THEmE............IDEAS ON LIBERTY

220 Lodge Doctors and the Poor by David T. BeitoA look at the "lodge practice evil" and medical care before theWelfare State, 1900-1930.

226 A Feminist Lesson from Economics by Deborah WalkerWomen and the "knowledge problem."

231 The Incredible Ticket Machine by Jerry ElligAre computerized reservation systems a threat to competition in theairline industry?

236 Ideas and Consequences by Lawrence W. Reed

238 The Moral Consequences of Paternalism by Daniel B. KleinWhy we should reject government's offer to lend us a helping hand.

241 The Past Is Prologue by K. Maureen HeatonWhat happened when the Planners came to Our City.

244 King Charles' Ax: Property Rights, Human Freedom,and the Quality of Life by John Robson

Property rights are not a human right; they are the human right.

251 Owls, Ferrets, and Free Markets by K. L. BillingsleyBattling the bureaucrats who seek to regulate every facet of the environment.

253 Post-Communist Traumas East and West by Tibor R. MachanFew people in the West seem to fully appreciate just how horrible theSoviet experiment was and how difficult it is to recover from it.

256 The Economic Way of Thinking, Part 8 by Ronald NashDr. Nash concludes his series with thoughts on the importance ofasking what the long-term consequences of any economic action will be.

259 Lending Discrimination: The Unending Search by Robert BatemarcoRecent regulatory follies.

263 Correction, Please! by Mark Skousen

266 Book ReviewsSteven Horwitz reviews Monetary Policy in the United States:An Intellectual and Institutional History by Richard Timberlake;Cities without Suburbs by David Rusk, reviewed by Dean Stansel;The Fortune Encyclopedia ofEconomics, edited by David R.Henderson, reviewed by Raymond J. Keating; Playing the Fieldby Charles Euchner, reviewed by Jeff A. Taylor.

CONTENTSMAY1994

VOL. 44NO.5

THEFREEMANIDEAS ON LIBERTY

Published byThe Foundation for Economic EducationIrvington-on-Hudson, NY 10533Phone (914) 591-7230 FAX (914) 591-8910

President: Hans F. SennholzManaging Editor: Beth A. HoffmanGuest Editor: Peter J. Boettke

Editor EmeritusPaul L. Poirot

Lewisburg, Pennsylvania

Book Review EditorRobert Batemarco

Marymount College, Tarrytown, New York

Associate EditorsJohn Chamberlain

Cheshire, ConnecticutBettina Bien Greaves

Resident Scholar, FEEEdmund A. Opitz

Chatham, Massachusetts

ColumnistsGary North

Institute for Christian EconomicsTyler, Texas

Lawrence W. ReedMackinac Center for Public PolicyMidland, Michigan

Mark SkousenRollins College, Winter Park, Florida

Contributing EditorsCharles W. Baird

California State University, HaywardDoug Bandow

Cato Institute, Washington, D.C.E. Calvin Beisner

Covenant College, Chattanooga, TennesseePeter J. Boettke

New York UniversityClarence B. Carson

American Textbook CommitteeWadley, Alabama

Thomas J. DiLorenzoLoyola College, Baltimore, Maryland

Joseph S. FuldaNew York, New York

Roger W. GarrisonAuburn University

Robert HiggsSeattle University

John HospersUniversity of Southern CaliforniaLos Angeles, California

Tibor R. MachanAuburn University

Ronald NashReformed Theological SeminaryMaitland, Florida

William H. PetersonHeritage Foundation, Washington. D.C.

Richard H. TimberlakeUniversity of Georgia

Lawrence H. WhiteUniversity of Georgia

The Freeman is the monthly publication of The Foundation forEconomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE,established in 1946 by Leonard E. Read, is a non-political, educa­tional champion of private property, the free market, and limitedgovernment. FEE is classified as a 26 USC 501(c)(3) tax-exemptorganization.

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PERSPECTIVE

Shifting the Termsof the Debate

An ancient legend has it that a Romanemperor, asked to judge a singing contestbetween two entrants, heard only one con­testant and gave the prize to the secondunder the assumption that the second singercould be no worse than the first. The prob­lem with the Emperor's judgment, ofcourse, was that his assumption was unwar­ranted. The second contestant might havebeen much worse.

Unfortunately, much of the popular de­bate concerning whether the market or gov­ernment should be relied on to providecertain goods and services follows the samemyopic pattern of behavior as that of theEmperor. When the market economy can beshown to "fail" in some area, it is simplyassumed that the government can providethe service better. One of the most impor­tant tasks of economic education is to re­verse this lopsided way of thinking.

Adam Smith, for example, argued in TheWealth of Nations that not only would thegovernment not be in a position to efficientlyjudge the best use of scarce resources, butthat' 'The statesman, who should attempt todirect private people in what manner theyought to employ their capitals,. would notonly load himself with a most unnecessaryattention, but assume an authority whichcould be safely trusted, not only to a singleperson, but to no council or senate what­ever, and which would nowhere be so dan­gerous as in the hands ofa man who had follyand presumption enough to fancy himself fitto exercise it."

The great French economic journalist,Frederic Bastiat, wrote in his classic essay,"What is Seen and What is Not Seen," inSelected Essays on Political Economy that"There is only one difference between a badeconomist and a good one: the bad econo­mist confines himself to the visible effect;the good economist takes into account boththe effect that can be seen and those effectsthat must be foreseen." The full extent ofthe harmful effects of such government

218

policies as taxes, public works, and re­straints of trade unfortunately can only begleaned by a careful and thorough examina­tion of interventionism and its effects (bothdirect and indirect) on the economy.

Though the debate over government ver­sus free market is old it is never ending.Each generation must fight the battle anew.The free market response to advocates ofgovernment intervention is twofold. First, itmust be pointed out that many so-calledmarket failures are not really failures of themarket but instead the consequence of gov­ernment failure to clearly define and strictlyenforce private property rights. Second, itmust be stressed that even in situationswhere the market could be said to fall shortof the optimality conditions of the best of allpossible worlds, the proposed governmentremedy may actually worsen the situation.This type of argument has been put forth bygenerations of economists from AdamSmith to J. B. Say to Ludwig von Mises toF. A. Hayek to Milton Friedman to JamesBuchanan. Sometimes their arguments havecarried the day-if not in policy implemen­tation at least in policy discussion. At othertimes, the teachings of economists whopossess a boundless optimism concerningthe ability of the government to solve ourproblems dominate. Economists who favorgovernment intervention in a wide array ofeconomic affairs, such as John MaynardKeynes, Paul Samuelson, and John Ken­neth Galbraith, have more or less dictatedthe terms of the debate for most of the postWorld War II era.

During the 1980s, the terms of the debateshifted so that the burden of proof was onthose who proposed government interven­tion. Unfortunately, the debate has shiftedback again so that the presumption in thepolicy debate is that the government canprovide an easy and efficient remedy toeconomic ills. The recently released Eco­nomic Report of the President, written bythe administration's leading economistsLaura D'Andrea Tyson, Joseph Stiglitz, andAlan Blinder, officially signaled the shift in

PERSPECTIVE

the terms of the debate. The Report calls foreconomic intervention by the government,including "microeconomic initiatives topromote efficiency and productivity." Asthe New York Times (February 15, 1994)pointed out, the Report does not examinethe age-old free market litmus test for jus­tifying government action (i.e., identifyingthe market failure, and then examiningwhether the government could outperformthe market in dealing with the problem).Instead, the Report identifies market fail­ures alone. As Laura D'Andrea Tysonstated herself in the press conference toannounce the publication of the Report, "Ithink there is something different in thewhole tone of this. . . . There is a lot hereimplicitly about the role of Government todo something that would be beneficial. . . "

Laura D'Andrea Tyson, Joseph Stiglitz,and Alan Blinder are accomplished econo­mists-in many ways leading representa­tives of their generation. Their argumentsmust be addressed in the most scholarlymanner possible. We will find neither a com­plete nor effective answer to their argumentsin Mises or Hayek or Friedman or Bucha­nan, let alone Smith or Bastiat. Repeatingthe basic principles of the free society taughtby these great thinkers is not enough (though,of course, it is a good start). Instead, wemust find the answer to these "new" chal­lenges to the market economy ourselves.

As Mises pointed out in his preface to theHenry Regnery edition of Adam Smith'sgreat treatise, "the reader will [not] find inthe Wealth of Nalions a refutation of theteachings of Marx, Veblen, Keynes, andtheir followers. . . . Read the great book ofSmith. But don't think that this may saveyou the trouble of seriously studying mod­ern economics books." Similarly, the de­bate has now shifted to a new generation.Free market thinkers must address the ques­tions of 1994 and beyond, with fresh refu­tations of modern theorists who favor gov­ernment solutions over the voluntarychoices of individuals within the market.

----PETERJ. BOETTKE

219

THEFREEMANIDEAS ON L1BERlY

LODGE DOCTORSAND THE POOR

by David T. Beito

Medical Care Before theWelfare State, 1900-1930

On the face of it, a historical study offraternal societies seems to be a subject fitonly for connoisseurs of the arcane. FewAmericans these days come into contactwith such groups. When many ofus hear theword lodge, we think of it as a place wheretelevision characters from our youth, suchas Ralph Kramden (of the Loyal Order ofRaccoons) and Fred Flintstone (of the LoyalOrder of Water Buffalos), escaped fromtheir more sensible wives to engage in child­ish hijinks-parading around with silly hatsand mouthing pretentious rituals.

There was a time, however, when frater­nal societies could not be so easily dis­missed. Before the rise of the welfare state,they were rivaled only by churches as or­ganizational providers of social welfare. Byconservative estimates eighteen millionAmerican men and women were members in1920-at least three out of every ten adultmales. While fraternal societies differed inethnicity, class, and gender, most shared acommon set of characteristics. In general,this included a decentralized lodge system,some sort of ritual, and the payment of cashbenefits in times of sickness and death.

Dr. Beito is a research fellow at The Institute forHumane Studies at George Mason University,Fairfax, Virginia.

By the turn of the century, an increasingnumber of societies began to add treatmentby a doctor to their menu of services. Thisarrangement was known as lodge practice.It involved a simple contract under which aphysician provided care in exchange for anannual salary determined by the size oflodge membership. To qualify, a prospec­tive lodge doctor had to win an election bythe members. Generally lodge practiceplans did not extend beyond basic primarycare and minor surgery, although a fewprovided hospitalization.

Lodge practice became particularly ex­tensive in urban and industrial centers. In1915, for example, Dr. S. S. Goldwater,Health Commissioner of New York City,went so far as to assert that in many com­munities it had become "the chosen orestablished method of dealing with sicknessamong the relatively poor." In the LowerEast Side of New York City, he noted, 500physicians catered to Jewish societiesalone. Among blacks in New Orleans therewere over 600 fraternal societies with lodgepractice during the 1920s.

Nationally, the two leading providers oflodge practice among native whites were theForesters and the Fraternal Order ofEagles.By 1910, both organizations had over 2,000doctors under contract to look after themedical needs of about 600,000 members.Yet, aside from the common thread of lodge

220

practice, the Foresters and Eagles were. actually quite unalike as fraternal societies.

The ForestersThe Foresters traced their origins directly

to the Ancient Order of Foresters, a Britishorganization. The ritual drew inspirationfrom Robin Hood and his legendary adven­tures in Sherwood Forest. In keeping withthe medieval motif, the lodges were called"courts" and the supreme leader a "chiefranger." Both women and men could join(although in separate courts) and the onlytests for membership were belief in a su­preme being and good moral character.

Foresters were quintessential interna­tionalists. In an age of self-conscious Anglo­Saxon exclusivity, they were notable amongfraternal societies for seeking converts notonly in Europe but also in Asia. The chiefranger for over two decades was a Dr. Oron-

. hyatekha, a Canadian Mohawk. Equallyremarkable for the time, his ancestry wasnot a cause of embarrassment for the mem­bers; in fact, they wore it as a badge ofdistinction. One member boasted that"There is not a Forester in the wide worldbut knows that this full-blooded Indian chiefis the one man to whom the Order should bethankful for its wonderful growth. "

The EaglesWhile the Foresters eschewed national­

ism, their leading rival for lodge practice,the Fraternal Order of Eagles was almost acaricature of apple-pie Americanism. TheEagles opened their first lodge in Seattle,Washington, in 1898. The members em­braced a fun-loving and informal style quiteunlike more solemn co-fraternalists, such asthe Free Masons. The aeries (as Eaglescalled their lodges), with their well-stockedbars, often served double duty as localcommunity centers. This freewheeling be­havior earned the Eagles an unsavory rep­utation in some quarters. In 1910, Mc­Clure's Magazine characterized the groupas "a great national organization of sportingmen, bartenders, politicians, thieves, and

221

professional criminals." The Eagles laterrefurbished this unwholesome image some­what by launching a highly visible, andultimately successful, campaign for theproclamation of Mother's Day.

Less than ten years after the Eagles hadbeen founded, they became noted (notori­ous in medical society circles) for engagingin lodge practice. For one dollar a year, amember and immediate family could receivebasic medical services (including minor sur­gery). This fee did not pay for treatment forobstetrics, venereal disease, and "any sick­ness or injury caused or brought about bythe use of intoxicating liquors, opiates or byany immoral conduct."

Ladies Friends of FaithUnfortunately, primary data from individ­

ual societies with lodge practice is in veryshort supply. Nevertheless, some recordssurvive which can shed light on the subject.Particularly helpful is a minute-book fromthe Ladies Friends of Faith BenevolentAssociation, covering the period from Au­gust 1914 through September 1916. It was ablack female society of about 170 memberswhich operated in New Orleans during theearly twentieth century.

The Ladies Friends of Faith was notexceptional, at least within the broad con­text of New Orleans. It was only one ofnumerous such societies which offeredlodge practice to blacks in the city. Amongthese were local affiliates of two prominentnational organizations, the Eastern Star andthe Household of Ruth. Much more com­mon, however, were home-grown societiessuch as the Female Union Band, YoungMen of Inseparable Friends, Francs Amis,Holy Ghost, and the United Sons andDaughters. A simple reading of 134 organi­zational names from a list assembled in 1937indicates that no less than 40 catered pri­marily to females.

In terms of organizational structure andbenefits, the Ladies Friends of Faith also fitthe general local pattern. The rank-and-filevoted in annual elections to choose a "so­ciety" druggist, doctor, and undertaker who

222 THE FREEMAN • MAY 1994

provided services at a low flat rate. Thosetaken sick collected two dollars a week ifthey saw the lodge doctor and three dollarsif they did not. To guard against false claimsfor cash benefits and to provide companion­ship, a visiting committee sat at bedside withthe recipient. Those members derelict inthese duties had to pay a one-dollar fine.

In this two-year period, the minute-bookevidences great activity. One hundred andthirteen individuals (slightly over half themembership) collected sick benefits. Ofthese, 70 used the lodge doctor at least once;several a dozen times or more. Almost allthese applicants obtained cash paymentsand medical service (including free medi­cine) without eliciting complaints from theother members.

This does not mean that the deliberationprocess of the Ladies Friends of Faith waswithout controversy. Most notably therewas a persistent need to grapple with ap­peals from individuals who had fallen inarrears. At nearly every meeting, the soci­ety heard at least one plea from a memberunable- to pay because of unemployment orpoor health. One of the most desperate ofthese concerned a woman who was "out ofDoors, and had no money. " In such cases,the society was generally ready to extendhelp. It allowed 24 members extra time topayoff their debts while it passed the hat forten others. Not once did the Ladies FriendsofFaith reject any of these appeals outright.Such liberality did not translate into openseason on the lodge's treasury, however.Those delinquents who failed to explaintheir "unfinancial" status were readilydropped from the rolls.

Regardless of religious, ethnic, or politi­cal orientation, all fraternal societies, to theextent they relied on lodge practice, faced asimilar set ofobstacles. Without a doubt, themost serious was the organized oppositionof doctors. By the first decade of the twen­tieth century, the spread of what becameknown to critics as the lodge practice evilelicited almost universal condemnationamong medical societies.

At its core, this opposition representedfear for the future survival of the dominant

fee-for-service remuneration. Writing in theWisconsin Journal of Medicine, Dr. W. F.Zierath of Sheboygan, Wisconsin, put thematter succinctly when he chided certainfellow members ofthe profession for bowingso readily to "the keen business instinct ofthe laity" who have "discovered in contractpractice a scheme to obtain medical servicesfor practically nothing . . . they are orga­nizing societies by the score with that fea­ture as the excuse for their existence. " Oncedoctors allowed themselves to be placed ona fixed payment system, he warned, loss ofboth income and independence would soonfollow. The profession would then becometainted and demoralized by every doctor'scutthroat and undignified scramble to sell tothe lowest bidder. Another opponent pre­dicted that lodge practice, if not stopped,would depress fees to levels "comparable tothose of the bootblack and peanut vendor. "

Lodge elections were depicted as carni­vals of corruption in which victory went tothose doctors best able to ingratiate them­selves with key players in the leadershipthrough extravagant promises or outrightbribery. Even when outright corruption didnot occur, the critics portrayed the electioncampaign as dominated by unseemly wire­pulling and backslapping. According to Dr.Zierath, success of a candidate dependedupon "the handshaking, the button-holing,the treating to cigars and drinks in publichouses. "

According to these critics, however,lodge practice was not only bad for doctors,but it also harmed the patient. While theyconceded that the fees were low, theywarned that the service given in return wasshabby. Along these lines, a leading profes­sional journal condemned lodge practice asa vain attempt by the patient to get "some­thing for nothing."

Who Benefited?Lodge practice, in my view, merits a far

more favorable assessment than it receivedeither from contemporary critics or morerecent historians. At first blush, such acontention would seem impossible to de-

fend. Most of the survIvIng sources onwhich the historian must rely already haveturned in a ringing verdict of guilty. Thisresearch problem is not fatal, however.Ironically, the strident manifestos publishedin the medical journals contain a wealth ofinformation which can cast a positive lighton lodge practice. With great profit, theseprofessional critiques can be supplementedand compared to the still extant defenseswritten by doctors and leaders of fraternalsocieties.

The most important beneficiary of lodgepractice was, of course, the patient of mod­est means. He or she was able to obtain thecare of a doctor for about two dollars ayear-roughly equivalent to a day's wagefor a laborer. If translated into 1994 dollars,this annual fee would be equivalent to about14 dollars, the hourly wage of some con­struction workers today!

The remuneration paid to the lodge doctorwas a far cry from the higher fee schedulesfavored by the profession. A local medicalsociety in Pennsylvania was typical in set­ting for its members the following minimumfees: one dollar per physical examination,surgical dressing, and housecall (daytime)and two dollars (nighttime). Such prices, atleast for continual service, would have beenout of reach for many poor Americans.

Why were the lodges able to charge suchlow fees? The answer to this question lieswith several organizational strengths pecu­liar to the fraternal structure itself. The factthat lodges could entice doctors with a largeand stable market left them well positioned,as one opponent put it, to purchase medicalservices at wholesale and sell at retail.

Also exerting downward pressure on feeswere lodge elections. While the electionprocess was not without flaws, there is alsoample evidence from both supporters andopponents that, on balance, it served mem­bers well. It gave patients an opportunityonce a year to compare notes on the medicalrecords of both the challenger and incum­bent. John C. McManemin, the Past WorthyPresident of the Eagles, maintained that as"the members have the right of franchise inelecting the lodge physician, so have they in

LODGE DOCTORS AND THE POOR 223

deposing him, and it therefore results thatunless the physician so selected, attends tothe duties devolving upon him he is quicklybrought to account. " From a very differentperspective, a leading opponent of lodgepractice complained that during campaigns"colleagues and rival applicants are roundly'knocked' and their mistakes and capabili­ties held up to public ridicule and censure."

Quality of ServiceCloser inspection of the medical journals

also gives some cause to be skeptical ofblanket claims that lodges heedlessly sacri­ficed quality to elect the candidate biddingthe lowest fee. The contrary, in fact, oc­curred in a campaign described by lodge­practice adversary Dr. George S. Mathewsof Rhode Island:

. . . in one lodge two members in goodstanding in the State Medical Societyopenly in lodge meeting underbid [eachother]. One volunteered his services at $2a head. The other dropped his price to$1.75. The first bidder then acceded to thisprice with medicines furnished. This oc­casioned a drop in bidder No.2 in his priceto include medicine and minor surgery.To the vast credit of the lodge neither bidwas accepted but a non-bidder was giventhe job at $2.

