectionism

This new cooperation is essentialto successful foreign trade. The tiredsolution of protectionism is not adequate to deal with contemporary issues. Technological advance in thefields of transportation and communication has reduced the size of theworld until the public philosophymust be aware of its global implications. Those who advocate barriersagainst foreign competition make nomention of the price rise for theAmerican public which is implied.More and more people are rediscovering the correctnessand pertinenceof David Hume, who more than twocenturies ago declared for international free trade. Those who try tomake a moral issue out of "buyAmerican" should consider the moralimperative to build better productsat less cost. The philosophy of liberty requires that people be free tobuy wherever they get the bestproduct for the least investment. IfAmerican production costs are toohigh and the products are inferior,the market is sending its inevitablesignal that we must learn to producebetter products at less cost.


The new natural liberty differsfrom past liberalism in that we havemore and better information andmore technological facility than everbefore. We are beginning to understand the nature of life on this littleplanet. We have become aware of theintricate ecology of everythingaround us. The interdependence ofeverything in our ecological worldhas reached the level of poignantawareness-and all of this in the recent past. When one natural condition is altered, all the others aresomewhat affected. Some of us havelearned, also, that the economic andpolitical world is quite as interdependent as the world of nature.

The contemporary American liberal argument that our world system is too complicated to be trustedto a free market is a contradiction ofpatent fact. Like the ecosystem, thepolitical economy of the world is toocomplicated to be placed in the handsof planning politicians and bureaucrats. The new natural liberty recognizes this fact and cries out for relief from the notorious failure ofsocialist solutions. The blindness ofour conventional wisdom is evidentin the fact that it has taken us solong to learn that the market is muchmore able to deal with vast and intricate problems than is any bureaucratic genius or pretentious political planner. Everybody knowsbetter than anybody. Noone personis wise enough, or strong enough, to

think, plan and prescribe for everybody else.

The principal factor in bringing onthe political economy, which I havecalled "the new natural liberty," isthe realization that our conventional wisdom of turning to the government for everything has betrayed us. Our experiment with thewar on poverty turned out to be awar on the poor. Our benevolent effort to provide free health service hassent the health costs soaring so thatthe system is in jeopardy. The political attempt to bring about equalityby the Robin Hood method of takingfrom the rich to give to the poor hashelped the rich and hurt the poor.Our attempts to regulate our industries have priced us out of the worldmarket and injured everybody. Thegray dawn of hope is enabling us todiscern the procedures that will freeus to work with the natural laws ofthe political economy instead ofagainst them. Nobody is wise enoughto plan for everybody. "The miracleof the market," to quote LeonardRead, is that the market reflects theinitiative and imagination of everybody.

Hardening of the Attitudes

Those who repair to governmentfor everything suffer from hardening of the attitudes. They seem to beunaware of government as an instrument of coercion which has amonopoly on violent force. Enchant-


ment with government obscures themeaning of voluntary action and association which flourish under liberty. Those who prate ofpartnershipof public and private sectors fail torecognize the difficulty which inheres in partnership between thosewho believe in freedom and those whobelieve in coercion. Government hasan important role, but it does notconsist of running everybody's lifeand making subjects out of citizens.The new natural liberty calls forfewer laws, less bureaucracy, lesspresumption that Washington knowsbest, and more reliance on free individuals working to improve theirconditions and fulfill their lives.

The findings of the Club of Romeshow a grim future for humanity. TheMalthus specter of limited resourcesand burgeoning population reappears. The one resource which isnever in short supply is the creativeimagination, the individual initiative, and the resourcefulness of individuals in a free society. The liberalism of Adam Smith's day freedthe people from the cartels and monopolies of the state which were a lingering influence ofmercantilism. Thenew natural liberty could free people from the burdensome government and stifling regulation of theconventional wisdom which I havesubsumed under the title, "Contemporary American Liberalism." Thispaper is a call for a new birth of liberty.

The Skeletal RemainsOne of the most notable murals of

America is located in the dining hallof Dartmouth College. Jose Clemente Orozco was the artist. Orozcohad lost a hand in a chemistry explosion when he was a student, buthe had an enormous reservoir of talent. His feeling for humanity wasprofound. The Dartmouth mural hasthe title "Epic of Culture of the NewWorld." He shows Christ choppingdown his cross with an axe as a protest to the human rejection of his giftof peace. He shows Quetzalcoatl, theMexican god of arts and crafts, turning away from his own country whichhad rejected him. In a most shockingand striking fashion, he shows themodern world rejecting its great opportunity for peace, prosperity andhappiness.

The scene is the operating room ofa modern hospital. The doctors inattendance are attired in academicrobes, rather than the usual whitegowns of physicians. A woman islying on the operating table and giving birth to a baby. These, also, arein academic attire. But the mostshocking fact is that the doctors, thenurses, the mother, and the stillborn child are all skeletons! Outsidethe window, the revolution flamesred.

This mural exemplifies the reluctance with which the intellectuals,especially those of the academiccommunity and those who man the

142 THE FREEMAN

media, cling to the socialist-tingedtheory of political economy, which Ihave called "contemporary American liberalism." Joseph Schumpetercorrectly pointed out the fact thatintellectuals show antipathy towardcapitalism and the free market. Theintellectuals feel somewhat dispossessed and lacking in power. They,therefore, identify with those who areaspiring to power, such as laborunion leaders, some politicians, andthe powerful revolutionaries. Theytend to look on business with envy,and therefore, hate. They have losttheir identity with the free marketcenters of power, capital and promise.

A Life Without Hope

The conventional wisdom of contemporary American liberalism is,therefore, a skeleton mother bringing forth a stillborn skeleton child.The promise of a truly free world inwhich, in the poetic language of TheOld Testament, "each could sit under his own vine and his own fig tree"is dismissed. Instead, some intellectuals write ofzero sum economics anda tightly-controlled society whichdistributes the rapidly depleting resources of the planet. They are blindto the hope that lies in the inexhaustible supply of creative individuals who have imagination and resourcefulness.

This spell of Marxism will continue in some academic halls and

among some news people. The government-centered theories of JohnMaynard Keynes, offered only for aspecial situation, will persist withthose who look to government foreverything. But the flaming red of anew moral revolution is just outsidethe window. It is the red sky beginning of a new period in which individuals are free and the market operates. This new natural libertyradiates benevolence. It trusts thecreative initiative of each individualperson. It speaks to the depths of thehuman nature, with its love of liberty which is as old as the humanrace.

G. K. Chesterton challenges humanity to a courageous reappraisalof our human predicament when hewrote a sort of prayer for our time:

From all that terror teaches,From lies of tongue and pen,From all the easy speechesThat comfort cruel men,From sale and profanationOfhonor and the sword,From sleep and from damnationDeliver us, Good Lord!

An audio-cassette of this articleis available at $10.00 from TheFoundation for Economic Education, Irvington-on-Hudson,N.Y. 10533

Henry Hazlitt

The Early History of FEE

I'VE been invited to share some recollections about the early days of theFoundation for Economic Education. It must have been sometime in1944 or 1945 that a handsome mandropped in to see me at the New YorkTimes, where I was then writing theeconomic editorials, and introducedhimself as Leonard Read, generalmanager of the Los Angeles Chamber of Commerce.

The free-enterprise philosophy hadalready become almost a religionwith him. He told me he was lookingfor a wider audience to which to explain that philosophy, and ·wasthinking of setting up a libertarianfoundation of his own.

In 1946 Leonard had raised themoney, set up the Foundation forEconomic Education here at Irvington, and invited me to become one ofhis original trustees and officers.

It is astonishing how soon Leonard's action began to produce important results. Friedrich Hayek, inLondon, impressed by Read's initiative, raised the money the next year,1947, to c~ll a conference at Vevey"Henry Hazlitt has a long and distinguished career as.economist, journalist, author, editor, and literary critic"This article is excerpted from his remarks at the!Leonard E. Read Memorial Conference on Freedom,November 18, 1983.

Switzerland, of 43 libertarian writers, mainly economists, from half adozen nations. The group of ten of usfrom the United States included suchfigures as Ludwig von Mises, MiltonFriedman, George Stigler-andLeonard Read. That was the beginning of the still flourishing and immensely influential Mont PelerinSociety, now with several hundredmembers from dozens of countries.

Another effect of Leonard's initiative soon followed. Other libertarian foundations were set up in emulation. Baldy Harper, who had beenworking as economist for FEE fromits first year, left in 1958 and startedhis Institute for Humane Studies in1963 in California. Soon AntonyFisher set up like organizations inEngland, Canada, and eventuallyhere. I recently learned from Antony that he is now watching overeighteen institutions in elevencountries. Manuel Ayau in Guatemala established his libertarianUniversidad Francisco Marroquin.Groups in other Latin Americancountries have set up their ownequivalents of FEE. It would taketoo long to name all the present institutions here and abroad, even ifI knew of them· all, that owe their

143


orIgIn directly to Leonard Read'sexample.

Let me return to the early days ofthe Foundation. The original officers were David M. Goodrich, chairman of the Board (he was then alsochairman of the board of the B. F.Goodrich Company); Leonard Read,presid~nt; myself, vice-president;Fred R. Fairchild, professor of economics at Yale University, secretary; and Claude Robinson, president of the Opinion ResearchInstitute, treasurer. There were sixteen trustees. They included H. W.Luhnow, president ofWilliam Volker& Company; A. C. Mattei, presidentof Honolulu Oil Corporation; William A. Paton of the University ofMichigan; Charles White, presidentof the Republic Steel Corporation;Leo Wolman, professor of economicsat Columbia; Donaldson Brown,former vice-president of GeneralMotors; Jasper Crane, former vicepresident of Du Pont; B. E. Hutchinson, chairman of the finance committee of Chrysler Corporation; BillMatthews, publisher of the ArizonaStar; W. C. Mullendore, president ofthe Southern California EdisonCompany; and the officers of FEE.

You can see from this list whatLeonard Read's persuasive powersmust have been.

FEE opened its doors on March 16,1946. Most of the spring and summer was spent in the library, as renovation continued on the main

building. The staff, as of September1946, consisted of Leonard Read asPresident, Herbert Cornuelle as assistant to the President, W. M. Curtiss as Executive Secretary, "Baldy"Harper as Economist, Orval Wattsas Editorial Director, and A. D. Williams, Jr. as director of public relations.

Leonard's first move was to publish an outline of the aims of theFoundation and its proposed activities. He listed no fewer than fourteen of these that would be "amongthose to be considered for programinclusion" as the resources of theFoundation would permit. I condense them here: (1) encouragement, including financial assistance, to scholars, (2) special studiesof current economic or political issues, (3) pamphlets applicable to"hundreds of economic problems," (4)leaflets for mass distribution, (5) ajournal (this was realized in mid-1954when FEE took over The Freeman),(6) books: the abridgment, publication, and distribution of classicalworks such as, for instance, TheWealth ofNations and The Federalist Papers, (7) the promotion andpublication of satisfactory textbooks, (8) a "pamphlet-of-the-monthclub," (9) a radio program, nationwide, (10) organize advisory andstudy groups in every state and inevery community in America-notpolitical action groups, (11) analysisof collectivistic trends so that new

1984 THE EARLY HISTORY OF FEE 145

interventionist proposals can be examined and refuted before they havebeen adopted, (12) a lecture institute, (13) arranging for graduatestudents in economics and potentialinstructors to accept short-term positions in industry to acquaint themwith actual production problems.And finally, (14) a study of themethods of financing and integrat·,ing all these activities.

And then in an amazingly shorttime a stream of publications beganto pour forth. There were more thana hundred in the first few years. Someofthese were one-page leaflets, somE~small folders, some moderate-lengthpamphlets, and some were in effectshort books. I must confine myself tomentioning only a few of these, intheir order of publication. The ear··liest I find is Profits and the Abilit,yto Pay Wages, by Professor FredFairchild of Yale. This came out inAugust, 1946; it ran to 64 pages. Amonth later came a 22-page pamphlet called Roofs or Ceilings?, anattack on rent control, sent in by twoyoung fellows from the University ofChicago, Milton Friedman andGeorge J. Stigler, both destined tobecome future recipients of the Nobel prize in economics. FEE distributed 36,000 of these, plus a specialcondensed version of 500,000 copiesfor the National Association of RealEstate Boards.

Next, still in 1946, came a 74-pagereprint of Andrew Dickson White's

famous monograph, originally written in 1876, on Fiat Money Inflationin France. FEE eventually distributed 52,000 copies of this. In J anuary, 1947, FEE published an 88-pagestudy called Wages and Prices byProfessor Jules Bachman of NewYork University.

Next, in 1947, came PlannedChaos, a 90;.page pamphlet by Ludwig von Mises. Lu had been put onthe payroll by Leonard from the firstyear of the Foundation. Next in 1947FEE began to publish Henry GradyWeaver's Mainspring of HumanProgress, and to date has distributed670,000 copies of it. The edition Ihave runs to 287 pages.

Late in 1947 a short book ofmine95 pages-was published called WillDollars Save the World? in paperback and hard-cover. Appleton-Century printed the hardback edition at$1.50.

I'd like to say a few words aboutit, becauses it illustrates a disheartening consequence-or lack of consequence. By pre-arrangement withAppleton, Leonard ran off a firstprinting in paperback of 80,000 copies. (This was over my protest, because I thought he would get stuckwith them. But he sold out practically the whole edition.) Then inJanuary, 1948, the Reader's Digestreprinted a 6,500-word condensation of the book not only in itsAmerican but in all twenty of itsforeign editions, a total circulation

146 THE FREEMAN

then of about 13 million copies. Oneimmediate consequence is that FEE'sown sales of the paperback came toa halt. Another was that I was askedto testify first before a Senate andthen before the corresponding Housecommittee on the then pending foreign-aid bill. But with all this undreamed-of publicity, I haven't ashred of hard evidence that my bookor the Reader's Digest condensationof it saved the American taxpayerone slim dime in our foreign-aid outlays.

For that matter, I see no evidencethat the Friedman-Stigler pamphletdid anything to slow down rent control. Nor can I think of any other ofFEE's publications that had any direct effect on actual legislation.

On the surface, as I have said, thisseems dreadfully disheartening. Butit must be acknowledged that theAmerican ideological situation ismuch better than if FEE had nevercome into being. Our institution hasinspired the formation of dozens ofothers. Increasing numbers of people now know what is wrong. True,we have inflation everywhere, butfew countries now try to combat itwith general price controls. FEE hasprovided precisely what its titlepromised-economic education. EvenAdam Smith's Wealth ofNations, letus remember, did not begin to changeactual legislation until many yearsafter its original appearance.

Let me resume our history. In 1948

FEE published F. A. Harper's 71page pamphlet on High Prices, andin 1949 Harper's 159-page book Liberty: A Path to its Recovery. FredericBastiat's 75-page pamphlet, TheLaw, was translated by Dean Russell and published by FEE in 1950.So far, the Foundation has distributed 344,000 copies.

I come to one final item. It was inDecember, 1958, that Leonard firstpublished his essay entitled "I, PenciL" The theme of that article, asmost of you will remember, is that"no single person on the face of thisearth knows how to make a pencil."It is a little classic-the essay ofLeonard's that is certain to be long,long remembered.

But now, in recalling this impressive history of FEE publications, Imust express just one regret. Leonard was long eager to have FEEpublish a monthly magazine. Hisambition was fulfilled in 1954 whenhe took over The Freeman, whichJohn Chamberlain and I had beenediting as a fortnightly. Since thenThe Freeman has published manyadmirable articles, and has becomean imperative part of FEE's activities. But it seems to have displacedsome of those special studies of current economic issues which I regardas an indispensable part of the program of a truly effective libertarianinstitution. I hope that this activitycan soon be restored. i

A constant cry peals across the land:"give us our fair share." A variety ofresults is expected by these claimants. For example, advocates mayseek "a fair share" ofmanufacturingprofits or insured employment for theworkers, a reduced rate for utilityusers, "tenant rights" for inhabit··ants of rented premises, subsidizedbus fares and public transit systems,guaranteed health and medical in··surance coverage, and a whole hostof other demands. This essay pro··poses an analysis of the meaningunderlying this clamor.

Initially, reflect upon the conten··tion that the public or a segmentthereof deserves "a fair share." First,the call presumes that the speakermerits a different or additional right.Second, the proposition presupposesthat such right belongs to the seekeras a matter of entitlement and as aprinciple of fundamental justice.

Mr. Foley, a partner in Schwabe, Williamson, Wyatlt,Moore & Roberts, practices law in Portland, Oregon.

Ridgway K. Foley, Jr.

OurFair

Share

Third, the appeal posits the propriety of limiting the correspondingrights of other persons in favor ofthe orator, or fails to recognize thatsuch an exchange necessarily takesplace in the stated situation. Thesethree presumptions generally proveincorrect.

Stripped to bare essentials, proponents of the concept of "a fairshare" rely upon the doctrine of entitlement to justify transfer payments and transferred rights. Thefoundation ofentitlement rests uponwhat Dr. Gary North so aptly describes as "the politics ofenvy."l "A"desires something possessed by "B."The strictures against coveting seemless enforceable than those condemning theft, so "A" dreams andschemes for a method ofrelieving "B"of his liberty or his property.2 Themodern method is disarmingly simple: "A," alone if he possesses sufficient power, or in league with companions similarly situated ifhe doesnot, effects his dreams and realizes

147


that which he covets by force of law.He converts his desires into edicts,secures the stamp of official approval upon them and enjoys thefruits of someone else's labors.

Unfortunately for "A," the humancreature contains innate socialmoral-psychological responsesagainst wrongdoing, even whensanctioned by law. At least some ofthe "A's" of the world feel uneasyabout their gains achieved at thebenefit of others. To alleviate thesesymptoms, they turn to the medicine cabinet for some doctrinal relief. There they discover "entitlement" which, if not possessing thecurative powers of penicillin, at leastoffers the temporary relief of aspirin.

The Doctrine of Entitlement

Entitlement refers to the postulate, expressed in varying ways andwith differing degrees of intensity,that in addition to the propriety ofstate-mandated transfer payments toachieve egalitarianism or some otherpurportedly good end, both the stateand the creative segments of societyowe these distributions to the recipients as a matter of right. One candebate whether the term "right" isconnotative or conclusive in nature.Whatever the outcome of that controversy, those who benefit from theproductive efforts of others tend todemand continuation and increase ofthese payments in the grand names

of fairness, justice and equality. Reduced to essentials, this justificationtranslates into a concern for theirown position with no considerationfor "fairness and justice" to the unwilling donor.

The doctrine of entitlement contains two conceptual errors: It assumes propriety of the transfer andit presupposes the right ofone to takefrom another. Neither assumptionproves valid upon reflection andanalysis.

First, contemplate propriety. Whatanalysis deems it proper to take froma producer a portion of the value hehas created for transfer to another?The concept of propriety conjures upnotions of justice or fundamentalfairness. One cannot condone such ataking or label it "fair" when viewedin light of the position of the producer except in situations where theproducer has breached a voluntarily-entered agreement, carelesslycaused a calamity to occur to another, or initiated aggression againstsome peaceful person. If fairnessconnotes equal and proper treatment of all parties to a transaction,3

then the creator becomes the victim,and loses his property (created value)and a part of his freedom to boot.One can only conclude that the egalitarian wealth-spreader employsfairness and propriety in quite a onesided and unreal sense reflecting hisown social value judgment coercively applied to others.

1984 OUR FAIR SHARE 149

Second, examine the concept of theoverpowering right of the donee todeprive his victim of the product ofthe latter's labors. Propriety concerns the appropriateness of governmental action; right relates to theappropriateness of individual action. No convincing argument can beoffered in support of deprivation under the doctrine of entitlement in theabsence of a consensual bargain or anegligent or intentional prior initiation of force by the current trans-,feror.

Transfer Payments DenyProperty Rights

Transfer payments consist of"property," a brief means of expression defining value created by thE~

efforts of the producer-owner. Prop··erty thus represents an extension ofone's very life, his power to create,his ability to choose his own destiny.Elimination of the potential to cre··ate an~ to retain human output nec··essarily enslaves an individual andreduces his humanity, his essentialnature, which consists in part of theability to make meaningful choices.The essence of all entitlement con·tentions must rest upon the propo,·sition that the taker is more prop,·erly entitled to goods, services, andideas than is the creator of thoseproducts.

What possible reason justifies acoerced transfer? In the lexicon ofthe modern egalitarian, equality as

a principle mandates transfer payments to even out existing naturalor artificial differences. Passing forthe purposes of this essay the possibility of achieving enforced equalityby any system of redistribution,4 focus upon the philosophical aspects ofthe equation reveals the barrennessof the purported analysis.

The fair share advocate perceivesthe inequality of appearance andtalentS naturally attendant upon thehuman condition; he decries this individuality, which he views as unfair disparity, and urges dull anddesolate sameness, the absolute ofreduction to the lowest common denominator. Down with Haydn andMonet, with Voltaire and Confucius!Seek the gray identity of those creatures who contribute little or nothing to creativity and culture. Unconsciously or intentionally, hisevery action leads necessarily andconvincingly to this cheerless end.

At the base, two aspects undergirding egalitarianism appear: apresupposition to power and a denial of essential humanity. First, theseeker after enforced equality wishesto impose an orthodoxy upon everyone about him to fit them into hissubjective mold. He knows onlypower; persuasion and rationalitydissatisfy him because they lead inflexibly to consequences contrary tohis preconceptions. Second, theegalitarian dislikes what he seeswhen he looks at humanity. He


wishes not to alter those thingswithin his puny power, such as theuplifting of man's material and spiritual existence by the developmentof new labor-saving devices or thecomposition of a beautiful work ofart. Instead, his quest is to achievethe opposite, by beating down thoseabout him who display any degreeof innovativeness or originality. Yetreflection reveals that the egalitarian position amounts to a stubborndenial of the essence of humanity:the awe of unique creation and themechanism of meaningful choicewhich unavoidably leads to differences in outlook, ability, goals, andappearance.

The Statist Position

A root misconception colors thefair-share approach to entitlement:the beliefthat individual differencesderived from the nature of man andby virtue of his individual choicemaking attribute constitute a malevolence demanding eradication bycollective coercive action. The statist presumes to know the course ofaction best suited for each person insociety. He assumes the role of modifier of human nature, he imposeshis own subjective standards uponunwilling citizens who fail to conform to his view, and he decides whoin society deserves (is "entitled to")a given share of production or created value. Nevertheless, he displays no special knowledge or train-

ing which qualifies him for thismomentous task of decision-makingwhich, in final analysis, should bebetter left to each individual actoras it affects his destiny.

Reduced to fundamentals, thetraducer exhibits the modern tendency to elitism. No longer doesmankind seek a Jeffersonian aristocracy of talent and virtue; the current aristocrat seeks power to the endof control of human lives. He understands the political and practicalmeans of communication, manipulation, and subjugation, and he applies this knowledge to direct othersto do his bidding. Whether well-orill-intentioned, the elitist, a "dictocrat" in Leonard Read's phrase,5 reduces people entitled to a countingchoice to pawns on a giant chessboard or puppets on a Pyrrhic stage.

The egalitarian becomes the elitist precisely because he pretends topossess the ability and the right, inaddition to the power, to quell creativity and to channel human conduct into prescribed forms and institutions-and he does so byapplication of charged code-wordssuch as entitlement which lend a degree ofjustification, authenticity, andvalidity to his endeavors. Entitlement is the mask, egalitarian is theappearance and the elitist is thereality in the play we witness today.

Those who quest for a fair shareopine that they are entitled to something more and greater than that


which they have produced-theywish to control part (or all) of thefruits of the labor and ingenuity ofothers. Thus, witness the teeminghordes who envy the entrepreneurwho constructs a power plant, transformers and distribution lines in aneffort to bring the wonders of electricity within reach of a fingertip.The multitudes convert this envy intoa shrill or harsh insistence thatthey-the consumer-deserve special favors in the sense that theyshould pay less than market pricesfor the output generated by the dintof effort, stored labor and native genius of other individuals.

Or consider the prattle of renterswho summon landlords to the dock.in an effort to change the nature ofthe place of habitation without pay-·ing the price. Natural law decreesthat every price must be paid, eitherby the buyer or the seller, by theproducer or the user, by the owneror the tenant. Fair share advocatesshunt the payment to the shouldersof others by employment of a juridi··cal talisman.

Distributive Justice

The legal amulet employed con··sists of the distributive theory of so··cial justice, the dogma devoted toeffectuating entitlement in thE~

satisfaction of envy. The distribu·tive theory of social justice suppliesthe rationale "explaining" why income and value should be redistri-

buted among members of a community. It suffers from the same rootfallacies as the doctrine of entitlement and it partakes of the identicalmistakes as the current corruptionof equality into egalitarianism.

Whatever the intention of thepurveyors of the doctrine, "distributive justice" cannot be classifiedproperly as "neutral"-it implies tothe reader or the listener that distribution of income, assets, resources,or things of value must take placeby means ofmarket intervention, andit further implies that some suchdistributive scheme relates to a concept ofjustice.

Society-that informal consensual grouping of persons-alwaysdetermines the distribution of thingsof value. The propounder of the distributive theory uses force to moldrecipients and their destiny; the believers in natural justice (respect forfree nonaggressive choice) prefer thevoluntary antics of the market. Under any term employed, the political-economic concept of distributiveor social justice carries with it ameaning which implies both a powerand a right residing in actors whodo not produce a product to determine its ultimate use and enjoyment.

Even some avowed supporters ofliberty needlessly "concede" that norational method allows determination in the abstract of a superiormethod of distribution.6 To the con-


trary, both abstractly (rationally) andempirically, a market system of creation, production, and delivery provessuperior to any other scheme.7 Really,only two possibilities exist:

(a) A market system wherein eachparticipant "votes" his subjectivevalue structure in a dollar democracy, by bidding the excess value hehas created for the excess value hedesires which someone else hasproduced, thereby determining notonly what is produced but also howassets (incomes) are distributed;

(b) A command economy, whereinsome or all choices are made by persons other than the producers andusers, thereby artificially distributing or deflecting choices, assets, andincome from those directly affectedto those in power under the politicalapparatus.

Fair share egalitarians suffer froma dilemma which follows from twocentral facts: (1) Economic distinctions in an open society occur as aresult of differences in aptitudes,motivations, and circumstances, but(2) government action to eliminatethe differences entails such exclusive coercion that society ceases tobe free: 8

In an open society, attempts to eliminate, or even substantially to reduce, income differences extend coercive power,Le., inequality of power between rulersand ruled. This also implies politicization ofeconomic life, a situation in which

economic activity depends largely on political decisions, and in which the incomes of people and their economic modus vivendi are prescribed principally bypoliticians and bureaucrats. How farreaching is the required coercion andpoliticization of economic life will depend upon the degree of economic equality the rulers intend to achieve; they willdepend also on the various aptitudes,motivations, and circumstances of thegroups and individuals among whomeconomic differences are to be reduced.9

Thus, the egalitarian faces twocounterproductive forces: first, political programs designed to level incomes or assets generally do nothingof the sort; instead, they shift income and assets from the productiveto the politically powerful; second,redistribution of income and assetsnecessarily entails the use offorcebecause it contra-indicates the natural tendencies of human beingsto such a degree that it destroys thefree society which makes possible theproduction of excess goods, services,and ideas to permit life at levelsabove poverty or mere existence.