Even the detractors, while generally dis­dainful of the quality of care provided,acknowledged that fraternal societies at­tracted some doctors of ability and hightraining. In Dr. Goldwater's opinion, forexample, there were "many competentmedical men and between the slip-shodservice of the poor kind of dispensary, andthe painstaking care of the conscientiouslodge doctor, the choice easily lies with thelatter. " It is worthy of note that the hackoften inspired less contempt than the phy­sician with a lucrative private practice whotook a lodge contract on the side. Oneleading critic excoriated such individuals as"inordinately selfish and avaricious menwho have no neighbors in the profession, forthey are not Samaritans by practice."

224 THE FREEMAN • MAY 1994

Proprietary Medical Schools

Also misleading were efforts to dismissthe abilities of lodge doctors by citing theirlow level of medical education. For manyopposed to the system, it was merely suffi­cient to note that these doctors graduateddisproportionately from the ranks of theproprietary medical schools. While as adescription of reality this was probablyaccurate, it fails as an indictment. To un­derstand why, a bit of background aboutproprietary education might be helpful.

These schools had two salient features.First, they were owned by doctors in regularpractice and second, unlike the endoweduniversity, they subsisted entirely on tu­ition. The owners earned income both fromtuition received in exchange for deliveringlectures and from sometimes lucrative re­ferrals tendered by grateful graduates. Thestudents often came from modest back­grounds and thus lacked both the contactsand financial pull enjoyed by many of theircounterparts in the universities. The alumniof these proprietary schools would haveample incentives to be attracted to lodgepractice. For a recent graduate especially, acontract with a fraternal society might be theonly means available to obtain the necessaryfinancing and community contacts neededto build up a practice.

To call these doctors quacks, however, asmany critics did, would be a misnomer, atleast in the strict meaning of the term. Likeevery other aspiring doctor, they neededto receive state certification to practice. Byno means was this pro forma. Since the1880s and 1890s, the requirements had be­come increasingly stringent and failure rateswere high. In short, the lodge doctormay not always have been top-of-the-linebut he or she had at least rudimentarytraining.

As the purchaser of these services, thefraternal society also had incentives tomaintain the quality of care. An incompe­tent or arbitrary doctor could prove fatal toactuarial soundness. Moreover, if fraternaladvertisements are any indication, prospec­tive members were leery of organizations

with high mortality rates. The publicity forthe Foresters repeatedly contrasted thedeath rate of its members (6 per 1,000) withthat of the same age group in the generalpopulation (9 per 1,000). It credited this lowmortality to "Sherlock-Holmes-like acute­ness in the detection of bad risks" exhibitedby the doctors attached to its courts. Thisboast was more than hyperbole. In the firstdecade of the twentieth century, the doctorsof the Foresters annually rejected betweenten and twenty percent of all initiates.

Additionally to ensure quality of carelodges often imposed specific sanctions, inthe form of fines, for doctors who neglectedtheir duties. Among the possible infractionswere failure to report at meetings, fraudu­lent approval of sick claims, and refusal torespond to a patient's housecall. For thelatter violation, for example, both the Ea­gles and Foresters authorized a lodge to hirea substitute from the open market and thendeduct the charges from the salary of thedelinquent lodge doctor.

An important consequence of lodge prac­tice for the patient was to facilitate habits ofassertiveness. The members who used theseservices anticipated by several decades theactive patient now very much in vogue.Many physicians, obviously unaccustomedto such treatment, denounced the willing­ness of members to quibble about fees anddiagnosis. One doctor blamed excessive andunnecessary housecalls for engenderingfears in the doctor "that he will lose hisposition if he fails to answer every callregardless of circumstances and his knowl­edge of the fact that he is being imposed onconstantly by members who abuse theirprivileges. "

For the patient, if not always the doctor,lodge practice had the additional virtue ofaffording accessible preventive care. Again,one need look no further for evidence thanthe repeated accusations in the professionaljournals that doctors were being pesteredwith trivial ailments. According to Dr.Zierath, the patient called on the lodgedoctor at all hours of the night' 'to see casesrepeatedly where a physician would not becalled, were the regular fee to apply. One of

the children in a family has abdominal pain,and the anxious mother promptly conjec­tures that it is appendicitis" when it wasnothing more "than too much indulgence inmince pie. But it looks stylish to have thedoctor's rig standing in front of house andexcites the curiosity and envy of the neigh­bors, therefore the 'free' doctor is sum­moned."

For fraternal societies, by contrast, theability to readily call on the doctor for anycomplaint was a major selling point. Lodgepractice, wrote a leader of the Eagles, "ac­cords perfectly with the modern theory ofthe prevention of disease . . . Many of thepoorer members, under other circum­stances might delay in calling a doctor untilthe disease made considerable headway."

Lodge practice opened up rare opportu­nities for many working-class Americans tocompare and experiment and empoweredthem with the necessary economic clout tobreak free from the confining view thathealth care was merely a generic good. Itgave patients the wherewithal to use medi­cal services more as a varied menu ofchoices, each adjustable to suit the partic­ular need at hand.

The discernment of lodge patients wasexemplified by their selective patronizationof medical services. They may have readilyturned to their lodge doctor for prevention,for example, but many looked elsewhere fora cure. On this note, an exhaustive study ofblacks in New Orleans, who were membersoffraternal societies during the 1930s, found

LODGE DOCTORS AND THE POOR 225

that while 56 percent relied exclusively onthe doctor hired by their lodge, the rest alsohired private physicians in some cases. Amember of one of these societies expresseda typical view when he commented, "Well,I think there is nothing better than a societyfor when you're sick they give you the bestpossible attention, but if I were real sick I'dprefer calling a doctor not connected with asociety, so that I could get the best ofattention. Society doctors are too busy tohandle extreme illnesses."

Decline of Lodge PracticeEven before the Depression, lodge prac­

tice had begun to fall into a state of decline.The pressure exerted by the leaders oforganized medicine hastened the demise.By the 1910s, doctors had launched an all­out war against lodge practice. Throughoutthe country, medical associations imposed arange of sanctions against lodge doctors,including expulsion from the associationand denial of hospital facilities. In certaininstances, campaigns were organized todeny patient care, even in emergencies, tomembers of offending lodges. Most com­mentary from both sides of this conflictindicates that these sanctions were highlyeffective. In any case, by the end of the1930s, the once vibrant health care alterna­tive of lodge practice, which less than twodecades before had inspired trepidationthroughout the medical establishment, hadvirtually disappeared. D

THEFREEMANIDEAS ON LIBERTY

A FEMINIST LESSONFROM ECONOMICS

by Deborah Walker

With the collapse ofCommunism, econ­omists have finally figured out that

economic planning does not work. This doesnot mean, of course, that the economicplanners don't continue to try; some willnever concede defeat, even when theoryand history tell them to give up. Along withthe economic planners are the social plan­ners, who usually call themselves egalitari­ans or defenders of social justice. But thetruth is, they, too, along with the economicplanners, should throw in the towel. Inter­estingly, the reason why the social plannersshould give up is the same reason why theeconomic planners should consign their vi­sions to the dustbin. It all has to do withknowledge.

Let me explain by focusing on one socialmovement in the United States which is ripewith social planning: mainstream feminism.Although feminists generally argue that theuse of legislation as social planning has itslimitations, they see legislative change as atleast a partial means to positive culturalchange.·

Complete cultural change requires an en­tire transformation of many existing institu­tions such as "the family, childrearing ar­rangements, the economy, the wage labormarket, and human consciousness. ,,2 So, infact, legislation is seen as a compromise to

Dr. Walker is an associate professor ofeconom­ics at Loyola University in New Orleans.

real reform, which requires the abolition ofmarkets.

The Problem With PlanningSince the whole abolition ofmarkets is not

feasible to most, legislative mandates arethe next best thing. Always keep in mindthat planning is planning; whether on a largeor small scale, the same problem arises. Thisproblem is what F. A. Hayek calls a knowl-edge problem. '

Each individual in an economy possessesknowledge only some of which is known byothers. This subjective knowledge of partic­ular time and circumstances is that of one'svalues, tastes, plans, talents, desires, and soon. This knowledge, of a contextual nature,is dispersed throughout the economy, and isconstantly changing.3 Furthermore, muchof this knowledge is inarticulate or tacit.Because of the contextual and subjectivenature of knowledge in society, anyoneperson or group of persons cannot possessall of this knowledge. The basic economicproblem that all societies face, therefore, ishow to utilize this knowledge.

Ludwig von Mises explains exactly whyeconomic calculation, the utilization of sub­jective and dispersed knowledge, in aplanned economy is technically impossi­ble.4 According to Mises, there are reallytwo processes of economic valuation in aneconomy: that of the consumer and that of

226

the producer. Both processes are necessaryfor economic calculation and coordination.For example, even if the planners couldknow the subjective valuations of goods bythe consumers in an economy (or evenassume that they know what should bevalued by consumers) and the best produc­tion techniques for producing these goods,economic calculation would still be impos~

sible. This is because there would be nomeans for knowing or calculating how thescarce productive resources should be uti­lized. That is, how would the planners knowif a piece of land should be used as a site fora factory or for a potato farm or for any othernumber of uses? Mises explains that what isnecessary for economic calculation is pri­vate ownership of the means of production.Without the existence of prices and theprofit calculations they make possible, cen­tral planners could never possess the knowl­edge necessary to direct resources so thatpeople's basic wants are satisfied. It is theprivate ownership of the means of produc­tion which leads to a competitive biddingprocess among resource owners, which inturn generates market prices for these re­sources. 5 It is with the use of these marketprices that economic calculation takes place.

What is important to note here is that theeconomic phenomena being conveyed or"calculated" in a market price are subjec­tive in nature. That is, they are the subjec­tive valuations of individual actors in anymarket. The "objective" price seen in amarket is the result of the interaction of thesubjective valuations of numerous marketactors. As Mises explains, "The subjectiveuse-value of each [commodity] is not imme­diately comparable as a purely individualphenomenon with the subjective use-valueof other men. It only becomes so in ex­change value [price], which arises out of theinterplay of the subjective valuations of allwho take part in exchange.,,6 It is thissubjective nature of economic phenomenathat dismisses the possibility of economiccalculation under socialism.

And it is also the subjective nature ofsocial phenomena which dismisses the pos­sibility of successful social planning. Just as

227

economic planners must "guess" whereresources should be utilized because it isimpossible for them to know the subjectivevaluations of consumers and producers,social planners, attempting to produce equalopportunities for both men and women,must also "guess" at what the subjectiveterm "opportunity" means to all women.But this is also an impossibility.

Opportunities CannotBe Objectified

Opportunities are subjective in nature.Furthermore, the knowledge regarding whatdifferent individuals value as opportunitiesis dispersed throughout society, is contex­tual in nature, and is constantly changing.Social planners could never possess all ofthis information. How then, could they besuccessful at organizing society such that allopportunities are "equal." In fact, sinceopportunities are subjective in nature, theycannot be objectified or thereby "equated"one with another.

In a planned system, whereby women aretold that they must playa certain role (orroles) in society, it is difficult to argue thatthis is a system which allows for individualwomen to plan their own lives and decidetheir own opportunities. This will always bethe major problem with centralized socialplanning of any scale: the individual womancan never be the focus of attention, onlywomen in some sort ofgeneric sense. There­fore there will always be a large number,if not the vast majority, of women who arenot satisfied with what the planners decideto do. Decentralized planning, with eachwoman planning her own life, would bemore successful than centralized socialplanning in fostering an atmosphere inwhich opportunities remain where they ac­tually are: in the minds of individual women.

Furthermore, planners do not seem tocomprehend the complexity of our society.Because of the complexity ofmarket orders,they cannot be planned with any degree ofsuccess. This is also true, for the socialorder in general. In fact, the more complexan order is, the more spontaneous it must

228 THE FREEMAN. MAY 1994

be. Attempting to plan the order such that aparticular end is reached will be futile. Butjust as important, this attempt will alsoproduce unintended and undesirable conse­quences, only some of which can be pre­dicted.

Important in this idea of markets as spon­taneous orders, as Hayek explains, is thatindividuals within markets must be guidedby general rules, not by specific commands.General rules provide a framework underwhich individuals act in a more or lesssimilar way. Because these rules are gen­eral, they are applicable to a variety ofcircumstances and, most important, allowpeople to utilize their individualized,'knowledge of time and circumstance."Hayek explains, "They [the rules governinga spontaneous order] will have to be appliedby the individuals in the light of their re­spective knowledge and purposes; and theirapplication will be independent of any com­mon purpose, which the individual need noteven know. ,,7

In her book Reclaiming the Mainstream:Individualist Feminism Rediscovered, JoanKennedy Taylor argues that the feministmovement in the United States has gonethrough several important changes sinceits conception. The most important of thesewas the movement from a focus on individ­ualism to that of collectivism.8 Another wayof approaching this idea is that when femi­nists focused on the individual, the desirewas to change the general rules of society sothat they applied to both men and women inthe same (or near same) manner. In otherwords, the focus was on equality under thelaw in general, or equality with respect tothe process, to the rules of the game-notequality with respect to specific ends.

Women, therefore, demanded the right toown property, to sue, to make contracts,and to vote, all of which men could alreadydo. Hayek explains that general rules,"must be the same, if not necessarily for allmembers, at least for whole classes ofmem­bers not individually designated by name. ,,9Although one can argue that there should begeneral rules which apply differently to menand women (for example, whether women

should enter combat or not), these should beexceptions and not norms, especially ifwomen themselves desire to have the samegeneral rules in all cases. This is because thegeneral rules of society should change ascultural norms change. In actuality, somegeneral rules are cultural norms, while oth­ers are deliberately designed. And, in fact,these two "types" of general rules worktogether or influence one another.

It was a change in the cultural norms thatled women to call for changes in the delib­erately designed general rules of society (thedemand for property rights and the like).And, in turn, these changes in the generalrules influence cultural norms. 10

Women Enter theMarket Arena

Two of the most important changes indi­vidualist feminism made with regard to thegeneral rules of society were giving womenthe right to own property and to makecontracts. Both of these rules are prerequi­sites of a market order. Allowing womenthese rights, therefore opened up the possi­bility for women to enter the market arena.

Before explaining the importance of theseparticular changes, it should first be notedthat both the freedom to own property andto make contracts are general rules, and notspecific commands because the actual own­ership rights and the terms of individualcontracts are left to the market participants.The general rule is that contracts can bemade, and then can be legally upheld. Leg­islative mandates, which force the terms ofparticular contracts, are not general rules,but are instead specific commands. Theterms of contracts are no longer left tomarket participants, but are instead stipu­lated across the board.

It is unfortunate, but today most feministgoals are often set in very specific terms: thedesire for more women in upper manage­ment or public· office (a set number orpercentage of population is often given), thedesire for equal wage rates between men and .women, or the desire for all businesses tooffer very specific terms of employment, .to

A FEMINIST LESSON FROM ECONOMICS 229

name a few examples. Given these particu­lar or specific goals, legislative mandates areset in place in order to bring them about.Instead of the intended goal, however, whatwe get are unintended consequences such asan increase in sex discrimination and adecrease in self-determination by women.

Now, why is freedom of contract, specif­ically, so important to women? First, again,as Hayek explains, "although we can en­deavor to improve a spontaneous order byrevising the general rules on which it rests,and can supplement its results by the effortsof various organizations, we cannot im­prove the results by specific commands thatdeprive its members of the possibility ofusing their knowledge for their purposes. ,,11

In other words, specific commands hindermarket actors by not allowing them to adjustthe general rules to their individual circum­stances by utilizing their unique knowledge.

Women and the"Knowledge Problem"

Why is the utilization of individual knowl­edge in labor markets so important towomen? In essence, employers face a"knowledge problem" regarding which em­ployees to hire. They must trade off thecosts of screening individual employeeswith the costs of missing out on hiring veryproductive workers. This is why firms, in­deed market forces , have produced differentways by which employers can screen em­ployees at lower costs. These include em­ployment agencies, interviews, references,different types ofemployment tests·(such asaptitude or skill level tests), as well as brandnames in educational and vocational insti­tutions.

All of these devices decrease screeningcosts for employers and thereby increasethe likelihood that potential employees willbe hired on the basis of their individualattributes rather than on the basis of theirgroup membership. This is especially appli­cable to women because men and womenare biologically, and sometimes culturally,different. These differences are oftenviewed by employers as statistical differ-

ences in terms ofemployment practices. Forexample, women, on average, have higherturnover rates than men; women, on aver­age, are more likely to take time offupon thebirth of a child, and so on. Anything whichincreases the flow of information regardingindividual employees will lead to a decreasein employer discrimination based uponthese group averages. Insofar as the flowof information is interrupted, employers'screening costs remain high and they resortto hiring on the basis of statistical averages.Legislation that prohibits the use of employ­ment tests, for example, on the basis thatthe tests are biased against particular groupsin society will actually decrease the likeli­hood that individual members of thesegroups can set themselves apart from thegroup and be hired on individual meritconsiderations. 12

The freedom to make creative, individu­alized employment contracts can be a vitalsource of information to employers andthereby decrease discrimination. Legisla­tive mandates take away this means forindividual women to distinguish them­selves, but more important, they take awaythe very method by which women can bringabout social change without the use oflegislation.

In fact, it is the unique ways in whichindividual economic actors can utilize theirspecific knowledge within a market orderthat will determine the changes in the orderover time. "The particular content of theorder will depend on the concrete circum­stances known only to the individuals whoobey the rules and apply them to factsknown only to them. It will be through theknowledge of these individuals both of therules and ofthe particular facts that both willdetermine the resulting order. ,,13 The pointbeing, the order will change over time asindividuals apply their particular knowledgeto the rules of the order. But note that theorder changes according to this knowledge,which contains individual tastes and subjec­tive values of market actors. The resultingorder is something which emerges sponta­neously in the sense that there was nodeliberate design of the whole order. In-

230 THE FREEMAN. MAY 1994

stead, the order adjusts to the individualactions of people within the order.

What message does this give to feministswho desire social change? It says that it is upto women themselves to change the orderfrom within. The order cannot be changedthrough legislative mandates for two rea­sons: the unintended consequences whichresult in decreased opportunities forwomen, and because mandates actually de­stroy the very means to social change thatwomen have-the utilization of individualknowledge through freedom of contract.

This idea of social change through free­dom of contract does not appeal to manyfeminists because it places the responsibilityfor change on those who desire the change.It provides the message to women that theyare not passive agents in social evolution,but are instead responsible for a largeamount of that evolution. It maintains thatmarkets do not take opportunities awayfrom women, but instead, that markets ac-

tually provide opportunities for women toinstigate social change. 0

1. See, for example, H. Hill Kay, "Models of Equality,"University o/Illinois Law Review, 39,1985; S. Law, "Rethink­ing Sex and the Constitution," University 0/Pennsylvania LawReview, 955, 1984; A. C. Scales, "Toward a Redefinition ofSexual Equality," Harvard Law Review, 95, 1981; and K. T.Bartlett & R. Kennedy, eds., Feminist Legal Theory: Readingsin Law and Gender (Boulder, Colo.: Westview Press, Inc.,1991).

2. Law, p. 965.3. Friedrich A. Hayek, "The Use of Knowledge in Soci­

ety," Individualism and Economic Order (Chicago: Universityof Chicago Press, 1948), pp. 77-91.

4. Ludwig von Mises, "Economic Calculation in theSocialist Commonwealth," in Collectivist Economic Planning,ed. Friedrich A. Hayek (New York: Augustus M. Kelley, 1975[1935]), pp. 87-130.

5. Ibid., see p. 108.6. Ibid., p. 97.7. Hayek, p. 50.8. Joan Kennedy Taylor, Reclaiming the Mainstream:

Individualist Feminism Rediscovered (Buffalo, N.Y.:Prometheus Books, 1992).

9. Hayek, p. 50.10. The moral arguments for the rights of women to own

property and to make contracts are beyond the scope of thispaper. However, they are not considered to be unimportant.

11. Hayek, p. 51.12. See Richard Epstein, Forbidden Grounds: The Case

AgainstEmployment Discrimination Laws (Cambridge, Mass.:Harvard University Press, 1992).