Equality of Opportunity

Some thinkers supporting the "fairshare" position rail against an inequality of opportunity. Such a contention merits attention despite itsambiguity and intended emotive appeal. By and large, human beingsseize their own opportunity; it cannot be conveyed to them by an om-


nipotent government, any more thana loving father can insure that hisprogeny will perform well in business or the arts. In many instances,inequality of opportunity merely restates the natural and necessaryuniqueness of human beings in abil-·ity, desire and other features.

In some instances, the challengeto inequality ofopportunity concealsa dislike for inherited assets. Assetsmerely represent labor which hasbeen stored and capitalized (madE~

productive of future goods, services,and products) rather than consumed. The modern leveler, muchlike his seventeenth-century fore··bear, desires elimination of such differences so that each person in eachgeneration starts afresh. Such ascheme presents a superficially appealing charm obscuring quite awicked interior.

First, consider the absurdity of anextension of the leveler position:Would such a theorist require eachindividual to develop all machineryand all ideas from scratch, withoutbuilding upon the accumulated wisdom of the past? If so, who among uscould reinvent the wheel or even apencil?lO

Second, consider the necessarypractical implications of the artifice:Would the egalitarian destroy allaccumulated wealth (a great wasteof costly and finite resources) orwould he transfer it to someone else?The obvious answer, and one refiect-

ing actual practice, is the latter alternative. Inheritance and estatetaxes generally shift saved assetsfrom the object of the producer's affection to other, unrelated membersof society who often do not create butdo consume and, more importantly,vote for the political officials whoundertake distribution. The doctrine justifying this social distribution of property: entitlement.

"Might Makes Right"

A more salient inquiry arises regarding the transfer of accumulatedor inherited wealth to effect a leveling and "equality of opportunity,"when one considers the propriety ofthese transfers. Only one justification exists for a transaction whichtakes created value from the producer against his will and givesit to another more favored by thelaw-the doctrine ofpower or mightmakes-right.

One accumulates wealth in one oftwo ways: by coercion or by contract.If a thug steals one million dollarsfrom an individual or an enterprise,he has acquired great wealth by forceof plunder.ll If a creative man orwoman renders services or produceslabor-saving devices desired by manyothers and thus acquires one milliondollars in trade value, he or she hasacquired great wealth by contractby bargains freely entered betweenindividuals, each seeking to satisfyhis desires according to his particu-


lar subjective value structures. Thelaw can justly demand the return ofloot to its rightful owner; it shouldnot affect an involuntary transfer offreely, fairly, and nonfraudulentlyaccumulated property to someonewho did not create it.

Seemingly, the traducers of themarket decry the entitlement of creators of value to their own creation.Instead of recognizing that accumulated wealth derived contractuallyusually results as the product ofbetter choices, these myopic transferagents attribute foul and malevolent deeds to the creators or theirdescendants. Yet the creation ofwealth occurs precisely because manmust predict what his fellow man willsubjectively value, and some individuals prove more able predictorsthan others.

The person who makes the bestusage of a finite resource, who offersthe surest service, or thinks of themost innovative idea, by and large,will receive more trade goods("money") from his consumers (traders) than will someone less motivated and lacking in some qualitiesof prescience. While someone maysuggest, subjectively, that a certainscion of one who has accumulatedproperty does not deserve, or makegood use o~ that property, it doesnot lie within the rightful power ofthat other person to make thatchoice. The creator of value shouldbe able to choose how to use his cre-

ated value, who shall receive it, andunder what circumstances. Whatother person possesses a higherclaim?

The Moral Factor

A moral factor overrides the entire question. If every human choiceconstitutes a moral act, then the essence of morality (making the rightchoice between good and evil) resides in the power to choose meaningfully between alternatives. To theextent that the fair-share advocateobviates other individuals' power tochoose, he commits an immoral acteven if his choice can be labeled"right"-and no one can apply thatlabel effectively because no one otherthan the victimized actor who losthis choice can assess his subjectivevalue under his conditions.

In comparing and contrasting justice and social justice, one writerfinds them antithetical:

So-called social justice is man's greatest injustice to man, anti-social in everyrespect; not the cement of society, but thelust for power and privilege and the seedof man's corruption and downfall.

Finally, social justice in no way fits theclaim of its advocates: an expression ofmercy and pity. These virtues are strictlypersonal attributes and are expressed onlyin the voluntary giving ofone's own, neverin the seizure and redistribution ofsomeone else's possessions.

Morally and ethically motivated citizens can condone a philosophy of so-called


social justice only if they fail to see itsterrible injustice.12

Social or distributive justice dei··fies force and coerces peaceful peo-pIe, robbing them of their choice··making ability. True justice ex-presses concern and respect for anindividual's non-aggressive freE~

choice. Social justice exudes falsesympathy and prattles about equality, all the while exhibiting theclenched fist of force. True justiceaccords with the ultimate moralityof choice. What, then, is "our fairshare"? It is precisely that which wecreate and acquire in non-aggressive manner during our tenure onthis earth. It is nothing more and itis nothing less. @

-FOOTNOTES-

ISee Gary North, III Remnant Review (No.19, October 6, 1976), p. 114; (No.7, April 7,1976), p. 38.

2He seldom seeks to deprive "B" of life anymore because the ''A:.s'' of the world recognizethat death of a producer finally terminates production of those coveted goods, services, andideas. So much better then to keep "B" aliveand producing.

3Such a definition amounts to a tautology,given the common usage of the terms, e.g., whatis proper is what is fair, and what is fair is whatis proper.

4Professor Cotton M. Lindsay, in an introdu(~

tion to Two Essays on Income Distribution andThe Open Society (International Institute forEconomic Research, Reprint Paper 4, January1977), p. 1, writes: ''And yet, detailed analysis

of redistributional results of many governmentactions indicates that the direction of this income transfer is the reverse of what most people are alleged to regard as 'fair.' From the Social Security System and minimum wagelegislation to government support of agricultural prices and higher education, one sees anarray ofprograms which generally end up serving individuals in the middle and upper-middleclasses as primary beneficiaries. Taxes fall uponboth the rich and the poor, but the poor aredisproportionately underserved by these programs."

5Leonard E. Read, The Love of Liberty, (Irvington-on-Hudson, N.Y.: The Foundation forEconomic Education, Inc., 1975) especiallyChapter 8, "The Roots of Concord and Discord," pp. 46-52.

6Jrving Kristol, "What is 'Social Justice'?" WallStreet Journal, August 12, 1976.

7This paper may not present the optimumplace to debate this particular issue in depth.The works of Mises such as Human Action andthe Bastiat trilogy seem apt places to commence a defense on this point. Ludwig von Mises,Human Action, 3rd rev. ed. (Chicago: HenryRegnery Co., 1966); Frederic Bastiat, Economic Harmonies, Economic Sophisms and Selected Essays on Political Economy (all published Princeton, N.J.: D. Van Nostrand Co.,Inc., 1964).

8Peter T. Bauer, "Egalitarianism: Art of theImpossible," The Times Literary Supplement(London, England: July 23, 1976).

9Ibid.lOSee Leonard E. Read, "I, Pencil," reprinted

in The Freeman, November 1983.11Strangely, the same opprobrium does not

seem to attach to plunder achieved by operationof the law, as where those in authority employthe Federal Reserve System and the TreasuryDepartment to milk citizens' savings of severaltrillion dollars over forty years by means of thetax commonly termed inflation.

12Leonard E. Read, "Justice Versus SocialJustice," Who's Listening? (Irvington-on-Hudson, N.Y.: The Foundation for Economic Education, 1973), p. 97.

Jerry Ellig

"One, two, three, pull!""Unghh!""Y'all on that side aren't pulling

hard enough. Ready? One, two, three,pull!"

"Unghh!"Was this the sound of galley slaves

in the glory days of the Roman Empire? Or of medieval serfs strainingto pull a nobleman's barge upstream?

No, it was the summer of 1983.The grunts and groans came fromabout a dozen salespeople on theirhands and knees, straining to maneuver a 15-foot long counter full ofsoap and shampoo into its final position. The store at which I work parttime while attending college wasbeing remodeled.

Though known to countless

Jerry Ellig is a senior majoring in economics andhistory at Xavier University in Cincinnati, Ohio.

156

DimeStore

Economics

neighborhood customers simply as"the dime store," our store is part ofa national chain and had been selected as the first in the city to beremodeled. The changes were drastic indeed: new counters, new tile,new paint and yes, even new merchandise.

There simply had to be a methodto this madness. No company as oldas ours would spend so much moneyon blueprints and diagrams, and somuch of its employees' time, for absolutely no reason.

The reason, of course, was quitesimple: profit. Those folks in the regional office who created so muchwork for us did not do so merely tofrustrate us, much as we might havethought that was their intention. Onthe contrary, their goal was thecompany's goal: to seek profits andto avoid losses.

In a store such as ours, profitabil-

DIME STORE ECONOMICS 157

ity comes through selling more at alower cost per sale. Every aspect ofthe remodeling, therefore, was atleast theoretically directed towardincreasing sales and reducing costsby providing customers with a moreattractive environment in which toshop.

For weeks, confusion reigned supreme. No employee could ever be100 percent certain where in thestore a given item could be found on.any given day. The manager was re-·puted to have quipped to a long-time!customer looking for notebook pa-·per, "Just stand still long enough andyou'll probably see it go by."

It was against this backgroundthat a customer approached me oneday (as I was using a hammer topound nails into the wall) and askeda pretty logical question: "Why arE~

you going to all this trouble whenyou'll just re-do it again in another25 years?"

I told him how much better thestore would look, how much moreconvenient the new arrangementwould be for customers, and so forth.But after he left the question remained in my mind and set me tothinking. Why, indeed?

The same question must have beenon everyone's mind a month laterwhen merchandise was still beingshuffled around for apparently noreason. Goods on one side ofa counterswitched places with goods on theother side. Merchandise on the left

side of counter A moved to the rightside of counter B, barely six feetaway. "We spent all day yesterdaysetting up those ten feet of counterspace," one employee complained,"and when I came in this morning,somebody'd moved it again!"

A key element in the whole schemeis the arrangement of merchandisein the most convenient and pleasingmanner. The constant migration ofmerchandise until it found a finalhome was like a giant jigsaw puzzle.Both management and employeeswere seeking to place each item inits· optimal location so as to rendertotal sales as large as possible.

The realization of this fact broughthome to me the incredible power ofthe price system. In striving forprofit, our store was simply strivingto please our customers in some veryspecific ways. It would not be exaggeration to state that each decisionto relocate an item was very muchan entrepreneurial decision. Eachmove was carried out in the hope thatthe new state ofaffairs would be moresatisfactory than the old one.

Though few involved in the efforthave even heard of Ludwig vonMises, all were acting as he wouldpredict:

If a businessman does not strictly obeythe orders of the public as they are conveyed to him by the structure of marketprices, he suffers losses, he goes bankrupt' and is thus removed from his eminent position at the helm ...

158 THE FREEMAN

The consumers ... determine precisely what should be produced, in whatquality, and in what quantities. They aremerciless bosses, full of whims and fancies, changeable and unpredictable. Forthem nothing counts other than their ownsatisfaction. l

Within a very few weeks, consumers will begin to tell us with theirdollars whether or not they like thenew arrangement. One thing is certain: their decision will be based ontheir own subjective valuations. Intheir quest for their own satisfaction, consumers will be entirely indifferent as to how much time, moneyand effort was put into the remodeling. They are concerned with results. If they do not like the changes,it will do no good to tell them abouthow much labor and capital was expended.

This is, of course, the Austriansubjective theory of value in action.The company's efforts will have valueonly if consumers value the results.Value exists only in the human mind,not in any object or collection of objects.

Unbelievable as it may first sound,then, the experience ofone store corroborates a host of fundamental economic principles. The firm is merely

lLudwig von Mises, Human Action, 3rd. Rev.Ed. (Chicago: Contemporary Books, 1966), p.270.

the middle man between the ownersof resources and consumers. Consumers reward service with purchases if they are pleased, and profits result if costs are kept down. Thesubjective valuations of consumers,therefore, determine the uses towhich resources will be devoted. The"higgling of the marketplace" ensures that those resources-the petroleum used to make gasoline, thewood in a broom handle, and eventhe steel of which store fixtures aremade-will go to the most highlyvalued uses. Moreover, all of this activity takes place voluntarily, requiring neither force nor directionfrom above.

At last, I've arrived at a worthyanswer to the customer's question.Why did we go to all that troublewhen the job will be re-done againin another 25 years? Because we believe that's what our customers want.It is ultimately the wishes of theconsumer, not the caprice of the corporate executive, which determinehow the store should be decorated,what lines of merchandise should bedropped or added, and even whetherbrown towels should be displayednext to green ones or blue ones.

If there be anyone who doubts theexistence of consumer sovereigntyand Adam Smith's "invisible hand"in modern America, he or she oughtto help remodel a dime store! ®

s. David Young

THE CASE OFTHE STOCK MARKE1-:Freedom vs.Regulation

THOSE who consider liberty as a pri··mary value are naturally very re··luctant to support any imposition ofgovernment authority. This is not tosay that state action is always inappropriate, but the standards fordetermining instances when the stateshould intervene are strict and unyielding.

When calling for government regulation in any sphere of endeavor(whether economic, social, or political), it is prudent to bear in mind thefundamental principles upon whichour country was founded. Due process, presumption of innocence, andlimited government should be driving forces behind the analysis of anyproposed government intervention.

Given the aforementioned principles, prerequisites can be derivedwhich will serve as a model for evaluating the efficacy of proposed reg-

Mr. Young is studying at the Darden School of Graduate Business Administration, the University of Virginia at Charlottesville.

ulation.1 First, some readily identifiable event or phenomenon musthave occurred (or is likelyto occur)which needlessly and unfairly damages a distinct group of individuals.Second, this damage should neitherbe the result of infrequent lawbreaking nor be addressed by existing laws. Third, a cost-effective freemarket alternative is not available.Fourth, a cost-effective governmentimposed remedy is available. Fifth,the proposed regulation should notviolate constitutional rights. Andsixth, the burden of proof should beplaced on the advocates of the proposed regulation, not on those whooppose it.

This article examines the regulation of the stock markets with respect to these prerequisites and concludes that the Securities andExchange Commission (SEC), thefederal agency tasked with regulating securities, has failed the testmiserably. Indeed, if the SEC were

159


to subject its own history and practices to the same scrutiny it focuseson the corporations it regulates, itscommissioners, staff, and Congressional sponsors would be more thanjust a little embarrassed.

Prerequisite No.1: Some eventor phenomenon has occurredwhich unfairly damages a distinct group of individuals.

The 1920s was a period of uncommon optimism and speculation in thestock market. The decade was characterized by an almost constantbullmarket. There were occasional setbacks but recovery was always swiftand strong. All of this came to anend, however, on October 24, 1929,the date known on Wall Street as"Black Thursday." On that day, themarket began a sudden and dramatic slide downward to the surprise of nearly everyone. Fortuneswere lost overnight and the countrywas thrown into the depths of theGreat Depression.

The stock market crash of1929 andthe ensuing depression were a puzzle to most people at the time. Partof the cause was thought to be thewidespread abuse of securities markets by insiders and inadequate disclosure of financial data by corporations. The disastrous effects of theFederal Reserve Banks' cheap moneypolicies in the late 1920s and protectionist trade measures such as theSmoot-Hawley tariffwere much more

important reasons for the economiccollapse, but few thought so at thetime.

Shortly after his election, President Roosevelt appointed FerdinandPecora to head up a Senate investigation of abuses in the securitiesmarkets. The Pecora Committee, asit was called, documented numerousinstances of alleged stock marketfraud and abuse. The Committee'srevelations sparked a public furorand proposals for government regulation were soon forthcoming. Public demands for reform led to the enactment of two very important lawswhich together form the cornerstoneof securities market regulation. TheSecurities Act of 1933 requires issuers of new securities to file a registrationstatement with the federalgovernment and issue a prospectusto the public. The Securities Exchange Act of 1934 requires disclosure on a regular basis for firmswhich have their securities publiclytraded. The latter act also established a federal agency to administer both acts, the Securities and Exchange Commission. The primarypurpose of the legislation, then, wasto redress abuses believed to be inherent in unregulated marketsabuses which were presumed to havecost naive investors dearly.

Unfortunately, very little empirical research was conducted at thetime securities regulation was firstdebated in Congress. Evidence pre-

1984 THE CASE OF THE STOCK MARKET 161

sented in support of governmentcontrol was largely anecdotal in nature. A reasoned assessment of thecosts of alleged abuses to the partieswho were supposed to have been hurtby them was never conducted.

The SEC's present scope of regulatory power includes not only disclosure requirements for new issuesand publicly traded companies, butalso constraints on insider trading,controls over the stock exchanges,antifraud regulation, regulation ofinvestment companies (e.g., mutualfunds) and investment advisors, andrules on corporate governance.

Prerequisite No.2: The damagedoes not occur infrequently andexisting laws are not sufficientto deal with it.

Benjamin Anderson, writing in thelate 1940s, agreed that Congress wascorrect in its pursuit of truth in securities and its prohibitions againststock manipulation. But he felt thatCongress and the SEC had clearlygone too far: "The normal functioning of the security business . . . isclean and sound ... Every daytransactions involving tens of millions ofdollars ... are made by wordof mouth.... Transactions betweenthe brokers on the floor of the exchanges are made by a word or evena nod of the head, each man makinga memorandum of his own part inthe transaction, but neither mangiving the other a written docu-

ment. Disputes regarding thesetransactions are very rare.... A veryhigh order of integrity is necessaryto make such a system work. Occasionally, however, criminal acts occur, as in every field . . . For theseoccasional criminal acts, there is needfor criminal law and punishment.But there is no more need for thekind ofsupervision ofmultitudinousdetails in which the [SEC] engages... than in any other field."2

Just like brokers, dealers and investment bankers, accountants werealso singled out for blame. Manyopinion-makers believed •that arbitrary accounting practices in the late1920s encouraged fictitious financial reporting and, thus, contributedto stock price manipulation. Specifically, accountants were charged witharbitrary write-ups of asset valuesfor the purpose of inflating financialstatements, enabling companies toappear more profitable than theyreally were. The significance of thischarge cannot be overstated for itserved as a prime justification forgovernment intrusion in corporateaccounting practice and is widelyaccepted to this day.

How common were write-ups ofassets in the years just prior to theGreat Crash? A recent study, whichexamined the accounting policies of110 NYSE companies chosen at random, shows that contrary to popularbelief, accountants in the 1920s didnot write-up asset values routinely.3


In fact, write-offs (declines in bookvalue) were much more common. Forthose companies that did write-upasset values on their books, rarelydid the amount exceed 5 per cent oftotal assets and never were write-upsreflected in the company's incomestatement (they were always shownin surplus accounts on the balancesheet). The conclusion drawn fromthis evidence is that accountingpractices of the late 1920s were nota contributing factor to the GreatCrash.

Prerequisite No.3: A cost-effective free market alternative isnot available.

In the absence of government regulation, corporations are still compelled to disclose information abouttheir financial affairs. They do thispartly because of economic incentives and partly because private stockexchanges may impose rules onmembers. For example, prior to thesecurities acts, all companies listedon the New York and AmericanStock Exchanges were required bythe Exchanges to make their financial statements publicly available.Also, over 90 per cent of all companies traded on the NYSE in 1933were audited by independent certified public accountants. The legislation requiring periodic financial reporting and the audits of thatinformation was not passed until1934.

The most persistent critic of securities regulation, George Benston,states the case for voluntary disclosure simply and elegantly. According to Benston, corporations havestrong incentives to disclose information in a free market.4 Prospective shareholders and creditors,whose funds the corporation wantsto attract, demand information.Corporations that do not disclose ina free market run the risk of suspicion. And once a corporation beginsdisclosing, its managers find thepractice difficult to give up.

In a free market, providing financial information that is audited byCPAs enhances investor beliefs thatcorporate resources will be used productively. Whenever managers haveless than a 100 per cent ownershipinterest in a company, they have incentives to waste or misuse resources if the benefits to them exceed their share of the reducedprofits. For example, managers maybe inclined to spend lavish sums onpersonal office furnishings when thecost can be passed on to others. Thisproblem is known in academic circles as "agency cost." Investors areaware of this problem and so thosein control must find a way of convincing investors that they do notintend to divert corporate assets. Oneway to do this is to install a systemof accounting control and convinceinvestors that the system is working. That is why corporations would


hire CPAs even in the absence ofregulation. CPAs are entrusted withdetermining the credibility of management's representations in the financial statements not because theyare inherently more trustworthythan others but because their reputation and ultimately their livelihood depends on professional integrity and expertise.

Benston's theory becomes especially powerful when applied to thecase of dishonest corporations (thosethat deliberately try to deceiveinvestors). First, we must considerwhether the SEC is effective in preventing the dissemination of falseinformation. Benston points out thatfinancial statements have proven tobe inefficient vehicles for cheatinginvestors. Accounting data presentsa history of past events, yet potential investors are forward looking;that is, they seek information thathelps them assess the present valueoffuture cash flows. Therefore, crooksare more likely to mislead investorsby floating rumors and spreading tipsthan by issuing fraudulent financialstatements. Next, we should ask ifcrooks are capable of deceivinginvestors. The problem here is thatthose who use financial statementsto defraud investors must either bribethe independent CPAs or do withouttheir services. Either prospect is notconducive to a successful fraud.

Great Britain continues to rely ona corporate disclosure system that is

privately run. Although Britain haslaws that govern disclosure by companies most of the functions performed by the SEC in this countryare performed by the London StockExchange, which is not an agency ofgovernment. Unlike American securities regulation, British laws areself-contained and allow very limited discretionary power for government administrators. The result is asystem that is not only less cumbersome, less costly and more flexible,but also has fewer frauds, proportionately, than our own capital markets. Clearly, a cost-effective market alternative can and does exist.

Prerequisite No.4: There is acost-effective regulatory remedy.

According to supporters of government-mandated disclosure, themore investors know about a corporation, the better their investmentdecisions will be. As more information becomes publicly disseminated,stock prices approach the underlying value of the securities beingtraded. In other words, stocks become fairly priced. Disclosure, it isargued, increases the fairness ofcapital markets and renders the taskof price manipulation more difficult.

The problem with this line of reasoning is that those who apply itnearly always ignore the fact thatinformation costs money to produce.In a free market, corporate disclosure is governed by the same prin-


ciples that govern resource allocations elsewhere in the economy.Resources would flow into corporatedisclosure activity until the cost ofadditional resources exceeded theperceived benefits. When the SECrequires more disclosure than therewould be in a free market, corporations are forced to devote more resources than efficiency demands.

Do the perceived social benefits ofefficiency and fairness allegedlycaused by mandatory disclosure exceed the costs? This is a difficultquestion to answer but, unfortunately, SEC supporters have rarelyeven tried. Even friendly critics ofthe commission frequently take it totask for its reluctance to perform anysort of cost-benefit analysis on proposed regulations.

George Benston has addressed theissue of whether there are some observable benefits from governmentregulation of corporate disclosurepractices. The essence of Benston'sposition is that required disclosurehas not led to an increase in the efficiency of capital markets.5 Sincecompetitive markets are already efficient, required disclosure addsnothing and because it costs money,we would be better off without it.His analysis is based on the idea thatdisclosed information should be perceived as valuable by market participants. Benston's methodology,therefore, is designed to determinewhether disclosure leads to observ-

able and significant changes in stockprices. Based on observations of disclosure practices and stock pricemovements, he concludes that government-mandated disclosure doesnot have an economically significantimpact.

Another issue we should consideris the effectiveness of governmentregulation on the trading of insiders. A study conducted in 1974 examined changes in trading volumeand profitability of insider tradingafter each of three important legaldecisions rendered in the 1960s.6 Because significant change in theproperties of insider trading was notobserved following any of these decisions, the author concluded thatregulation had no apparent effect. Inother words, taxpayers were payingfor a service with no apparent equity or efficiency benefits.

A recent estimate of the costs ofSEC-required disclosure to corporations, deliberately biased on theconservative side, puts the cost ofconforming with periodic reportingrequirements at $213 million in1975.7 The cost of new issues disclosure was placed at $192 million.These figures have not been adjusted for subsequent inflation or thecost of additional requirements, but1983 costs are likely to be well inexcess of $1 billion. This evidence islost on those advocates of government regulation who seemingly viewinformation as a costless good.


The SEC imposes costs on business in other ways that are virtuallyimpossible to quantify but are quitereal nonetheless. For example, bureaucratic interference in the securities markets increases the time ittakes for new products to reach themarket. In some cases, potentiallyprofitable investment vehicles maynever reach the investor becausesellers find the time delays and costsprohibitive. In fact, evidence has beenpresented suggesting that althoughSEC interference may have reducedthe risk of new stock issues, it hasalso had the effect of reducing theaverage return on such issues.8 Inother words, the SEC does not necessarily force out poorer quality issues, just riskier ones. For investorswho are willing to incur high riskfor the prospect of high return, theiroptions have been limited.

Prerequisite No.5: The proposed regulation should not violate Constitutional rights.

Roberta Karmel, in relating herexperiences as an SEC Commissioner (1977-1980), describes a disturbing trend among Commissionstaffers toward a flagrant disrespectfor the rights of business people.9

Harold Williams, SEC Chairmanunder President Carter, is chargedwith attempting to guide the SECtoward ever greater control overpublicly held corporations and promoting an anti-business atmo-

sphere. Williams pursued certainpolicies not to secure investor interests but rather to promote his ideasabout corporate governance. Investor protection became a facade behind which Williams and his followers justified their notions of properpublic policy (namely an expandingrole for government in the securitiesmarkets). Although Karmel still believes that the potential for corporate wrongdoing is a problem worthy of SEC attention, clearly the lackof government accountability is farworse.

An even more disturbing reportexposes the SEC's suppression of firstamendment rights through its regulatory supervision of investmentadvisors.1o Emboldened with powersallegedly bestowed by the Investment Advisors Act of 1940, theCommission has seen fit to censorcertain investment advisory publications and, in some cases, even prohibit publication altogether. Thisgrievous attack on freedom of speechand press continues.

Prerequisite No.6: The burdenof proof should be placed on theadvocates of regulation.

Determining the effects of anyregulation is a difficult and oftenfrustrating experience. George Benston and other critics of securitiesregulation have not "proven" that theSEC has failed to provide any benefits to investors. They do show us,


however, a preponderance of evidence suggesting that the presenceof such benefits has not been proveneither. And in a country where people value the protections afforded bylimited government, the burden ofproof should lie squarely on thosewho support government regulationof the securities markets. Such proofwas not required when securitiesregulation was first debated in theSenate hearings of1933, and has yetto be required by those who set government policy.