13. Hayek, p. 46.

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THE INCREDIBLETICKET MACHINE

by Jerry Ellig

Way back in high school, a far-from­right-wing teacher made our class sit

through a short film called "The IncredibleBread Machine." The story's protagonistinvented a bread-baking machine so produc­tive that it vastly reduced bread prices andpromised to end world hunger. But insteadofpraising his achievement, the governmentpilloried him as a monopolist, claiming thathe drove competitors out of business andcharged monopoly prices. He could do bothbecause his wondrous invention dramati­cally slashed the cost of baking bread.Despite this boon to society, the movieimplied that the inventor landed in the pokeyfor a Sherman Act violation.

Even during the malaise years of the late1970s, the movie sounded like a stretch ofthe libertarian imagination. Surely, if some­one invented a technology that is superior,even politicians and regulators would haveto recognize him as a benefactor and let himgo about his business.

Recent events in the airline industry haveshown otherwise. During the past 20 years,several airlines developed anew, comput­erized technology to process reservationsand issue tickets that is the equivalent ofthe "Incredible Bread Machine." Unfortu­nately, the developers of airline computer­ized reservation systems have fared little

Dr. Ellig is AssistantProfessor in the Program onSocial and Organizational Learning at GeorgeMason University, Fairfax, Virginia.

better than the ill-fated inventor of the breadmachine.

What Is a ComputerizedReservation System?

The Airline Deregulation Act of 1978freed airlines to enter new routes and chargewhatever fares they could induce customersto pay. In this new, deregulated environ­ment, an airline of any size has thousandsof different route combinations, generatingtens of thousands of different airline fares.Before the invention of computerized res­ervation systems, a travel agent making areservation had to look up flights in a bookcalled the Official Airline Guide, then phonethe different airlines to find out if they actu­ally had seats available at a particular dateand time. If the customer wanted a hotelroom or rental car, the agent had to makeanother round ofphone calls to find out whatwas available and make reservations.

Computerized reservation systems auto­mated and streamlined this process, oftenpermitting travel agents to consult with thecustomer, search for available seats, andbook the reservation within minutes. Whena customer phones, a travel agent beginssearching for suitable flights on a computerscreen. The screen is linked through phonelines to a mainframe computer owned by thecompany that operates the reservation sys­tem. The mainframe contains informationon millions of available airline flights and

231

232 THE FREEMAN • MAY 1994

fares. As soon as the customer and agentselect a flight and agree on payment, theagent can print out the ticket. Similarly, atravel agent can access information on avail­able hotel rooms and rental cars, makingreservations within minutes.

Computerized reservation systemsslashed travel agent and airline costs whiledramatically reducing the time it takes tomake reservations. By 1981, use of thesesystems had become widespread, and aHarris survey in that year indicated thatcomputerized reservation systems had in­creased travel agents' productivity by anaverage of 41 percent. In fact, "One travelagent estimated that his employees couldmake a reservation using a computerizedreservation system in one-third the time itwould take to look up schedules in a bookand make reservations over the tele­phone.,,1 United Air Lines estimated that areservation system's booking fee is less thanhalf the cost ofmaking a reservation throughthe airline's own reservation staff.2 Al­though travel agents retain the option ofreturning to pre-computerized reservationsystem technology, 95 percent subscribe toat least one system.3

Of course, if computer systems cut thetime and effort needed to make reservations,they no doubt eliminated some jobs in thetravel industry, and possibly in the airlineindustry's reservations departments as well.In effect, these systems substitute humanbrain power and the sand in a microchip forthe brute force labor previously required toprocess airline reservations. They provide atextbook example of what the economistJoseph Schumpeter called "creative de­struction": the replacement of old technol­ogies and ways of doing things with newarrangements that drastically reduce theamount of resources required to get the jobdone. In so doing, the new methods andtechnologies may cause some temporarydislocations, but they vastly increase ourstandard of living by enabling us to satisfymore human desires with fewer resources.Schumpeter argued that the process of cre­ative destruction is in fact the driving forcebehind economic progress.4

The Competition Issue

In the case of computerized reservationsystems, some critics saw a great deal ofdestruction and very little creativity. In­stead, voices in both industry and govern­ment perceived computerized reservationsystems as a threat to competition in theairline industry.

There are currently four major comput­erized reservation systems in the UnitedStates, but most travel agents subscribe toonly one system. Typically, a travel agentsigns a long-term contract with a comput­erized reservation system provider, whothen installs computer terminals and otherequipment in the travel agent's offices. Thecontracts have included rollover provisions,so that when a system vendor adds equip­ment or features, the contract is automati­cally extended. Minimum-use provisionshave required travel agents to book 50percent of their flights on a given system,and liquidated-damages provisions have dis­couraged travel agents from switching to anew computerized reservation system.

There is also some evidence that this is adifficult industry for new firms to enter. Thecomputer systems and software needed fora reservation system may not have muchresale value if their developer chooses toleave the industry. Analysts at the Depart­ment of Transportation also found evidenceof economies of scale, economies of scope,and learning-curve effects, which suggestthat the first firms to enter this industrymay enjoy a substantial advantage overnew competitors.5 The existence of long­term contracts helps augment this advan­tage.

Most of the policy controversy stemsfrom the fact that all four major computer­ized reservation systems are owned by air­lines or groups of airlines. The two systemswith the largest market shares are Sabre,owned by the parent company of AmericanAirlines, and Apollo, developed by UnitedAir Lines and now owned by a consortiumofdomestic and foreign airlines. To be listedon a system, an airline must sign a contractwith the system vendor, and it then pays the

THE INCREDIBLE TICKET MACHINE 233

vendor a booking fee every time one of itstickets is booked using that system.

Critics charge that ownership of a reser­vation system gives an airline an unfairadvantage over competing airlines. Com­puterized reservation system technology al­lows the airline owning the system to list itsown flights before those of other airlines,update information on its flights beforeupdating the information of rivals, and ingeneral manipulate the information pre­sented to travel agents in ways that promotethe owner's flights over those of rivals. Inthe absence of regulation, the system ownercould also charge discriminatory bookingfees, forcing other airlines to pay a higherprice when customers choose them.

These types of complaints are commonamong companies in many types of busi­nesses; the "have-nots" can always becounted on to complain about the' 'unfair"advantages possessed by the "haves." Butthe airline case is unusual, because manydefenders of airline deregulation agree thatcomputerized reservation systems pose athreat to competition. Most economists, forexample, agree that airline deregulation haslowered prices and greatly enhanced theconvenience of air travel.6 Yet even themost authoritative study on the impact ofairline deregulation warned that computer­ized reservation systems might require reg­ulation because they give the large, estab­lished airlines that own them an advantageover new upstarts. 7 An entire mini-industryof scholarly articles focuses on ways ofachieving the full benefits of airline dereg­ulation through government interventionto eliminate remaining "market imperfec­tions, " such as those created by reservationsystems.8

In response to both theoretical and prac­tical concerns, the federal government hasissued a number of regulations that governthe conduct of computerized reservationsystem vendors. "Display bias" is out­lawed; vendors are prohibited from givingpreferential treatment to any airline's flightsin constructing video displays or operatingthe system. Contracts between vendors andtravel agents are limited to five years. The

government prohibits discriminatory book­ing fees, tie-ins, and exclusive-use con­tracts. Travel agents must also be permittedto use software that would allow them toaccess all computerized reservation sys­tems from the equipment supplied by onesystem vendor.

All of these regulations were adopted notby social planning zealots, but by the CivilAeronautics Board under President Reaganand the Department ofTransportation underPresident Bush. In both cases, the respon­sible officials appreciated free marketsenough to firmly resist a return to thepre-1978 regulatory regime, under which thegovernment limited entry and regulated air­line fares. In fact, they saw the regulationsas quite consistent with the goals of airlinederegulation, which replaced a government­enforced cartel with a competitive market­place.

In general, these regulations stemmedfrom the belief that ownership of a comput­erized reservation system constitutes a"barrier to entry" that will impede compe­tition and prevent consumers from reapingthe full benefits of airline deregulation. Thispolicy position, however, begs a very im­portant question about the true nature ofcompetition in this and all industries.

The Importance ofConceptual Frameworks

What prompts some of the staunchestdefenders of deregulation to advocate po­tentially extensive regulation of a new tech­nology? The answer can be found in theconcept of competition employed by mosteconomists who analyze the airline indus­try. In modern neoclassical economics,"competition" means the abstract model ofperfect competition. Perfect competition ischaracterized by numerous buyers and sell­ers, homogeneous products, perfect infor­mation, and costless entry and exit from theindustry. Economists have logically proventhat, under such conditions, decentralizedmarkets allocate every unit of every re­source to its most highly valued use. Thisresult, termed' 'allocative efficiency," is the

234 THE FREEMAN • MAY 1994

Before regulators intervened,computerized reservation sys­tems were a powerful market­ing tool that gave owners acompetitive advantage.

standard of economic efficiency by whichmany economists judge policy proposals.

Noone seriously argues that regulators orantitrust authorities should impose perfectcompetition on the airline industry, or on thecomputerized reservation system industry.However, many common economic policyprescriptions in this industry are based onthe related model of "perfect contestabil­ity. " A perfectly contestable market mayhave only one seller, but as long as there areno barriers to entry or exit, the threat ofpotential entry can force the monopolist tobehave as if it had numerous competitors.The end result is the same as perfect com­petition: prices closely reflect marginalcosts, and allocative efficiency is achieved.9

A key policy prescription that emergesfrom contestability theory is that govern­ment can promote efficiency by removingbarriers to entry. These include not justgovernment-imposed limitations on compe­tition, but also private barriers to entry thattake the form of "sunk cost" facilities. to A"sunk cost" is an industry-specific invest­ment that a firm cannot recoup if it choosesto leave the industry. In the airline industry,examples of sunk cost facilities includeairports, the air traffic control system, andcomputerized reservation systems. Whenfacilities involving sunk costs exist, govern-

ment policy can promote contestability byensuring that all actual and potential com­petitors have equal access to the facilities.This might be accomplished by governmentownership, as with airports and air trafficcontrol, or it could be accomplished throughregulation of privately owned facilities, as isdone with computerized reservation systems.

Given this theoretical background, itshould come as no surprise that many peo­ple who appreciate the virtues of free mar­kets advocate regulation of computerizedreservation systems. A good many analystsbelieve that free markets enhance humanwelfare by moving us closer to the ideal ofallocative efficiency. When private marketdevelopments seem to thwart allocative ef­ficiency, it is time for government to inter­vene.

A Different View ofCompetition

Such prescriptions make perfectly goodsense, if indeed allocative efficiency de­scribes the sum total of human welfare. Butmany advances in our standard of livingoccur because of phenomena that the mod­els of perfect competition and contestabilityassume away. Both of these models de­scribe a world in which all change that will

THE INCREDIBLE TICKET MACHINE 235

occur, has occurred. The assumption ofperfect knowledge rules out the possibilitythat someone might discover something newtomorrow. To the extent that technologicalprogress is foreseen, market participantsincorporate it into their plans today.

In the theoretical world that generates thepolicy norm ofallocative efficiency, Schum­peterian creative destruction is ruled out byassumption. That does not mean that theconventional neoclassical economic modelsmight not be useful for some purposes; theyare just not particularly useful for under­standing entrepreneurship and creativity.To the extent that entrepreneurship andcreativity exist in the real world, we riskmisperceiving them ifwe insist on interpret­ing them through the lens of the neoclassicalmodel.

Airline computerized reservation systemsprovide a clear case in point. Several com­panies became the industry leaders becausethey were the first to capitalize on the newpossibilities that information technology of­fered the airline industry. Indeed, the firstcomputerized reservation systems began asextensions of American and United AirLines' own internal computer systems.These pioneers quickly signed up manytravel agents, and before regulators inter­vened, computerized reservation systemswere a powerful marketing tool that gave theowners a competitive advantage in sellingtickets on their own flights. The computer­ized reservation system owners earned highprofits-in the form of booking fees andadditional ticket sales-because they werethe first to enter the market with an inno­vative new service.

These profits, however, are not a sign thatgovernment needs to eradicate imperfec­tions in the airline market. Rather, theprofits are the reward that the innovatorsreceived for entering a new, untried busi­ness. When government policy permits en­trepreneurs to keep their profits, it promotesthe alertness to new opportunities that is thefirst step toward achieving a more produc­tive use ofresources. When policy penalizessuch profitability, it penalizes entrepreneur­ial activity aimed at the discovery of new

knowledge. 11 Without such discovery, therecan be no replacement of old methods ortechnologies by new ones. A consistentquest for allocative efficiency will some­times impede the movement of resources tomore highly valued uses, because it canundermine the discovery process that drivesthis reallocation.

"Where you stand depends on where yousit" is a common saying in the nation'scapital. In the battle over computerizedreservation system regulation, plenty of na­ked self-interest is in evidence. But thepolicy debate reveals more than self-inter­est; it reveals a clash of conceptual frame­works. Analysts who take allocative effi­ciency as their policy ideal will tend to seekregulation that eliminates any competitiveadvantage an airline might gain from owninga computerized reservation system. A mi­nority will be more skeptical of regulation,because it erodes the incentive for entrepre­neurial discovery. As the information ageunleashes its creative potential, we can onlyhope that the minority view gains greaterrecognition and understanding. Economicprogress depends on it. D

1. "New Reservations About Airline Computers," Fre­quent Flyer (December 1982), pp. 45-50.

2. Comments of United Air Lines, DOT DocketNo. 46494 (November 20, 1989), p. 9.

3. U.S. Department of Transportation, Study of AirlineComputer Reservation Systems (May 1988), p. 10.

4. Joseph Schumpeter, Capitalism, Socialism, and De­mocracy (New York: Harper & Row, 1942), pp. 81-108.

5. U.S. Department of Transportation, Study of AirlineComputer Reservation Systems (May 1988), pp. 24-27. Strictlyspeaking, these may not constitute "barriers to entry" in theeconomic sense; see George Stigler, The Organization ofIndustry (Chicago: University of Chicago Press, 1983), pp.67-70.

6. For a general study of the economic literature on airlinederegulation, see Jerry Ellig and Wayne Winegarden, "AirlinePolicy and Consumer Welfare," Transportation PractitionersJournal, Spring 1994.

7. Steven Morrison and Clifford Winston, The EconomicEffects ofAirline Deregulation (Washington, D.C.: BrookingsInstitution, 1986).

8. See, for example, Severin Borenstein, "Hubs and HighFares: Dominance and Market Power in the U.S. AirlineIndustry," Rand Journal ofEconomics (1989), p. 344.

9. See William Baumol, John Panzar, and Robert Willig,Contestable Markets and the Theory of Industry Structure(New York: Harcourt Brace Jovanovich, 1985).

10. Elizabeth Bailey, "Contestability and the Design ofRegulatory and Antitrust Policy," American Economic Review(May 1981), pp. 178-183.

11. Israel Kirzner, Discovery and the Capitalist Process(Chicago: University of Chicago Press, 1985).

Ideas and Consequences

As Values Collapse,Government Grows

by Lawrence W. Reed

T he collapse of moral and ethical valuesin American society is frighteningly real

and equally dangerous. Consider the find­ings of a recent Louis Harris poll of 5,000young people.

Of those high schoolers in the poll, 65percent said "Yes, I would cheat to pass animportant exam." Fifty-three percent saidthey would lie to protect a friend who hasvandalized school property.

One of the questions asked was, "Whatdo you take to be the most believableauthority in matters of truth1" One to twopercent said science or the media. Three tofour percent said religion or their parents.Most of the kids said "Me."

In a different study done by an interna­tional public relations firm, 67 percent ofAmerican high school seniors said theywould happily inflate an expense account,50 percent would pad an insurance claim,and 66 percent said they would willingly lieto achieve a business objective.

These and other appalling manifestationsofa national moral and ethical vacuum werecited in a remarkable speech in 1991 byRushworth Kidder, president of The Insti­tute for Global Ethics in Camden, Maine.He was speaking at Principia College inIllinois.

Kidder recounted a true story about a

Lawrence W. Reed, economist and author, isPresident of The Mackinac Center for PublicPolicy, a free market research and educationalorganization headquartered in Midland, Michi­gan.

10-year-old child in Brooklyn, New York,who found on the street a wallet full ofmoney, credit cards, and identification. Theboy took the wallet into school and wasunable to find either a teacher or an admin­istrator who was able to tell him what wasthe right thing to do with the wallet.

"I can't possibly impose my values onyou," Kidder said the teachers and admin­istrators seemed to be saying. Even moreincredibly, when he told this story "in thecompany of about seven very bright collegejuniors and seniors sitting around a dinnertable at a very good liberal arts college inCalifornia," every single one said thoseteachers and administrators were absolutelyright. This is worse than situational ethics;it's just no ethics at all.

Should it be any wonder, then, that crimeis up? In a recent year-1990-one violentcrime was committed every 17 seconds inAmerica, compared to every 3 minutes in1963. Thirty years ago, one murder occurredevery hour in America; now it's every 22minutes. Likewise for rape: one every 32minutes then, one every 5 minutes now.Robbery: one 'every 5minutes then, one every49 seconds today. Burglary: one every 32seconds then, one every 10 seconds now.

Just between 1986 and 1992, the murderrate was up 14 percent, the incidence ofrapewas up 12 percent, and street robbery wasup 21 percent. Motor vehicle theft increased15 percent, while robbery of conveniencestores and aggravated assault both rose awhopping 26 percent.

236

Twenty three hundred American youthbetween the ages of 15 and 19 were mur­dered in 1990-up by 53 percent since 1982.

As America prepares to enter the 21stcentury, Americans have become some ofthe most violent people on the planet. Theyfeel less safe in their homes and on theirstreets than at any time in the history ofthe country. And when we're not assault­ing or being assaulted, it seems we spend alot of time cursing, conniving, lying, deceiv­ing, backstabbing, and otherwise being un­faithful to spouse, family, friends, or asso­ciates. Our politicians seem to hit new lowsof public and private morality with eachnew scandalous revelation. How can oursociety possibly retain any meaningful mea­sure of freedom if these trends persist anddeepen?

At the core of America's values crisis,Kidder pointed out so well in his speech, isthe destructive, demoralizing notion that allvalues are in the eye of the beholder, thatthere are no "absolutes" against which theactions and decisions of people should bejudged.

The teaching of values, Kidder says, maynot yet be extinct, but it has been relegated(particularly at the college level) to a neu­tralist approach, where the teacher "is notto get in the way of kids discovering theirown standards."

Distinctions between right and wrong arebeing eroded. Indeed, it seems that manypeople these days think the only choices arebetween right and right, that fewer andfewer things are really "wrong" when their"context" or the individual's motives aretaken into account.

Moral and ethical relativism has suffusedits poison throughout society, a major rea­son America has been losing its valuescompass. But that isn't the only thing we'relosing.

The first casualty when the moral/ethical

237

core of society evaporates is freedom. Law(government) fills the void-directing bythreat of force those aspects of life thatformerly were governed by our ethical stan­dards.

Ethical people don't require fines fortossing trash out of car windows or for em­bezzling funds from their employer, becauseethical people just don't do those things.

Nor do ethical people abandon responsi­bility for the education of their children orthe care of their parents and expect societyto do the job. Ethical people don't cast offtheir problems onto others because theyhave both a healthy dose of self-esteem anda respect for the lives and property ofothers. Moral people do not stake a claim ofany kind on what doesn't belong to them.The erosion of values-ethical, moral, orwhatever adjective you choose to employ-is freedom's single most lethal threat.

The choice, in other words, is to governyourself or be governed. The less you do ofthe former, the more you'll get of the latter.

Ultimately, the standards by which weorder our personal lives as well as ourrelationships with family, associates andothers determine the sum and substance ofour society. When those standards arestrong, people take care of themselves andthose around them; they work for a livinginstead of voting for one.

But when those standards decay, we paythe price in broken families, crime, drugabuse, child neglect, a loss of personalindependence and greater reliance uponpublic welfare. If the rot gets deep enough,the price can be reckoned in terms of na­tional bankruptcy and dictatorship. Wholecivilizations in history have travelled thispath and bit the dust.

Restoring our foundational values oughtto be top priority for all Americans. There'sjust too much at stake for us to dootherwise. D

THEFREEMANIDEAS ON LIBERTY

THE MORALCONSEQUENCES OFPATERNALISM

by Daniel B. Klein

Picture a man gobbling a second helpingof chocolate cake, or chain-smoking a

pack of cigarettes, or injecting heroin intohis vein. Is there a crime being committed?Is aggression or violence being done to aninnocent person?