So Why the SEC?

As we have just seen, when subjected to the stringent standardslisted at the beginning of this article' the supporters of securities regulation have much to answer for.Why then are we still subjected tothese burdensome securities laws?The answer lies partly in the selfinterest of various constituencieswhich are affected by the laws. Themost obvious of these constituenciesare the staffers and commissionersof the SEC who possess considerablediscretionary power, not to mentiontheir impressive government salaries. Also securities lawyers andcertified public accountants owemuch of their livelihood to the SEC.Contrary to what we may think, theSEC is not a thorn in their side, formany of these professionals havemade fortunes off the agency byhelping their clients cope with the

burden of regulatory requirements.Security analysts and portfoliomanagers also benefit from government-mandated disclosure. Theyneed financial information in orderto do their jobs and the more information they can get the better. Andsince they do not have to pay for theinformation, quite naturally they areat the forefront of demands for evengreater disclosure.

One intriguing theory suggeststhat the securities laws were passedbecause Congressmen were anxiousto appear as having addressed theproblem of stock market abuses. 11

Since stock fraud and inadequatedisclosure were perceived as important causes of the 1929 Crash, antifraud legislation and governmentmandated disclosure were perceivedas the solution. According to thistheory, the SEC's budget is still determined by politicians concernedmore with appearance than substance. This attitude is reflected inthe actions of the SEC and helps toexplain the near total absence ofcostbenefit analysis.

Since there is no such thing as afree lunch, who pays for this legislation? Not suprisingly, taxpayers(who fund the SEC's operations) andshareholders (who ultimately bearthe cost in reduced corporate profits).

But if the rest of us are forced tobear these costs, why do we allow itto continue? One reason is that


investors have been deluded into believing that confidence in our financial markets would be underminedwithout regulation. But anothermore subtle reason has to do withthe per capita costs and benefits ofthe regulations. Because SEC employees, securities lawyers, CPAs,and security analysts have muchmore at stake in these laws on a percapita basis, they are more inclinedto go to the trouble and expense ofpreserving their domain. The rest ofus foot the bill but the per capitacharges are not perceived as largeenough to merit an effort at repeal.

Conclusion

We should not view the currentdebate over securities regulation assimply a contest between privatecapital and public interest as mostlawmakers are inclined to do. Afterall, government policy makers arethemselves private individuals withtheir own self-interests to pursue.The question is really one of whichgroup of private decision-makers willdetermine how capital resources areallocated in the American economy.A system which allows investors applying the time-honored tradition ofcaveat emptor to make their ownchoices is far superior to a system inwhich government administrators,insulated from the risks and rewards of the marketplace, decidewhat investment opportunities. canbe made available. When investors

are allowed to make their ownchoices, unconstrained by government control, they are the ultimateauthority. I

-FOOTNOTES-

lR. K. Elliott and W. Schuetze, "Regulationof Accounting: Practitioners' Viewpoint," inGovernment Regulation ofAccounting and Information, A. R. Abdel-khalik, ed. (UniversityPresses of Florida, 1980).

2Benjamin Anderson, Economics and thePublic Welfare (Liberty Press, 1979), p. 455..

3G. D. Dillon, "Corporate Asset Revaluations:1925-1934," The Accounting Historians Journal, Spring 1979, pp. 1-15.

4G. J. Benston, "Security for Investors," inInstead ofRegulation, R.W. Poole, ed. (Lexington Books, 1982), pp. 169-205.

5G. J. Benston, "The Value of the SEC's Accounting Disclosure Requirements," The Accounting Review, July 1969, pp. 515-538 and''Required Disclosure and the Stock Market: AnEvaluation of the Securities and Exchange Actof 1934," American Economic Review, March1973, pp. 132-155.

6Jeffrey F. Jaffe, "The Effect of RegulationChanges on Insider Trading," Bell Journal ofEconomics, Spring 1974, pp. 93-121.

7Susan Phillips and J. Richard Zecher, TheSEC and the Public Interest (The MIT Press,1981).

8Gregg A. Jarrell, "The Economic Effect ofFederal Regulation on the Market for New Security Issues," Journal ofLaw and Economics,December 1981, pp. 613-675.

9Roberta Karmel, Regulation by Prosecution(Simon and Schuster, 1982).

lOMichael McMenamin and William Gorenc,Jr., "Subverting the First Amendment," Reason, January 1983, pp. 23-28.

11Ross L. Watts, "Beauty is in the Eye of theBeholder: a Comment on John C. Burton's 'TheSEC and Financial Reporting: the Sand in theOyster,''' in Government Regulation of Accounting and Information.

Morgan O. Reynolds

HOW TOREDUCECRIME

CRIME remains a silent contender forthe number 1 domestic ill. It won'tgo away. Criminal experts are proneto explain this by saying that crimeis "intractable," that there is littlewe can do. This claim is false. Crimeis complex, to be sure, because it involves factors beyond law enforcement such as the strength of thefamily, neighborhoods, schools, andchurches. But crime is simple in thesense that government officials canreduce crime by doing their job,namely, by making crime too unprofitable to practice.

No added resources are needed bythe criminal justice system in orderto accomplish this. Government findsit easy enough to spend money, butdifficult to spend it productively. Be-

Morgan O. Reynolds is Associate Professor of Economics at Texas A & M University. This article is basedon Crime by Choice, to be published by the FisherInstitute in 1984.

168

tween 1960 and 1982, for example,the number of serious crimes knownto the police jumped from 3.3 millionto 12.8 million, while governmentspending on police, courts, and corrections was doubling as a share ofGNP, rising to one per cent of totaloutput. Furthermore, victimizationsurveys show that only about onethird of crimes are reported to thepolice.

The key to making our cities lessdangerous is to change the rules ofthe game. We must reduce the enormous daily waste of time and effortthat makes it so expensive to arrest,convict, and punish the guilty.1 Whilethe machinery of government and itsbureaucrats is always plagued byweak accountability and inefficiency, the law enforcement problem has increased dramatically overthe last twenty years. Since 1961 thecriminal justice system has beentransformed from a law enforcement

HOW TO REDUCE CRIME 169

system into a thicket of criminalrights and make-work projects fornearly 2 million lawyers, judges, social workers, psychologists, criminologists, prison officials, and otherbureaucrats. More people nowproduce less justice.

The quadrupling ofcrime over thepast twenty years is due to a topdown revolution, as all revolutionsin public policy are. Friedrich vonHayek points out that political opinion over the long run is determinedby the active intellectuals. That iswhy in every country that has movedtoward socialism, there was a longpreceding phase during which socialist ideas governed the thinkingof most intellectuals. Expandedrights for. criminal defendants, sociological theories of crime, theoriesof rehabilitation, and dubious legalprocesses have followed the samepath.

The Short Run:Rebuilding External Constraints

Suppose that we had a carteblanche on crime policy and a mandate to reduce crime. What changeswould be prudent and effective? I donot claim that my recommendationsare feasible in short-run politicalterms, only that they are sound waysto reduce crime. The basic short-runstrategy is to raise the criminal'schances of arrest and conviction andincrease the effectiveness of punishment, all without added burden on

the taxpayer. This is far from impossible, provided these five recommendations were followed:

1. Avoid worsening the problemthrough increased community "rehabilitation" and other "therapeutic" treatments instead of prisonterms.

2. Repeal the laws which make thecrime problem worse than necessary, such as drug laws, gun controllaws, rules restricting the use ofprison labor, and those grantingcoercive privileges to organized labor.

3. Revise the exclusionary rules,suppression of evidence, inordinatedelays, technical reversals, instability in criminal procedures, bias infavor of criminal defendants, anddisregard for the rule of law by Supreme Court majorities.

4. Make greater use of private incentives and private contractors forpolice, prosecution, and correctionswork, so that the taxpayers get morefor their money.

5. Make sentencing fit the crime,not the criminal: Punishment shouldbe usual, even-handed, determinate,prompt, shorter, more severe (thoughnot cruel) and served in full.

The cardinal rule for any physician is "First, do no harm," and recommendations 1 and 2 reflect thisphilosophy. The likely prospect isthat things will get worse before they


get better because criminal policiesare still dominated by unsound ideasand unsound advisers. Legislaturesare losing their earlier resolve andbowing to public pressure over thelast few years. The people sellingtherapy for criminals are succeedingonce again based on the argumentthat prisons are crowded and thereis no sense in spending more moneyon failed policies. The legislature inTexas recently accepted this idea,pulling up short just as more plentiful and longer prison terms werebeginning to make a dent -m-crimerates. So the first order of businessis to fend off more of the same policies which caused the crime epidemic in the first place.

Perhaps the most controversialrecommendation is to repeal thecriminal drug laws (and laws againstother victimless crime), cases inwhich the cure is worse than the disease. Over 20 per cent of criminalarrests are for drug violations andthese clog up the courts, preoccupypolice resources, sustain the infrastructure of organized crime, raise theprice of opiates so that as much as30 per cent more street crime occurs,promote corruption, and have failedmiserably in every respect. Simi1arly' gun laws are misguided attempts to control crime "on thecheap" which never have worked andcannot work in America. They arecounterproductive and reduce citizen protection.2 The numerous re-

strictions on the use of prison laborhave reduced the output of the economy, raised the prison bill for taxpayers, and denied prisoners wideremployment opportunities.3 Even theprospects of rehabilitation have beenharmed by these protectionist measures. Another labor policy addingto the crime problem is the tacit rightof labor unions to use "the weaponsof labor" in order to create artificialscarcities of labor via violence andthreat of violence. The special privileges of labor unions, both by statute and common law, should be revoked. Not only would this directlyreduce violence, it would also reducethe close association between organized crime and organized labor.4

In addition to discontinuing somethings, the public sector should dosome things that presently are notbeing done. The most important stepis to rebalance our biased criminalprocedures. It is no exaggeration tosay that the Warren Court has theblood of thousands of crime victimson its hands. Without the ability toconvict the guilty promptly and conclusively in fair if less-than-idealprocedures, nothing can substantially reduce crime. With all of theprivileges granted to the accused intoday's courts, we are fortunate tohave as little crime as we have.5

The techniques of the .marketplace can improve the productivityof the public sector. Police departments, for example, should be at least

1984 HOW TO REDUCE CRIME 171

partially rewarded on the basis ofgains in reducing crime rates. Thecrime data should be checked by independent auditors. Private security agencies should be allowed tobid for contracts to supply police services where it is legally feasible.Based on experience, these measures can emerge on a piecemeal basis around the country, learning aswe gO.6 Similarly, private incentivesand contractors can be more widelyused in prosecution and corrections.When the duty of protecting a citizen from criminal harm is left solelyto government, there are times dueto neglect, malice, or political intrigue that prosecutors fail to act onbehalf of the victim. If criminal lawwere amended to allow wider private rights of enforcement in thecourts, then the citizen can protecthimself if the government does not,and enforcement will be much moreenergetic. Prisoners should havemore productive opportunities, withthe profit motive allowed wider scopeon both the demand and supply sidesof the highly restricted market forprison labor services and in prisonmade products. The ingenuity of themarketplace and competition shouldbe harnessed to serve the cause ofcrime reduction.

Recommendation 5 is to changesentencing policies. We should eliminate false advertising: make sentences shorter but served in full.Sentences should fit the crime, not

the criminal. The present philosophy about the appropriate procedures for determination of guilt andassignment of punishment basicallyshould be reversed. Evidence aboutthe accused's criminal background,for example, should be allowed inweighing the probability of guilt orinnocence, but should be ignored forsentencing. We do it for traffic finesor tax evasion and should do it forcriminal offenses as well. Perhapsjuveniles should receive special consideration but punishment basicallyshould fit the act, not the age nor thecriminal record of the guilty party.One of the tragedies of the currentarrangement is that juveniles initially receive tender-loving-care atthe hands of the criminal system andare almost seduced into a criminallife. Not taking the system seriously, some of them end up servinglong sentences as habitual criminalsfor crimes so old that nobody can remember them.

Severity ofpunishment can be humanely increased through greateruse of solitary confinement. Thisserves the cause of justice becauseanti-social individuals and criminalbands destroy social cooperation, solet them bear the logical results oftheir actions. The English penalsystem used this technique withgreat success in days gone by, andtheir abandonment of the procedurehas been a factor in the British crimeepidemic. Solitary confinement also


has the virtue of decreasing schooling in criminal skills and criminalcontacts. Prisoners also should work,but I favor the carrot of productive,remunerative employment opportunities rather than the stick ofbreaking rocks all day.

And what about the death penalty? I personally favor its reinstitution to administer just deserts forthe absolutely worst crimes. Lifeimprisonment in an era of color TVand coed prisons cannot do justicefor the acts of a Richard Speck. Weterminate vicious animals, and ifwebelieve that society is worth protecting we should be willing to executethe vicious killers that spring upamong humans. Our present unwillingness to execute the most grotesque evildoers speaks loudly tocriminals about our society and itsideological climate.7 As FriedrichNietzsche said, "There is a point inthe history of society when it becomes so pathologically soft andtender that among other things itsides even with those who harm it,criminals, and does this quite seriously and honestly."8

The Long Run:Rebuilding Internal Constraints

The rise of crime has not been anisolated social phenomenon. For instance, there is a striking parallelwith the demise of discipline in theschools. Why? The basic reason isthat a large, influential segment of

public opinion came to believe thatstudents should not be punishedmade unhappy, reprimanded,scorned-for doing things that arewrong. As a substitute we ended upwith "special counseling programs"and other non-answers. Those opposed to punishment share Rousseau's view of man, feeling that social constraints inhibit healthyhuman development, that people areborn friendly and considerate. Propunishers believe that man is a mixture of good and bad, but that ourbasic instinct is to look out for number one·and trample anyone who getsin the way of what we want. Underthe weight of painful experience, ourschools may be shifting away fromRousseau's views, but it can only beeffective if adults are willing to faceup to things, to show some backbone. Without serious steps to restrain the law-breaking minority, ofcourse, the reversion to savagery isnever far away.

The breakdown of the personalqualities of self-restraint, honesty,integrity, foresight, self-reliance, andconsideration for others is indissolubly linked with the welfare state.For what is the redistributive statebut a glorification of envy? There isan irreconcilable conflict between therule of law, which depends on limited government, and the welfarestate, which depends on a limitlessgovernment. As government haspassed more and more laws and reg-

1984 HOW TO REDUCE CRIME 173

ulations, individual liberty hasshrunk and disorder has grown. Therule of man has been substituted forthe rule of law.

Crime and the Welfare State

The welfare state does not respectprivate property. It takes from thepolitically uninfluential and gives tothe politically influential. Redistribution by government is not calledstealing, though the same act is ifperformed by a private individualrather than a government official.Neither shoplifters nor more seriouscriminals think of themselves asstealing; they say that they just"take" things. In away, they areright because crime and most ofwhattakes place under the heading ofpolitics amount to the same thing.

Changing the incentives faced bycriminals is relatively easy from atechnical point of view. Just makepunishment swift, sure, and severe.It requires a firm b'Ut limited government. But if government is to restore the rule of law and protect private property, government itselfmust abide by the law. And this isnot consistent with the welfare state.

Collectivists like to say that a waron poverty is also a war on crime. Iagree with this statement but not inthe sense that collectivists mean it.Collectivists mean more coerced redistribution, generous welfare benefits, more social workers and bureaucrats. The consequences of these

programs have been family dissolution, illegitimacy, mass unemployment, demoralization, and non-existent work skills. Redistributionperpetuates poverty, intensifies it,and therefore increases crime. Thereal war on poverty occurs daily inthe marketplace. Capitalism, entrepreneurship, commerce, and the creation of new wealth is the real waron poverty. Capitalism encouragesindependence, self-reliance, honestdealing, expanded employment opportunities, and therefore less crime.9

New job opportunities in the private sector reduce the relative attractiveness of crime and do not callfor more government training andwelfare programs. They demand lesswelfarism. Government should getout of the way and allow the marketplace to create more opportunities and wealth. Many factors influence the labor market conditions thatpotential criminals confront. For example, federal minimum wage lawsand union wage rates prevent manyyoung people, whose services are notworth $3.35 or more per hour, fromfinding legitimate work. Stealingthen is more attractive because theycannot find occasional jobs to pickup spending money. They also failto acquire the skills, like basic reliability, that would allow them to raisetheir value in the marketplace. Manyother policies adversely affect crimerates, including monetary and fiscalpolicies. The graduated tax rates, for

174 THE FREEMAN

example, used to finance destructivesocial programs retard economicgrowth and employment opportunities.

Robbery and tyranny by the stateis a reflection of the general breakdown of moral law, as it was in ancient Rome, when people had lost allrespect for the sanctity of privateproperty. If the lights go out in anymajor American city, many thousands of people will go on a crimespree, as they did in New York Cityin the blackout of 1977. The intellectuals have spent decades tellingpeople that they are underdogs in anunjust and decaying society, and thatviolating the laws against theft orrape is a form of social protest, a formof higher morality.

The long run problem of producing more considerate people meansgreater reliance on the private market and less on government. It is nosurprise that a decline in criminalbehavior occurred with the growthof capitalism, and that greater criminality has been associated with therise of the welfare state and socialism. Reviving internal constraintsmeans gradually reversing thegrowth of Leviathan. If we are tosolve the problem of crime, as withother ills of the welfare state, wemust work toward a society whereeconomic and social policies are determined by free markets, not centralized coercion.

The underlying problem is tochange the intellectual climate inthis country toward liberty and justice and away from collectivism andinjustice. No one can avoid this intellectual battle in our politicized era.The purpose of the criminal justicesystem must become the pursuit ofjustice once again. ®

-FOOTNOTES-

lAlso see Ernest van den Haag, "MakingCrime Cost and Lawfulness Pay," Society, 19(July/August 1982), p. 22.

2For evidence, see David T. Hardy, "Gun Control: Arm Yourself with Evidence," Reason (November 1982), pp. 37-41.

3For a dramatic example, see Jeffrey Shedd,"Making Goods Behind Bars," Reason (March1982), pp. 23-34.

4See Morgan O. Reynolds, "Unions and Violence," The Freeman (February 1983), pp. 98106, and "Contradictions of Unionism," Journal of Political, Social, and Economic Studies(Winter 1982), pp. 387-409.

5For the arguments, see Steven R. Schlesinger, "Criminal Procedures in the Courtroom,"especially pp. 192-200 on the exclusionary rulein Crime and Public Policy, edited by James Q.Wilson (San Francisco, CA: Institute for Contemporary Studies, 1983).

6Theodore Gage, "Cops, Inc.," Reason (November 1982), pp. 23-28.

7Walter Berns, For Capital Punishment (NewYork: Basic Books, 1979).

8Friedrich Nietzsche, Beyond Good and Evil,trans. Walter Kaufman (New York: Vintage,1966), sec. 201., p. 114.

9For corroborating views, see Christie Davies, "Crime, Bureaucracy, and Inequality," Policy Review, 23 (Winter 1983), pp. 89-105; JamesQ. Wilson, "Crime and American Culture," ThePublic Interest, 70 (Winter 1983), pp. 22-48.

Dennis Bechara

UNIONS ANDGOVERNMENTEMPLOYMENT

SEPTEMBER 9, 1919 was a date thataltered government employment andthe duties associated with it. For thiswas the time the Boston police forcewent on strike, causing an alarmingstate of violence, riots and lootingpreviously unheard of in the country. The Boston police strike markedthe beginning of a long and protracted struggle aimed at the unionization of government employees.

The strike at that time was doomedto failure, for public opinion wasagainst it. The policemen who participated in the strike were discharged, with public approval. WhenSamuel Gompers, head of the American Federation of Labor which hadcalled the strike, petitioned Governor Calvin Coolidge to reinstate thestrikers, the Governor replied: "Thereis no right to strike against the public safety by anybody, anytime, anywhere." This statement enjoyed al-

Mr. Bechara is an attorney in Mayaguez, Puerto Rico.

most unanimous approval, andhelped Coolidge attain national recognition which ultimately catapulted him to the· vice-presidentialnomination in 1920.

The Boston police strike occurredas the economy was readjusting fromthe severe pressures of the FirstWorld War. During the war, a WarLabor Board was formed by the federal government, which encouragedthe organization of labor unions. Thiswas the first time the governmentcreated conditions favorable for theunionization of employees. So, it isnot surprising that as many as fivemillion employees were union members by early 1920.

The Boston police strike was onlyone of many strikes that took placeduring this time. It has been estimated that over 3,000 strikes occurred in 1919 involving approximately 4 million employees. Yet, thedifference between the Boston policestrike and the others was that the

175


latter were aimed at private industry whereas the former was directednot only against the government butagainst the entire Boston population. People instinctively knew theunfairness of such a strike since ittouched everyone in Boston, whetheror not they wanted to be involved inthe controversy. The stark differences between public and privateemployment became clearer, andpeople generally agreed that therecould not be such a thing as a rightto strike against the public safety.

Compulsory Union BargainingBegan in Private Sector

In order to· understand the fullmeasure ofcompulsory public-sectorbargaining, it is instructive to studythe origins of private collective bargaining and its effects on the unionization of employees in the privatesector. The unionizatiQn of government employees took place after theprinciples ofmajority rule, exclusiverepresentation and collective bargaining were entrenched in privatelabor relations.

After the abolition of the War Labor Board when the war ended, unionmembership declined from its all-

.time high of 5 million members in1920 to 31/2 million members by 1923.During the depths of the GreatDepression, union membership hovered around 31/4 million members,and it was not until the passage ofprotective Federal legislation that

union membership substantially increased. Under the Norris-La Guardia Act of 1932, the jurisdiction ofthe courts to issue injunctions wasseverely restricted in cases involving labor disputes. Similarly, underthe National Recovery Act in 1933,collective bargaining was encouraged. Although this statute was laterto be found unconstitutional, its encouragement of collective bargaining was enshrined in the Wagner Actof 1935. The effect of this legislationwas substantial. The Department ofLabor has stated that:

The 2-year expansion of total unionmembership brought about a rise fromless than 3 million in 1933 to 33/4 millionin 1935. In the following 2 years (the first2 years of the Wagner Act), membershipalmost doubled, advancing to 71/4 million. The largest gains during the latterperiod were made in the automobile,rubber, and aluminum industries, inwhich workers were organized on an industrial basis. Many of the older organizations, including such unions as the International Ladies' Garment Workers'Union, the International Association ofMachinists, and the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers, also registeredsubstantial membership increases. Theextent of these gains is even more impressive when it is realized that the totallabor force increased only 2 percent between 1935 and 1937, and that nonagricultural employment, the main source ofunion membership, increased less than15 percent.1

1984 UNIONS AND GOVERN]~ENTEMPLOYMENT 177

Union membership continued toincrease during World War II andpeaked in 1953, when 25.5 percentof the private sector work force wasunionized. Membership decreasedthereafter to approximately 16.2percent by 1978.2 It is not surprisingthat although recent labor leaderpressures have failed to amend theNational Labor Relations Act, otherefforts aimed at the same goal of increasing unionization of employeeshave met with startling success.

President Kennedy signed Executive Order 10988 on January 19,1962whereby collective bargaining wasrecognized as a right of certain Federal employees. Although the termsof the Executive Order prohibitedstrikes and mandated that allagreements entered into must meetcivil service regulations, the stagewas set for further inroads. As onecommentator put it: "Kennedy's Executive Order triggered a series ofbargaining laws in states with substantial private sector unionism likeMichigan, New York, Washington,and Pennsylvania. Only a dozen stategovernments, mostly in the Southand West, do not have some kind ofmandatory bargaining law to promote public employee unions today."3

The situation in the federal government has been substantially altered by the passage of the CivilService Reform Act of 1978 whichenshrined the principle of compul-

sory collective bargaining for mostFederal employees.

Membership in public-employeeunions has soared during the twentyyear period between 1960 and 1980.By 1960 eleven percent of government employees were unionized,whereas by 1980 the figure had increased to 50 percent of a total ofover 15 million government employees.4

The recent surge in the unionization of government employees is inmarked contrast to the decline in theunionization of the private sector.With government employment becoming more significant in the economy, it is essential that we understand how this differs fromemployment in private industry.

Market Guidelines

Perhaps the most salient distinction between the private sector andthe government is the fact that private enterprise is guided in its behavior by the market and especiallyby the demand for its services. Businesses base their decisions on themarket price for goods and services,and the consumer ultimately has thepower to decide whether or not topurchase the items offered. There isalways the incentive to be efficientin the provision of goods and services since real or potential competitors may offer a better price.

Government, on the other hand,has no such guidelines. Revenues are


based on the taxes collected from thepopulation. Efficiency in the provision of goods and services has no effect on revenues. Nor is there danger of losing the market to theprivate sector because in most instances competition is forbidden. ThePostal Service, for example, has amonopoly in the delivery of first classmail. Regardless of the efficiency ofthe Postal Service, there is no danger that a private entity will offeralternative modes of delivering suchmail. Even where competition is notforbidden, it is impractical in manycases because the government hasthe power to tax and may offer itsservices at below-cost prices. Publicschools, for instance, have the advantage that no direct charges areimposed on the users of their services, whereas those who attend private schools not only have to pay forthe private schooling but must sustain the public school system as well.

Since there is no incentive toeconomize or lower costs, and sincethere is no possibility of effectivecompetition, government has considerable leeway in the assignmentof priorities to provide goods andservices. And since there is no market price for government services, itsactions are in a sense arbitrary.Ludwig von Mises elaborated thispoint:

A police department has the job of protecting a defense plant against sabotage.It assigns thirty patrolmen to this duty.

The responsible commissioner does notneed the advice of an efficiency expert inorder to discover that he could save moneyby reducing the guard to only twenty men.But the question is: Does this economyoutweigh the increase in risk? There areserious things at stake: national defense,the morale of the armed forces and of civilians' repercussions in the field of foreign affairs, the lives of many uprightworkers. All these valuable things cannot be assessed in terms of money.5

These facts tend to complicate theemployer-employee relationship inthe public sector. There are no objective standards by which to judge andreward the productivity of government employees. In a private enterprise, the profit and loss system provides an objective framework uponwhich to judge the contribution madeby each employee. It is true that arbitrary actions on the part of theemployer may take place in the private sector. It is conceivable that anemployer may act rashly and may infact discharge his most efficient employees, retaining the least productive. But ifhe acts in such a fashion,he will do so at his peril.