In a sense, yes. A fleeting, short-term selfthat enjoys chocolate, nicotine, or heroin isworking his will on an enduring self thatpays the cost. Although we may fancyourself a fully integrated and consistentbeing, it might make more sense to describeourselfas a bundle ofmultiple selves, selvesthat overlap, intermingle, and sometimesconflict.

Although you may not think ofyourselfasplural, the idea of multiple selves is reallyfamiliar. It is common for people to say thatheavy drug users don't know what they aredoing, that anorexic young girls are self­destructive, that people perpetrating vio­lence suffer from "temporary insanity."

Some people recognize a dark self-a Mr.Hyde-that lurks within, and act strategi­cally to defeat him. The reformed smokerwill flush cigarettes down the toilet. Com­pulsive spenders put their savings in aChristmas Club account that levies a heavy

Dr. Klein is Assistant Professor ofEconomics atUniversity of California, Irvine.

penalty for early withdrawal. And somepeople, like myself, don't subscribe to cabletelevision, not because we wouldn't use it,but because we would use it too much!

If such personal tactics are insufficient insubduing the Mr. Hydes that lurk, perhapsthe government can lend a helping hand.After all, subduing bad guys is what thegovernment is all about. This reasoningunderlies numerous paternalistic laws in ourcountry.

Anyone can suffer a fine for motorcyclingwithout a helmet, or for driving a car withseat-belts unbuckled. States limit gamblingto keep the poor from falling into bad habits.To help people preserve the family circle wehave proscriptions on sexual commerce.Laws help us not to overuse a huge varietyof substances, from heroin to penicillin.Other laws protect us from buying on im­pulse, from hiring incompetent plumbers ortherapists, from not saving for our old age,and from murdering ourselves. All theselaws are offered as a service to the erstwhilepartaker.

Yes, people sometimes do things theyregret. You'd be ridiculous to say that younever make mistakes, that you never dothings to excess. But does that mean thegovernment should step in and protect usfrom ourselves?

238

THE MORAL CONSEQUENCES OF PATERNALISM 239

One good reason to reject paternalism isthat public officials, acting in some remotegovernment office, do not in fact knowbetter whether an activity is detrimental toour enduring self. Passing blanket restric­tions on behavior rides roughshod on indi­viduality. Some people drink too much, orgamble too much, but many others do not.

Another reason to reject paternalism isthat it sets a nefarious precedent. Up to whatpoint does the government get to playnanny? Where does it end? Sometimes it isthe government that seems to suffer addic­tion-addiction to power-and it is the onethat needs to show restraint. Furthermore,the justification of "it's for their own good"is bound to be abused. It will be used tojustify all manner of special-interest plun­der, such as excessive licensing laws.

But the chief reasons for rejecting pater­nalism do not deny irrationality in the pri­vate individual, nor even wisdom and be­nevolence in government stewards. Thechief reasons to reject paternalism are itsmoral and spiritual consequences.

The Meaning of LifeWhat is it that gives one's life meaning?

Meaning flows from narrative, from thedrama of the story. But any old story won'tgive our lives meaning. It must be one's ownstory, a story that one feels is of his ownmaking. To achieve a profound sense ofmeaning, one must be free to choose hisbehaviors. Hence, as Thomas Szasz hasexplained, paternalism is demeaning to theindividual because it de-means his exis­tence. It makes existence a happening ratherthan a willful action; it makes the storyarbitrary and alien, rather than purposiveand personalized.

The autonomous individual admits hisinconsistencies, his contradictions, his be­deviling impulses, but insists nonetheless:Grant me the. dignity of choosing whichbehaviors define my being, and charge mewith the responsibility for the Mr. Hydesthat lurk. Ifyou suspect that some Mr. Hydeseeks to undo me, then I say, go ahead andlet him try.

A first moral consequence ofliberty, then,is dignity, the romantic sense of being thecaptain ofone's soul and relishing the dramaof one's existence.

There is a second moral argument againstpaternalism. To give our existence beautifulmeaning, to make ourselves becoming, wemust learn how to manage our troublesomeimpulses. But how do people learn self­command? The best teacher is liberty her­self. The second moral argument is thatliberty breeds responsibility (in the sense oftrustworthiness or dependability, not in thesense of accountability). How does libertyteach responsibility? Return to the intimatecontest of self-command.

Often hubris prevails. Beforehand we saywe won't gamble at all, we won't get angry,we won't watch TV, we won't, we won't!We forget that the mood and vision in whichplans are laid may vary greatly from themood and scenes experienced as the courseis traveled. So hubris produces unhappyexperiences and a feeling of regret. Fromexperience we gain awareness of the needfor better self-command and a will to defeatour entrenched impulses.

Sometimes it is not our own outrageousfortune that sets us in search of betterimpulses, but the pleasing fortune of some­one else. Nothing awakens our soul like theimage of one we admire. As Matthew Priorwrote in 1708:

Examples draw where precept fails,And sermons are less read than tales.

Rather than leaving the individual free tolearn from experience and example, pater­nalism deprives him of these moral oppor­tunities. By pre-empting choice, it weakensthe moral faculty of choosing one's owncourse. And by presuming that the individ­ual is incapable of choosing competently,paternalistic government may actually makehim incapable. Wean a person in a world ofdecrees and proscriptions, and he may fearpersonal independence and responsibility(here, in the sense of accountability).

In 1792 the classical-liberal thinkerWilhelm von Humboldt came to similarconclusions about paternalism in his book,

240 THE FREEMAN • MAY 1994

The Limits of State Action. He said: "Asociety in which the citizens were compelledto obey even the best behaviors might be atranquil, peaceable, and prosperous one.But it would always seem to me a multitudeofwell-eared-for slaves, rather than a nationof free and independent men."

Albert Jay Nock argued similarly in hisgreat essay, "On Doing the Right Thing":"The practical reason for freedom, then, isthat freedom seems to be the only conditionunder which any kind of substantial moralfibre can be developed."

Two moral arguments against paternal­ism, then, are dignity-that is, our desire tobelong to a culture of proud and romanticindividuals-and responsibility-our desireto belong to a culture of decent and self­reliant individuals.

If a Mr. Hyde sometimes puts too muchchocolate cake in my stomach, too muchalcohol in my bloodstream, or too muchtelevision news in my head, that is myproblem, and everyday I must practice theart of subduing him and negotiating with~m. 0

New from FEE!

AMERICAN UNIONISM:FALLACIES AND FOLLIES

Labor unions are the bitter fruit·of erroneous economic theory. At the core of union doc­trine is the notion that the market order does not function fairly and equitably-that itvictimizes working people. Despite declining membership, U.S. labor unions haveretained their popular appeal, deeply entrenched in myth, legislation, and jurisdiction.

The twenty-two essays in American Unionism: Fallacies and Follies brilliantly set forththe intellectual origins and economic implications of union ideology.

Contributors include Clarence B. Carson, Hans F. Sennholz, Charles W. Baird, RobertJames Bidinotto, Gary North, Morgan Reynolds, Robert G. Anderson, Sylvester Petro,Thomas J. DiLorenzo, and William H. Peterson.

237 pages, indexed, $14.95 paperback

THEFREEMANIDEAS ON UBERTY

1993 Bound Volume

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THEmEEMANIDEAS ON LIBERTY

THE PAST Is PROLOGUE

by K. Maureen Heaton

T ime was when owning a home of one'sown was not an impossible dream in

America. Then, a determined young couplecould find an affordable lot and build theirdream themselves. I know. My husband andI did just that.

We had a small nest egg and a verysizeable dream. We paid for the lot with warbonds, and, on the strength of that equity,purchased a prefabricated house, which weput together ourselves. (Never mind that nonails-which were in short supply after thewar-were included in our "package." Atrip to San Diego and back from RedondoBeach where we lived at the time, stoppingat every hardware store on the way, sup­plied enough to put the house together!)

When the parts were assembled, a roofover our heads, a living room and kitchen,two bedrooms and a bath were ours-forabout seven thousand dollars, including thelot and the trip to San Diego.

Young people today can't do that.Even if such a lot could be found today,

it would be expensive, and the averageyoung couple wouldn't be able to saveenough to pay for it, anyway.

Our little house wouldn't have had theapproval ofa "planning commission." (For­tunately, there was none in those days!) Itdidn't have enough floor space for one thing(we thought it did). We moved in before theinterior walls were installed, because theydidn't come with the package, either, and

K. Maureen Heaton is a free-lance researchanalyst and writer living in Bellingham, Wash­ington.

we didn't have enough money then to buythem. (Today's Planners wouldn't let us dothat.) I used the firebreaks between thestuds to display my treasures, and missedthem when the walls were finally installed.

We didn't have a garage, or even a car­port, and the lot was so narrow we had toturn the house sideways to get it to fit. As aresult, the front door didn't face the street.(Would that be permitted today?)

A few years later we built an addition onthe back for my folks. There was no "zon­ing" then to say we couldn't, and no neigh­bors ran to the city fathers to object.

There were other ways as well for youngfolks to get their dream house then. Maybethe old folks had more property than theyneeded or wanted, and would cut off a piecefor their kids. Many did that.

The PlannersThose were happy days-but it was just

about then that the foolishness started and,surprisingly, found support among the gen­eral population. Just about then, the Plan­ners moved into Our City. Their presencewas not announced, but it was obvious­only we did not know it then.

The first any of us knew they were therewas the night the city council held its firstdiscussion of a "city plan." In short order,Our City had a "city manager," who quicklyproduced a Plan, and scheduled a "hearing"to present it to the citizens.

The citizen reaction was mixed. Disbeliefwas probably the strongest response from

241

The homes around the old high school,grand relics of a happier past, with theirbeveled-glass windows and door lights,beautifully planted yards, and huge gracefulold tre~s, and those little homes in the wayof the "government center" were con­demned and demolished.

Gradually, the former owners disap­peared from their usual haunts. So many ofthese were old folks, who had lived there alltheir productive lives, close to schools andshopping. Most had paid off their mort­gages, and were looking forward to their"golden years," with only taxes to worryabout. It was not possible for them to findhousing they could afford for anything near

About Thanksgiving time, it suddenlybecame "necessary" to put new sewersin the downtown area. Main Street wasblocked off, and merchants who had alreadyput in their stocks for Christmas, foundthemselves isolated from their customers,who had to park outside the business dis­trict to do their Christmas shopping. It wasa long uphill walk, especially with armsfull of packages, and many regular custom­ers found it more convenient to shop atstores elsewhere, which had parking closeby.

Several merchants closed their doors af­ter the holidays, and never reopened. Otherbusinesses moved to the planned "shoppingcenters. "

Awaiting the pleasure of Congress andfederal funds, it was 20 years before the"marina" became a reality. By then, mostof the downtown stores stood empty, orwere occupied by fortune tellers, shadypromotional entrepreneurs, tea-leaf read­ers, and the like.

And grass grew in the sidewalk cracks onMain Street.

The rest of that story unfolded just beforethe Fourth of July, 1988. The evening TVnews had dramatic pictures of that marinagoing up in flames and smoke. It was re­ported completely destroyed. So much forPlanner's plans!

242 THE FREEMAN • MAY 1994

those present, because the Plan was so farremoved from the projected layout of thecity that had grown over the years. Youcouldn't call those early projections a"plan" -they were simply logical exten­sions of expected growth, sensibly prepar­ing for a need which was already visible.

But with this Plan, the whole area withinthe City boundaries was to be metamor­phosed.

ReconstructionThe visionary maps of a reconstructed

City showed that the second high schoolplanned for North City had, as if by magic,become a public park. Around our existinghigh school stood substantial homes-silentwitnesses to the competence of those whohad pioneered the City. On the Plan, thosewere gone. In their place, additions to theold high school spread out like a universitycampus.

City Hall (where the meeting was held), alovely relic of a past era, was missing fromthe map. It was replaced by a "governmentcenter,'" which was shown in an area thenoccupied by hundreds of small homes.

The heart of the business district, situatedat the waterfront, became a utopian dreamof a marina-the businesses miraculouslyremovedto outlying areas ofthe City, wheresmall clumps of stores were surrounded byhuge parking lots.

Someone asked what the reason was forall this transformation. The answer wasalmost mechanical: "We must have plan­ning. " "Why?" the citizens wanted toknow. "You don't want a pig farm nextto you, do you?" was the response. Well, ofcourse no one did. But none had beenproposed, either. How a pig farm might beset down in the middle of an established citywas never explained.

The year was 1948. Despite strong oppo­sition from the majority of citizens, despitean attempted recall of three of the membersof the City Council (which, sadly, wasunsuccessful by a slim margin), the Planbegan to take on a life of its own, and OurCity was never the same.

A Man's Home ?. . . .

what the government paid for their homes.Some went to live with their children, dis­rupting two families' lives. Some foundapartments, and some just up and died,perhaps of broken hearts, frustration, orsheer anger at being put out of their ownproperty.

A New Order?This was the beginning of a new era for

California-and the rest of the world,though few knew it then.

This was the activation of the NationalResources Board Plan developed during theRoosevelt years.

Resistance was minimal, because citizensin one area did not know that what was goingon locally was being repeated all over thecountry. The resistance met by Planners inthe pilot areas was used by them as a lesson,to gain control in other areas.

There was a growing acceptance of the"planning idea. " There was a growing bodyof opinion which was receptive to "govern­ment" taking control of such matters. Therewas a growing belief that no one could"live" in a one-room house-unless it hadbeen there forever. Why the older one-roomdwelling could be allowed and the otherproposed structure not, was never ex­plained. To an innocent, a new one-roomhouse, surely seemed better than an old one!

Even a one-bedroom house was not to becountenanced, unless it met arbitrary stan­dards: so much square footage; so manywindows per room; the bedroom couldn'topen off the kitchen; the rafters had to be sofar apart; so much yard area to so muchhouse; so much set back from the street, sofar away from the lotline; and so on and onand on.

THE PAST IS PROLOGUE 243

All these things added to the cost of ahouse, and the American dream movedfurther from reality for many people.

Then came the pressures for "urban re­newal" and "modernizing the cities." Littlehouses from the past were in the path of thebulldozers everywhere.

All these interventions in the use of pri­vate property have resulted in many largerproblems-no homes for the young folksjust starting out on their own, no place forthe oldsters to go when the children movedaway, the emergence of the "street peo­ple"-and the also inevitable "necessity"for "government" to "solve" these prob­lems.

The list offoolish interventions has grownexponentially. With each one accepted, newridiculosities are concocted. They are madeto seem so practical-no, desirable-that itwould be considered quixotic to opposethem. It was all for our own good, you know.

Well, today, the birds have come home toroost. The way things are going, the birdsmay well be the only creatures with a placeto call home.

I have no idea what that first home of ourswould bring on the market today. I've heardthat the "veteran's housing" which wasbuilt across the street from us a year or solater (which sold new for four, five, and sixthousand dollars), was selling in the neigh­borhood of seventy thousand dollars severalyears ago. That's a nice neighborhood, ifyou can afford it. Certainly we who livedthere after the war couldn't have.

Centralized planning has all but replacedthe historic American method of individualplanning. If unchecked, government willusurp all initiative for planning by citizens­not just for property, but for the whole oftheir lives. D

THEFREEMANIDEAS ON LIBERTY

KING CHARLES' Ax:PROPERTY RIGHTS,HUMAN FREEDOM, ANDTHE QUALITY OF LIFE

by John Robson

T here is an old saw that "He who is nota socialist at twenty has no heart; he

who is at thirty has no head. " Perhaps thenthe world grew up in the 1980s, and learnedthe sad wisdom that the great schemes forbettering the human condition through gov­ernment intervention did not actually work.The U.S.S.R. and its Eastern Europe sat­ellites crashed in flames, while the wide­spread famines and other human tragedies inthe Third World showed the Soviet devel­opment model of heavy industrializationand a squeeze on agriculture to be equallyunsuited for developing countries.

Meanwhile the welfare state in the ad­vanced industrial economies has provenitself unable either to produce overall pros­perity or to remedy "social injustices" likepoverty. Admittedly the rollback ofthe statein the 1980s in the United States, Britain,Canada, and elsewhere consisted muchmore of rhetoric than of action, but inter-

Dr. Robson is a Policy Analyst with the FraserInstitute, Vancouver, British Columbia. Thisessay is adapted from a paper originally pre­sented at an Association of Private EnterpriseEducation conference in Washington, D.C., lastyear.

ventionism is on the defensive both politi­cally and intellectually. It simply does notwork. And as secure property rights are theindispensable foundation of free markets,they too are enjoying something of a renais­sance.

Nevertheless that old saw lingers, in theform of a suspicion that the triumph of freemarkets has been a triumph for the mean­spirited; there are even those who stillcontinue to believe that with sufficient will,sufficient compassion, intervention can bemade to work.

It cannot, and the most immediate reasonwhy it cannot is that everything in life ismore complicated than it seems, and wesimply cannot foresee all the consequencesof our actions. For this reason we have overa long time developed general rules for bothpersonal and public decisions, and the mostimportant of these in the latter area, is thatthe neglect or flagrant violation of propertyrights leads to counterproductive results.What Rudyard Kipling called "The Gods ofthe Copybook Headings" have persisted inreturning afresh to the scene ofeach disasterand saying "We told you so."

But though this is a triumph of experience

244

over hope, it is more than that. Free marketsand their philosophical premise, propertyrights, are not a mean, grasping, Scrooge­like set of institutions collectively labeled"Devil take the hindmost." Rather, they rep­resent the only way of organizing a societythat really respects individual people.

Property rights are not a human right,they are the human right, and the reason thatcoercion fails practically is not a differentreason from the reason that it fails morally.Coercion, even when "benign," founderson the rock of individual responsibility. Youcannot as a practical matter take propertyrights away, and you cannot as a moralmatter do so. People own themselves, butthey do not own others, and there is nothingmoral or idealistic about saying that they do.Property rights are a matter not only of thehead but also of the heart.

The Challenge toProperty Rights

There is no difficulty in demonstrating theimportance of property rights to economicefficiency. There is no difficulty in demon­strating that historically societies with prop­erty rights are richer and freer than thosewithout. Yet if we only present them in thisway, saying that they have worked so far,we risk being cast as the man who, havingfallen off the Empire State Building, washeard as he passed the tenth floor saying tohimself' 'So far, so good." 1

Some people will claim that conditionshave changed, or that the longer-term neg­ative consequences of respect for propertyare now surfacing (for instance with regardto the environment) and that they must nowbe jettisoned. Indeed, the very success ofproperty rights in creating wealth can turn,as Schumpeter said it would in Capitalism,Socialism, and Democracy, into an argu­ment that they can and should be aban­doned.

Even now there is a persistent' 'progres­sive" claim that we are moving into a newage, that somehow our increased prosper­ity, our increased awareness, the environ­mental "crisis" or something else has pro-

KING CHARLES' AX 245

duced a situation where what used to begood enough, or the best available, is nowunacceptable. And part of this claim is thatwe must submerge our individualism andour materialism and march cheerfully into aglorious communal future as comrades.Economics, they say, is not all life is about.This, in fact, is taken to be the core of the"idealist" position, and it is against thisclaim that property rights must be defended.

King Charles' AxYet the denunciation ofproperty rights as

materialist is quite inaccurate. They are themost fundamental human right, and theyaddress themselves to the spirit and themeaning of life directly, and to the accumu­lation of material wealth only indirectly.

Indeed, those who would separate "merethings" from the "higher values" simplydon't understand what the world is like.King Charles I of England would be the firstto point out that an ax may undo a politicalphilosophy. No matter how elegant it mighthave been, his theory of the divine right ofkings could not withstand the practical testof whether it could govern a world of fleshlysubjects and rulers, physical crops in thefield, mere stone walls and lowly water inrivers. No matter how bright the eye of achild, or elegant the couplets of a poet,without food the child will die and withoutpen and ink the inspiration will pass unre­corded and be lost.

In this sense, and in this sense alone, adevotion to property rights is a triumph ofexperience over hope. For the essence ofutopian philosophies is their unwillingnessto accept the tragic element in life, whereasto accept property rights is to accept it. Andto object to the tragic in life on the groundsof "idealism" is to object not to a politicalphilosophy but to the fundamental nature ofthe universe.

Inevitably in this vale of tears our hopesand dreams assume physical form. Timepasses and we must use it one way oranother, and once we have it is gone and allwe have is what we did with it then. To takean individual's property is to steal that time,

246 THE FREEMAN. MAY 1994

King Charles I declaring war on Parliament.

to steal the hopes and purposes embodied inthe acts of transforming the world, and it isto say that the physical objects, the surds ifyou will, matter more than the hope thatproduced them. Thus it is that those whowould violate property rights, not those whodefend them, are the true materialists.

If we had world enough and time, it mightbe no offense for the state to take the fruitsofour labor. Ifwe were immortal, who couldbegrudge an hour's work? But the time wechose to invest in that transformation ofmatter will never come again, and as one ofClint Eastwood's characters once observed,it is a hard thing to take all a man has and allhe will ever have. All we have is our time,our effort and our free choice, and to takewhat we do with these is to take of ouressence, to violate our personal integrity,and to steal part of our soul.

Property Rights andJohn Stuart Mill

It may be alleged, of course, that thebutcher has an obligation to other membersof society, that it is his moral duty to give of

his excess to those in want. To begin with,there is a world ofdifference between sayingthat everyone should be charitable and insaying that they should all agree on whatcharity is, and without elaborating much Iwould say that it is because of this thatsocialists must be at war with human nature.Dntil some way is found to produce una­nimity in society, redistribution in violationof property rights remains only a way ofproducing the appearance of agreement andof charity, but not the reality.

There is also a world of difference be­tween saying that it is the butcher's moralduty to be charitable, and saying that it is ourmoral duty (or right) to force him to act asthough he were charitable. What we areasserting is not that we should force thebutcher to be charitable (for we cannot getinside his head and rearrange his thoughts),but that we should force him to act as thoughhe was, from our point of view, charitable.Coercion will make the butcher act asthough he shared the majority-or govern­ment-view of charity, but it will not in factmake him share that view.

And this is crucial. For in forcing him to

act according to our conception of generos­ity, rather than his own, we deprive him ofany moral freedom, and put material abovemoral considerations. His physical goodswill be transferred to another, and he may becompelled to produce more even once heknows it will be diverted to the purposes ofothers. But he will not be acting voluntarily.And so in an act of coercive redistribution,the material aspects are rearranged as theywould be in an act of charity, but theintellectual and moral ones, the intentionsand feelings, are not.3

As the great economic philosopher Fred­eric Bastiat wrote a century and a half ago,one's person, liberty and property are "thethree basic requirements of life, and thepreservation of anyone of them is com­pletely dependent upon the preservation ofthe other two. For what are our faculties butthe extension ofour individuality? And whatis property but an extension of our facul­ties?,,2

Adam Smith's famous observation that itis not from the benevolence of the butcherthat we expect our dinner, and that we speakto him not ofour needs but ofhis advantage,relies on this point. The butcher's stockembodies his time, effort, risk, and dreams,and to take it because we want it, forourselves or for others, is to assault hisperson. To substitute our judgment for his,or to try to, is a monstrous violation.

Property Rights andthe Grim Reaper

In a utilitarian sense, perhaps, my respectfor your property rights is merely a conces­sion to you in return for your respect formine, and if that is as far as someone iswilling to go it will have to do. But in adeeper sense my respect for your propertyrights is based on my practical and moralrespect for your individuality. Not only willyou resist my attempts to make you do whatI want, but all I really know about yourchoices is that they are and must be yours.

Thus my respect for property rights isbased fundamentally on humility. I believethat the purpose of life is, at best, somewhat

KING CHARLES' AX 247

obscure, and that living is a difficult activitythat inevitably, in some sense at least, endsin failure. As Paul Newman's character putit in Buffalo Bill and the Indians, "the lastthing a man wants to do is the last thing hedoes." And this fact stares everyone in theface, or at the very least peers over theirshoulder constantly.

I am going to die. I don't know muchabout you, my readers, butl know that asSeneca wrote' 'You will die not because youare sick but because you are alive. " And asdeath rushes toward you and all of us (andif you have one of those digital watches thatbeeps every hour you don't need to miss ithappening) you have chosen to spend thesemoments reading this essay. Many peoplewould consider this folly. And they aren'tsitting, The Freeman in hand, absorbingideas on liberty and property. They are outshopping, or skydiving, or fighting with theirin-laws, or doing any number of things.

Once again, if the arrow of time were notunidimensional, this would not be a prob­lem. If you didn't like what you had done,you'd just do something else. But in ouruniverse making one choice means not mak­ing another, so we can in fact make ourchoices badly and be stuck with it.

Property Rights andJoseph Stalin

The only way to avoid these conclusions,and into the bargain to protect others fromthe terrible fate ofjustified guilt, is to rejectthe premise of individualism. We may saythat it is simply not true that individuals are,or should be, left to face the universe ofmoral choices alone (we have already seenthat the world of moral choices is a world ofchoices about material things with moralconsequences, so we cannot avoid the moralchoices by saying that where we went wasmerely physical. So is all motion, and allchoice). We may say that the purpose of theindividual is to serve the greater good andthat the individual's choices will be dictatedby the greater good, or its agents, and thatonly the greater good can feel any culpabil­ity for those choices.

248 THE FREEMAN • MAY 1994

In its purest form this is as a practicalmatter impossible to hold, and even themost rigid Stalinists would blame an indi­vidual worker who neglected his revolution­ary duties. Even if you submit to the com­mon will, if you do it badly you are to blame.Or, to quote Elizabeth Fox-Genovese'sFeminism Without Illusions: A Critique ofIndividualism, "Here I am arguing thatindividualism actually perverts the idea ofthe socially obligated and personally re­sponsible freedom that constitutes the onlyfreedom worthy of the name or indeedhistorically possible.,,4 There's that darnpersonal responsibility again, in the writingsof a self-described foe of individualism.

But in fact I simply do not accept thecollectivist vision as a description of theworld, let alone as a prescription. I observeand I believe that if told what to do for thecommon good I must myselfdecide whetherto obey, and I must live with my choice.Even if disobedience means death, I cannotturn on the Zyklon B and say "Just follow­ing orders."

This is very much the same as c.S. Lewis'argument at the beginning of Mere Christi­anity: even if you say "I do not believe inindividual responsibility" you will observeas a matter of fact about the operation ofyour personality that you do. You will in factconsider yourself responsible for your ac­tions, even if only in that you take pride incomplete submission to authority.5

So I begin by taking the intellectually hum­ble position that I do not know what otherpeople should do. If asked by the shoppersand sky-divers whether they should be read­ing these words or doing what they aredoing, I can certainly inform them. I caninquire as to how they expect to benefit fromwhat they are now doing, and what theythink they might experience by choosingsomething else. If I find that there is some­thing wrong or suspect about their expec­tations in one or both cases, I can pursue thematter as long as they want me to. I can evenmake a suggestion as to what I think theyshould do. But I do not know. And since Ido not know, I take the intellectually humbleposition that I will not compel them.

The knowledge that we do not know mustmake us more profoundly humble. To assertthat I know what you should do impliesnecessarily that I know what I should do,and who among us will cast the first stone onthat account? No one makes all decisionsperfectly because there are so many and lifeis so difficult. We all, to be blunt, messthings up, and it'smostly a question ofavoiding mistakes as much as possible,making amends where necessary, and notgetting too down over our own fallibility.It's just life.

But I also take the morally humble posi­tion that even if I did know, I could notcompel others. I do not know the meaning ofyour life, nor of mine, and I have my handsfull with the latter. Yet I do not spare timeto run yours not because I hate you or scornyou, but because I do not believe that I canmake your choices for you at all. It's notjustthat I shouldn't; I can't. This is a matter ofdefinition: no matter what I say, you mustchoose whether to do it, even if it's "Yourmoney or your life." And if I do try I willonly get in your way.

The meaning of your life is the meaning ofyour choices, so to make them for you is tovoid your life of meaning in pursuit ofmaterial, not moral, situations that I prefer.

Money Can't Buy HappinessIndeed, it is always vital, in my view, to

go back to first principles, in this case askingwhat society is for and what the good life is.To take a rather trivial example, the reasonthat airports should be private is not thatprivate property increases the wealth ofsociety and moves us closer to the NewWorld Order. It is that private airports letpeople go where they want.

And to treat government as some institu­tion for achieving the greater good, andasserting that it can and should overrideindividual rights when "prosperity" re­quires it, is not only to advocate a policy thatalmost certainly won't work. It is also toassert that individual freedom is a good likeany other, and with a low price. It is to saythat we would be better off in an unfree

society with a per capita income of $20,000than in a free society with a per capitaincome of $3,000, and that is simply not so.As Booker T. Washington wrote in hisautobiography, "I have learned that successis to be measured not so much by theposition that one has reached in life as by theobstacles which he has overcome whiletrying to succeed.,,6

Thus while I enjoy luxury as much as thenext guy, I would prefer my own log cabinto a gilded cage. And I would not dream ofcalling' 'idealistic" any philosophy that didnot respect this same preference, in me or inothers.

The Constitution of LibertyRespect for property rights means respect

for individual choice, and therefore we canquickly identify laws and institutions inim­ical to respect for individual choice by theirimpact on property rights. You in the U.S.are blessed with a Constitution that firmlyprotects them, though you are cursed with aSupreme Court that has all but destroyedthem, while we in Canada have a Constitu­tion that ridicules them and a SupremeCourt that does likewise. But we should aimfor a legislative and ultimately a Constitu­tional order that does protect them, whenwe do not have one, and for a restoration ofjudicial sense and hence Constitutional gov­ernment when we do.

In order to do this we must win theintellectual battle, and we cannot win it onthe terrain of Pareto Optimality not becauseour arguments are so weak there but be­cause they are so strong. Anyone who reallyunderstands the terms "utility maximiza­tion" will not fall for "beneficial" legisla­tion.

No, where we must win is on the enemy'sterrain, where we argue that property rightsliterally are human rights. We own our­selves, not other people, and we may exer­cise that ownership as we see fit. But ourownership of other people, which we do notpossess, we may not exercise. Thus rent­seeking, the curse of modern government,is ruled out a priori. A government that

KING CHARLES' AX 249

respects property rights is not in the busi­ness of redistributing income, period.

Property Rights AreHuman Rights

And so we must remember that a Consti­tution that protects property rights is aConstitution that protects not the exploiteror the pampered heir, but one that protectsindividuals.

In fact there is no "human right" that isnot best understood as a property right,including free speech, freedom of religion,the right to bear arms, the right to be free ofarbitrary search and seizure, and the right tofreedom of contract.

Even the ninth and tenth Amendments tothe U.S. Constitution are, from this point ofview, easily explained. Since no one maydelegate to government a power he or shedoes not possess, the government may notgo about assuming powers it hasn't ex­pressly been given, even on the grounds that"it's for the best." Like the entire Bill ofRights, this section was questioned by somewho argued that no one could possibly takeany other view. Fine and good, said thedoubters, if it's that obvious let's put it injust for good measure. History has provedthat even they did not doubt stronglyenough, but the other parties were right that,given the nature of the U.S. Constitution,the government could not possibly have thepower to undertake any sort of coercion ofits citizens not expressly enumerated.

Moreover, if human rights literally areproperty rights and vice versa then theso-called "positive" rights are not rights atall. For they are the right to someone else'sproperty, which means the right to someoneelse's person, and that you do not have. Nothaving it, you certainly cannot delegate it togovernment. And from this point of view wewill not lose sight of why you may not, andwill not fall into practical or moral errors.

To take a rather less cosmic example,consider the coercive, universal, shoddyeducation currently afflicting youth in NorthAmerica. What is particularly remarkableabout this problem is that for thirty years we

250 THE FREEMAN • MAY 1994

have been throwing money at our schools,like good materialists, yet as the quality ofeducation declines still further the only thingwe can think ofto do is to throw more moneyat them. This is even empirically silly, sincethose nations that outschool us-for in­stance Japan-have much shabbier, muchmore crowded schools than we do.7 Theproblem is that our educational system doesnot allow people to take control of their ownor their children's education, to make theimportant choices themselves. This is apractical error and it is a moral error, but itis not two errors. It is one very big one.

For you do not have the right, through anymeans at all, to make other people's choicesfor them. You do not have the ability either.This is where and why practicality andidealism intersect. The attempt to makeother people's choices for them will failbecause they are fundamentally theirs tomake. You can, ofcourse, reduce the choiceset available to them, but if you do you areengaged in a deplorable violation of theirpersonal integrity, not in an act of benignand magnanimous charity.

Conclusion-A PrisonCalled Heaven

This was driven home to me quite force­fully in a rather unlikely setting in Decemberof 1992, when the Fraser Institute hosteda round-table luncheon where the guestspeaker was Karlhermann Klottschen, di­rector of the Treuhandanstalt (the agencycharged with privatizing the "economy" ofthe former German Democratic Republic).My thesis, as I noted at the outset, is thatproperty rights are not material in nature,except insofar as the universe is. The rightto property is first and foremost the right ofself-ownership, and becomes a right tothings only because the universe is made ofmaterial stuff and the arrow of time isunidirectional. In such a universe it is theheight of miserable materialism to constrainthe free choices of others, and the height ofidealism to allow them.

And when Herr Klottschen was askedwhat was the most lasting damage done by

socialism in East Germany, this is what hesaid:

I think they have robbed people of themost precious thing they have; that is, tospend their time in a way that they wish.They have taken away this very preciousthing which we cherish, and that is thefreedom, the liberty to move where youwant, and to do what you want, and thisthey have basically forbidden. I think thatis a very serious crime for which there isno penalty. . . . What I find is very disas­trous is to put 16 million people in a prisonfor 45 years and pretend they are inheaven.8

There is no doubt at this point in historythat violations of property rights do notachieve their goals, and indeed East Ger­many was not a prosperous place. Butmoney cannot buy happiness, and what wasreally wrong with the GDR, as HerrKlottschen rightly stated, was that people'sdrea~s and ideals were destroyed. Even ifthe GDR had enjoyed greater materialwealth than, say, eighteenth-century Eng­land, the latter would have been a betterplace to live.

So it is wrong, even preposterous, to callproperty rights materialistic. They are themost basic human right. They are the onlyhuman right. They are what makes lifeworth living. 0

1. This analogy was in fact used by environmentalist PaulEhrlich in an ongoing debate with economist Julian Simonabout the so-called "limits to growth," after he had lost $500in a bet with Simon about metal price trends in the period1980-90, The Economist, December 21, 1991, p. 26.

2. Frederic Bastiat, The Law (Irvington-on-Hudson, N.Y.:The Foundation for Economic Education, 1974 [first published1850, in French]), p. 6.

3. In this sense those who respect property rights manifesttrue idealism. But rather than become involved in a squabbleover terminology, let us regard the term as the rattle on arattlesnake, and avoid any "idealism" we may encounter. Inthis we would be following Thoreau, who warned us that if wesaw a man approaching bent on doing us good we should fleefor our lives.

4. Cited in Joan Kennedy Taylor, Reclaiming the Main­stream, p. 11.

5. Unless, ofcourse, you decide to get really messed up andfeel guilt over feeling proud of your humility before Allah.

6. Booker T. Washington, Up from Slavery, p. 39.7. See for instance the survey of education in The Econo­

mist, November 21, 1992.8. In the elision he spoke of the inappropriateness of trying

Erich Honecker for the shooting of a handful of people whenthe whole regime was a monstrous crime.

THEFREEMANIDEAS ON LIBERTY

OWLS, FERRETS, ANDFREE MARKETS

by K. L. Billingsley

Ranchers in the western states like black­footed ferrets because they wreak

havoc on the prairie-dog towns that causeranchers much grief. But when ranchers seea black-footed ferret, they are likely toshoot, shovel, and shut up about it. Whatwould lead ranchers to act against theirinterests?

Federal regulation. The black-footed fer­ret has been declared an endangered spe­cies, like spotted owls and various brands ofwoodpeckers and snails. If an endangeredspecies is discovered on your property andfederal regulators find out about it, they willmake life very difficult for you. In fact, youmay not be able to use your property.

The Constitution of the United Statesstipulates that you may not be forced toquarter soldiers on your property withoutcompensation. As Montana State econom­ics professor and former Interior Depart­ment official Richard Stroup points out,"the military pays for what it takes," butenvironmental bureaucrats do not. Stroupnotes that current regulations require land­owners to quarter all manner of species, oreven a wetland, with no compensation.

To many observers, this constitutes a"taking" and should be compensated. JohnEcheverria, chief legal counsel of the Au­dubon Society, disagrees, seeing the call for

K. L. Billingsley is a media fellow of the PacificResearch Institute in San Francisco.

compensation as a money-making scam andradical reinterpretation of the Constitution.Echeverria favors stepping up the regula­tory enforcement that has become quitedraconian.

According to Nancie Marzulla, formerlyof the Justice Department and now chieflegal counsel for Defenders of PropertyRights, some 800 people have beenjailed forenvironmental infractions since 1982. Thatfigure includes seven for violating wetlandspolicy.

According to Vice President Al Gore, theworld and nation stand at the brink of anenvironmental apocalypse. By Gore's stan­dards, then, the regulatory approach is pro­tecting neither the environment nor theindividual rights that constitute the bedrockof American government and society. Somepeople see a better way: free-market envi­ronmentalism, which is more than a theory.

The government of Zimbabwe has cometo the rescue of dwindling elephant herds byprivatizing hunting rights. Poaching has vir­tually disappeared, the elephants are thriv­ing, and the income of the villagers hasdoubled.

In the United States, the group DucksUnlimited has preserved more wetlandsthan government departments boastingmuch larger budgets, resources, and legalclout.

Hank Fischer, the Northern Rockies rep­resentative of Defenders of Wildlife says

251

252 THE FREEMAN • MAY 1994

that the Endangered Species Act (ESA) would force people to face both costs andhas been ineffective on private lands, which benefits. According to Anderson, the fed­harbor fifty percent of endangered species. eral government lost $23 million on recre­Fischer's group compensates ranchers ation last year.when wolves kill livestock. The group also Parks could be privatized and companiespays ranchers to let wolves develop on their could lease their land to hikers, hunters, andland. fishermen. Another market measure would

R.J. Smith of the Competitive Enterprise be the trading of permits. For example if aInstitute is an avid bird-watcher and former logging company owned some old-growthpresident of the Monmouth (N.J.) Audubon forest, it could trade that area for a timberSociety. Smith notes that around the turn of region that they could harvest.the century the wood duck became an en- "When you own assets you take betterdangered species. The ducks now thrive, care of them," says Richard Stroup, whonot due to government regulation but to adds that the market "forces even short­private landowners who built boxes for the sighted people to account for the future."ducks to use in nesting. Something similar Stroup argues that, contrary to what manyhappened with the osprey. But things have believe, the government is more short­changed since the ESA. sighted than the market. He cites the case of

At present, Smith notes, "there is no a government official he worked with whoincentive to help the spotted owl," since agreed that a certain inexpensive researchbuilding boxes for the birds will only attract project had merit but who failed to fund itpredatory regulators. In this way the ESA, because it outlasted his tenure in the InteriorSmith adds, provides "perverse incentives" Department.and creates a "lose-lose" situation. While those on opposite sides of the

The largest landowner in the United environmental debate disagree with eachStates is not some tycoon or corporation but other's beliefs, observes Stroup, a marketthe U.S. Government, which still controls system based on common law will forceabout one-third of the nation's land. Econ- them to respect each other's rights. Andomist Terry Anderson, Senior Research since there is no perfection in human affairs,Associate at the Montana-based Political Stroup urges all sides to ask the "comparedEconomy Research Center (PERC) and co- to what?" question.author of Free Market Environmentalism, In the end, there are only two ways toadvocates a plan in which the federal gov- solve the environmental question: by regu­ernment could sell some of this land to lation or by property rights. According toprivate groups such as the Sierra Club, the best evidence to date, the property rightswhich are interested in preserving old- approach comes closest to a win-wingrowth forest. This type of privatiza,tion situation. D

\-'~7?N~J

Tibor Machan, of the philosophy faculty atAuburn University, escaped at age 14 fromCommunist Hungary in 1953. His experiencesand reflections appear in his book Liberty andCulture, Essays on the Idea of a Free Society(Prometheus, 1989).

THEFREEMANIDEAS ON UBERTY

POST-COMMUNISTTRAUMAS EASTAND WEST

by Tibor R. Machan

[We] cannot say that democratic institutions re­flect a moral reality and that tyrannical regimesdo not reflect one, that tyrannies get somethingwrong that democratic societies get right.

-PROFESSOR RICHARD RORTY,

The New Republic, July 1, 1991

During an international conference on what we might have said but could not comepolitical theory several of us were sit- up with a sensible answer. In a while she

ting in a restaurant in Tallinn, Estonia. calmed down a bit and told us.Among us was a participant from Bucharest, All of this amusing banter called to ourRomania, a young woman, who listened as friend's mind not only what she had beensome from the West poked fun at the evident living with for all of her life but what in herinefficiency of the Russians who still have a country is still largely the case, namely, thesignificant presence in the Baltic countries complete control of the Soviet-type bureau­and who happened to be running this estab- cracy over the society. She then went on tolishment. We noted the drabness of the recount, in halting English and tearfully,decor, the ineptness of the help, the slow- how the daily lives of her family and friendsness of the service, and reminisced about had been utterly trapped in the abyss that sothe even worse olden days when the gray- many in the West championed as the prom­looking Russians who dominated the Com- ising wave of the future. She gave examplemunist culture would run roughshod over after example of how people suffered, fromeveryone in sight. moment to moment-how every ounce of

Suddenly we saw our friend from Bucha- some modicum of joy and pleasure, neverrest in tears. She was apologizing but unable mind genuine happiness, was rendered ut­to keep herself from sobbing. We were terly impossible and inconceivable for them.stunned-we didn't know what we did to She noted that people simply lost the will toupset her. We all searched our minds for live, that they could not even smile, not to

mention laugh heartily, and how the mostminute matters, such as the way in whichparents played and talked with their chil­dren, suffered from this totalitarian impact.

It is often only when one finds oneselffacing the facts directly, inescapably, that

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254 THE FREEMAN • MAY 1994

one can appreciate their meaning. This isespecially true about facts that so manypeople would just as soon obscure withclever rationalizations.

In the West, especially in American news­papers, academic journals, and collegeclassrooms, the collapse of the Soviet em­pire is now nearly forgotten. People every­where are talking about why there isn'tsome kind of major economic boom inresponse to this fall. A Business Weekeditorial remarked, "Communism has beenvanquished in much of the globe, the victimof its own failure to deliver a decentliving toits citizens under its rule. Yet capitalism inthe industrialized nations is limping along."It is as if "one, two, three," and our worldwill simply put 40 to 70 years of bloodydictatorship and command economy out ofmind and bounce back as if nothing hadhappened.

Assessing the DamageThe damage inflicted by the Communist

reign is not nearly well enough understood.It is certainly no longer treated as a big deal.What has taken its place as a vital item ofconcern is just how bad conditions are in thewake of the efforts to live without Commu­nism, without the mighty Soviet State im­posing its warped vision of human life on allthe colonies within its sphere of impact. Thequestion that seems to titillate the interest ofmany people is why the recovery is so slow,if a recovery was needed in the first place.The question on the minds of many promi­nent journalists, for example, is: "Whatshould be substituted for the admittedlyharsh and clumsy form of socialism, in thewake of the evident unworkability of thefreedoms that the people gained after thefall?"

Despite all the talk about free markets andfree institutions in the newly liberated coun­tries of Eastern Europe, the intellectualconsensus among political theorists and sci­entists seems to be that some kind of middleway is needed between socialism and capi­talism. There is little encouragement towarda truly vibrant capitalist system either from

our politicians and political theorists or thevoices of moral leadership.

Just consider what the word on this isfrom the Vatican Secretary of State, AngeloCardinal Sodano: "Capitalism is no lessdangerous [than Communism] because ofitsbasic materialism and the unbridled con­sumerism and selfishness it encourages"(La Stampa, December 28, 1992). Instead ofthe truly productive capitalist system, thepreferred alternative seems to be socialdemocracy, the welfare state or communi­tarianism, a hybrid of liberalism and social­ism, with the emphasis not on the value ofthe freedom of the individual, includingfreedom to engage in free production andtrade, but on the value of individuals' re­sponsibilities to the community, not unlikethe creed preached by Marx and his follow­ers. The new vision involves a system inwhich free trade is here and there "permit­ted," but only under the watchful eyes ofplanners and regulators who knowjust whento limit people's liberty good and hard.

The one system that gets the least playasa proper candidate to replace the tyrannyjust overthrown is free-market capitalismor, as the Europeans call it, classicalliber­alism. No, that would unleash all the beasts.Such freedom cannot work and must not betried, lest anarchy and rapaciousness breakout all over. Look what freedom's promisehas already unleashed on Bosnia-Herzegov­ina. Look how greed and profiteering hasalready spread all over the old Sovietsphere. So the proper answer is not to let ithappen-some people must become thestern tamers of the rest, if only we couldquickly decide who are so clever and de­pendable as to take the reins of power.

Not only, then, is there little left of truecapitalism and free-market economies in theWest but there is little chance of such asystem taking over where the Communistdictators failed. In addition to this, fewpeople in the West seem to fully appreciatejust how horrible the Soviet experimentreally was and how difficult it is to recoverfrom it. There are no expressions of earnestmea culpa anywhere. Publications such asThe Nation, The New Republic, The Pro-

POST-COMMUNIST TRAUMAS EAST AND WEST 255

gressive, The New York Times, The Wash­ington Post, and the hundreds ofother morescholarly outlets or related media do notspend much time acknowledging that theirdifferent degrees of softness on Commu­nism, the thesis of moral equivalency be­tween capitalism and Communism, theirsubtle but evident apologies for the Lenins,Stalins, Brezhnevs, and others in the Sovietdebacle may have had a bit to do with thehorrors the people had been subjected to,as well as with their current difficulties inrecovering from these horrors and startinga new life, and recapturing some measureof hopefulness and the will to live andflourish.

I was rereading Naming Names, the bookabout the black list period in America duringthe 1950s by Victor Navasky, editor of TheNation (which is still proudly championingsocialism with some kind of human facefor all countries). In it Navasky made clearthat he thought that despite the brutality ofSoviet Marxism there was something mor­ally noble about the system because itsintent was to help the poor and powerless.I also read some passages ridiculing theRussian-born American novelist Ayn Randwho once claimed that a movie that depictedRussians smiling was a travesty, a sly pro­paganda piece since no ordinary Russiancould be presented in such a way without agross distortion of the truth-it would becomparable to depicting Jews in concentra­tion camps having a good time playingvolleyball. Not that this may never havehappened, but that highlighting such char­acters in a work of fiction amounts to a viledistortion. Navasky and his ilk, of course,scoffed at this and still do.

A Complex, Painful OrdealBut that is just what our Romanian friend

was telling us about the millions and millions

of victims of the Soviet terror, one that onlya lunatic could imagine to have been moti­vated from compassion and care. What isworse, today many of these same naivereporters of the meaning and impact ofSoviet socialism still do not appreciate justhow complex and painful an ordeal it is toattempt to recover from it all.

People are not simply changing from onegame to another when they finally are ableto leave the Soviet system behind. They areundergoing recovery from massive and pro­longed injury to their whole beings. Theyand everyone they know and love had beenbeaten and derided and terrorized by thugsfor decades on end. When finally they areleft alone, they are expected to, as the songsays, just pick themselves up, brush them­selves off, and start all over again-withcheer in their hearts.

We are seeing some extremely painfulrecovery as well as relapses in the lives ofthose who had been the victims of the Sovietexperiment that so many of our comfortableintellectuals watched with vile neglect. Wewill see normal imperfect human beingsundergo a slow convalescence or standaround hesitatingly coping with new prob­lems and nearly forgotten ones as well.

For the many people who have given theirsupport to socialism and Communism overthe years-if only by not being brutallyhonest about them-on such grounds asthat, well, these systems were motivated bycompassion for the poor and downtrodden,the failure to see all this is a blatant confes­sion of hypocrisy. The victims of the Sovietvision of human life deserve compassionand caring and yet all they seem to be gettingis the callous disregard for their plight andthe quick judgment that they are, after all,unable to handle freedom, aren't they?What the yearning for self-justification willnot permit some people to do in the face ofthe gravest of human tragedies!. D

THEFREEMANIDEAS ON LIBERTY

THE ECONOMIC WAYOF THINKINGPARTS

by Ronald Nash

I n June of 1992, I was nearing the end of aset of lectures in Moscow, Russia, when

I learned that a member of the Congress ofPeoples' Deputies was coming by my hotelto meet some people in our party. I decidedthat I would use the meeting to try to learnmore about what makes Boris Yeltsin' sopponents in the Russian Congress tick.When the deputy revealed that he was animportant player in economic decisionsmade by the Congress, I brought up thesubject of the massive increase in Russia'smoney supply that hadjust been announced.In a matter of weeks, Russia planned todouble its money supply. Didn't anyone inthe Russian Congress realize, I asked thedeputy, what the announced action woulddo to the Russian economy? Didn't anyoneunderstand the horrendous inflation thatwould result?

The deputy made it clear that he and hisallies in the Congress did not care about thelong-term results. The huge inflation in Rus­sia's money supply was necessary in the

Dr. Nash is a contributing editor ofThe Freemanand professor of philosophy and theology atReformed Theological Seminary in Orlando,Florida. His many books include Freedom, Jus­tice and the State and Social Justice and theChristian Church, both published by UniversityPress·ofAmerica.

short-run because, he claimed, it wouldalleviate serious problems resulting from hisnation's movement away from Socialism.Had the deputy been a bit more candid, hewould have admitted that the planned infla­tion in the money supply was going tobenefit the deputy and thousands of otherRussian bureaucrats like him.

Actions like those just described, alongwith the blase attitude toward the futureexhibited by the Russian deputy, are anexample of the folly that results wheneverindividuals or governments ignore thefourth principle of the economic way ofthinking, which is the subject for this, thelast in my eight-part series. This fourthprinciple of the economic way of thinking isthe importance of always asking what thelong-term consequences of any economicaction will be.

Short-Run Versus Long-RangeConsequences

Economic theories are testable in terms oftheir success in predicting and explainingwhat takes place in the real world. One wayofassessing any economic proposal is to askwhat its long-range consequences will be. Itis a mistake to notice only the short-term orimmediate consequences ofeconomic activ-

256

ity. Any proposal or policy can affect theway people view a situation and thus canalter their incentives in ways that changetheir choices. Such a change in incentivesoften produces other effects that becomenoticeable only in the long run.

American politicians excel at adoptingeconomic policies because they appear toproduce desired consequences in the shortrun. What "the short run" usually means forAmerican politicians is an effect likely to lastthrough the next election. This has oftenbeen true of policies adopted because of thehelp it was claimed they would bring to thepoor. But measures that appeared beneficialwhen viewed in the short term often lookquite different after a longer period of time.This has certainly proved to be the case withthe Russian government's continued expan­sion of its money supply that has gone farbeyond the one-hundred percent increase inmid-1992. The Russian ruble has becomeworthless and the incomes of tens of mil­lions ofRussians continue to plummet, leav­ing them further behind each week in theirquest for the basic necessities of life. As theinflation rate continues to escalate, the left­ist-controlled Congress has continued toslow down Russia's feeble efforts to movetowards democracy and a market economy.

But there is no need to say more about theinsane economic policies of the Russiangovernment; there are abundant examplesof equally foolish acts by the Americangovernment.

How the U.S. GovernmentDestroys Industries andAmerican Jobs

In 1955, the United States produced halfof the world's cotton (some 18 million balesa year). But by 1969, only 11 million baleswere being harvested in the United States.This dramatic decline resulted from growingcompetition from foreign cotton growersand synthetic fabrics. Lost in the fog ofhistory and government statistics is the sadbut true story of how U.S. governmentalintrusion into the cotton and textile markets

257

gave added strength to foreign intrusion inthese markets.

The first leg of this governmental inter­vention were federally mandated price sup­ports for U.S. cotton that by 1955 hadreached a peak of 32 cents a pound. Theshort-run justification for this price supportwas the alleged good of cotton growerswhose income would increase because of thegovernment's' 'wise and benevolent action."But as we saw earlier in this series, everyeconomic action involves some cost. If youartificially raise the price of U.S. cotton toraise the income of U.S. cotton producers,you open the door to the importing oflowerpriced cotton from foreign producers. Evenmore serious was the fact that the pricesupports raised the price of U.S. cottonabove the world-wide market price, cuttingdramatically into sales of U.S. cottonabroad. U.S. cotton producers were rapidlylosing their niche in the world market.

The federal bureaucracy's answer to thiswas to subsidize the price of U.S. cottonexported overseas in 1956. This immedi­ately created problems for the Americantextile industry whose manufacturers werenow forced to pay more for u.S. cottonthan their foreign competitors. This meantthat foreign producers ofcotton goods couldmanufacture and sell their goods morecheaply than American millers. The U.S.government's response was to add still an­other subsidy, this one for U.S. millers.

There was nothing mysterious or surpris­ing in any of these long-term consequencesresulting from our government's interven­tion with the cotton and textile markets.Anyone attuned to the economic way ofthinking could easily have predicted whatwas going to happen; and of course manyeconomists and businessmen issued theirwarnings. But those warnings were ignoredin the mad rush to produce some immediatebut short-lived "solution" to some problem.Notice also that many American business­men were eager accomplices in what even­tually became the destruction of their in­dustries.

Once the dangers of the government sub­sidies became apparent, assorted changes

258 THE FREEMAN • MAY 1994

were made. But the damage had alreadybeen done. Foreign growers had alreadybecome established because the u.s. gov­ernment's actions gave them an incentive toenter the cotton market. Foreign millersbecame established because the U.S. gov­ernment's actions gave them an incentive.To appreciate fully the damages resultingfrom this last fact, it is necessary to visitsome of the American communities thatused to provide tens of thousands of textilejobs. The factories are closed, thejobs wereterminated years ago, and the local econo­mies were devastated. But few people rec­ognize the role of the federal government inbringing about all this loss. And fewer peo­ple still recognize how inattention to thefourth principle of the economic way ofthinking helped produce the situation. Whencontemplating any economic action, alwaysask what the long-term consequences of thataction will be.

How Government Destroys aHousing Market

Failure to calculate the long-term conse­quences of an act has been a major factor inthe housing crisis in New York City. Whena locality like New York City imposes rentcontrols, it does so under the pretense thatrent controls will stifle the greed of selfishproperty owners, reflect the greater com­passion of the liberal bureaucrats who runthe city, and presumably make more decenthousing available at a lower cost. But any­one familiar with the principle of long-rangeconsequences knows that the· end result ofrent controls will not be more availablehousing but less; and on top of all that, thecondition of available housing will continueto deteriorate.

As we learned earlier in this series, peoplerespond to incentives. Property ownersthink they are entitled to some return ontheir investment. When they begin losingmoney because of coercive rent controls,the first thing they begin to do is cut back onrequired maintenance of their property. Asthe condition of the property declines, itbecomes increasingly less desirable to re-

sponsible people who find other places tolive. As the apartments become increasinglyoccupied by lower-class residents, the lackof maintenance coupled with the tendencyof people to treat other people's propertywith something less than loving care leads tostill a further decline in the quality of theproperty. Many such properties deteriorateso badly that they eventually become con­demned or mysteriously burn to the ground.If one doubts that this happens, all one needdo is make a brief visit to the borough ofNew York known as the Bronx.

Other property owners will survive therent controls by finding creative ways ofgetting around the restrictions. A blackmarket in rental property may arise. Peopleable to rent an apartment at the governmen­tally approved price may still have to makeadditional payments under the table, per­haps by renting additional furniture or pay­ing for a cleaning service. A good exercisein the economic way of thinking would be toconsider what would happen to housing inNew York City if all rent controls wereended. The short-term consequence, ofcourse, is that the price ofhousing in the citywould jump dramatically. But, of course,the ultimate blame for this would be theoriginal, short-sighted view of the city bu­reaucrats. But the long-term consequencewould be an enormous increase in the quan­tity of new housing as entrepreneurs rushinto the market to build new housing inresponse to the incentives of higher rents.But as the quantity of new housing in­creased, as it would, another long-termconsequence would be the significant de­crease in the cost of such housing when thequantity of acceptable housing then sup­plied by the market increased.

Given the obvious answer to New York'shousing crisis, the question to ask is why theliberal bureaucrats don't admit their mis­takes and abandon their self-destructivepolicies? One possible answer, of course, isthat one must never underestimate the stu­pidity ofpoliticians. Whatever the truth maybe in the case of these bureaucrats, it is clearthat the real losers are the people who liveor would like to live in the city.

LENDING DISCRIMINATION: THE UNENDING SEARCH 259

Conclusion

Another worthwhile exercise for thereader would involve the identification ofother self-destructive economic policiesthat fail to consider long-range conse­quences. Even as I write, there is proposedlegislation that would produce automaticincreases in the minimum wage in responseto inflation. Minimum-wage laws are justi-

fled as acts that will help low-skilled workersearn a living wage. But it is clear that suchlaws only force employers to layoff moreunskilled workers. And so, the very law thatwas supposed to help unskilled workersearn more money has the long-range effectof costing many of them their jobs. Such isthe nature of liberal "compassion" thatignores the economic way of thinking. D

LENDINGDISCRIMINATION: THEUNENDING SEARCH

by Robert Batemarco

H L. Mencken once called politics• "the art of looking for trouble, find­

ing it everywhere, diagnosing it incorrectly,and applying the wrong remedies." Youdon't have to spend much time lookingaround to seejust how right he was. Menck­en's characterization fits some recent regu­latory follies to a tee.

One problem the politicians and bureau­crats set out to find was discrimination inlending. They found it in just about everyrundown neighborhood in which mortgagelenders failed to extend credit because therewasn't a sufficient probability of recoveringmoney lent. This avoidance by lenders ofcertain areas, known as red-lining (so-calledbecause red lines were supposedly drawn

Dr. Batemarco, The Freeman's book revieweditor, teaches economics at Marymount Col­lege, Tarrytown, New York.

This paper was delivered at the December 1993Round Table at FEE.

around areas where banks would not makeloans) was outlawed by the CommunityReinvestment Act of 1977. Other types oflending discrimination were forbidden un­der the Equal Credit Opportunity Act of1974. 1 Interestingly enough, despite the cur­rent political climate, which encouragesmembers of officially designated victimgroups to make any of life's little disappoint­ments into a federal case, the Federal Re­serve System's office that deals with creditdiscrimination has received but a trickle ofcomplaints, not one of which was found toentail illegality. The Fed's response to thisdearth ofactivity was to seek out complaintsfrom civil rights activists. Even this had nodiscernible effect. 2

The misdiagnosis was the idea that theseareas were rundown because they couldn'tget loans. Dysfunctional families, publicschools incapable of imparting the skills toprepare children for a productive adulthood,

260 THE FREEMAN • MAY 1994

pervasive dependency on government lar­gesse, high unemployment, and rampantcrime which prevents those who are pro­ductive from enjoying the fruits of theirlabor get nary a mention as contributingfactors. Certainly, the notion that thesefactors, which cannot help rendering aneighborhood rundown, might also makeloans there a losing business propositionseems not to have occurred to those who areso quick to cry "discrimination."

Indeed, the very existence of racial dis­crimination in lending is only plausible be­cause of the misinterpretation of the avail­able data. The finding by the FederalReserve Bank of Boston that, in 1991, 15.0percent ofAsian, 17.3 percent ofwhite, 26.6percent of Hispanic, and 37.6 percent ofblack applicants for mortgage loans weredenied credit is taken by regulators as proofof such discrimination. 3 Whether it is or not,however, depends on a number of factorswhich such summary statistics are incapableof revealing. Unless the members of each,of these groups possessed identical levelsof such characteristics relevant to credit­worthiness as income, net worth, employ­ment stability, and quality of the collateralthey can post as security for the loan, toname a few, the numeric discrepancies men­tioned above provide but the flimsiest ofcircumstantial evidence regarding the exis­tence of discrimination.

Those studies which have taken suchfactors into account have discovered thatAsians, whites, Hispanics, and blacks withsimilar levels ofcredit-worthiness do indeedhave similar rejection rates. A study oflending behavior at a Detroit-area bankwhich controlled for factors related to cred­it-worthiness found no correlation betweenone's likelihood of having his mortgageapplication approved and one's race.4 Eventhe study conducted by the Federal ReserveBank of Boston, which has been held bymany as evidence of widespread discrimi­nation, shows that taking credit-worthinessinto account reduces the differences in re­jection rates among racial groups. Its au­thor, Alicia Munnell, has conceded that herstudy does not prove discrimination.5

Default RatesIf any statistic could shed some light on

the presence or absence of discriminationamong various ethnic groups, it would bethe relative default rates among thosegroups. If lenders both made loans only onnon-discriminatory profitability criteria andwere able to avoid systematic errors, defaultrates would be identical for all groups. As amatter of fact, data cited by Ms. Munnellestablishes the absence of any statisticalrelationship between race and defaultrates. 6 Any fair-minded observer wouldhave to conclude from this evidence thatlending discrimination, if it exists at all, is anon-problem. Indeed, the very regulatorscharged with enforcing Community Rein­vestment Act guidelines have rated nearly90 percent of commercial banks as "satis­factory" or "outstanding" regarding theirfair lending records.7

Not only are the numbers incapable ofsupporting the charge of lending discrimi­nation, but so are theoretical consider­ations. To the extent that loan officers'incomes are based on the number and thevalue of the loans they generate, indulgingwhatever prejudices they may have againstmembers of other races who in point of factare fully qualified for loans would be a priceyindulgence indeed.8 Furthermore, as long assuch prejudices were not acted upon by alllenders, any qualified applicant turned downby one lender because of his race wouldrepresent a profit opportunity for thoselenders not blinded by prejudice.

It should be noted that those who single­mindedly seek to find discrimination arenot deterred by anything as pedestrian asthe absence of evidence or logic on theirside. Thus, Richard F. Syron, President ofthe Federal Reserve Bank of Boston, whilerealizing that loan rejection rates have moreto do with weak credit histories than withrace, nevertheless exhorts lenders and reg­ulators to stop asking if there is a problemand begin to workto solve it.9 Alicia Mun­nell continues to insist that lending discrim­ination occurs even though she had admittedthat neither she nor anyone else has any

LENDING DISCRIMINATION: THE UNENDING SEARCH 261

evidence of it. tO Indeed, some regulators,when they can't find discrimination, arestill not satisfied. Federal Reserve BoardGovernor Lawrence Lindsey, for instance,sought to prevent First Interstate Bancorpfrom acquiring another bank, not becausethere was any evidence that it discrimi­nated, but because he did not think thatit worked aggressively enough to makemortgage loans in particular low-incomeand minority areas. ll Atlanta's DecaturFederal Savings & Loan was put through thewringer for not advertising in black mediaand not giving special treatment to blackborrowers, specifically not making loansat below-market rates to black borrowerswho did not qualify by· traditional bankingcriteria. 12

Mencken Was RightAs Mencken realized, regulators would

not be so hell-bent on finding problemsunless they were itching to tryout their(invariably counterproductive) pet solutionson them. One preferred solution is to foist onlenders the same types of affirmative actionrequirements which become so much a partof the business landscape. Regulators' abil­ity to withhold approval of new branches oracquisitions until their mandates are com­plied with in full is a potent threat indeed.

Shawmut Bank, New England's thirdlargest banking company, knows by painfulexperiencejust how effective it is. The bankhas seen its efforts to expand through ac­quisition of other banks, a virtual necessityin today's fiercely competitive environ­ment, halted abruptly not because it hasbeen convicted of, or even indicted for anyviolation of any law, but merely because ofsuspicion that Shawmut may be guilty oflending bias, which is being investigated bythe Justice Department. 13 Until the banks'officials comply with the commands of reg­ulators, they will remain at a competitivedisadvantage. Some of the actions whichthey have taken in an effort to placate thepowers-that-be include requiring lowerdown payments of certain low-income ap­plicants, earmarking $25 million for appli-

cants whose unstable employment historieswould not qualify for loans under traditionalstandards, and paying $100,000 to a left­wing community activist group which onewould expect to otherwise make furtheraccusations of discrimination. 14 Similarpressures forced Decatur Federal to "payheavy fines, institute lending quotas, paybonuses to people who didn't qualify formortgages, hold racial brainwashing ses­sions for employees, and pay a hefty ransomto liberal community groups." 15

Another proposed "solution," while lesspunitive, may set an even worse precedent.This is the Community Development Bank,(CDB) whose mission is to "stimulate theeconomy in areas where other bankers areloath to lend. ,,16 The CDB is modeled onsome private institutions which already ex­ist-although these generally enjoy somesubsidy either from the government or pri­vate foundations. (In any case, they havesufficient private capital invested that mustseek out only the credit-worthy.) Govern­ment CDBs, on the other hand, are likelysimply to depend far more on political cri­teria and to end up making mostly uneco­nomic loans. Critics hold up the federalFarm Credit System, which required $4billion of government funds to cover thelosses it incurred on agricultural loans in theearly 1980s, as an example of the likely fateof these CDBs. 17 Of course, given thatcredit, as are all economic goods, is scarce,if the government makes loans to those whofail to meet traditional qualification criteria,it must be taking credit away from those whodo meet them. Thus, it diverts credit fromthose more able to repay it to those less ableto do so.

Ultimately, all of these proposed solu­tions constitute an attack on the rationaleconomic calculation which Ludwig vonMises identified as the sine qua non of themarket economy. Each of these measuresreplaces calculations based on expectedprofits and losses with those based on po­litical criteria. Furthermore, such actionsalso erode the rights of property owners,specifically the right to use their propertywhere it offers the greatest potential for gain.

262 THE FREEMAN • MAY 1994

What the government has been doing tolenders is not an isolated case. Governmentattempts to suppress decisions based on theprofit motive in the name of some unattain­able notion of fairness or equality are quitewidespread in the United States today. Theinsurance industry has also come underattack for alleged red-lining. Communityratings statutes in a number of states haveprevented health insurers from "discrimi­nating" between good and bad risks. TheClinton Administration and several keyCongressmen are now considering extend­ing the Community Reinvestment Act tocover mutual funds and other financial in­stitutions. 18 Even the use of informationregarding prospective employees has comeunder attack by our courts, with the bizarrelegal principle of "compelled self-publica­tion," under which your telling a prospec­tive employer the official reason why youwere fired by a previous employer, givesyou standing to sue that previous employerfor slander. 19 These examples are but the tipof the iceberg. And if our country does notshift course soon, that iceberg is likely tosink the Good Ship Capitalism. D

1. This act includes among its prohibitions a bank's refusalto lend money to welfare recipients.

2. Statement by John P. LaWare, Chairman, FederalFinancial Institutions Examination Council and Member,

board ofGovernors of the Federal Reserve System, before theCommittee on Banking, Housing, and Urban Affairs, U.S.Senate, February 24, 1993, Federal Reserve Bulletin, April1993, p. 194.

3. Peter Brimelow and Leslie Spencer, "The HiddenClue," Forbes, January 4, 1993, p. 48.

4. Jonathan Chait, "Bad Examples," Reason, December1993, p. 58.

5. Brimelow and Spencer.6. Ibid.7. Dean Foust with Kelley Holland, "Taking A Sharper

Look at Bank Examiners," Business Week, April 19, 1993,p.99.

8. Jack M. Guttentag, "Most Lenders Would Rather ProfitThan Discriminate," American Banker 158, January 6, 1992,p.4.

9. "Statement of Richard F. Syron, President, FederalReserve Bank of Boston, before the Committee on Banking,Housing, and Urban Affairs, U.S. Senate, February 24, 1993,"Federal Reserve Bulletin, April 1993, p. 314.

10. Brimelow and Spencer.11. Kenneth H. Bacon and Suzanne Alexander Ryan,

"Shawmut Decision Shows Fed's Division over Adequacy ofFair-Lending Records," Wall Street Journal, November 22,1993, p. A4.

12. Llewellyn Rockwell, Jr., "Fact," Forbes, Septem­ber 27, 1993, p. 86.

13. Kenneth H. Bacon and Gary Putka, "Shawmut's Planfor Acquisition Rejected by Fed," Wall Street Journal, No­vember 16, 1993, p. A2.

14. Kenneth H. Bacon and John R. Wilke, "Fed Gives BiasLaw New Clout As It Blocks a Bank Acquisition," Wall StreetJournal, November 17, 1993, pp. Al and A9.

15. Llewellyn Rockwell, Jr., "Nader Aim at Banks­Unsafe at Any Rate?" The Washington Times, August 24,1993, p. F2. The fines in question amount to $1 million, paid to48 black applicants who were denied loans.

16. Dean Foust with David Greising, "Banks That Believein Many Towns Called Hope," Business Week, November 30,1992, p. 89.

17. Foust and Greising, p. 90.18. Janet Novack, "What's Ahead for Business," Forbes,

October 25, 1993, p. 39.19. Junda Woo, "Quirky Slander Actions Threaten Em­

ployers," The Wall Street Journal, November 26, 1993, p. 81.

Bankers and Regulators

The current u.s. financial structure, in despair and disrepute, is thelogical outcome of financial thought that places legislators and reg­ulators in the center of things. It is a precarious system that builds

-on government insurance and government guarantees and, in finalanalysis, depends on monopoly money and legal tender force. It is a dis­credited system that is inflicting immeasurable harm on many people.

The seventeen essays in this volume, all selected from earlier issues ofThe Freeman, examine in detail the failure of regulation and offer hopefor a return to sound banking. The collection includes, among ot~ers,

articles by Hans F. Sennholz, Ken S. Ewert, E.C. Pasour, Jr., ChristopherCulp, Richard M. Salsman, and Lawrence H. White.

176 pages, indexed, $14.95 paperback

Correction, Please!

The Mother ofAll Myths"Analysts watch consumer spendingclosely because it represents roughlytwo-thirds of all economic activity."

-Associated Press(October 30, 1993)

I n the early 1990s, in the depths of therecession, Range Rover, a British maker

of sports-utility vehicles, ran an unusual adin USA Today. It announced its formula forending the downturn: "Buy Something." Ofcourse, Range Rover wanted you to buytheir car, but in any case, purchase some­thing. "Buy a microwave, a basset hound,theater tickets, a Tootsie Roll, something."Anything to get the economy moving again.

In late 1991 , Federal Reserve chairmanAlan Greenspan suggested that the eco­nomic contraction was caused in part byretrenchment in consumer and businessdebt during the early 1990s. The implicationis that the economy could be on its way torecovery if only consumers and businesswould start spending again, even if it meantspending beyond their means.

Mark Skousen is editor-in-chief of Forecasts &Strategies, one of the largest investment news­letters in the country, adjunct professor of eco­nomics and finance at Rollins College in WinterPark, Florida, and author of fourteen books,including The Structure of Production and Eco­nomics on Trial. For information on his news­letter and books, call Phillips Publishing Inc., at(800) 777-5005 or (301) 340-2100.

by Mark Skousen

Falling Under theKeynesian Spell

For decades, members of the media andthe financial community have fallen underthe Keynesian spell, emphasizing the im­portance of demand over supply, of deficitsover surpluses, of debt over equity, and ofconsumption over saving. For them, the keyto prosperity is found in encouraging a highlevel of consumption, even if it means goingdeeply into debt. The establishment press isso enamored with consumption that it high­lights monthly changes in consumer spend­ing, consumer debt, consumer prices, andsurveys ofconsumer confidence, looking forany encouraging signs. After all, doesn'tconsumer spending represent two thirds oftotal economic activity?

Pro-Consumption MischiefWell, no, it doesn't. The idea that con­

sumption is the largest sector of the econ­omy is based on a grave misreading of GrossDomestic Product (GDP).

According to 1993 data, consumption ex­penditures represents 66.1 percent of GDP,or approximately two thirds. Governmentpurchases are second at 18.3 percent, andinvestment, which includes residentialhousing, comes in third at 15.6 percent.Business fixed investment is only 11.5 per­cent of GDP. By making the standardassumption that GDP measures total eco­nomic activity, the unsophisticated journal-

263

264 THE FREEMAN. MAY 1994

ist has concluded that consumer and gov­ernment spending are by far the mostimportant sectors of the economy, whilebusiness investment rates a poor third.

Much mischief in government policy hasarisen in consequence of this misinterpre­tation of national income statistics. Manylawmakers have passed legislation encour­aging consumption at the expense of invest­ment. At the same time, they see no reasonto cut capital gains taxes or corporate in­come taxes, since the business investmentsector appears to be relatively small andunimportant.

The Source of the FallacyWhat's gone awry? The source of the

error is that GDP is not a measure of totaleconomic activity. As anyone who hastaken Econ 101 knows, GDP measures thepurchase of final goods and services only.GDP deliberately leaves out spending bybusiness in all the intermediate stages ofproduction before the retail market. It doesnot include spending (what economists call"working capital") by natural resourcecompanies, manufacturers, and wholesal­ers. Obviously, financial journalists need arefresher course in economics.

In sum, GDP does not measure totalspending in the U.S. economy, only finalretail purchases by consumers, business,and government.

Introducing a MoreAccurate Statistic

To determine total economic activity, weneed to look at Gross Domestic Output(GDO), a statistic I developed in my book,The Structure of Production (New YorkUniversity Press, 1990). It measures grossexpenditures at all stages of production,from raw commodities to finished products.Based on the input-output data prepared bythe U.S. Commerce Department, I estimatethat consumption expenditures actually rep­resent only about 33 percent, or one third, ofeconomic activity in the United States, nottwo thirds as is commonly reported. More-

over, gross investment by business repre­sents the majority (54 percent) of totalspending in the economy if you add togethergross intermediate expenditures (' 'workingcapital"), business fixed investment, andresidential housing. Government purchasesrepresent the remainder, or 13 percent.

This new statistic, GDO, provides a morecomplete indicator of total economic activ­ity. As such, it suggests a far differentinterpretation of how the world works. Infact, we come to the opposite conclusion:Investment is far more important than con­sumption. The U.S. economy, like all econ­omies, is investment-driven, not consump­tion-driven. Consumption is ultimately theeffect, not the cause, of a nation's prosperity.

An individual becomes wealthy by pro­ducing and investing first, then increasinghis consumption-not the other way around.To go on a spending spree using credit cardsor other forms of debt may initially give theimpression ofa higher standard ofliving, buteventually the individual must pay the piperor face bankruptcy. The same principleapplies to a nation as a whole.

"But," retort the big spenders, "if con­sumers stop buying, business will eventu­ally stop producing." Granted, the wholepurpose of production is eventual consump­tion. Per capita consumption is usually areasonable measure of national wellbeing,and business must be responsive to con­sumer needs. But the real question is, howdo we improve our standard ofliving? Thereis only one proven way, and that is by raisingthe amount of capital invested per worker.Economic progress is achieved when busi­ness increases its profits by providing cus­tomers· with better products at cheaperprices. That requires a direct investment incapital. Those who postpone consumptionnow and invest their savings productivelywill be rewarded with higher consumptionlater.

Consumer Spending Not aLeading Indicator

If the U.S. economy is consumption­driven, why aren't retail sales a leading in-

dicator of economic activity? Of the elevencomponents in the D.S. Department ofCommerce's Index of Leading Indicators,only one, the Consumer Expectations In­dex, is directly linked to future retail sales.The other leading indicators are almostentirely related to capital investment andearlier stages of production, such as manu­facturers' orders, sensitive materials'prices, contracts for plant and equipment,and stock prices.

Retail sales are in reality an unreliableindicator of where the economy and thestock market are headed. Industrial outputis a much better forecaster. And, contrary towhat the national media often reports, retailsales are relatively stable compared to in­dustrial production, just as, consumer pricesare nowhere near as volatile as commodityprices. Financial analysts seeking to pin­point changes in the direction of the econ­omy and the stock market will be disap­pointed if they rely entirely on retail salesas a guide.

The Crisis in Productivityand Investment

Stimulating consumer spending in theshort run will undoubtedly encourage somelines of investment. If people go on a buyingspree at a local grocery store or mall,merchants and their suppliers will see theirprofits go up. But the consumer spendingbinge will do little or nothing to construct abridge, build a hospital, pay for a researchprogram to cure cancer, or provide fundsfor a new invention or a new productionprocess. Only a higher level of saving will dothat. Thus, in nations following Keynesianpro-consumption policies, it is not surpris­ing to see luxurious retail stores and mallsalong side dilapidated roads and infrastruc-

THE MOTHER OF ALL MYTHS 265

ture. Their consumption/investment ratiois systematically out of balance. PeterDrucker chastises the United States andother Keynesian industrial nations for a"crisis in productivity and capital forma­tion" and "underinvesting on a massivescale. ,,1 The current administration hasdone little to reverse this trend.

Saving, investing, and capital formationare the principal ingredients of economicgrowth. Countries with the highest growthrates (most recently in Southeast Asia andLatin America) are those that encouragesaving and investing, i.e., investing in newproduction processes, education, technol­ogy, and labor-saving devices. Such invest­ing in turn results in better consumer prod­ucts at lower prices. They do not seek toartificially promote consumption at the ex­pense of saving. Stimulating the economythrough excessive consumption or wastefulgovernment programs may provide artificialrecovery in the short run, but cannot lead togenuine prosperity in the long run.

Dsing our new statistic, ODO, we now seethat cutting taxes on business and invest­ments (interest, dividends, and capitalgains) will have a dramatically favorableeffect, far more than previously thought.When business investment represents 54percent of the economy, not 15 percent,reducing investment taxes can have a mul­tiplying impact on the nation's economy.

In sum, it is capital investment, not con­sumer spending, that ultimately drives theeconomy. As economist Ludwig von Misesdeclared forty years ago, "Progressive cap­ital accumulation results in perpetual eco­nomic betterment. ,,2 0

1. Peter Drucker, Toward the Next Economics and OtherEssays (Harper & Row, 1981), p. 8.

2. Ludwig von Mises, "Capital Supply and AmericanProsperity," Planning for Freedom, 4th ed. (Libertarian Press,1980), p. 197.

266

BOOKSMonetary Policy in the United States:An Intellectual and Institutional History

by Richard TimberlakeUniversity of Chicago Press. 1993 • 502 +xxv pages. $28.95 paper. $65.00 cloth

Reviewed by Steven Horwitz

Both the public and most economistshave generally agreed that of all the

sectors of the economy, the production ofmoney and financial services requires asignificant amount of government interven­tion in order to work "properly." Thecommon view is that, more than any otherindustry, supposed laissez-faire has failedconsistently in banking and has been re­sponsible for various crises, panics, anddifficulties throughout American history.This trend has begun to reverse itself in thelast twenty years, however, as more econ­omists and bankers are beginning to under­stand how regulations can destabilize thebanking system and how various free­market alternatives might provide monetaryorder.

Richard Timberlake's study is sure topush this debate to the next level. In a com­prehensive and readable book, he carefullyscours the history of American bankingfrom Colonial times to the early 1990s todocument the increase in government inter­vention and its deleterious effects on boththe banking industry and the economy morebroadly. His book is a perfect complementto the more technical and statistical work ofMilton Friedman and Anna Schwartz andwill likely, like their work, be considered aclassic of monetary history.

Two themes form the backbone of Tim­berlake's historical story. The first is theway in which increased government inter­vention has occurred not because laissez­faire has failed, but because various inter­ventions served the revenue-raising inter-

ests of the political sector. Timberlake care­fully documents how each of thoseinterventions led to further crises and fail­ures, resulting in calls for even more gov­ernment regulation and more problemsdown the road. Although he does not men­tion it explicitly, the story he tells is a perfecthistorical example of what Ludwig vonMises called the "logic ofinterventionism. "

Timberlake's second theme is that thisincreasing encroachment by governmenthas moved us away from the rule of law inthe monetary realm, to the rule of all-too­fallible humans. Each successive interven­tion undermined the Constitution's attemptsto prevent government from doing any morethan stipulating the gold or silver content ofthe medium of exchange, leaving the pro­duction of money to the private sector. Asearlier systems and now the Federal Re­serve System have led to increased govern­ment power, the quantity of money and therange of financial services available havebecome the products of intentional human­designed policy, rather than the more auto­matic and unintended consequences of themarket.

The danger in this shift is that whenhuman policymakers are unable to providerational solutions, they will turn to thosepolicies that work to their own self-interest,or the interests of the political actors towhom they answer. As Timberlake's histor­ical story reveals, one of the primary pur­poses of various bank regulations and othergovernment powers has been to facilitategrowing government deficits and the vote­seeking of elected officials.

For example, one of the regulations ofthe National Banking System (1863-1914)forced banks to purchase federal govern­ment bonds to serve as collateral for thecurrency they created. This law providedthe federal government with a captive mar­ket for its bonds, both to finance the CivilWar and other government expenditures.The result was a lack of flexibility in thecurrency supply leading in turn to the peri­odic panics during the late 1800s and early1900s. Many would ascribe these crises tothe failure of the market, but as Timberlake

and others have demonstrated, the prob­lems of the system were the result of mis­taken, and politically self-interested, regu­lations.

A second example Timberlake notes is theFed's acquisition of open market powers inthe mid-1930s. The Fed increases the supplyofbank reserves by buying government debtin the open market. Having this powerenables the Fed to purchase, ifit so chooses,any level of debt Congress creates. Withoutsuch powers, debt creation is limited to theamount the public willingly purchases. Withopen market operations, the Fed can alwaysbuy any amount of debt the public does notvoluntarily wish to hold. Congress was morethan happy to give the Fed open marketpowers so that it could finance the debt ofboth the New Deal and World War II.

These are only two examples of the kindof historical evidence that Timberlake hasdocumented. Some ofhis best work is on the1960-1990 period, particularly the inflationof the late '70s. He also effectively demol­ishes the myth that monetarism was triedand failed in the 1979-82 period as well asun"masking the confusion that underlay mostFed policy since World War II.

Of particular importance is his discussionof the final nail in the coffin of the goldstandard-the closing of the internationalgold window in 1971. Franklin Roosevelthad ended the American public's ability toexchange Federal Reserve Notes for gold in1934, but foreign holders of U.S. currencycould redeem them for gold at a stipulatedprice. This process put some limits on theFed's ability to increase the money supply.However, as Timberlake argues, PresidentJohnson's decision to finance the VietnamWar and the Great Society through infla­tion forced the end of even internationalredemption.

As the money supply grew in the mid andlate 1960s, more foreign recipients of U.S.dollars began to return them to the Fed,leading to a significant outflow of gold.Rather than lose the gold or reduce inflation,President Nixon ended international re­demption in 1971. Since then'the U.s. dollarhas been a complete fiat currency. Once

267

again, the spending proclivities of the fed­eral government drove monetary policy indirections that benefited the political pro­cess at the expense of the general public.

Timberlake's book is sure to quickly be­come a genuine economic classic. Unlikemany such books, however, it is readable bythe nonspecialist and ofimportant relevancefor current events. As Washington is debat­ing the consolidation of bank regulatoryagencies, and the possibility of a new reg­ulatory push, a careful examination of thehistory of bank regulations, and their role incausing monetary disorder and economicdisaster, could not be more important. Rich­ard Timberlake has given us just such ananalysis, and a masterful one at that. DDr. Horwitz is an assistant professor ofeconom­ics and Flora Irene Eggleston Faculty Chair atSt. Lawrence University, Canton, New York.

Cities without Suburbs

by David RuskJohns Hopkins University Press, A WoodrowWilson Center Book, 1993 • 130 pages. $13.95paper. $29.00 cloth

Reviewed by Dean Stansel

W atch out, suburbanites.New, multibillion-dollar federal

program proposed to solve America's urbancrisis by putting public housing projects inthe suburbs.

Though we haven't seen that headline yet,it's not because the idea does not exist. Fordecades America's cities have been in de­cline, in mocking defiance of the explosionof new government-spending programs de­signed to save them. Nevertheless, manyurban advocates still seem to think someelusive new government program will mi­raculously reverse the cities' decline.

One such person is David Rusk, formermayor of Albuquerque and the author of anew book entitled Cities without Suburbs.Rusk says the solution to the urban crisis liesin "regional governance." That is, he wantscities to annex their thriving suburbs-with

268 THE FREEMAN • MAY 1994

or without their consent-or consolidatewith their counties, thus creating "citieswithout suburbs." According to Rusk, thatwill transform declining cities into boomingcities by forcing suburbanites to pay whathe feels is their "fair share" of the costs ofurban decline.

Though some cities-most notably,Nashville, Indianapolis, and Jacksonville­have successfully annexed their suburbs orconsolidated with their counties, the politi­cal and legal obstacles are usually prohibi­tive. So Rusk suggests other ways-short ofsuburban annexation or city-county consol­idation-to reduce the racial and economicsegregation that he thinks is "the heart ofAmerica's 'urban problem.' "

One such plan would put public housingprojects in the suburbs. Rusk argues thatthis would integrate the underclass intomainstream society, exposing them to thepositive role models therein.

However, having subsidized housing intheir neighborhoods is nearly as objection­able to most suburbanites as is annexation.Therefore, Rusk suggests the provision offederal "incentives" to get suburbs to co­operate. That's the catch. (Even Rusk ad­mits that " 'incentives' is a euphemism forfederal money.' ') According to Rusk, theso-called "incentives" would cost federaltaxpayers $23 billion a year.

Though touted as a new approach, Rusk'sproposal is just another big spending pro­gram. To make matters worse, his expen­sive proposals have support in high places.Speaking at a Spring 1993 conference onurban policy sponsored by PresidentClinton's favorite think tank (the Progres­sive Policy Institute), Secretary of Housingand Urban Development Henry Cisnerosexplicitly endorsed Rusk's proposal, say­ing, "If we cannot open up suburban com­munities to subsidized housing. . . ,we willnot succeed."

Since then, Cisneros has proposed a mas­sive expansion of' 'Moving to Opportunity"(MTO), a program created by his predeces­sor Jack Kemp. MTO will be tested in sixmajor cities over the next two years, moving6,200 households from inner-city public

housing units to suburban ones, at a cost of$234 million.

While Rusk contends that "in any con­stitutional sense, the federal governmenthas no role" to play, he advocates imple-.menting these types of programs througheither the provision of federal dollars or"new requirements on federal grants in aid."

In further contradiction, Rusk calls forlarger, more centralized governments, whilegushing that' 'in many ways the belief that'smaller government is better government'resonates emotionally within me" (empha­sis added). He even muses that larger gov­ernment "may be less efficient and lessresponsive as a deliverer of services thansmaller governments."

Rusk is correct about that. Studies haveconsistently shown that large, centralizedgovernments have significantly higher unitcosts of providing public services thansmall, decentralized governments. Never­theless, Rusk insists that larger, more cen­tralized governments are the answer, listingas "key goals: unification ofthe tax base andcentralization of planning and zoning au­thority . . . under a dominant local govern­ment" (emphasis added).

Only in America do you still hear argu­ments such as Rusk's for larger, more cen­tralized government. The last few yearshave witnessed a worldwide revolution.People have been throwing off the yoke ofbig, centralized government with rampantenthusiasm. Rusk ignores that reality, orperhaps he was too busy researching andwriting his book to notice.

Rusk states that his primary motivation increating cities without suburbs is the elim­ination of economic and racial segregation.He cites statistic after statistic to "prove"that cities that have annexed their suburbsare less segregated than those that have not.But what does that really mean? Few woulddisagree that redrawing the borders of acentral city to include its suburbs will createa new "city" that has a greater proportionof middle- and upper-class whites than theold central city. Thus, by definition, Rusk'ssolution does indeed reduce measured seg­regation in "the city."

However, isn't that just semantics? Afterall, "the city" is no longer the central city.It is now the central city plus its suburbs.There is no reason to believe that creatingcities without suburbs will in any way re­duce the racial and economic disparitiesbetween the central city and what used to bethe suburbs. Rusk's so-called solution towhat he sees as the "heart of the urbanproblem" -racial and economic segrega­tion-is, to be kind, a sham.

As Rusk himself says, his real goal increating cities without suburbs is "tapping abroader tax base." He further states that"sustained success requires . . . movingdollars from relatively wealthy suburbangovernments to poorer city governments."Although Rusk uses the term "suburbangovernments," it is suburban taxpayerswho will take the hit. Could Rusk's rhetor­ical chicanery be intended to camouflage thefact that his plan is simply a Robin Hood­esque effort to take from the suburbanitesand give to the city dwellers? And whatabout the phrase "moving dollars"? Mostpeople would call that stealing.

Furthermore, Rusk's proposals are im­bued with the traditional left-wing notionthat the solution to the problems of the innercity (or any problem for that matter) is moregovernment spending. However, that argu­ment rests on the assumption that the citiessimply have not been spending enough.Nothing could be further from the truth.

In 1960 the average city government spent$470 per resident (in inflation-adjusted dol­lars). By 1991 that amount had more thandoubled, rising to $1,070. Few city residentswould argue that the quality of municipalservices has doubled. Most would say justthe opposite.

Twenty-five years ago Harvard's JohnKenneth Galbraith said that there was noth­ing wrong with New York City that doublingthe city's budget wouldn't solve. Appar­ently, New York City's leaders took him toheart; since then their budget has nearlytripled (in real terms). Surely, no one be­lieves that New York City is in better shapetoday than it was twenty-five years ago. Infact, the recent efforts of the boroughs of

BOOKS 269

Queens and Staten Island to secede fromthe city are damning evidence to the con­trary.

Rusk admits that" cities, in the battle overmiddle-class America, have lost to theirsuburbs." To many, the central question ofthe "urban crisis" is why. Why are Amer­icans voting with their feet by fleeing theinner cities in such large numbers?

Rusk seems to realize that higher taxesand spending are part ofthe problem, not thesolution, saying, "Many middle-class fam­ilies ... went to the suburbs to flee high citytaxes" (emphasis added). However, Ruskthen goes on to say, "Admittedly, somefactors in suburban growth in the earlypostwar decades were nonracial ... [but]racially motivated 'White flight' was unde­niably a major factor in suburban growth"(emphasis added).

While racial prejudice certainly exists, theidea that it is a major factor in the decline ofAmerica's cities smacks of a conspiracytheory. Besides, it is no longer just whiteswho are fleeing the inner city; middle-classblacks have been leaving in droves as well.Does Rusk really contend that suburbanexiles from declining cities such as Oakland,New Orleans, and Birmingham are moreracist than their same-state neighbors in themore prosperous cities of San Diego, BatonRouge, and Mobile? Or could it be that thehigh tax burdens in declining cities-oftentwice as high as in booming cities-aresimply forcing middle-class Americans toflee to areas with lower taxes?

Many urban advocates argue that Amer­ica's large, declining cities cannot cut theirtaxes without slashing crucial municipalservices. However, one reason taxes are sohigh in those cities is that the per unit costof providing municipal services is oftentwice as high as in smaller cities.

The underlying problem is that most citygovernments are simply too big and central­ized. They are too far from the people theygovern. As a result, residents of large,centralized cities have relatively little abilityto influence their leaders and to control howwell their government is run. In contrast,public employee unions have substantial

270 THE FREEMAN • MAY 1994

influence in such cities. For example, inNew York City, some public employees getas many as 51 days off a year. That meansthey work the equivalent of a four-day workweek. Such generous spending of city tax­payers' dollars on members of public em­ployee unions is well documented in otherlarge cities as well. It is a major factordriving up the cost of providing municipalservices in large cities.

Rusk's solution would create more waste­ful centralized governments. Thus, the costof providing public services such as trashcollection and police protection in Rusk'scities without suburbs would be even higherthan it is now. Those higher costs wouldrequire still higher taxes.' Since tax hikescause residents and businesses to leave,Rusk's solution would only perpetuate thedownward spiral of America's cities. It isthe exact opposite of what should be done.Cities should move, instead, toward moredecentralized governments and seek to pri­vatize municipal services. That would en­able them to enact the pro-growth tax cutsnecessary to make the cities places wherethe middle class and businesses again wantto, and can afford to, live and work.

Ignoring that centralization leads to inef­ficiency and higher costs, and that taxeshave consequences, Rusk's "solution" tothe urban crisis is ultimately just an elabo­rately constructed house of cards. He failsto even consider the possibility that manysuburban businesses and residents, facedwith higher taxes after being annexed bytheir central city, would simply choose tomove farther and farther away from theinner city to avoid those tax hikes. PerhapsRusk plans to build a Berlin Wall around thenew cities without suburbs to ensure thatbusinesses, people, and capital cannot es­cape. Without such police-state restrictions,Rusk's proposal is doomed to failure. Hishouse of cards will inevitably come crashingdown.

Nevertheless, given the huge amount oftax dollars at stake and Rusk's powerfulsupporters, at a short 130 pages, Citieswithout Suburbs is a worthwhile read­especially for suburbanites. The proposals it

contains are a haunting harbinger of thingsto come.

If Rusk, Cisneros, and Clinton have theirway, we will all soon be living in citieswithout suburbs. So start forming yourgrassroots organizations now, suburban­ites. And hold onto your wallets. The taxman cometh. DMr. Stansel is a fiscal policy researcher at theCato Institute in Washington, D.C., and co­author ofa recent Cato study entitled "The MythofAmerica's Underfunded Cities."

The Fortune Encyclopedia ofEconomics: 141 Top EconomistsExplain the Theories, Mechanics,and Institutions of Money, Trade,and Marketsedited by David R. HendersonWarner Books, Inc.• 1993 • 876 pages.$49.95

Reviewed by Raymond J. Keating

I nitially, one might think that reviewing aneconomics encyclopedia would be an ar­

duous task-slogging through esoteric the­ories, statistical models, and academicprose. However, The Fortune Encyclopediaof Economics successfully dispels suchcommonly held concerns. The 157 essays inthis collection, as well as an appendix ofshort biographies on a variety of econo­mists, are well written, clear, and oftenlively. Considering the fact that economistsare not generally known as engaging writers,this amounts to nothing less than a momen­tous achievement for editor David R. Hend­erson.

No less of an achievement is the fact thatthis tome weighs in heavily with essentiallyfree-market views. With a few exceptions,the issues addressed in this encyclopediaare examined from a sound, market-basedperspective. Henderson has largely ban­ished hyperbole in favor of well-groundedeconomic reasoning.

This combination of style and substancemakes The Fortune Encyclopedia of Eco­nomics invaluable to a wide variety of read-

ers. For example, students and professorsshould find that this collection serves as anexcellent supplement to various texts andcourses in economics, while also as a reli­able desk-top reference book when re­searching and writing, or for those occa­sional moments when the mind falters and arefresher on certain issues is in order. Bothbusiness executives and government poli­cymakers also should find this volume agood resource in helping to sort through thejargon of economics as well as often con­flicting economic news reporting.

As for the topics addressed in this one­volume, oversized encyclopedia, the editorhas cut a wide swath through the economicsdiscipline. Included are such basic topics asefficiency, profits, opportunity cost, fiscalpolicy, investment, inflation, and propertyrights, as well as more specialized areas likeprivatization, deposit insurance, the goldstandard, recycling, natural gas regulation,public schools, and sportometrics. Whilesuch a book really is not designed to be readfrom cover to cover-but rather to serve asa reference or educational guide with eachessay standing alone-the format does allowone to read straight through if he so desired.In fact, it offers a much smoother read thanmany economics textbooks.

While the essays that stand out will varyfrom reader to reader, depending on one'sparticular interests, I found several worthmentioning here. Armen A. Alchian offers agood essay on how private property rights"protect individual liberty." Thomas W.Hazlett writes an interesting and informa­tive piece on apartheid and how it developedin South Africa. Deborah L. Walker andRobert Hessen supply good summary es­says on Austrian economics and capitalism,respectively. Also, Allan H. Meltzer's arti­cle on monetarism includes a good evalua­tion of recent monetary policy in GreatBritain. Supply-side economics is given fairtreatment by James D. Gwartney, as well asby Alan Reynolds in a piece focusing onmarginal tax rates. Also, William Niskanenpresents one of the more balanced views ofReaganomics that one is apt to find.

David Ranson's essay on inflation regis-

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ters as an outstanding piece, as he illustratesthat: "Inflation has tended to increase inperiods of slow growth or recession anddecrease in periods of expansion," -a fun­damental point missed by most economists.John Cogan offers an interesting essay onthe federal budget, noting that spendinggrowth accelerates the more decentralizedthe federal budget process.

The growing field of free-market environ­mentalism is introduced well by RichardStroup, while Jane S. Shaw supplies anessay on recycling that needs to be distrib­uted to any policymaker or elected officialdealing with the issue. In a similar vein, thePat Buchanans and Ross Perots of the worldshould be supplied with Alan Blinder's con­tribution on free trade. Individuals perpet­uating myths about so-called shortsighted­ness of American business and thedestructive effects of junk bonds need toread Steven L. Jones and Jeffry M. Netter'sarticle on efficient capital markets and GlennYago's piece onjunk bonds. Also ofnote areMark Casson's essay on entrepreneurship,George Gilder's piece on the computer in­dustry, John Chubb's overview of publicschools and educational choice, John Har­ing's contribution on telecommunications,as well as editor Henderson's essays on thetrue sources of economic growth in post­World War II Japan and Germany.

More disappointing are Blinder's attemptto defend Keynesian economics, James To­bin's archaic essay on monetary policy, andKevin D. Hoover's equally archaic articleon the Phillips Curve. In addition, Joseph J.Cordes' piece on capital-gains taxes offersa workmanlike analysis of the "lock-in"effect of high capital gains taxes, as well asthe effect of inflation on capital gains, butnothing substantial on such critical issues asthe effects of such taxes on incentives andthe trade-off between risks and potentialrewards.

On the whole, however, this is a stellarcollection of essays by some of the world'smost knowledgeable economists. While itmight seem strange to those who vieweconomics as a dismal science, a lucid,market-oriented encyclopedia of economics

272 THE FREEMAN • MAY 1994

is worth getting excited about. The FortuneEncyclopedia of Economics is an astound­ing feat. 0Mr. Keating is New York State Director ofCitizens for a Sound Economy.

Playing the Field

by Charles EuchnerThe Johns Hopkins University Press. 1993 •205 pp.• $24.95

Reviewed by Jeff A. Taylor

Cities across America are caught in aheadlong rush to land a professional

sports franchise. Five cities-Memphis,Jacksonville, St. Louis, Baltimore, andCharlotte-recently ended a competition toentice the National Football League intotheir towns. When it was over, the tab forpublic financing of playing fields hadclimbed into the hundreds of millions ofdollars. Charles Euchner, a political scienceprofessor at Holy Cross, provides insight onwhy cities do this and why it is a bad deal forlocal taxpayers.

Euchner has studied several cities' at­tempts to woo teams and finds much of thecompetition centers on which locality canprovide the biggest cut of public money toteam owners. Owners, in turn, make themost of this situation by actively pittingcities against one another with threats tomove the franchise to more lucrative envi­rons.

In 1988, the Chicago White Sox effec­tively used a threat to move to Florida to winpublic funding for a new baseball park builtliterally on top of the existing one. TheWhite Sox's spurned suitor, St. Petersburg,is stuck with an empty Suncoast Dome forwhich Euchner estimates local residents pay$7.7 million a year in debt service.

Euchner makes the case that franchiseowners have adroitly played upon officials'political fears of "losing" a franchise towin backing for stadium upgrades. The bigpayoff for the owners is control of stadiumskyboxes-Iuxury suites which can sell forhundreds of thousands of dollars apiece.

The Houston Astrodome originated the sky­box in 1965, but they now number in thehundreds for each new stadium built.

Euchner notes that if building stadiumswas such a good business venture, moreprivate entities would be willing to stepforward and build them. And in fact, wherethe facilities are privately owned cities earnmoney rather than spend it. The hugelysuccessful Dodger Stadium in Los Angelespays $400,000 a year in property taxes.

The oft-repeated mantra that sports fran­chises generate economic growth is alsodisputed by numerous studies collected byEuchner. One local official compared thedecision on NFL expansion to "whether ornot the railroad was coming to your town inthe Old West." But, as the evidence shows,filling a stadium eight times a year does nothave the same economic impact as a many­fold increase in transportation capacity. Bydefinition, dollars spent on sporting eventsare highly disposable and would likely bespent on other forms of entertainment­movies, plays, participatory sports-absentthe franchise. The difference is that all theeconomic activity doesn't occur on a singleday, at a single site.

Euchner also argues that when comparedto other forms of social spending, such asjob training, government subsidies forsports teams lag behind in generating areturn. However, that line of argument isdangerous: it could entice local officials tograft a "job training" element into theirstadium building plans rather than eschewthe endeavor outright. It also overlooks thecost of taking of resources from the privatesector in the first place.

There is every sign the frenzy for sportsfranchises is intensifying. The state of NewYork recently authorized funds to help com­munities keep and attract minor league base­ball teams while two Chicago suburbs nowspar over a farm team. Officials from everycity, town, and hamlet would do well tolisten to Euchner's warnings lest they getsucked into a game they cannot win. D

Jeff Taylor is National Political Reporter forEvans & Novak in Washington, D.C.