Non-economic Factors

The public employer, lacking amarket method of judging his employees, turns to other non-economicconsiderations. At one time partisanpolitics played the most importantrole in the employment of government employees. The spoils system

1984 UNIONS AND GOVERNMENT EMPLOYMENT 179

became so much a part of politicalreality that it took President JamesA. Garfield's assassination in 1883by a disappointed office seeker toinitiate the enactment of the firstcivil service law. This statute, knownas the Pendleton Act of 1883, "created a Civil Service Commission toadminister a new set of rules whichrequired appointments to be madeas a result of competitive examinations and prohibited assessments onoffice-holders for political purposes.By law these new rules were appliedonly to some 14,000 positions, about12 per cent of the total, but the President was empowered to extend themat his discretion. At the turn of thecentury there were not far from100,000 in the classified civil service; at the end of Theodore Roosevelt's administration the number hadmore than doubled, and when Wilson left the White House it had increased to almost half a million. Atthe same time most states werepassing civil service laws."6

The situation has changed evenmore dramatically; the SupremeCourt has held that patronage dismissal from government employment violates the U.S. Constitution.The Court stated in Elrod v. Burns,7that patronage dismissals could onlybe justified in policymaking positions so as to guarantee that the policies which the electorate has mandated may be implemented. In yetanother case, Branti v. Finkel, the

Court indicated that patronage dismissals may only be justified if "thehiring authority can demonstratethat party affiliation is an appropriate requirement for the effectiveperformance of the public office involved."8 It may reasonably be saidthat the spoils system is no longeran important factor in the employment relationship in the government. However, this does not alterthe fact that the public employer hasno objective measure by which tojudge the efficiency and productivityof his employees. Even in those government agencies where there is aprovision of services for which thereis a market price (like railroads andthe provision of electric power), theagency is operated with other thana profit motive and thus lacks an objective standard.

The Power to AbuseThere is no question that govern

ment employees have the constitutional right to form and join unions.This is a part of the freedom of association guaranteed by the Constitution, and is as it should be in afree society. However, to extrapolatefrom that right of association a concomitant right to engage in collective bargaining is a quantum leap.

The theory of collective bargaining, which is embodied in our national labor policy, confers uponunions the exclusive right to engagein bargaining with an employer over


the terms and conditions of employment, in behalf of certain employees. This exclusive right is in itselfa very broad delegation of power, aseach individual employee correspondingly loses his right to deal withhis employer over those terms andconditions. The union that enjoys thisexclusive right to engage in collective bargaining has the economic selfinterest to raise the wages and otherconditions of employment of thoseemployees it represents at the expense of the rest of the work force.Such collective bargaining has hadvarious effects. Some companies havenot been able to compete as a resultof the high wages exacted by theunions they must bargain with.Others have not been able to hire asmany employees as they would havepreferred. When we take these effects of collective bargaining, not tomention the consequences of prolonged strikes, it becomes obviousthat unions in government will tendto exert an inordinate amount ofpower over the budgetary decisionsof the government. As Sylvester Petro pointed out:

So long as taxpayers remain a diffuse,unconcentrated group, while public-sector unions enjoy the compact politicalpower derived from the laws grantingthem the privileges ofexclusive bargaining statutes and of compulsory collectivebargaining, the taxpayers must fight alosing battle.9

Although it is difficult to estimate

the actual income generated by public-employee unions, an expert recently estimated that $750 million ayear is a conservative figure. 10

Clearly, public-employee unions havean acute interest in promoting compulsory public sector bargaining.

Essential Differences

Among the many other differences between the government andprivate employers is the economicadvantage enjoyed by the government. Taxpayers must subsidize thegovernment's expenditures regardless of their demand for the servicesoffered. As previously noted, thepossibilities of private competitionare curtailed. All of these factors enhance the entrenched power of public-employee unions. Besides, sincegovernment is usually the only supplier of many services, a strike,however short its duration, can inflict tremendous damage to the population. This in turn causes the politicians to yield to exorbitant uniondemands so as to lessen the publicoutcry caused by the strike.

The politicians responsible formaintaining labor peace in the government must reconcile two conflicting demands. On the one hand theymust pacify the concerted efforts ofpublic-employee unions to raise labor costs while on the other handthey must stem any outcry that maysurface on the part of the populationat large to avoid profligate spend-


ing. This effort at reconciling theseopposing demands is usually resolved in terms favorable to the public-employee unions since these organizations have formidable lobbyingpower. Public employees have aneconomic interest in voting for candidates who will be more generousin settlements with public-employeeunions. It is not surprising that"public employees participate inelections at substantially higherrates than the general citizenry does,thereby forming a more potent voting bloc than their share of the workforce might suggest."ll

A Political Process

The easiest way for politicians toreconcile the conflict between thegeneral taxpayers' clamor to reducespending and the strong pressuresexerted by public employee unionshas been to grant many of the benefits demanded as long as they are tobe financed over the long term. Thereis no short-term need to raise taxes,and both the unions and the taxpayers are satisfied. This developmentis similar to the so-called "uncontrollable" items in the Federal budget where benefit increases have beenmandated over a number of years.Since the legislation took place inthe past, no politician needs to suffer the consequences of being singled out as responsible for the increase in spending.

Public-sector bargaining is part

and parcel of the political processsince its outcome directly influencesthe budgetary decisions of the government. This becomes even moreacute whenever a strike takes place:"A strike designed to get for thestrikers more than the legislativeappropriation calls for is thus a political act, not an economic one; itspurpose is to supplant the budgetarydecisions produced by the politicalprocesses of representative government with a form of action whichcan only be called an act of politicalaggression or extortion."12

Although most public-employeecollective bargaining statutes contain prohibitions against strikes,government officials have becomereluctant to impose any sanctions onthe strikers. In 1980 there were 536work stoppages involving 224,000government employees.13 It seemssafe to assume that the reason fewsanctions have been taken has beendue to the powerful political influence enjoyed by public-employeeunions. Yet, one must consider thatduring the 1981 Professional AirTraffic Controllers Organizationstrike the government took an unusually strong stand and proceededto discharge all those strikers whorefused to return to work. This severely strong action was politicallyacceptable and shattered the myththat it is impossible for a government official to deal effectively withthe issue of strikes in the public sec-


tor. But the issue posed by publicemployee unions goes beyondwhether or not public employeesshould have the right to go on strike.The question that should be addressed is whether or not compulsory collective bargaining should bethe guiding principle for labor relations in the public sector.

The clear differences that existbetween a private and a public employer demonstrate the vulnerability of both the government and thetaxpayers to the pressures exertedby public-employer unions. Compulsory public-sector collective bargaining will increase governmentspending inordinately with the consequent adverse effects on the budgetary and policy-making process. Itshould be remembered that the costsof collective bargaining include allthe disputes that may arise duringthe term of the collective bargainingagreement. Clearly, collective bargaining in the public sector is notthe most appropriate mechanism tohandle labor relations in government.

Mandatory Arbitration

There are some who share a negative opinion about compulsory public-sector bargaining but feel that theideal solution is to refer all disputesto compulsory arbitration. In thisfashion, it is argued, arbitrators willdecide the fairness of the union demands as well as the reasonableness

of the employers' position. Yet, thisargument overlooks an importantconsideration. By empowering independent arbitrators to impose contract settlements mandating newterms and conditions of employment, the people at large will havegiven up their capacity to hold anyone accountable for the particularsettlements. Instead of bringingabout a solution to the problemsposed by the public sector bargaining, mandatory arbitration will onlyaggravate them.

If the government were to changeits policies and refuse to engage incollective bargaining, would thisopen the door for arbitrary treatment ofgovernment employees? Thefact is that government employeeshave rights protected by the Constitution which are not open to employees in the private sector. We havealready seen that the spoils systemhas been effectively curtailed as aresult of recent Supreme Court decisions. In addition to this, the Supreme Court in Perry v. Sinderman14

granted public employees who facedismissal the right to a hearing sothat they may establish whether ornot they had a "property interest" intheir jobs.

The instances in which public employees have been dismissed areminimal. In 1978, for example, "only300 of 2.8 million federal employeesreportedly were dismissed or terminated for incompetence."15 In addi-


tion, public employees may not bedisciplined for their exercise of FirstAmendment rights. As all of this reveals, government employees enjoycertain rights that guarantee thatthey will not be subjected to arbitrary actions on the part of their employer. In addition, of course, publicemployees enjoy economic securitysince the government does not runthe risk of going out of business. Allin all, government employees enjoygreater job security than do employees in the private sector.

Government should rededicate itself to the purposes of the originalcivil service statutes. A pay scalecognizant of the realities of the market, along with the constitutional andstatutory protections afforded publicemployees, assure them fair treatment without subjecting the government to the shackles of public-employee union pressures. If wecontinue to pursue the policies ofcompulsory public-sector bargaining, we will lose further control overthe behavior of the government andits spending decisions. As SylvesterPetro has said:

Compulsory public sector bargainingdilutes governmental sovereignty bytransferring the loyalties of public employees from their government employers to their union. It dilutes popular sovereignty by pitting public employees asa group against taxpayers as a group. In-

stead of serving taxpayers, governmentemployees and their unions extort fromthem. 16

It is in our power to change thosepolicies which have brought forthcompulsory public-sector bargaining; if we do not, the events of September 9,1919 may no longer be incidents of the past. ,

-FOOTNOTES-lUnited States Department of Labor, Brief

History ofthe American Labor Movement, 1976,p.23-24.

2Myron Lieberman, Public-Sector Bargaining (Lexington: D.C. Heath and Company, 1980),p.2.

3Vol. 4 Government Union Review (1983), p.6-7.

4Ibid, p. 3.5Ludwig von Mises, Bureaucracy (New Ro

chelle: Arlington House, 1969), p. 50.6S. E. Morison, H. S. Commager and W E.

Lluchtenburg, A Concise History of the American Republic (New York: Oxford UniversityPress, 1977), p. 414.

7427U.S.347 (1976).8445U.S.507 (1980), at 518.9Vol. 10 Wake Forest Law Review (1974),

p.134.lOLieberman, op. cit., p. 13.llVol. 4 Government Union Review (1983),

p.14.12Vol. 10 Wake Forest Law Review (1974), p.

10l.13United States Department of Commerce,

Statistical Abstract of the United States (198283), p. 411, table 685.

14408U.S.593 (1972).15Vol. 4, Government Union Review (1983),

p.13.16Vol. 3, Government Union Review (1982),

p.23.

A REVIEWER'S NOTEBOOK

CHARACTER

LEONARD READ once made the prescient remark that, now that we hadsucceeded in separating church andstate, the next big battle would be toseparate state and school.

With the hold that compulsorypublic education has on this country,the struggle suggested by LeonardRead has hardly begun. Even the mostindependent private schools have togo to government for accreditation.Sometimes they can't even get that:ministers in Nebraska are jailed forstarting church schools in competition with the public school system.The Amish, who persist in their attempts to teach their own children,are persecuted and hauled into court.But, with the big decline in the socalled SAT scores in the past fewyears, public dissatisfaction with ourgovernment-run school system is undeniably mounting.

Since, after a century and more ofindoctrination by the followers of

184

JOHN CHAMBERLAIN

EDUCATION

Horace Mann, the public schools arenot going to be abandoned withinforeseeable time, there will be effortswithin the system to do somethingabout those bad SAT scores. FrankGoble, who runs the Thomas Jefferson Research Center, thinks the answer to the problem is to restore theteaching of ethics. In a book writtenin collaboration with B. David Brooks,The Case for Character Education(Green Hill Publishers, Ottawa, Illinois, 168 pp., $7.95), Mr. Goble makesan eloquent pitch for his contentionthat if the schools will only add thefourth "R" ofresponsibility to the basic "Rs" of reading, 'riting and 'rithmetic, the SAT scores will dramatically improve and classroomvandalism will tend to disappear.

The Goble-Brooks book definitelyshows there is a correlation betweenstudent behavior and academicachievement. With the growth ofethical relativism in the Seventies,

CHARACTER EDUCATION 185

both the verbal and mathematical testscores began to tumble. Where theaverage verbal test score was 478 in1963, it plunged to 427 in 1979 and424 in 1980. The 1963 average scorein mathematics had been 502; in 1979it was 467, and in 1980 it fell off another point to 466.

While it is possible that the teaching might have become more negligent in the decade of the Seventies,or that the SAT tests themselves hadbecome subtly more difficult, Mr. Goble does not have to go very far toassemble a whole host of negativebehavior statistics, beginning withdrug use and ending with suicide andhomicide, to prove his correlation. Hequotes Health, Education and Welfare Secretary Califano's statementto Congress that "schools that shouldbe centers of teaching and learning... have become centers ofdanger andviolence for teachers and students."Teen-agers spend only a fourth oftheir waking hours in school-butforty per cent of the robberies theyperpetrate or suffer and thirty-six percent of the assaults on teen-agers occur in the classrooms or school hallways and grounds. The streets themselves are much safer places for kids.

The Teaching of Ethics

The teaching of ethics has tendedto fade out because ethics is connected with religion, and the separation of church and state has beeninterpreted by the courts to preclude

John Chamberlain's book reviews have been a regular feature of The Freeman since 1950.We are doubly grateful to Johnand to Henry Regnery for nowmaking available John's autobiography, A ute with the PrintedWord. Copies of this remarkableaccount of a man and his times-our times-are available at$12.95 from The Foundation forEconomic Education, Irvingtonon-Hudson, New York 10533.

anything in the classroom thatsmacks of religious indoctrination.Kids can't even pray silently tothemselves for divine guidance. ButMr. Goble defies the American CivilLiberties Union to tell him that theFirst Amendmentmeans the schoolscan't teach things like responsibility, citizenship and generally approved codes of behavior.

"Character," says Goble, "refers tothose aspects of personality-mental habits, attitudes, values, personal goals-that influence personal behavior." A person of goodcharacter will have persistence, tact,self-reliance, generosity and loyalty.Character building can be stressedwithout relation to any specific religion or system of government, whichmeans that any school can go in forit without running into constitutional roadblocks.

Mr. Goble would have a hard time


proving that character in itself canmake a person more nimble atmathematical calculation or thewriting of good prose. Crooks can beintelligent, and good souls can bedumb. But it still remains true thatit is easier to learn to parse sentences and to do long division inclassrooms where order predominates and ambition is encouraged. Ittakes a genius to concentrate in aboiler factory.

The Goble-Brooks book relies oncase histories to make the correlation between behavior and academicexcellence come clear. The story ofwhat happened in the schools of Modesto, California, is typical. Stressing the "fourth R" of responsibility,Modesto decided in 1976 to go backto the basics in everything. It cutout the old habit of automatic promotions. Competency tests had to bepassed year by year or no diplomawould be awarded. Written studentconduct codes setting forth studentrights and responsibilities were distributed to parents. The conductcodes, with specified punishments forinfractions included, had to be signedby the parents and returned to theschool.

The results of the Modesto program have been most impressive. Itdid not wipe out vandalism, but thework of the graffiti artists and window smashers was held to a 6.9 threeyear increase where other California schools were reporting a twenty

to twenty-five per cent increase indestructive practices each year.Meanwhile, the Modesto reading,writing and arithmetic scores gainedmarkedly in comparison to what theother state schools were showing.

Teaching at Home

In New Hampshire two parents,Bob and Nancy Wallace, decided notto wait upon the improvement of thepublic schools. It was not so muchthe ethical standards of the schoolsthat bothered them; their two children, Ishmael and Vita, happened tohave special self-starting characteristics, and they would have·sufferedif bound down to the ordinary classroom pace. In an appealing bookcalled Better Than School (LarsonPublications, Burdett, New York, 256pp., $11.95 paperback), Nancy Wallace recounts the adventures of ahappy and dedicated mother and father in educating their children athome. They had the devil's own timein wresting permission for a "homeschool" from their local Board of Education in New Hampshire. (Ithaca,New York, did better by them afterthey had moved to be near CornellUniversity, with its needed libraryand cultural facilities). But, save forthe once-a-year administration ofstate tests, the Wallaces kept thegovernment out of their hair. Theresult, apparently, has been two superbly educated kids-and a coupleof educated parents, too. @

1984 OTHER BOOKS 187

NATION, STATE, ECONOMY:CONTRIBUTIONS TO THEPOLITICS AND HISTORY OFOUR TIMEby Ludwig von MisesTranslated by Leland B. Yeager(New York University Press, WashingtonSquare, New York, NY 10003)231 pages. $25.00 cloth; $9.00paperback

Reviewed by Bettina Bien Greaves

THE noted free market economist,Ludwig von Mises, was a native ofthe old Austro-Hungarian Empire.By 1914, he was in his early thirtiesand his years of compulsory militaryservice had been all but completed.When World War I broke out, however, he was called to duty immediately. He served throughout the war,a large portion of the time in thecavalry on the eastern (Russian) frontwhere, as he lamented later, he"could rarely find time to read anewspaper." (Notes and Recollections, p. 66). Shortly before the warended, Mises was transferred backto Vienna where he had been livingpreviously. He was there when theCentral Powers finally collapsed.

War's end found Europe in turmoil, hunger widespread, nationalboundaries in disarray, and communist terrorists eager to stir uptrouble at every opportunity. As op-

portunity permitted, Mises returnedto his intellectual pursuits. Onequestion uppermost in the minds ofmany persons at that time was whathad caused the strife that had led tothe war just ended. This book, firstpublished in German in 1919 andonly now translated into English,explores the answer.

As the title indicates, Mises dealswith the concepts of "nation," "state,"and "economy," their respectivesimilarities and differences. To appreciate the situation in post WorldWar I Europe, with its countless intermingled minorities, many withdifferent languages, dialects, cultures, religions and special interests, an understanding of these concepts is essential. Unfortunately,little attention was paid to the explanations Mises presented in thisbook. Longstanding internationalconflicts continued to fester in spiteof the attempt to implement in Europe the then-popular idea of national self-determination. As a result, when Hitler came along he hadonly to stir these issues up again,until in time they erupted into WorldWar II. Mises' message is importantto us today also, for the same issuesare at the root of current international conflicts.

Nineteenth-century Europe hadbeen trending toward the freedomideas of classical liberalism. To understand the origins of German nationalism which led to World War I,


therefore, it must be explained howliberalism, always pacifist and antimilitaristic, was overthrown. "[T]helast trace of the liberal spirit hadfirst to disappear from Germany andliberalism had to become regardedas a kind of dishonorable ideologybefore the people of poets and thinkers could become a weak-willed toolof the [imperialist] war party." (p. 3)This was accomplished primarilythanks to a combination of interventionists-(l) working class socialists, who favored "democracy" initially, and (2) the bourgeoisie,industrialists and militarist authoritarians.

Mises contrasts the principles ofclassical liberalism with those of theinterventionists. "The basic idea ofliberalism and of democracy is theharmony of interests of all sectionsof a nation and then the harmony ofinterests of all nations (p. 44)....Full freedom of movement of persons and goods, the most comprehensive protection of the propertyand freedom of each individual, removal of all state compulsion in theschool system . . . are the prerequisites of peaceful conditions." (p. 96)Liberalism stood for the international division of labor, free trade andfree migration. Frictions in a trulyliberal society can usually be resolved peacefully, through discussion, debate, election and voluntaryagreement.

Authoritarianism and socialism,

although nominally opposed to oneanother, shared quite a few non-liberal, protectionist positions. Because of their opposition to socialism, many entrepreneurs andindustrialists aligned themselveswith the privileged, authoritarian,class. And many socialists, opposedto monarchy and a privileged nobility, upheld the idea of democracy and"fought for the right to vote, freedom of the press, and the right toform associations and assemblies aslong as they were not the ruling party[but when] they came to power theydid nothing more quickly than setthese freedoms aside." (pp. 44-45).However, both groups, authoritarians and socialists alike, were interventionist. Both were advocates ofnational self-sufficiency and protectionism. Both favored a status society in which certain special groupshad the power and authority to suppress minorities. And the policies ofboth led in time to militarism andconquest. The only way to settlecontroversies under an authoritarian or socialist regime is by resorting to force and authority.

Prior to World War I, Europe wasa polyglot patchwork quilt of linguistic and cultural communities,each anxious for independence andthe freedom to control its destiny.The non-liberal governments of thatday, however, could not grant thisindependence or freedom to the separate linguistic groups within their


borders without relinquishing someof their own power and authority.Mises devotes considerable attention to the role of language as thebasis of "nationality" and to the conflicts that arise under non-liberalregimes when different linguistic andcultural groups are geographicallyintermingled and overlapping. Hedeals especially with the conflictsamong the many different languagegroups located within the pre-WorldWar I borders of Prussia and Austria-Hungary, conflicts that contributed directly to the start of bothWorld Wars.

Under liberalism, production isexpanded as the world becomes evermore closely linked by the widespread division of labor and far-flunginternational trade. It is a sort of poetic justice that the imperialisticGerman government, having rejected free market principles, had toturn to free enterprisers duringWorld War I to keep their war machine operating. "War," Mises wrotein 1919, long before nuclear bombswere even dreamed of, "has becomemore fearful and destructive thanever before because it is now wagedwith all the means of the highly developed technique that the freeeconomy has created." (p. 216) Andtoday, war is even more dreadful tocontemplate. It is not surprising,therefore, that many concerned persons now clamor for peace. Unfortunately, however, most of those who

agitate for a nuclear freeze or to banthe bomb are "socialists" or "interventionists" who advocate the verygovernment policies that lead to domestic and international conflict."Philanthropic pacifism," Miseswrote in 1919, "wants to abolish warwithout getting at the causes of war."(p.88)

Mises explains that the path tolasting peace depends on adoptingthe freedom philosophy of classicalliberalism.

He who has made the harmony of therightly understood interests of all stratawithin a nation and of all nations amongeach other the basis of his world viewcan no longer find any rational basis forwarfare. He to whom even protective tariffs and occupational prohibitions appearas measures harmful to everyone can stillless understand how one could regard waras anything other than a destroyer andannihilator, in short as an evil that strikesall, victor as well as vanquished. Liberalpacifism demands peace because it considers war useless.... He who wants toprepare a lasting peace must be a freetrader and a democrat and work with decisiveness for the removal of all politicalrule over colonies by a mother countryand fight for the full freedom of movement of persons and goods. . .. Liberalism rejects aggressive war not on philanthropic grounds but from thestandpoint of utility. (pp. 86-87)

The cause ofpeace would be betterserved if, instead of mounting massive protests and demonstrations,concerned persons were to speak up


for the repeal of special privileges,subsidies, welfare programs, progressive taxes, protectionist measures, barriers to world trade and freemigration, and the like. Such stepswould accomplish more towardeliminating the causes of war thanpicketing at nuclear missile sites.

To those who fail to recognize thatthe hope for peaceful interpersonalrelations rests on utilitarianism andclassical liberalism and who, as aresult, reproach their advocates forconsidering only "the satisfaction ofmaterial interests and neglecting thehigher goals of human striving,"Mises has an answer:

Nothing is more absurd than this criticism. It is true that utilitarianism andliberalism postulate the attainment of thegreatest possible productivity of labor asthe first and most important goal of policy. But they in no way do this out ofmisunderstanding of the fact that human existence does not exhaust itself inmaterial pleasures. They strive for welfare and for wealth not because they seethe highest value in them but becausethey know that all higher and inner culture presupposes outward welfare.... Notout of irreligiosity do they demand religious freedom but out of deepest intimacy of religious feeling, which wants tomake inner experience free from everyraw influence of outward power. Theydemand freedom of thought because theyrank thought much too high to hand it

over to the domination of magistrates andcouncils. They demand freedom of speechand of the press because they expect thetriumph of truth only from the struggleof opposing opinions. They reject everyauthority because they believe in man.(p.215)

This book, written so long ago, offers important insights to us todayfor understanding current problems.Professor Yeager provides a helpfulintroduction explaining the European background situation at thetime Mises was writing. This earlywork is a worthy addition to the collection of Mises books available inEnglish. Mises himself realized itsimportance, for he referred to it asfollows in his 1940 recollections:

It was a scientific book with politicaldesign. It was an attempt at alienatingthe affections of the German and Austrian public from National-Socialist [Nazi]ideas, which then had no special name,and at recommending reconstruction bydemocratic-liberal policy. My book remained unnoticed and was seldom read.But I know that it will be read in thefuture. (Notes and Recollections, p. 66)

Now that Nation, State, and Economy has been rendered into veryreadable English by ProfessorYeager, perhaps that future is here.,


NATURAL RESOURCES:BUREAUCRATIC MYTHS ANDENVIRONMENTAL MANAGEMENTby Richard L. Stroup and John A. Baden(Pacific Institute for Public PolicyResearch, 635 Mason Street,San Francisco, CA 94108) 1983148 pages. $25.00 cloth, $9.95paperback

Reviewed by Brian Summers

THE battle lines over environmentalissues seem to be clearly drawn. Onone side stand private landownersand businessmen, supposedly bent onplundering natural resources. Opposing them are government bureaucrats, who seem to form the environment's last line of defense.Almost all environmentalists sidewith the bureaucrats.

But according to Richard Stroupand John Baden, the environmentalists are on the wrong side. Private owners face economic incentives which are fundamentallydifferent from the political incentives facing government bureaucrats. After carefully examiningthese incentives, the authors conclude that private ownership ofnatural resources offers the best hopefor enlightened resource management.

Consider, for example, the 107million acres of public forestlandmanaged by the federal govern-

mente The bureaucrats in control, nomatter how well intentioned, haveno economic incentive to promote efficient timber production. Instead oflogging where marginal returns arethe greatest, the U.S. Forest Serviceresponds to political pressures. Bureaucratic mismanagement squanders scarce resources, deprives thenation of needed lumber, raiseshousing costs, and increases thenumber of acres that have to be cutto produce a given amount of lumber.

But wouldn't private forest companies do even worse? Wouldn't theystrip forests bare and then move on?Not if they owned the forests. Asprivate forest companies such asBoise Cascade and Weyerhaeuserhave shown, it is in their economicself-interest to maintain their forests and plant seedlings-if for noother reason than to sell the forestto the next private owner.

In addition to forestland management, Stroup and Baden analyze airand water pollution, toxic waste disposal, the development of fossil fuels,nuclear and alternative energysources, wildlife sanctuaries, rangeland management, and water resources. Through the use of basiceconomics and concrete examples,they make a compelling case for private ownership in a market economy as the best.possible solution toenvironmental problems. ,

Summer Seminars at FEE

3 Week-long sessionsFirst: June 17-23, 1984

Second: July 8-14, 1984Third: July 29-August 4, 1984

For the 22nd consecutive summer, FEE will conduct its notedseminars in the freedom philosophy and the economics of a freesociety. Here, in the company of like-minded individuals, withexperienced discussion leaders, and in a setting ideal for thecalm exchange of ideas, is an opportunity for those who believethat the proper approach to economic problems is through thestudy of individual human action. These seminars continue toattract individuals 'from all walks of life who seek a betterunderstanding of the principles of a free society and areinterested in exploring ways of presenting the case moreconvincingly.

Each seminar will consist of 40 hours of classroom lecturesand discussions in economics and government. In addition to theregular FEE staff, there will be a number of distinguished visitinglecturers.

The FEE charge for a seminar-tuition, supplies, room andboard-is $400. Fellowships (including partial travel grants) willbe made available.

The formal announcement, giving details of the seminars aswell as information about fellowships, will be sent immediately onrequest. Write:

THE FOUNDATION FOR ECONOMIC EDUCATIONIrvington-on-Hudson, New York 10533

Attention: Summer Seminars

Documents

The Freeman 1984 - Foundation for Economic Education · Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational