the

FreemanVOL. 30, NO.3 • MARCH 1980

Two Kinds of Sabotage Robert G. Anderson 131Market disruptions may be as destructive as terrorist bombs.

The Outcome of the Income Tax Scott W. Hahn 134A historical review of the graduated income tax and today's conse-quences in the U.S.

Government Regulation ofMass Media Communication Bettina Bien Greaves 141

Study questions for the national college debate topic.

How to Produce Human Beings P. Dean Russell 147It is human nature to respond to incentives and to penalties.

Inflation Ludwig von Mises 151To avoid the ravages of inflation requires withdrawing from govern-ment the power to create fiat money.

The Rotting Fabric of Trust Donald L. Kemmerer 164When government debases the currency, fear displaces trust andlowers the level of living.

Witch-Hunting for Robber Barons:The Standard Oil Story Lawrence W. Reed 166

A review of the monopoly charges and antitrust action againstStandard Oil.

The Invisible Hand-1980 William H. Peterson 176The profit motive is a great civilizer, peacefully and harmoniouslypromoting human interests and well-being.

Justice and Freedom Leslie Snyder 180"To live honestly, to hurt no one, to give every one his due."

Book Reviews: 189"Reflections on History" by Jacob Burckhardt.

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

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Some articles available as reprints at cost; state quantity desired. Permissiongranted to reprint any article from this issue, with appropriate credit except "Infla­tion" and "Justice and Freedom."

Robert G. Anderson

2 KINDS OFSABOTAGE

THE newspaper headline read, DamDestroyed,-Damages In Millions.The copy relates the horrifying de­tails: ~~A group of terrorists an­nounced responsibility for the de­struction of the hydro-electric dam... A bomb exploding deep in the damfractured the superstructure ... Thecollapsing dam released a huge wallof water into the valley below ...Within hours the lake was drainedcompletely . . . Power generationwas cut off instantly."

The stunned reader can clearlyrecognize the devastation inflictedon life and property from such anevil event. Bombs in the hand ofsaboteurs can wreak havoc. Thedamage, both seen and unseen, isapparent to all.

The physical destruction of thedam, the leveling of properties from

Mr. Anderson Is Executive Secretary of The Founda­tion for Economic Education.

the onslaught of water below thedam, the loss of both electricalpower and the lake itself are im­mediately discernible. Also recog­nized are the losses of future recrea­tional activities from the lake, irri­gation water for agriculture, and alow-cost source of electrical energy.The impact of the saboteur's bomb interms of capital destruction and alower material well being for manypeople angers all who read or hear ofsuch a violent act.

A public debate on the merits ofblowing up the dam would be a dis­cussion reserved for madmen. Theharm from such sabotage is directlyrelated to the exploding bomb. Auniversal condemnation of ter­rorism inevitably results becausethe devastation is so clearly recog­nized.

There is, however, another kind ofsabotage. Unlike the exploding

131

132 THE FREEMAN March

bomb at the dam, the damage fromthis sabotage is not as readily per­ceived. This second kind of sabotageis the tttime bomb" of governmentinterference in the marketplace.And unlike madmen· debating themerits of blowing up dams, practi­cally everyone participates in thisforum of economic sabotage by polit­ical manipulation.

The problem arises not from anabandonment of common sense insuch debates, but instead from afailure to grasp the destructive con­sequences that this governmenttttime bomb" can impose on life andproperty. If the economic conse­quences of government interventioncould be as clear and direct as thedamage from an exploding bomb, noproblem would exist. The greattragedy, however, is that the effectsof this latter bomb are rarely thatclear.

Windfall Profits Taxa Time Bomb

An excellent demonstration ofthis government tttime bomb"sabotaging the productivity of themarket has been witnessed in thepublic debates over the ttwindfallprofits tax." Political rhetoric seri­ously argued that the ttsolution" tothe energy crisis was yet anothertax. It was argued that such a taxwould ttsolve" the problem ofeconomic waste, while at the sametime lead us to greater socialjustice.

But what is argued and what istrue are rarely the same in politicstoday. The ttwindfall profits tax" is aclassic example of sabotage with agovernment tttime bomb." Andwhether this sabotage is an act ofevil or ignorance is irrelevant, for itin no way alters the outcome. Theresult of sabotage, intentional ormisguided, is always the same­devastation of life and property.

The Hwindfall profits tax" is awedge driven between consumersand suppliers of a scarce and valu:..able resource. It deprives thesuppliers of a part of the price con­sumers will pay for additional oil orother forms of energy. So it is a costof production that will have to becovered by higher prices if the addi­tional production is to be undertak­en. Gasoline prices and cigaretteprices have consistently demon­strated this principle in the pastwhenever new taxes were imposedupon them.

It is, of course, this very result ofincreasing product price that has ledto the advocating of a ttwindfall prof­its tax" as a means of curtailingenergy consumption. At least thereseems to be an understanding thatless of a good will be consumed athigher prices than at lower prices.But it's the other things that are notseen, and their harm to life andproperty, that is the force of sabo­tage to the marketplace.

It must never be forgotten that

1980 TWO KINDS OF SABOTAGE 133

the advancement of human welfareis accomplished by increasing theabundance of goods and services insociety. A curtailment of consump­tion by taxation can only discourageproduction and therefore lead to aworsening of economic conditions.Such taxation, therefore, is a directundermining of our economic well­being as it increases energy costsand makes energy ever more scarce.

The Function of Price

A distinction between rIsIngprices generated by increased taxesand rising prices resulting frommarket forces must be made. Risingprices generated by the marketforces ofsupply and demand performa valuable economic function. Thehigher market price makes con­sumption more costly and therebyconsumers will demand less. Cor­respondingly, producers receivingthese higher prices are motivated tosupply more of the good. Thesehigher prices, when market deter­mined, encourage more efficient useby consumers and greater produc­tive output by producers. This in­creased efficiency in the use of thehigher priced good by the consumerand the increased incentive to pro­duce more of the good by producersbrings about an ultimate improve­ment in total welfare.

When higher prices are generatedby taxation, however, the marketprocess is sabotaged. The signal gets

short-circuited. The demand by con­sumers falls in response to thehigher price, but the ~~tax wedge"prevents the signal from reachingthe producers. The result is a trans­fer of wealth, equal to the tax, fromthe consumers to the tax collector.

The public expenditure of thewealth collected by the tax invari­ably leads to the destruction of thatwealth. Either through its consump­tion in wasteful activities (synfuelplants) or its employment in gov­ernment regulation of future pro­duction (an energy department) thewealth collected by the tax is lost.The final result is a lower standardof living as the cost of living in­creases and productive activity de­clines.

The devastation to life and prop­erty from the destruction of the damwas visible to all. The evil of suchsabotage could be clearly seen. Butthe sabotage by government taxa­tion is never so visible. The unseendestruction of future prosperity bythe political consumption of thiswealth is every bit as devastating toour lives and property as the ter­rorist's bomb. But to see it requiresan understanding of the economicforces in the marketplace that directour lives.

An understanding of all of theeconomic consequences, both seenand unseen, is vital if we are toguard ourselves from this secondkind of sabotage. @

Scott W. Hahn1"-"'_·'f

" ,., 27i.,.·· ·8..:.·".·..·.. ~ "~N(J..W··T····'C"''''W";;r~:;;I:;; .•... 'eie,ot;;:;}(~{:>r

OF THE" ...,.•....•~~

The moment you abandon the cardi­nal principle of exacting from allindividuals the same proportion oftheir income or of their property, youare at sea without rudder or com­pass, and there is no amount of in­justice and folly you may not commit

-J. R. McCullough

* * *MORE than a century ago, a youngradical proposed the notion that thespecter of communism would inevi­tably rise up and conquer the world.However, several measures had tobe taken before this proletarianutopia could be ushered in. YoungMarx admitted that these necessarymeasures could not be broughtabout

except by means of despotic inroads onthe rights of property, and on the condi-

134

tions of bourgeois production; by meansof measures, therefore, which appeareconomically insufficient and untenable,but which, in the course of the move­ment, outstrip themselves, necessitatefurther inroads upon the old social order,and are unavoidable as a means of en­tirely revolutionizing the mode of pro­duction.

One of the most significant of theseproposed measures was the applica­tion of ((a heavy progressive or grad­uated income tax."

For more than half a century, ournation has been experimenting withsuch a tax. Objections would bestrenuously raised if one concludedthat these American social ((scien­tists" were consciously working toimplement Marxist ideology. Indeedsuch name calling usually producesmore heat than light. It would not beMr. Hahn, a recent graduate of Grove City Collegewhere he majored In economics, theology, and phi­losophy, Is now studying at Gordon-ConwellTheological Seminary.

THE OUTCOME OF THE INCOME TAX 135

improper, however, to examine theeffect that this graduated incometax has had upon the American soci­ety. For I believe that Marx wasright. This progressive tax trulyrepresents CC a despotic inroad" whichis cCeconomically insufficient and un­tenable," thus cCnecessitatingfurther inroads" upon the estab­lishment of American liberty.Therefore, it would be profitable todiscern how the graduated incometax has worked to subtly erode theeconomic, legal, and moral pillarsupon which our nation has longrested.

Attacks on Income and Economy

Especially as April fifteenthcomes and goes, taxpayers acrossthe country ache from the powerfulone-two combination of inflationand graduated taxation. Through­out the economy, there have ap­peared signs of a sustained rate ofdouble-digit inflation. This unfortu­nate reality, coupled with the cur­rently steep rates of the graduatedincome tax, works as a double poisonwhich is slowly crippling private en­terprise. This is no small cause forconcern. It is crucial that we per­ceive how this combination subtlyerodes our economic substance. Suchaccurate perception is the prerequi­site for proper action. And both aredesperately needed to prevent ourreeling economy from going downfor the count. Let us then briefly

examine the economic consequencesof our graduated income tax in thisage of inflation.

First of all, it is imperative thatwe recognize the current under­standing and explanation of infla­tion for what it is: an economicmyth. All are agreed that inflationis a dreadful evil which short­changes the moneyholders. (Themainstream economists even assentto this fact.) All the while, however,these economists wag their tonguesat the alleged cCcauses" of inflation:big business or labor unions. (Whichside is blamed usually depends, ofcourse, on the individual econo­mist's own special interests.)

The accusations of these econ­omists produce much legislationbut little change in the inflationrate. Well, that's not quite true; therate inevitably rises. So, everyonestruggles to stay one step ahead ofinflation. They hope to make a littleprofit or just break even. In order todo this, however, their money­income must steadily rise at orabove the present inflation rate.Such income increases are main­tained at no small cost to both laborand management alike. Social con­flict also inevitably rises.

The manner in which mainstreameconomists ignore the actual causeof this economic calamity is as baf­fling as it is reprehensible. The his­tory of economic thought must beunknown to these men, or else it has

136 THE FREEMAN March

been rewritten. Whatever the case,the issue will remain obscure untilit is clearly understood that the gov­ernment's expansion of the currencyand credit is truly the cause ofinfla­tion. (Actually, such expansionshould be identified as inflation,properly defined.) Thus, we wait forthe ebb of economic ignorance andwatch as moneyholders continue toget shortchanged in the meantime.

If this reality only affectedmoneyholdings, it would be badenough. However, insult is added toinjury when people fill out their in­come tax returns and discover thattheir brutal struggle to stay evenwith inflation has lifted them intohigher and more confiscatory ratesof taxation. If inflation were notharsh enough, the graduated rate ofincome tax serves only to rub saltinto their economic wounds. Suchabuse inescapably wreaks havoc onan individual's incentive to produce.

Inflation Speeds the Erosion

Actually, the inflation is notnecessary for the graduated incometax to effectively erode the nation'seconomic foundation. It only servesto expedite the process. But the gov­ernment betrays both its impatienceand immoral intention by continu­ally boosting the rate of inflation.Throughout the economy, thecrunch is felt by all. The whole time,the ravenous reapers of revenue inWashington clean up.

One might think that Americanshave always been subjected to thisannual headache. Clearly, such isnot the case. In fact, a Constitu­tional amendment was necessarybefore the graduated income taxcould be legally loosed upon theAmerican taxpayers in 1913. Thisfact alone serves to confirm one'ssuspicion that such a revenue mea­sure was far from the intention ofthe founding fathers. In fact, prior tothe amendment, it was commonlyunderstood that such a tax flew inthe face of the direct and propor­tioned taxes called for in the Con­stitution. Specifically, the progres­sive income tax marked a distinctbreak from the established principleof nondiscriminating uniformity intaxation. This principle had longbeen recognized as crucial to thebalance and stability of the Ameri­can market economy. It also wasunderstood to be a necessary meansto protect private property and sus­tain voluntary exchange.

The first century of American in­dependence saw the majority of rev­enues coming from tariffs andduties. Taxation, when it occurred,was slight and proportioned so as todistribute the tax burden impar­tially. This all changed in 1913,when the relatively young incometax was apportioned upon agraduated scale. The break fromtradition has been widening as thegraduated scale has become steeper.

1980 THE OUTCOME OF THE INCOME TAX 137

What was it that motivated such adistinctive break from the Constitu­tion? It would be profitable to brieflyexamine the arguments put forth infavor of the graduated scale.

~~The rich should pay a greaterproportion of taxes!" ~~Only such ameasure will actually bring aboutgreater equality of sacrifice!" Gen­erally speaking, these arguments infavor of the graduated income taxhave been exposed for what theyare: expressions ofegalitarian ideol­ogy. There were very few argumentswhich gained any credence ineconomic circles as providing ~~scien­

tific justification" for this socialdogma of reform.

Punishing Those Who HaveBeen Most Productive

One such case ostensibly provid­ing rational grounds was the argu­ment from ~~the decreasing marginalutility ofsuccessive acts ofconsump­tion."1 In crude terms, this theoryasserted that the rich entrepreneur,after making a cool million, wouldtend to value $10,000 less thanwould a typical American bread­winner. Such arguments, however,are rendered invalid by a properunderstanding of marginal utilityand subjective value. (This under­standing goes all the way back tothe last century when Boehm-

lFriedrich A. Hayek, The Constitution ofLiberty (South Bend, Ind.: Gateway Editions,1972), p. 309.

Bawerk exposed the inadequate dis­tinction between ~~use value" and(~exchange value."2) And recently,even the most dedicated econometri­cians have abandoned the hope ofbeing able to calculate and comparedifferent subjective utilities be­tween individuals. Such utilitymeasurements are in fact as unde­sirable as they are unscientific!Therefore, the ultimate foundationfor the graduated income tax seemsto have been the dogma of socialequality.

What, then, are the economic con­sequences of implementing this so­cial dogma by establishing a pro­gressive income tax? Quite simply,this graduated tax structure worksto burden the economy in generaland the most productive members inparticular. This is so beeause thereis a heavier, disproportionate taxupon those who earn the higher in­comes. And in a market economy,the more productive people makethe higher incomes. Thus, a greaterproportion ofcapital is diverted fromthe most productive channels of themarketplace. Instead of fundingproductive investments, this dispro­portionate amount of income willfind its way into the conspicuouslyconsumptive hands of the federalgovernment.

The graduated income tax will

2Eugen von Boehm-Bawerk, Capital andInterest (South Holland, TIL: Libertarian Press,1959), II, p. 160.

138 THE FREEMAN March

only serve to discourage initiativewhile dissolving incentive. For whatman would be overly anxious to poolcapital resources into a more pro­ductive combination if his profitswill only serve to lift him into asteeper tax bracket which offsets hisgains? Only the confident, daring, ormasochistic would be interested. Ithink we can then accurately con­clude that the graduated income taxis at work, even now, slowly con­suming our substance and erodingthe economic base of our indepen­dent republic. This parasite is asunnatural as it is unnecessary. HereAmericans have gravely erred. Wehave sold our birthright of libertyfor a mess of CCprogressive" pottage.

The Distortion of Disproportion

The market order has often beendepicted by its opponents as restingupon the competitive savagery ofthe law ofthe jungle, where only thestrong survive. An examination ofthis disparaging allusion is notwithin the scope of this essay.Whether or not this was ever true, itcould be more safely asserted that,with the dramatic reversal in socialthought in this past century, we arenow living in a society ensnarled inajungle of law. The irony of it all isdiscomforting. The turning pointcame with an exchange of legalprinciples.

For centuries, the conflict raged inEurope between serfs and lords,

peasants and monarchs. The issue atstake: the nature of the individualand his rights before the law. Theoutcome of the conflict marked adecisive victory for human liberty.cCThe equality of all men before thelaw" represented a most significantstep in the progress of justice.

What did it all mean for America?The founding fathers viewed thishard-fought acquisition as the legalpillar which would support the re­public. CCEquality before the law"meant that where an individualstood before the court, he could beassured that his guilt or innocencewould be determined without regardto his economic status. The lawwould judge all men impartially. AsBenjamin Franklin stated: cCThesame for every member of the soci­ety; and the poorest continues tohave an equal claim to them withthe most opulent, whatever differ­ence time, chance, or industry mayoccasion in their circumstances."

While the United States enjoyedlegal stability within its land, Euro­pean nations began toying with thenotion ofthe progressive income tax.They seemed disinterested in under­standing the legal struggle thattheir ancestors had undergone toestablish impartiality within therule of law. In 1891 Prussia beganits social experiment with thegraduated income tax. Many Ameri­cans and Europeans perceived thedanger. Dissent was raised by many

1980 THE OUTCOME OF THE INCOME TAX 139

who argued that ((the sacred princi­ple of equality before the law" was((the only barrier against the en-croachment on private property."3However, the argument fell on deafears as the progressive rate was tooinsignificant to render any force tothe argument against graduatedrates in principle.

In the meantime, American andBritish social reformers were sound­ing the battle cry for greater ((equal­ity of sacrifice." With the opposi­tion's arguments rendered ineffec­tive by the very smallness of the taxburden, these reformers did theirhomework. Within less than twentyyears of Prussia's experiment, GreatBritain succumbed to the progres­sive temptation.

America soon followed. Sowithin one generation, the legal les­sons learned and the advancesmade, after the centuries of strug­gle, were forgotten. It was felt that amajority, by the mere fact of itsnumerical strength, could apply aburden to the wealthier minoritywithout being affected itself by anequal load.

At that point, any remainder oflegal clarity was distorted beyondrecognition. Granted, the graduatedburden was seemingly light. How­ever, any attempt to impose a limitin the future would be arbitraryand, inevitably, only temporary.

3Hayek, op. cit., p. 310.

Thus, once the floodgate wasopened, there no longer existed anyprinciple which could prevent thetrickle from becoming a deluge.

So much was lost so quickly.Where the law had once beencharacterized by impartiality andpredictability, it was now an arbi­trary standard which was shifted bythe will of the majority. A man'srelation to the law was now greatlyinfluenced, if not determined, by hiseconomic status.

What can this produce but a con­flict society? Suppose, after all, oneman is taxed at one rate and hisneighbor at a lower rate. Now thisdoes not exactly create social har­mony; rather it breeds suspicion andenvy. So much of this confusion isbrought about by a progressive in­come tax.

The Oppression of Progression

The redistribution of income andproperty by progressive taxation isnow universally recognized as aproper means to attain socialjustice.It has been argued in this essay thatsuch a policy is at once economicallyunproductive and legally unjust. Inaddition, it is morally reprehensible,contradicting the principles whichestablished the nation upon thefoundation of freedom and justice.

These principles were formulatedby men who comprehended that anation had to be built and sustainedby individuals who understood both

140 THE FREEMAN

self-discipline and self-development.Anything less would not endure. Solong as their actions did not violatethe rights of another, men were freeto pursue happiness according to thedictates of their· own conscience.Hence, men learned that individualenterprise and self-reliance weregifts of God which were to be culti­vated and utilized. As they weredeveloped, the American peopleprospered.

In the midst of their prosperity, asubtle shift began to occur. Thechange was imperceptible at first.The results of the change, however,were most distinct. Perhaps theprosperity led to economic fatness,and fatness in turn led to moralflabbiness. Whatever the causes, theeffects remain with us. Where therewas once individual enterprise andself-reliance, there is now a growingdependence upon the state and fed­eral governments. Accompanyingthis shift came a growing distrustdirected toward the more productivemembers of the society.

This distrust has blossomed intoopen hostility. With the instru­mentality of the progressive taxstructure, this hostility has led to an

Frederic BastiatIDEAS ON

economic and legal assault upon thewealth ofthese productive members.Prior to 1913, such hostility surelyexisted. But once a disproportionatetax was permitted to burden somemore than others, the governmentthen became the means of economic,legal, and moral oppression.

When a discriminating incometax is allowed to become the meansof legal plunder, the spark of envywithin the classes of men is fannedinto a raging fire. No longer is thestate able to restrain the fruits ofcovetousness; now it works to pro­duce them. From the spark of envyto a conflagration of confiscation,the graduated income tax has led todemocratic tyranny.

The progressive income tax hascome upon us gradually. It beganwith a seemingly harmless maxi­mum rate of 7 per cent. Yet withinless than a generation, this rateclimbed higher than 90 per cent.Of course ((progressive" is a mis­nomer. ((Aggressive" might be closerto the truth. But alas, perhaps((regressive" would be best, as thisgraduated tax policy has takenAmerica back centuries-down theroad to serfdom. @

LIBERTY

THE STATE is and ought to be nothing whatever but community forceorganized, not to be an instrument of oppression and mutual plunderamong citizens, but, on the contrary, to guarantee to each his own, andto cause justice and security to reign.

Bettina Bien Greaves

GovernmentRegulation of

Mass MediaCommunication

PEACEFUL RELATIONS among peopledepend on voluntary social coopera­tion. And the success of social coop­eration rests in large part on ease ofcommunication. With the develop­ment, many millennia ago, of primi­tive language and, in time, of thewritten word, interpersonal com­munication and cooperation couldbegin. Much more sophisticated andefficient ways of relaying ideas andknowledge have since been de­veloped and communicationtechniques have changed radicallysince the time of footrunningcouriers and town criers.

Our modern mass media of com­munication have been made possibleby countless inventions and im-

Mrs. Greaves is a member of the senior staff of TheFoundation for Economic Education and the authorof the two-volume Basic Reader and Syllabus-FreeMarket Economics. For many years she has assem­bled material on national high school and collegedebate topics.

This essay deals with the SUbject of the currentcollege debate resolutions.

provements made by unnumberedindividuals over the years. Printingtechniques and the production ofpaper, books and newspapers havebeen considerably improved. To­day's very remarkable radio, TV,print and film industries are prod­ucts of extremely complicatedcapital-intensive electrical, electron­ic and photographic technologies andequipment. Readers, listeners andviewers everywhere want these me­chanical techniques of communica­tion to be continually improved stillmore. They also want the quality ofthe material published, produced andbroadcast to be upgraded so as tosatisfy better their own personalinterests.

1. What information do peoplewant to communicate and to havecommunicated to them? Onethinks first offof personal messages,letters and daily newspapers. Butcommunication involves much more

141

142 THE FREEMAN March

than that. Access to theoretical, fac­tual and historical knowledge ac­cumulated throughout the centuriesis most important. People also wantto learn what others have beendoing recently. They want reports oncurrent events with comments, oftencritical of specific persons and theiractions. They want to learn whattheir government is doing, or maydo. They are interested in politicalevents. They want to know aboutlaws, proposed or enacted, and aboutactual or likely administrative deci­sions. They want reports on judicialprocedures and court trials. Theywant to be able to petition theirgovernment. They want reports onbusiness, production, trade and othereconomic activities. They want toknow likely production costs, as wellas what prices producers and retail­ers are asking for goods and ser­vices. They want to hear weatherreports and forecasts. They want in­formation on new products and sci­entific developments. They want en­tertainment. They follow competi­tive sports closely. They want toknow about social events, as well asdisasters, accidents, crimes. Peoplenow rely on mass media communi­cation facilities for all these andmany other kinds of informationand entertainment.

2. What forms of communicationare used to transmit all this mate­rial? The traditional mass media of

communication are television, radio,print and/or film. But ideas, knowl­edge, factual data and entertain­ment are also transmitted by othermeans. Personal messages are de­livered by hand, through the mails,by word of mouth and by telephone.Printed messages and commentariesappear in books, newspapers, pam­phlets and on billboards. Radio andtelevision offer news of all kinds,sports and entertainment, films, fic­tional and documentary, interviewswith prominent personalities, ad­vertising and much more. Modernloud speakers, often with radioand/or TV hook-up, enable speakersto be heard by hundreds, thousands,even millions, from outdoor lectureplatforms or even a soap box, as wellas in theaters or auditoriums.

Although not usually classified ascommunications media, schools anduniversities are among the most im­portant means for transmitting fromone generation to another the vastbody of theoretical knowledge andfactual data accumulated over cen­turies. And businessmen everywherelook to daily prices and stock marketreports for information about antic­ipated prices and future demandsfor products throughout the world.

3. How have communicationsmedia changed over the years?Inventors and investors have sub­stantially modified and improvedcommunication facilities. Many more

1980 GOVERNMENT REGULATION OF MASS MEDIA 143

individuals may now transmit moremessages to more people morequickly and more easily than everbefore. We no longer need rely ondirect word of mouth communica­tion or hand-to-hand transmission oforiginal messages.

Improvements in distributioncame first. By wagon, coach, ponyexpress, train, automobile andplane, messages could be deliveredmuch faster than men could run,over much longer distances. Print­ing presses, rag and woodpulp pa­pers, book binding equipment,strong glues, etc., improved the pub­lishing of printed books and news­papers. With the development ofelectricity, photography, electronics,transistors, and so forth, the tele­graph, ticker tape, telephone, radio,television, teletype, communicationsatellites, etc., became possible,permitting spoken words and pic­tures to be sent through the air.Using these modern techniques, anyarrangement of words and photosmay be transmitted promptly andaccurately all around the world.Books, newspapers, statistics, films,radio broadcasts, TV shows, and thelike, may be transmitted in preciseand accurate reproduction.

Lies, distortions, propaganda andmisinterpretations of truth are re­layed just as faithfully as are truths,accurate data and reliable knowl­edge. The media themselves aremerely tools created by individuals

to facilitate communication. Themedia are not selective; they may beused for good or evil.

4. How can we best assure thatthe media transmit truths, not lies?The eagerness to know and to com­municate often conflicts with thedesire of individuals to live in pri­vacy and to keep unpleasant mat­ters hidden. Yet freedom ofthe presshas been traditional in this country.Generally speaking, reporters havebeen free to write as they chose, solong as they were responsible forwhat they wrote. The broadcastingof libelous (defamatory) statementsthat destroy a person's reputationwas generally considered a form oftheft. Yet, since the trial of jour­nalist John Peter Zenger (1697­1764) in colonial New York, a de­rogatory statement that was truewas not considered libelous; to de­fend himselfagainst charges ofHbel,an author had only to demonstratehis statement was true.

With recent technological ad­vances, .freedom of press principleshave been expanded to apply toradio, TV, even films and all printedmatter, as well as traditional news­papers. However, the principle ofreporter responsibility has been di­luted. Since New York Times v. Sul­livan I (1964), reporters have beenfree to publish almost anything,true or false, about~~public figures,"confident that they could not be

144 THE FREEMAN March

charged with libel unless ((actualmalice" were proved. Some reportersnow refuse to reveal the sources onwhich they base a story, claimingthey promised anonymity to obtaininformation to satisfy their readers'((right to know." Some reportershave lost their jobs as a result. Somehave even been jailed. Marie Torre,William T. Farr, Daniel Schorr, M.A. Farber are a few who refused toreveal sources.

However, the principle of a freepress is not simply protecting thefreedom of reporters to publish whatthey choose. How about the readers'((right to know" the source ofa story,so as to judge bias and reliability ina particular instance? How aboutthe constitutional right (Amend­ment VI) of a person being accused((to be confronted with the witnessesagainst him"? What will happen ifreporters may write what theychoose without any obligation todemonstrate its truth or to revealsources? What assurance will thepublic then have of the reliability ofnews reporting?

5. Suppose the federal govern­ment assumed responsibility forthe quality and reliability of com­munications by strengthening itsregulation of the media? Govern­ment officials, like private individ­uals, would prefer at times not to bein the public eye; they would like tohide their mistakes, misjudgments

and indiscretions. Yet private report­ers want to uncover and publicizeprecisely the informat!on govern­ment officials are most intent onconcealing. Thus reporters and offi­cials frequently become adversaries.If more power is given government,the officials gain the upper hand andcan threaten recalcitrant reporterswith reprisals. Classification of gov­ernm~nt documents as SECRET orCONFIDENTIAL (viz. the PentagonPapers, released in 1971 by DanielEllsberg) may sometimes be usedsimply to avoid government embar­rassment. Such a situation couldlead, on the one hand, to censorshipwith the concealment of any infor­mation unfavorable to the govern­ment and, on the other hand, topropaganda with the release of pro­government handouts only.

6. How does the federal govern­ment now influence the communi­cations media? The federal gov­ernment now exercises considerablecontrol over the private media, oftenby the back door-through FCC re­quirements with respect to licens­ing, radio-TV programming, allot­ment of time to public service andnews programs, equal time provi­sions in political campaigns, freetime for persons to answer criticismunder the ~~faimessdoctrine," adver­tising limitations, and so on. Gov­ernment may also interfere throughantitrust regulations, labor-

1980 GOVERNMENT REGULATION OF MASS MEDIA 145

IT is a sad fact that some people try to exploit their fellow men'splight by offering them patent medicines.... It would not impair theoperation of the market if the authorities were to prevent suchadvertising.... But whoever is ready to grant to the government thispower would be inconsistent if he objected to the demand to submitthe statements of churches and sects to the same examination.Freedom is indivisible. As soon as one starts to restrict it, one entersupon a decline on which it is difficult to stop. If one assigns to thegovernment the task of making truth prevail in the advertising ofperfumes and tooth paste, one cannot contest it the right to lookafter truth in the more important matters of religion, philosophy, andsocial ideology.

LUDWIG VON MISES, Human Action

management relations, the SEC,CIA and FBI surveillance activities,etc. Government directly subsidizessome communications-throughUSIA, Radio Free Europe, CETA,the poverty program, aid to the arts,etc. Government is also concerned,necessarily, with publicity givencourt cases, for it may contribute to,or hamper, fair trials for defendants.All in all, the influence of the fed­eral government over the media isconsiderably more pervasive thanappears at first glance.

7. What authority should the fed­eral government have to regulatecommunications media? The FirstAmendment to the Constitutionprovides that the Congress shall((make no law . . . abridging thefreedom of speech, or of the press

..."Generally speaking, the princi­ples of a free press should prevailthroughout the communications in­dustry. Radio, television, printing,film production, etc., should all becompletely private enterprises, fi­nanced entirely by the savings ofprivate investors. They should besubject to free and open competitionon the market, free to experiment, totryout new ideas, dependent forsurvival, like any other enterprise,on satisfying consumers.

In a completely free system, thecommunications media would relyfor news of production costs and thedemand for goods and services onpricing information communicatedthrough the market. Government'sobligation to them would be thesame as to any other privateenterprise-to protect them from

146 THE FREEMAN

those who would use force, fraud orthreat of either to destroy life andproperty.

In war, truth inevitably becomesThe First Casualty, as PhillipKnightley demonstrates in his bookof that title. For patriotic and mili­tary reasons, reporters then usuallysubmit willingly to censorship. Butonce war ends, freedom of the pressprinciples should prevail. The com­munications media should then be­come once more the eternally vigi­lant ((watchdog," reporting the newsas accurately and as responsibly aspossible.

Thomas Jefferson had profoundconfidence in a free press. He wrote,nWere it left to me to decide whetherwe should have a government with­out newspapers, or newspaperswithout· a government, I should not

hesitate to prefer the latter.... Rea­son and free inquiry are the onlyeffectual agents against error." If allour communications media today-not only radio, TV, film andprinting industries, but also schools,libraries, churches, theaters, adver­tisers, politicians, and so on-wererelieved of the hampering effects ofgovernment regulations, controls,red tape and excess taxes, theywould have to become more respon­sible to the ever-changing wishes ofconsumers, or go out of business.Those enterprises that succeededbest in presenting sound principle,truth and lively entertainment totheir customers, in· free and opencompetition with all other enter­prises, would become increasinglymore effective and vigorouscommunicators. @

DEBATE TOPICS OF RECENT. YEARSGovernment Regulation of Mass Media

CommunicationsForeign PolicyEmployment OpportunitiesEnergyFederal Law Enforcement-Investigation

and Prosecution of Felony CrimesConsumer "Protection" or Consumer Sovereignty

Mrs. Greaves has a limited supply of her suggested study questions andreferences for each of these topics, available on request while the supplylasts. Send requests (specify topic or topics desired) to:

The Foundation for Economic Education, Inc.30 South BroadwayIrvington-on-Hudson, N.Y. 10533

P. Dean Russell

HOW TOPRODUCE

HUMAN BEINGSA FEATURE of our tour of a collectivefarm in China was a visit to thehome of a worker. To my astonish­ment, our host had five children.

I wondered if he was aware of thepolicy of the State Council's familyplanning department. The chair­woman, Vice Premier Chen Muhua,summed up that policy in this clearstatement: ~~The planned economy ofsocialism should make it possible toregulate the reproduction of humanbeings so that the population growthkeeps in step with the growth ofmaterial production."

Five children in one family is notin harmony with the current level ofmaterial production in the People'sRepublic of China. In fact, the gov-

Dr. Russell, Professor of Management, University ofWisconsin at La Crosse, also gains economic In­sight from his observation of people and conditionsaround the world.

ernment's plan to equalize them isbased on the production of no morethan two children per couple-andone, or even none, is preferred.

At my request, our tour guide putthis information into a question toour farmer-host. He listened care­fully, smiled proudly, and repliedthat the official policy on his collec­tive farm of 26,000 members is topermit the production of childrenuntil a son is born. He and his wifehad produced four daughters beforethe son arrived. Then both weresterilized.

This policy on the production ofhuman beings in China varies fromprovince to province and, appar­ently, from collective to collective.Also the ((child production allot­ment" appears to be larger on collec­tive farms than in collective fac­tories. Increasingly, however, the

147

148 THE FREEMAN March

philosophy now followed in ruralGuizhou Province is becoming thenorm for the nation: ((The party or­ganizations at all levels have calledon the masses to resolutely dealblows to the criminals ... [who]have used the masses' old ideas,"(i.e., more sons, more bliss) to sabo­tage socialist population controlmeasures.

Traditions die hard, however, inany society. Prime Minister IndiraGandhi also discovered this truthwhen she encouraged the use offorce to sterilize people who refusedto comply with her plans to decreasethe population in India. Her succes­sor as prime minister, Maraji Desai,once told me that Mrs. Gandhi'scompulsory sterilization policies hadfar more to do with her politicaldefeat than did the charges of cor­ruption against her administrationand family.

Rewards and Penalties

In India and China, a combinationof both ((carrot and stick" measuresare used in the attempt to keep theproduction of human beings in har­mony with state plans. For example,free birth control devices, abortions,and sterilizations are readily avail­able to all. These control measuresare always actively promoted andare sometimes even enforcedagainst reluctant participants. Insome cities in China, e.g., Peking,the production of a third child may

bring a fine of 10 per cent of pay forup to 14 years. One-child and no­child families in China are oftenrewarded by the government withmore housing space and better jobopportunities. These cooperatingparents may also get special creditsadded to their retirement pensions.

Similar reward and punishmentmeasures are used (in reverse) inwestern nations where the produc­tion of children is positively encour­aged. For example, in Sweden thelow birth rate is of great concern tothe government. The allocation ofscarce housing is one of several waysthe government uses to reward theproducers of more Swedish babies.During my two visits to Stockholmin the 1960s I found that the waitingtime for an apartment was from fourto ten years. But a woman couldmove to the top ofthe waiting list forscarce and low-rent housing if shebecame pregnant. That's a most per­suasive production bonus in a soci­ety where there's a housing short­age.

In France with its declining birthrate, a friend ofmine in Paris is paidmore (directly and indirectly) by thegovernment for his five childrenthan he's paid (take home) by hisemployer. He once joked to me thathis family is a two-income family;his wife is paid for producing morechildren while he's paid for produc­ing more lectures.

In New York City, the payment of

1980 HOW TO PRODUCE HUMAN BEINGS 149

various direct and indirect subsidiesto families with dependent childrenusually adds up to considerablymore than the parent could earn atany available job. And so on, inevery nation of the world, with thegovernment applying both carrotand stick to increase or decrease theproduction of human beings accord­ing to state plans.

Motivation

There is a strong tendency bymost persons in any society to takethe job that offers the most materialgoods and services for the least ef­fort. And quite frequently in variouswestern nations, the governmentpays more for the production of chil­dren than the market pays for theproduction of goods and services.

This ~~reward principle" applies tothe· production of anything and ev­erything, at all times, and in allnations. For example, when thestate planners in Russia wantedmore food produced, they permittedprivate farming, market pricing,and high profits. The socialist plan­ners knew with certainty that theRussian farmers would respond tothe profit motive in precisely thesame way the managers of GeneralMotors respond to the same motive.Both will produce more of thewanted products. In Poland, I ob­served people standing in line forthree hours at the no-profit govern­ment stores while other people were

getting immediate service in the~~private sector" of the economy thatoperates on the profit motive.

This motivation to increase pro­duction, i.e., the basic desire ofmankind to accumulate productsand services for survival and com­fort, is not restricted to any particu­lar economic system. It is aninherent-not an acquired­characteristic. It came with the firsthuman being, and everyone of ustoday was born with it in our genes.Even the persons who use force in aneffort to suppress this motivatingprinciple ~~to get ahead" are them­selves thereby trying to get ahead ofthe rest of us.

This acquisitive characteristic isresponsible for all progress, includ­ing art by the old masters. Thephilosopher who argues how the~~surplus" production should be dis­tributed seems happily unawarethat the surplus was produced bypersons who expected to gain some­thing from it personally. What didthey eXPect to gain? Ask any pro­ducer, including yourself. While theanswers will vary widely, they willall involve self-interest (includingself-glorification and immortaliza­tion) in one way or another.

As my minister sincerely de­nounced the ~~root of all evil" in hissermons, I continued to help him inhis search for a larger church thatpaid its pastor more money. I rec­ommended him because he was a

150 THE FREEMAN

high producer and a good man inevery sense of the word. He, too,wanted (and I think, deserved) moreof the world's products and services.

What do you want more of?Babies? Tobacco? Chrysler cars? Thesecret ofhow to get them produced isknown to everyone, in Russia as inthe United States. Just pay a biggerbonus in one form or another, in­cluding the government's support ofprices higher than the market wouldtolerate.

Leave to the Individual theChoice and Its Consequences

What do you want less of? Babies?Rental housing and apartments? In­vestment in machinery? The secretof how to decrease production is alsoknown to everyone, in China as inthe United States. Just penalizesuch production in one way oranother, including the government'ssetting of prices lower than themarket would offer.

Personally, I'm not in favor of ourgovernment's rewarding or penaliz­ing the producers of any product,most especially the producers ofhuman beings. That's a bit too close

The Right to Choose

to cCplaying God" for my taste.Perhaps we collectively (throughour government) would be well ad­vised neither to reward nor topenalize anyone for having or nothaving babies. Perhaps that deci­sion should be left with the individ­uals who are directly concerned, andwith no one else.

In retrospect, I just can't imaginethat any government planningagency would have permitted me(unit number 11) to be added to theexisting 10 children already pro­duced by a dirt-poor family in theVirginia mountains. Even the worstof the bureaucratic plannerscouldn't make such an obviousblunder as that.

I think of that when I take thegovernment-granted income tax de­duction for my own children. If I askthe government to reward me withtax rebates (and other subsidies) forproducing human beings, I have nomoral ground to stand on when thegovernment planners decide topenalize me for it. If they have theright to do the one, then most defi­nitely they have the right to do theother. ®

IDEAS ON

LIBERTY

IT must be obvious that liberty necessarily means freedom to choosefoolishly as well as wisely; freedom to choose evil as well as good;freedom to enjoy the rewards ofgood judgment, and freedom to suffer thepenalties of bad judgment.

BEN MOREELL, "Survival of the Species"

Ludwig von Mises

Inflation

IF the supply of caviar were as plen­tiful as the supply of potatoes, theprice of caviar-that is, the ex­change ratio between caviar andmoney or caviar and other com­modities-would change considera­bly. In that case, one could obtaincaviar at a much smaller sacrificethan is required today. Likewise, ifthe quantity of money is increased,the purchasing power of the mone­tary unit decreases, and the quantityof goods that can be obtained for oneunit of this money decreases also.

When, in the sixteenth century,American resources of gold andsilver were discovered and ex­ploited, enormous quantities ofthe precious metals were trans­ported to Europe. The result of thisincrease in the quantity of moneywas a general tendency toward anupward movement of prices. In thesame way, today, when a govern­ment increases the quantity of papermoney, the result is that the pur­chasing power of the monetary unit

begins to drop, and so prices rise.This is called inflation.

Unfortunately, in the UnitedStates, as well as in other countries,some people prefer to attribute thecause of inflation not to an increasein the quantity ofmoney but, rather,to the rise in prices.

However, there has never beenany serious argument against theeconomic interpretation of the rela­tionship between prices and thequantity of money, or the exchangeratio between money and othergoods, commodities, and services.Under present day technologicalconditions there is nothing easierthan to manufacture pieces of paperupon which certain monetaryamounts are printed. In the UnitedStates, where all the notes are of thesame size, it does not cost the gov­ernment more to print a bill of athousand dollars than it does toprint a bill of one dollar. It is purelya printing procedure that requiresthe same quantity of paper and ink.

151

152 THE FREEMAN March

Ludwig von Mises, 1881-1973, was oneof the great defenders of a rationaleconomic science, and perhaps the sin­gle most creative mind at work in thisfield in our century.

Found among the papers of Dr. Miseswere transcripts of lectures he deliveredin Argentina in 1959. These have nowbeen edited by his widow and are avail­able as a Regnery/Gateway paper­backed book. This article, one of thelectures, is here reprinted by permissionof the publishers. All rights reserved.

The book, Economic Policy: Thoughtsfor Today and Tomorrow, also may bepurchased at $4.95 from The Foundationfor Economic Education, Inc., Irving­ton-on-Hudson, N.Y. 10533.

In the eighteenth century, whenthe first attempts were made toissue bank notes and to give thesebank notes the quality of legaltender-that is, the right to be hon­ored in exchange transactions in thesame way that gold and silver pieceswere honored-the governmentsand nations believed that bankershad some secret knowledge enablingthem to produce wealth out of noth­ing. When the governments of theeighteenth century were in financialdifficulties, they thought all theyneeded was a clever banker at thehead of their financial managementin order to get rid of all their dif­ficulties.

Some years before the FrenchRevolution, when the royalty ofFrance was in financial trouble, the

king of France sought out such aclever banker, and appointed him toa high position. This man was, inevery regard, the opposite of thepeople who, up to that time, hadruled France. First of all he was nota Frenchman, he was a foreigner-aGenevese. Secondly, he was not amember of the aristocracy, he was asimple commoner. And whatcounted even more in eighteenthcentu!y France, he was not aCatholic, but a Protestant. And soMonsieur Necker, the father of thefamous Madame de StaiH, becamethe minister of finance, andeveryone expected him to solve thefinancial problems of France. But inspite ofthe high degree ofconfidenceMonsieur Necker enjoyed, the royalcashbox remained empty-Necker'sgreatest mistake having been hisattempt to finance aid to the Ameri­can colonists in their war of inde­pendence against England withoutraising taxes. That was certainly thewrong way to go about solvingFrance's financial troubles.

No Secret Source of Funds

There can be no secret way to thesolution of the financial problems ofa government; if it needs money, ithas to obtain the money by taxingits citizens (or, under special condi­tions, by borrowing it from peoplewho have the money). But manygovernments, we can even say mostgovernments, think there is another

1980 INFLATION 153

method for getting the neededmoney; simply to print it.

If the government wants to dosomething beneficial-if, for exam­ple, it wants to build a hospital-theway to find the needed money forthis project is to tax the citizens andbuild the hospital out of tax reve­nues. Then no special Hprice revolu­tion" will occur, because when thegovernment collects money for theconstruction of the hospital, the citi­zens-having paid the taxes-areforced to reduce their spending. Theindividual taxpayer is forced to re­strict either his consumption, hisinvestments or his savings. Thegovernment, appearing on the mar­ket as a buyer, replaces the individ­ual citizen: the citizen buys less, butthe government buys more. Thegovernment, of course, does not al­ways buy the same goods which thecitizens would have bought; but onthe average there occurs no rise inprices due to the government's con­struction of a hospital.

I choose this example of a hospitalprecisely because people sometimessay: HIt makes a difference whetherthe government uses its money forgood or for bad purposes." I want toassume that the government alwaysuses the money which it has printedfor the best possible purposes­purposes with which we all agree.For it is not the way in which themoney is spent, it is the way inwhich the government obtains this

money that brings about those con­sequences we call inflation andwhich most people in the worldtoday do not consider as beneficial.

For example, without inflating,the government could use the tax­collected money for hiring new em­ployees or for raising the salaries ofthose who are already in govern­ment service. Then these people,whose salaries have been increased,are in a position to buy more. Whenthe government taxes the citizensand uses this money to increase thesalaries of government employees,the taxpayers have less to spend, butthe government employees havemore. Prices in general will not in­crease.

But if the government does notuse tax money for this purpose, if ituses freshly printed money instead,it means that there will be peoplewho now have more money while allother people still have as much asthey had before. So those who re­ceived the newly-printed money willbe competing with those people whowere buyers before. And since thereare no more commodities than therewere previously, but there is moremoney on the market-and sincethere are now people who can buymore today than they could havebought yesterday-there will be anadditional demand for that samequantity of goods. Therefore priceswill tend to go up. This cannot beavoided, no matter what the use of

154 THE FREEMAN March

this newly-issued money will be.And most importantly, this ten­

dency for prices to go up will developstep by step; it is not a .generalupward movement of what has beencalled the ((price level." Themetaphorical expression ((pricelevel" must never be used.

When people talk of a ((pricelevel," they have in mind the imageof a level of a liquid which goes up ordown according to the increase ordecrease in its quantity, but which,like a liquid in a tank, always risesevenly. But with prices, there is nosuch thing as a ((level." Prices do notchange to the same extent at thesame time. There are always pricesthat are changing more rapidly, ris­ing or falling more rapidly thanother prices. There is a reason forthis.

Early Beneficiaries

Consider the case of the govern­ment employee who received thenew money added to the money sup­ply. People do not buy today pre­cisely the same commodities and inthe same quantities as they did yes­terday. The additional money whichthe government has printed and in­troduced into the market is not usedfor the purchase of all commoditiesand services. It is used for the pur­chase of certain commodities, theprices of which will rise, while othercommodities will still remain at theprices that prevailed before the new

money was put on the market.Therefore, when inflation starts, dif­ferent groups within the populationare affected by this inflation, in dif­ferent ways. Those groups who getthe new money first, gain a tempo­rary benefit.

When the government. inflates inorder to wage a war, it has to buymunitions, and the first to get theadditional money are the munitionindustries and the workers withinthese industries. These groups arenow in a very favorable position.They have higher profits and higherwages; their business is moving.Why? Because they were the first toreceive the additional money. Andhaving now more money at theirdisposal, they are buying. And theyare buying from other people whoare manufacturing and selling thecommodities that these munitionmakers want.

These other people form a secondgroup. And this second group con­siders inflation to be very good forbusiness. Why not? Isn't it. wonder­ful to sell more? For example, theowner of a restaurant in theneighborhood of a munitions factorysays: ((It is really marvelous! Themunition workers have moremoney; there are many more ofthem now than before; they are allpatronizing my restaurant; I amvery happy about it." He does notsee any reason to feel otherwise.

The situation is this: those people

1980 INFLATION 155

to whom the money comes first nowhave a higher income, and they canstill buy many commodities and ser­vices at prices which correspond tothe previous state of the market, tothe condition that existed on the eveof inflation. Therefore, they are in avery favorable position. And thusinflation continues step by step,from one group of the population toanother. And all those to whom theadditional money comes at the earlystage of inflation are benefited be­cause they are buying some thingsat prices still corresponding to theprevious stage of the exchange ratiobetween money and commodities.

Others Must Lose

But there are other groups in thepopulation to whom this additionalmoney comes much, much later.These people are in an unfavorableposition. Before the additionalmoney comes to them they areforced to pay higher prices than theypaid before for some~r for practi­cally all-of the commodities theywanted to purchase, while their in­come has remained the same, or hasnot increased proportionately withprices.

Consider for instance a countrylike the United States during theSecond World War; on the one hand,inflation at that time favored themunitions workers, the munitionindustries, the manufacturers ofguns, while on the other hand it

worked against other groups of thepopulation. And the ones who suf­fered the greatest disadvantagesfrom inflation were the teachers andthe ministers.

As you know, a minister is a verymodest person who serves God andmust not talk too much aboutmoney. Teachers, likewise, are dedi­cated persons who are supposed tothink more about educating theyoung than about their salaries.Consequently, the teachers andministers were among those whowere most penalized by inflation, forthe various schools and churcheswere the last to realize that theymust raise salaries. When thechurch elders and the school corpo­rations finally discovered that, afterall one should also raise the salariesof those dedicated people, the earlierlosses they had suffered still re­mained.

For a long time, they had to buyless than they did before, to cutdown their consumption of betterand more expensive foods, and torestrict their purchase of cloth­ing-because prices had already ad­justed upward, while their income,their salaries, had not yet beenraised. (This situation has changedconsiderably today, at least forteachers.)

There are therefore always differ­ent groups in the population beingaffected differently by inflation. Forsome of them, inflation is not so bad;

156 THE FREEMAN March

they even ask for a continuation ofit, because they are the first to profitfrom it. We will see, in the nextlecture, how this unevenness in theconsequences of inflation vitally af­fects the politics that lead towardinflation.

Under these changes broughtabout by inflation, we have groupswho are favored and groups who aredirectly profiteering. I do not use theterm ~(profiteering"as a reproach tothese people, for if there is some­one to blame, it is the governmentthat established the inflation. Andthere are always people who favorinflation, because they realize whatis going on sooner than other peopledo. Their special profits are due tothe fact that there will necessarilybe unevenness in the process of in­flation.

Inflation as a Tax

The government may think thatinflation-as a method of raisingfunds-is better than taxation,which is always unpopular and dif­ficult. In many rich and great na­tions, legislators have often dis­cussed, for months and months, thevarious forms ofnew taxes that werenecessary because the parliamenthad decided to increase expendi­tures. Having discussed variousmethods of getting the money bytaxation, they finally decided thatperhaps it was better to do it byinflation.

But of course, the word Hinflation"was not used. The politician in powerwho proceeds toward inflation doesnot announce: ~~I am proceeding to­ward inflation." The technicalmethods employed to achieve theinflation are so complicated that theaverage citizen does not realize in­flation has begun.

During one of the biggest infla­tions in history, in the GermanReich after the First World War, theinflation was not so momentous dur­ing the war. It was the inflationafter the war that brought about thecatastrophe. The government didnot say: ~(We .are proceeding towardinflation." The government simplyborrowed money very indirectlyfrom the central bank. The govern­ment did not have to ask how thecentral bank would find and deliverthe money. The central bank simplyprinted it.

Today the techniques for inflationare complicated by the fact thatthere is checkbook money. It in­volves another technique, but theresult is the same. With the strokeof a pen, the government creates fiatmoney, thus increasing the quantityof money and credit. The govern­ment simply issues the order, andthe fiat money is there.

The government does not care, atfirst, that some people will be losers,it does not care that prices will goup. The legislators say: ((This is awonderful system!" But this wonder-

1980 INFLATION 157

ful system has one fundamentalweakness: it cannot last. If inflationcould go on forever, there would beno point in telling governments theyshould not inflate. But the certainfact about inflation is that, sooner orlater, it must come to an end. It is apolicy that cannot last.

In the long run, inflation comes toan end with the breakdown of thecurrency-to a catastrophe, to asituation like the one in Germany in1923. On August 1, 1914, the valueof the dollar was four marks andtwenty pfennigs. Nine years andthree months later, in November1923, the dollar was pegged at 4.2trillion marks. In other words, themark was worth nothing. It nolonger had any value.

Some years ago, a famous authorwrote: ~~In the long run we are alldead." This is certainly true, I amsorry to say. But the question is, howshort or long will the short run be?In the eighteenth century there wasa famous lady, Madame de Pom­padour, who is credited with thedictum: ~~Apres nous Ie deluge" C~Af­

ter us will come the flood"). Madamede Pompadour was happy enough todie in the short run. But her succes­sor in office, Madame du Barry, out­lived the short run and was be­headed in the long run. For manypeople the ~~long run" quickly be-comes the ~~short run"-and thelonger inflation goes on the soonerthe Hshort run."

How long can the short run last?How long can a central bank con­tinue an inflation? Probably as longas people are convinced that thegovernment, sooner or later, but cer­tainly not too late, will stop printingmoney and thereby stop decreasingthe value of each unit of money.

The Flight from Money

When people no longer believethis, when they realize that the gov­ernment will go on and on withoutany intention of stopping, then theybegin to understand that prices to­morrow will be higher than they aretoday. Then they begin buying atany price, causing prices to go up tosuch heights that the monetary sys­tem breaks down.

I refer to the case of Germany,which the whole world was watch­ing. Many books have described theevents of that time. (Although I amno German, but an Austrian, I saweverything from the inside: in Au­stria, conditions were not very dif­ferent from those in Germany; norwere they much different in manyother European countries.) For sev­eral years, the German people be­lieved that their inflation was just atemporary affair, that it would sooncome to an end. They believed it foralmost nine years, until the summerof 1923. Then, finally, they began todoubt. As the inflation continued,people thought it wiser to buy every­thing available, instead of keeping

158 THE FREEMAN March

money in their pockets. Further­more, they reasoned that one shouldnot give loans of money, but on thecontrary, that it was a very goodidea to be a debtor. Thus inflationcontinued feeding on itself.

And it went on in Germany untilexactly August 28, 1923. Themasses had believed inflation moneyto be real money, but then they foundout that conditions had changed. Atthe end of the German inflation, inthe fall of 1923, the German fac­tories paid their workers everymorning in advance for the day. Andthe workingman who came to thefactory with his wife, handed hiswages-all the millions he got~

over to her immediately. And thelady immediately went to a shop tobuy something, no matter what. Sherealized what most people knew atthat time-that overnight, from oneday to another, the mark lost 50% ofits purchasing power. Money, likechocolate on a hot oven, was meltingin the pockets of the people. Thislast phase of German inflation didnot last long; after a few days, thewhole nightmare was over: themark was valueless and a new cur­rency had to be established.

Lord Keynes, the same man whosaid that in the long run we are alldead, was one of the long line ofinflationist authors of the twentiethcentury. They all wrote against thegold standard. When Keynes at­tacked the gold standard, he called

it a Hbarbarous relic." And mostpeople today consider it ridiculous tospeak of a return to the gold stan­dard. In the United States, for in­stance, you are considered to bemore or less a dreamer if you say:((Sooner or later, the United Stateswill have to return to the gold stan­dard."

Yet the gold standard has onetremendous virtue: the quantity ofthe money supply, under the goldstandard, is independent of thepolicies of governments and politicalparties. This is its advantage. It is aform of protection against SPend­thrift governments. If, under thegold standard, a government isasked to spend money for somethingnew, the minister of finance can say:((And where do I get the money? Tellme, first, how I will find the moneyfor this additional expenditure."

A Restraint on Spending

Under an inflationary system,nothing is simpler for the politiciansto do than to order the governmentprinting office to provide as muchmoney as they need for their projects.Under a gold standard, sound gov­ernment has a much better chance;its leaders can say to the people andto the politicians: ((We can't do itunless we increase taxes."

But under inflationary conditions,people acquire the habit of lookingupon the government as an institu­tion with limitless means at its dis-

1980 INFLATION 159

posal: the state, the government,can do anything. If, for instance, thenation wants a new highway sys­tem, the government is eXPected tobuild it. But where will the govern­ment get the money?

One could say that in the UnitedStates today-and even in the past,under McKinley-the Republicanparty was more or less in favor ofsound money and of the gold stan­dard, and the Democratic party wasin favor of inflation. Of cours~ not apaper inflation, but of silver.

It was, however, a Democraticpresident of the United States, Pres­ident Cleveland, who at the end ofthe 1880s vetoed a decision of Con­gress, to give a small sum-about$10,OOO-to help a community thathad suffered some disaster. AndPresident Cleveland justified hisveto by writing: ((While it is the dutyof the citizens to support the gov­ernment, it is not the duty of thegovernment to support the citizens."This is something which everystatesman should write on the wallof his office to show to people whocome asking for money.

I am rather embarrassed by thenecessity to simplify these problems.There are so many complex prob­lems in the monetary system, and Iwould not have written volumesabout them ifthey were as simple asI am describing them here. But thefundamentals are precisely these: ifyou increase the quantity of money,

you bring about the lowering of thepurchasing power of the monetaryunit. This is what people whose pri­vate affairs are unfavorably affecteddo not like. People who do not bene­fit from inflation are the ones whocomplain.

A Worldwide Plague

If inflation is bad and if peoplerealize it, why has it become almosta way of life in all countries? Evensome of the richest countries sufferfrom this disease. The United Statestoday is certainly the richest coun­try in the world, with the higheststandard of living. But when youtravel in the United States, you willdiscover that there is constant talkabout inflation and about the neces­sity to stop it. But they only talk;they do not act.

To give you some facts: after theFirst World War, Great Britain re­turned to the prewar gold parity ofthe pound. That is, it revalued thepound upward. This increased thepurchasing power of every worker'swages. In an unhampered marketthe nominal money wage wouldhave fallen to comPensate for thisand the workers' real wage wouldnot have suffered. We do not havetime here to discuss the reasons forthis. But the unions in Great Britainwere unwilling to accept an adjust­ment of wage rates to the higherpurchasing power of the monetaryunit, therefore real wages were

160 THE FREEMAN March

raised considerably by this mone­tary measure. This was a seriouscatastrophe for England, becauseGreat Britain is a predominantlyindustrial country that has to im­port its raw materials, half-finishedgoods, and food stuffs in order tolive, and has to export manufac­tured goods to pay for these imports.With the rise in the internationalvalue of the pound, the price ofBritish goods rose on foreign mar­kets and sales and exports declined.Great Britain had, in effect, priceditself out of the world market.

The unions could not be defeated.You know the power of a union to­day. It has the right, practically theprivilege, to resort to violence. Anda union order is, therefore, let ussay, not less important than a gov­ernment decree. The governmentdecree is an order for enforcementfor which the enforcement ap­paratus of the government-thepolice-is ready. You must obey thegovernment decree, otherwise youwill have difficulties with the police.

The Impact of Unions

Unfortunately, we have now, inalmost all countries all over theworld, a second power that is in aposition to exercise force: the laborunions. The labor unions determinewages and the strikes to enforcethem in the same way in which thegovernment might decree aminimum wage rate. I will not dis-

cuss the union question now; I shalldeal with it later. I only want toestablish that it is the union policyto raise wage rates above the levelthey would have on an unhamperedmarket. As a result, a considerablepart of the potential labor force canbe employed only by people or indus­tries that are prepared to sufferlosses. And, since businesses are notable to keep on suffering losses, theyclose their doors and people becomeunemployed. The setting of wagerates above the level they wouldhave on the unhampered marketalways results in the unemploymentof a considerable part of the poten­tial labor force.

In Great Britain, the result ofhigh wage rates enforced by thelabor unions was lasting un­employment, prolonged year afteryear. Millions of workers were un­employed, production figuresdropped. Even experts wereperplexed. In this situation theBritish government made a movewhich it considered an indispensa­ble, emergency measure: it devaluedits currency.

The result was that the purchas­ing power of the money wages, uponwhich the unions had insisted, wasno longer the same. The real wages,the commodity wages, were reduced.Now the worker could not buy asmuch as he had been able to buybefore, even though the nominalwage rates remained the same. In

1980 INFLATION 161

this way, it was thought, real wagerates would return to free marketlevels and unemployment woulddisappear.

This measure-devaluation-wasadopted by various other countries,by France, the Netherlands, andBelgium. One country even resortedtwice to this measure within aperiod of one year and a half. Thatcountry was Czechoslovakia. It wasa surreptitious method, let us say, tothwart the power of the unions. Youcould not call it a real success, how­ever.

Indexation

After a few years, the people, thew.orkers, even the unions, began tounderstand what was going on.They came to realize that currencydevaluation had reduced their realwages. The unions had the power tooppose this. In many countries theyinserted a clause into wage con­tracts providing that money wagesmust go up automatically with anincrease in prices. This is called in­dexing. .The unions became indexconscious. So, this method of reduc­ing unemployment that the gov­ernment of Great Britain started in1931-which was later adopted byalmost all important govern­ments-this method of ((solving un-employment" no longer works today.

In 1936, in his General Theory ofEmployment, Interest and Money,Lord Keynes unfortunately elevated

this method-those emergency mea­sures of the period between 1929and 1933-to a principle, to a fun­damental system of policy. And hejustified it by saying, in effect: ((Un­employment is bad. If you want un­employment to disappear you mustinflate the currency."

He realized very well that wagerates can be too high for the market,that is, too high to make it profitablefor an employer to increase his workforce, thus too high from the point ofview of the total 'working popula­tion, for with wage rates imposed byunions above the market level, onlya part of those anxious to earnwages can obtain jobs.

And Keynes said, in effect: ((Cer­tainly mass unemployment, pro­longed year after year, is a veryunsatisfactory condition." But in­stead of suggesting that wage ratescould and should be adjusted tomarket conditions, he said, in effect:((If one devalues the currency andthe workers are not clever enough torealize it, they will not offer resis­tance against a drop in real wagerates, as long as nominal wage ratesremain the same." In other words,Lord Keynes was saying that if aman gets the·same amount of ster­ling today as he got before the cur­rency was devalued, he will notrealize that he is, in fact, now get­ting less.

In old fashioned language, Keynesproposed cheating the workers. In-

162 THE FREEMAN March

stead of declaring openly that wagerates must be adjusted to the condi­tions ofthe market-because, iftheyare not, a part of the labor force willinevitably remain unemployed-hesaid, in effect: ((Full employment canbe reached only if you have infla­tion. Cheat the workers." The mostinteresting fact, however, is thatwhen his General Theory was pub­lished, it was no -longer possible tocheat, because people had alreadybecome index conscious. But thegoal of full employment remained.

Full Employment

What does Hfull employment"mean? It has to do with the unham­pered labor market, which is notmanipulated by the unions or by thegovernment. On this market, wagerates for every type of labor tend toreach a level where everybody whowants a job can get one and everyemployer can hire as many workersas he needs. Ifthere is an increase inthe demand for labor, the wage ratewill tend to be greater, and if fewerworkers are needed, the wage ratewill tend to fall.

The only method by which a Hfullemployment" situation can bebrought about is by the mainte­nance of an unhampered labor mar­ket. This is valid for every ·kind oflabor and for every kind of commod­ity.

What does a businessman do whowants to sell a commodity for five

dollars a unit? When he cannot sellit at that price, the technical busi­ness expression in the United Statesis, ((the inventory does not move."But it must move. He cannot retainthings because he must buy some­thing new; fashions are changing.So he sells at a lower price. If hecannot sell the merchandise at fivedollars, he must sell it at four. If hecannot sell it at four, he must sell itat three. There is no other choice aslong as he stays in business. He maysuffer losses, but these losses are dueto the fact that his anticipation ofthe market for his product waswrong.

It is the same with the thousandsand thousands of young people whocome every day from the agricul­tural districts into the city, trying toearn money. It happens so in everyindustrial nation. In the UnitedStates they come to town with theidea that they should get, say, ahundred dollars a week. This may beimpossible. So if a man cannot get ajob for a hundred dollars a week, hemust try to get a job for ninety oreighty dollars, and perhaps evenless. But if he were to say-as theunions do- ((one hundred dollars aweek or nothing," then he mighthave to remain unemployed. (Manydo not mind being unemployed, be­cause the government pays un­employment benefits-out of specialtaxes levied on the employers­which are sometimes nearly as high

1980 INFLATION 163

as the wages the man would receiveif he were employed.)

Because a certain group of peoplebelieves that full employment canbe attained only by inflation, infla­tion is accepted in the United States.But people are discussing the ques­tion: Should we have a sound cur­rency with unemployment, or infla­tion with full employment? This isin fact a very vicious analysis.

Clarifying the Problem

To deal with this problem we mustraise the question: How can one im­prove the condition of the workersand of all other groups of the popula­tion? The answer is: by maintainingan unhampered labor market andthus achieving full employment.Our dilemma is, shall the marketdetermine wage rates or shall theybe determined by union pressureand compulsion? The dilemma is not((shall we have inflation or un­employment?"

This mistaken analysis of theproblem is argued in England, inEuropean industrial countries andeven in the United States. And somepeople say: HNow look, even theUnited States is inflating. Whyshould we not do it also."

To these people one should answerfirst of all: HOne of the privileges of arich man is that he can afford to befoolish much longer than a poorman." And this is the situation ofthe United States. The financial pol-

icy of the United States is very badand is getting worse. Perhaps theUnited States can afford to befoolish a bit longer than some othercountries.

The most important thing to re­member is that inflation is not anact of God, that inflation is not acatastrophe of the elements or a dis­ease that comes like a plague. Infla­tion is a policy-a deliberate policyof people who resort to inflation be­cause they consider it to be a lesserevil than unemployment. But thefact is that, in the not very long run,inflation does not cure unemploy­ment.

Inflation is a policy. And a policycan be changed. Therefore, there isno reason to give in to inflation. Ifone regards inflation as an evil, thenone has to stop inflating. One has tobalance the budget of the govern­ment. Ofcourse, public opinion mustsupport this; the intellectuals musthelp the people to understand.Given the support of public opinion,it is certainly possible for the peo­ple's elected representatives toabandon the policy of inflation.

We must remember that, in thelong run, we may all be dead andcertainly will be dead. But weshould arrange our earthly affairs,for the short run in which we have tolive, in the best possible way. Andone of the measures necessary forthis purpose is to abandon inflation­ary policies. @

Donald L. Kemmerer

THEROTTINGFABRIC

OFTRUST

164

As we drove from New Delhi to Agrato see India's famous Taj Mahal, wepassed through extremely primitivevillages. There was not a petrol can,broken umbrella or empty bottle tobe seen. We thought, HPerhaps aTime Machine has carried us back1000 years or more." In one dustyhamlet we saw an Indian womanwearing a crude anklet of silver. Thereason for this abysmal squalorstruck us. That silver was all hersavings and no one was going totake it from her. She didn't trust herneighbors and they didn't trust any­one either. There could be no banks,and businessmen found it almostimpossible to borrow. Progress wasat a standstill and had been forcenturies because an all-importantingredient was missing in thateconomy, the fabric of trust betweenmen, that enables them to work to­gether willingly toward productiveends.

When men work with tools andequipment-economists call thesecapital-they can produce morethan when they work with barehands. But to produce capital ittakes a willingness to save and toinvest those savings. And men willsave little and invest less unlessthey trust their fellow men as indi­viduals and believe that their prop-

Dr. Kemmerer, president of The Committee forMonetary Research and Education, Inc., taughteconomic history for many years at the University of

illinois.

1980 THE ROTTING FABRIC OF TRUST 165

erty and savings will be safe andthat the money of the realm willhold its buying power. These are thewarp and woof of the fabric of trust.

Aggravated Inflation

In the United States today, due togovernment-caused expansion of thesupply ofmoney and credit, inflationis raging at a rate of about 13 percent a year, double what it was twoyears ago. If this continues, the dol­lar will lose half of its present buy­ing power in six years. That presentbuying power is only a fifth of whatit was in 1933. Those conditions arenot conducive to saving. The rate ofsaving and of capital investment isfive per cent a year, the lowestamong major modern nations.

Such misuse of power by govern­ment sets a bad example to manywho then lash back at governmentand often at others too. The govern­ment should set an example oftrustworthiness. Its courts punishcounterfeiters, embezzlers andthieves. To find the government it­self engaged in similar actions isdemoralizing. A government thatinflates and destroys the buyingpower of its money pours, as it were,a destructive acid over the econ­omy's fabric of trust which rots thefabric and seriously damages theeconomy.

Just how suspicious Americansare of their government's money canbe seen by the fact that millions of

them are putting more and more ofthe savings they have left into gold,silver, diamonds, rare coins, stampsand paintings and antique furni­ture, to name just some items. All ofthese they increasingly look upon aspreferable to banking their money,the buying power of which meltsaway like an ice cube in July. Thedegree of distrust can be gauged bythe fact that the prices of these non­income producing ~~stores of value"have been bid up much higher thanwholesale or consumer price levelshave risen. Whereas price levelstoday are five times higher than in1933, the price of gold is 29 timeshigher, of silver at least 70 timesand of precious gems 20 to 60 timeshigher. These prices rise out of dis­trust and fear more than they dofrom speculation.

Inflation is rotting away the fab­ric of trust which helped so much tomake this nation economicallystrong. Fear is rendering a growingportion of our savings as unproduc­tive as that Indian woman's anklet.President Carter has said we mustlower our standard of living. He andCongress, and preceding adminis­trations too, by their inflationarypolicies, have been bringing on thatlowering process for some time. Letus hope that we never regress toconditions in those Indian villages,but we are headed in that direction.That precious fabric of trust is disin­tegrating before our eyes. @

Lawrence W. Reed

WITCH-HUNTING FORROBBER BARONS:

The Standard Oil Story

AMONG the great misconceptions ofthe free economy is the widely-heldbelief that ((laissez faire" embodies anatural tendency toward monopolyconcentration. Under unfetteredcapitalism, so goes the familiar re­frain, large firms would systemati­cally devour smaller ones, cornermarkets, and stamp out competitionuntil every inhabitant of the landfell victim to their power. Just aspopular is the notion that John D.Rockefeller's Standard Oil Companyof the late 1800s gave substance tosuch an evil course of events.

Regarding Standard Oil's chiefexecutive, one noted historianwrites, HHe (Rockefeller) iron­handedly ruined competitors by cut­ting prices until his victim wentbankrupt or sold out, whereupon

Mr. Reed Is Assistant Professor of Economics atNorthwood Institute In Midland, Michigan. This artl·cle Is based upon one of his lectures for a course,"Philosophy of American Life and Business."

166

higher prices would be likely to re­turn."!

Two other historians, co-authorsof a popular college text, opine that((Rockefeller was a ruthless operatorwho did not hesitate to crush hiscompetitors by harsh and unfairmethods."2

In 1899, Standard refined 90 percent of America's oil-the peak ofthe company's dominance of the re­fining business. Though that mar­ket share was steadily siphoned offby competitors after 1899, the com­pany nonetheless has been brandedever since as «an industrial oc­topus."

Does the story of Standard Oilreally present a case against the freemarket? In my opinion, it most em­phatically does not. Furthermore,setting the record straight on thisissue must become an importantweapon in every free market advo­cate's intellectual arsenal. That's

WITCH-HUNTING FOR ROBBER BARONS 167

the purpose of the following re­marks.

Theoretically, there are two kindsof monopoly: coercive and efficiency.A coercive monopoly results from, inthe words of Adam Smith, ~~a

government grant of exclusiveprivilege." Government, in effect,must take sides in the market inorder to give birth to a coercivemonopoly. It must make it difficult,costly, or impossible for anyone butthe favored firm to do business.

The United States Postal Serviceis an example of this kind ofmonopoly. By law, no one can de­liver first class mail except theUSPS. Fines and imprisonment(coercion) await all those daringenough to compete.

In some other cases, the govern­ment may not ban competition out­right, but simply bestow privileges,immunities, or subsidies on one firmwhile imposing costly requirementson all others. Regardless of themethod, a firm which enjoys a coer­cive monopoly is in a position toharm the consumer and get awaywith it.

An efficiency monopoly, on theother hand, earns a high share of amarket because it does the best job.It receives no special favors from thelaw to account for its size. Othersare free to compete and, if consum­ers so will it, to grow as big as the~~monopoly."

An efficiency monopoly has no

legal power to compel people to dealwith it or to protect itself from theconsequences of its unethical prac­tices. It can only attain bignessthrough its excellence in satisfyingcustomers and by the economy of itsoperations. An efficiency monopolywhich turns its back on the veryperformance which produced its suc­cess would be posting a sign, ~~COM­PETITORS WANTED." The marketrewards excellence and exacts a tollon mediocrity.

It is my contention that the histor­ical record casts the Standard OilCompany in the role of efficiencymonopoly-a firm to which consum­ers repeatedly awarded their votesof confidence.

The oil rush began with the dis­covery of oil by Colonel Edwin Drakeat Titusville, Pennsylvania in 1859.Northwestern Pennsylvania soon~~was overrun with businessmen,speculators, misfits, horse dealers,drillers, bankers, and just plainhell-raisers. Dirt-poor farmersleased land at fantastic prices, andrigs began blackening the land­scape. Existing towns jammed fullovernight with ~strangers,' and newtowns appeared almost as quickly."3

In the midst of chaos emergedyoung John D. Rockefeller. An ex­ceptionally hard-working andthrifty man, Rockefeller trans­formed his early interest in oil into apartnership in the refinery stage ofthe business in 1865.

168 THE FREEMAN March

Five years later, Rockefellerformed the Standard Oil Companywith 4 per cent of the refining mar­ket. Less than thirty years later, hereached that all-time high of 90 percent. What accounts for such stun­ning success?

On December 30, 1899, Rockefel­ler was asked that very questionbefore a governmental investigatingbody called the Industrial Commis­sion. He replied:

I ascribe the success of the Standard toits consistent policy to make the volumeof its business large through the meritsand cheapness of its products. It hasspared no expense in finding, securing,and utilizing the best and cheapestmethods of manufacture. It has soughtfor the best superintendents and work­men and paid the best wages. It has nothesitated to sacrifice old machinery andold plants for new and better ones. It hasplaced its manufactories at the pointswhere they could supply markets at theleast expense. It has not only soughtmarkets for its principal products, butfor all possible by-products, sparing noexpense in introducing them to the pub­lie. It has not hesitated to invest millionsof dollars in methods of cheapening thegathering and distribution of oils by pipelines, special cars, tank steamers, andtank wagons. It has erected tank stationsat every important railroad station tocheapen the storage and delivery of itsproducts. It has spared no expense inforcing its products into the markets ofthe world among people civilized anduncivilized. It has had faith in Americanoil, and has brought together millions ofmoney for the purpose of making it what

it is, and holding its markets against thecompetition of Russia and all the manycountries which are producers of oil andcompetitors against American oi1.4

A Master Organizerof Men and Materials

Rockefeller was a managerialgenius-a master organizer of menas well as of materials. He had a giftfor bringing devoted, brilliant, andhard-working young men into hisorganization. Among his most out­standing associates were H. H.Rogers, John D. Archbold, StephenV. Harkness, Samuel Andrews, andHenry M. Flagler. Together theyemphasized efficient economic oper­ation, research, and sound financialpractices. The economic excellenceof their performance is described byeconomist D. T. Armentano:

Instead ofbuying oil fromjobbers, theymade the jobbers' profit by sending theirown purchasing men into the oil region.In addition, they made their own sulfuricacid, their own barrels, their ownlumber, their own wagons, and their ownglue. They kept minute and accuraterecords of every item from rivets to bar­rel bungs. They built elaborate storagefacilities near their refineries. Rockefel­ler bargained as shrewdly for crude asanyone before or since. And Sam An­drews coaxed more kerosene from a bar­rel of crude than could the competition.In addition, the Rockefeller firm put outthe cleanest-burning kerosene, andmanaged to dispose of most of the resi­dues like lubricating oil, paraffin, andvaseline at a profit.5

1980 WITCH-HUNTING FOR ROBBER BARONS 169

Even muckraker Ida Tarbell, oneof Standard's critics, admired thecompany's streamlined processes ofproduction:

Not far away from the canning works,on Newton Creek, is an oil refinery. Thisoil runs to the canning works, and, as thenewmade cans come down by a chutefrom the works above, where they havejust been finished, they are filled, twelveat a time, with the oil made a few milesaway. The filling apparatus is admira­ble. As the newmade cans come down thechute they are distributed, twelve in arow, along one side of a turn-table. Theturn-table is revolved, and the cans comedirectly under twelve measures, eachholding five gallons of oil-a turn of avalve, and the cans are full. The table isturned a quarter, and while twelve morecans are filled and twelve fresh ones aredistributed, four men with solderingcappers put the caps on the first set.Another quarter. turn, and men standready to take the cans from the filler andwhile they do this, twelve more are hav­ing caps put on, twelve are filling, andtwelve are coming to their place from thechute. The cans are placed at once inwooden boxes standing ready, and, aftera twenty-four-hour wait for discoveringleaks, are nailed up and carted to anearby door. This door opens on theriver, and thereat anchor by the side ofthe factory is a vessel chartered forSouth America or China or wherenot-waiting to receive the cans which alittle more than twenty-four hours beforewere tin sheets lying on flatboxes. It is amarvellous example ofeconomy, not onlyin materials, but in time and infootsteps. 6

Market CompetitionProtects the Public

Socialist historian Gabriel Kolko,who argues in The Triumph ofCon­servatism that the forces of comPeti­tion in the free market of the late1800s were too potent to allow Stan­dard to cheat the public, stressesthat HStandard treated the con­sumer with deference. Crude andrefined oil prices for consumers de­clined during the period Standardexercised greatest control of the in­dustry ..."7

Standard's service to the con­sumer in the form of lower prices iswell-documented. To quote fromProfessor Armentano again:

Between 1870 and 1885 the price ofrefined kerosene dropped from 26 centsto 8 cents per gallon. In the same period,the Standard Oil Company reduced the[refining] costs per gallon from almost 3cents in 1870 to .452 cents in 1885.Clearly, the firm was relatively efficient,and its efficiency was being translated tothe consumer in the form of lower pricesfor a much improved product, and to thefirm in the form of additional profits.8

That story continued for the re­mainder of the century, with theprice of kerosene to the consumerfalling to 5.91 cents Per gallon in1897. Armentano concludes fromthe record that Hat the very pinnacleof Standard's industry (control,' thecosts and the prices for refined oilreached their lowest levels in the his­tory of the petroleum industry."9

170 THE FREEMAN March

John D. Rockefeller's success,then, was a consequence of hissuperior performance. He derivedhis impressive market share notfrom government favors but ratherfrom aggressive courting of the con­sumer. Standard Oil is one of his­tory's classic efficiency monopolies.

But what about the many' seriouscharges leveled against Standard?Predatory price cutting? Buying outcompetitors? Conspiracy? Railroadrebates? Charging any price itwanted? Greed? Each of these can beviewed as an assault not just onStandard Oil but on the free marketin general. They can and must beanswered.

Predatory price cutting

Predatory price cutting is ((thepractice of deliberately undersellingrivals in certain markets to drivethem out of business, and then rais­ing prices to exploit a market devoidof competition."lo

Professor John S. McGee, writingin the Journal ofLaw and Econom­ics for October 1958, stripped thischarge of any intellectual substance.Describing it as ((logically deficient,"he concluded, ((I can find little or noevidence to support it."ll

In his extraordinary article,McGee scrutinized the testimony ofRockefeller's competitors who

claimed to have been victims of pred;.atory price cutting. He found theirclaims to be shallow and misdirec­ted. McGee pointed out that someof these very people later openednew refineries and successfully chal­lenged Standard again.

Beyond the actual record,economic theory also argues againsta winning policy of predatory pricecutting in a free market for thefollowing reasons:

1. Price is only one aspect ofcom­petition. Firms compete in a varietyof ways: service, location, packag­ing, marketing, even courtesy. Forprice alone to draw customers awayfrom the competition, the predatorwould have to cut substantially­enough to outweigh all the othercompetitive pressures the others canthrow at him. That means sufferinglosses on every unit sold. If the pred­ator has a war-chest of ((monopolyprofits" to draw upon in such a bat­tle, then the predatory price cuttingtheorist must explain how he wasable to achieve such ability in theabsence of this practice in the firstplace!

2. The large firm stands to losethe most. By definition, the largefirm is already selling the most units.As a predator, it must actuallystep up its production if it is to haveany effect on competitors. As Profes­sor McGee observed, ((To lure cus­tomers away from somebody, he (thepredator) must be prepared to serve

1980 WITCH-HUNTING FOR ROBBER BARONS 171

them himself. The monopolizer thusfinds himself in the position of sell­ing more-and therefore losingmore-than his competitors."12

3. Consumers will increase theirpurchases at the rrbargain prices."This factor causes the predator tostep up production even further. Italso puts off the day when he can((cash in" on his hOPed-for victorybecause consumers will be in a posi­tion to refrain from purchasing athigher prices, consuming theirstockpiles instead.

4. The length. of the battle is al­ways uncertain. The predator doesnot know how long he must sufferlosses before his competitors quit. Itmay take weeks, months, or evenyears. Meanwhile, consumers are~~cleaningup" at his expense.

5. Any rrbeaten" firms may re­open. Competitors may scale downproduction or close only temporarilyas they ~~wait out the storm." Whenthe predator raises prices, theyenter the market again. Conceiva­bly, a ~~beaten" firm might be boughtup by someone for a H song," andthen, under fresh management andwith relatively low capital costs,face the predator with an actualcompetitive cost advantage.

6. High prices encourage new­comers. Even if the predator driveseveryone else from the market, rais­ing prices will attract competitionfrom people heretofore not even inthe industry. The higher the prices

go, the more powerful that attrac­tion.

7. The predator would lose thefavor of consumers. Predatory pricecutting is simply not good publicrelations. Once known, it wouldswiftly erode the public's faith andgood will. It might even evoke con­sumer boycotts and a backlash ofsympathy for the firm's competitors.

In summary, let me quote Profes­sor McGee once again:

Judging from the Record, Standard Oildid not use predatory price discrimina­tion to drive out competing refiners, nordid its pricing practice have that effect.Whereas there may be a very few cases inwhich retail kerosene peddlers or dealerswent out of business after or during pricecutting, there is no real proof that Stan­dard's pricing policies were responsible. Iam convinced that Standard did not sys­tematically, if ever, use local price cut­ting in retailing, or anywhere else, toreduce competition. To do so would havebeen foolish; and, whatever else has beensaid about them, the old Standard or­ganization was seldom criticized formaking less money when it could readilyhave made more.13

Buying out competitors

The intent of this practice, thecritics say, was to stifle competitorsby absorbing them.

First, it must be said that Stan­dard had no legal power to coerce acompetitor into selling. For a pur-

172 THE FREEMAN March

chase to occur, Rockefeller had topay the market price for an oil refin­ery. And evidence abounds that heoften hired the very People whoseoperations he purchased. ((Vic­timized ex-rivals," wrote McGee,~~might be expected to make pooremployees and dissident or unwill­ing shareholders."14

Kolko writes that ~~Standard at­tained its control of the refinerybusiness primarily by mergers, notprice wars, and most refinery own­ers were anxious to sell out to it.Some of these refinery owners laterreopened new plants after selling toStandard."15

Buying out competitors can be awise move if achieving economy ofscale is the intent. Buying out com­petitorsmerely to eliminate themfrom the market can be a futile,expensive, and never-ending policy.It appears that Rockefeller's mer­gers were designed with the firstmotive in mind.

Even so, other people found itprofitable to go into the business ofbuilding refineries and selling toStandard. David P. Reighard man­aged to build and sell three succes­sive refineries to Rockefeller, all onexcellent terms.

A firm which adopts a policy ofabsorbing others solely to stiflecompetition embarks upon the im­possible adventure of putting outthe recurring and unpredictableprairie fires of competition.

Conspiracy to fix prices

This accusation holds that Stan­dard secured secret agreements withcompetitors to carve up markets andfix prices at higher-than-marketlevels.

I will not contend here that Rocke­feller never attempted this policy.His experiment with the South Im­prov~ment Company in 1872 pro­vides at least some evidence that hedid. I do argue, however, that allsuch attempts were failures fromthe start and no harm to the con­sumer occurred.

Standard's price performance,cited extensively above, supports myargument. Prices fell steadily on animproving product. Some conspir­acy!

From the perspective of economictheory, collusion to raise and/or fixprices is a practice doomed to failurein a free market for these reasons:

1. Internal pressures. Conspiringfirms must resolve the dilemma ofproduction. To exact a higher pricethan the market currently permits,production must be curtailed.Otherwise, in the face of a fall indemand, the firms will be stuck witha quantity of unsold goods. Who willcut their production and by howmuch? Will the conspirators acceptan equal reduction for all when it islikely that each faces a unique con­stellation of cost and distribution

1980 WITCH-HUNTING FOR ROBBER BARONS 173

advantages and disadvantages?Assuming a formula for restrict­

ing production is agreed upon, itthen becomes highly profitable forany member of the cartel to· quietlycheat on the agreement. By offeringsecret rebates or discounts or other~~deals" to his comPetitors' custom­ers, any conspirator can undercutthe cartel price, earn an increasingshare of the market and make a lotof money. When the others get windof this, they must quickly break theagreement or lose their marketshares to the ~~cheater." The veryreason for the conspiracy in the firstplace-higher profits-proves to beits undoing!

2. External pressures. This comesfrom comPetitors who are not par­ties to the secret agreement. Theyfeel under no obligation to abide bythe cartel price and actually usetheir somewhat lower price as a sell­ing point to customers. The. higherthe cartel price, the more this exter­nal competition pays. The conspi­racy must either convince all out­siders to join the cartel (making itincreasingly likely that somebodywill cheat) or else dissolve the cartelto meet the comPetition.

I would once again call the read­er's attention to Kolko's TheTriumph of Conservatism, whichdocuments the tendency for collu­sive agreements to break apart,sometimes even before the ink isdry.

Railroad rebates

John D. Rockefeller received sub­stantial rebates from railroads whohauled his oil, a factor which criticsclaim gave him an unfair advantageover other refiners.

The fact is that most all refinersreceived rebates from railroads.This practice was simply evidence ofstiff comPetition among the roadsfor the business of hauling refinedoil products. Standard got thebiggest rebates because Rockefellerwas a shrewd bargainer and becausehe offered the railroads large vol­ume on a regular basis.

This charge is even less crediblewhen one considers that Rockefellerincreasingly relied on his ownpipelines, not railroads, to transporthis oil.

The power to chargeany price wanted

According to the notion thatStandard's size gave it the power tocharge any price it wanted, bignessper se immunizes the firm fromcompetition and consumer sov­ereignty.

As an ~~efficiency monopoly,"Standard could not coercively pre­vent others from comPeting with it.And others did, so much so that thecompany's share of the market de-

174 THE FREEMAN March

clined dramatically after 1899. Asthe economy shifted from keroseneto electricity, from the horse to theautomobile, and from oil productionin the East to production in the GulfStates, Rockefeller found himselflosing ground to younger, more ag­gressive men.

Neither did Standard have thepower to compel people to buy itsproducts. It had to rely on its ownexcellence to attract and keep cus­tomers.

In a totally free market, the fol­lowing factors insure that no firm,regardless of size, can charge andget ~~any price it wants":

1. Free entry. Potential competi­tion is encouraged by any firm'sabuse of the consumer. In describingentry into the oil business, Rockefel­ler once remarked that ~(all sorts ofpeople . . . the butcher, the baker,and the candlestick maker began torefine oil."16

2. Foreign competition. As long asgovernment doesn't hamper inter­national trade, this is always a po­tent force.

3. Competition of substitutes.People are often able to substitute aproduct different from yet similar tothe monopolist's.

4. Competition ofall goods for theconsumer's dollar. Every busi­nessman is in competition withevery other businessman to get con­sumers to spend their limited dollarson him.

5. Elasticity ofdemand. At higherprices, people will simply buy less.

It makes sense to view competi­tion in a free market not as a staticphenomenon, but as a dynamic,never-ending, leap-frog process bywhich the leader today can be thefollower tomorrow.

Rockefeller was greedy

The charge that John D. Rockefel­ler was a (~greedy" man is the mostmeaningless of all the attacks onhim but nonetheless echoes con­stantly in the history books.

If Rockefeller wanted to make alot of money (and there is no doubt­ing he did), he certainly discoveredthe free market solution to his prob­lem: produce and sell somethingthat consumers will buy and buyagain. One of the great attributes ofthe free market is that it channelsgreed into constructive directions.One cannot accumulate wealthwithout offering something in ex­change!

At this point the reader mightrightly wonder about the dissolutionof the Standard Oil Trust in 1911.Didn't the Supreme Court findStandard guilty of successfullyemploying anti-competitive prac­tices?

Interestingly, a careful reading ofthe decision reveals that no attemptwas made by the Court to examine

1980 WITCH-HUNTING FOR ROBBER BARONS 175

Standard's conduct or performance.The justices did not sift through theconflicting evidence concerning anyof the government's allegationsagainst the company. No specificfinding of guilt was made with re­gard to those charges. Although therecord clearly indicates that ~~prices

fell, costs fell, outputs expanded,product quality improved, and hun­dreds of firms at one time or an­other produced and sold refined pe­troleum products in competitionwith Standard Oil,"17 the SupremeCourt ruled against the company.The justices argued simply that thecompetition between some of thedivisions of Standard Oil was lessthan the competition that existedbetween them when they were sepa­rate companies before merging withStandard.

In 1915, Charles W. Eliot, presi­dent of Harvard, observed: ~tThe or­ganization of the great business oftaking petroleum out of the earth,piping the oil over great distances,distilling and refining it, and dis­tributing it in tank steamers, tankwagons, and cans all over the earth,was an American invention."18 Letthe facts record that the great Stan­dard Oil Company, more than anyother firm, and John D. Rockefeller,more than any other man, were· re­sponsible for this amazingdevelopment. i

-FOOTNOTES-

lThomas A. Bailey, The American Pageant:A History of the Republic, 2 vols., 8th ed.(Boston: D. C. Heath and Company, 1966),2:532.

2Gilbert C. Fite and Jim E. Reese, AnEconomic History of the United States, 2nd ed.(Boston: Houghton Mifflin Company, 1965), p.367.

3D. T. Armentano, The Myths of Antitrust:Economic Theory and Legal Cases (NewRochelle, N.Y.: Arlington House, 1972), p. 64.

4'fhomas G. Manning, E. David Cronon, andHoward R. Lamar, The Standard Oil Com­pany: The Rise ofa National Monopoly, part 3:Government and the American Economy: 1870to the Present, revised (New York: Henry Holtand Company, 1960), p. 19.

5Armentano, Myths ofAntitrust, p.67.6Ida M. Tarbell, The History ofthe Standard

Oil Company, 2 vols. in 1 (Gloucester, Mass.:Peter Smith, 1950), p. 240-241.

7Gabriel Kolko, The Triumph of Conser­vatism: A Reinterpretation of American His­tory, 1900-1916 (New York: The MacmillanCompany, 1963; reprint ed., Chicago: Quad­rangle Books, 1967), p. 39.

8Armentano, Myths ofAntitrust, p. 70.9Ibid., p. 77.lOIbid., p. 73.llJohn S. McGee,ttPredatory Price Cutting:

The Standard Oil (N.J.) Case," Journal ofLawand Economics, I (October, 1958), p. 138.

l2Ibid., p. 140.l3Ibid., p. 168.l4Ibid., p. 145.l5Kolko, Triumph ofConservatism, p. 40.l6John A. Garraty, The American Nation,

vol. 2: A History of the United States Since1865, 3rd ed. (New York: Harper and Row,1975), p. 499.

17Armentano, Myths ofAntitrust, p. 83.l8Fite and Reese, An Economic History, p.

366.

William H. Peterson

TheInvisible

Hand

PITIFUL helpless giant.Is that what America is becoming,

wracked by inflation, energy con­strictions and an unfolding reces­sion? If so, it's all, I submit, for wantof understanding the ramificationsof one little word: profits.

The immediate problem may havestarted last March when a 26 percent advance in fourth-quarter 1978corporate profits (over fourth­quarter 1977 profits) was greeted byAdministration spokesmen as a((catastrophe," as putting ((businesson trial," as Hunnecessarily high."

Then, later in the year, the as­sault turned on ((already enormous"oil profits. In a television address tothe American people, President Car­ter demanded a ((windfall profits

Dr. Peterson Is the Scott L Probasco, Jr., Professorof Free Enterprise and director of the Center forEconomic Education at the University of Tennesseeat Chattanooga.

176

1980

tax" to curb those who would ((cheatthe public and ... damage the na­tion" via ((unearned billions of dol­lars."

Catastrophe? Unearned? Cheat?Damage? What goes on here?

This is not the place to engage inextensive statistical rebuttal.Enough to say that inflation causesplant and equipment to be under­depreciated and inventories under­valued, due to IRS rules and regula­tions. Profits become overstated,exaggerated. Remove the resultingphantom profits, and corporate prof­its are indeed what they have beenfor a long time, a ((catastrophe"-acatastrophic low: for example, a 5.5per cent return on assets in 1978against 7.6 per cent 10 years prior.So talk nowadays of ((record profits"is really an inflationary mirage, anational delusion.

One result of this prolonged profit

THE INVISIBLE HAND-1980 177

famine has been a drop of the cur­rent Dow Jones Industrial Averageby more than half in real termssince hitting 1,000 in February1966. Another result has been pro­longed weakening in the rates ofpersonal saving, business invest­ment and productivity growth­rates now about the lowest in theWestern industrial world, eventhough they represent pathways tojob creation and rising living stan­dards, and offsets to inflationarypressures.

Enough to say, too, that oil profits,when measured as a return on salesor equity, were less than industrialprofits as a whole in 1978, that, asPresident Carter himself concedes,oil price controls-read oil profitcontrols-have failed, that theyhave caused domestic oil productionto lag almost every year since theywere first imposed in 1971.

Profit Controls

Why, then, the masochism in de­nying ourselves desperately-neededdomestic oil supplies via a tax on~~windfall profits"? After all, it isprofits, or rather, the lure of profitsthat induces production, not prices.The bigger the lure, as a ratherstrict rule, the greater the produc­tion. This logic is now officially rec­ognized for heavy oil-why not forall oil?

And in view of the overall anti­~~big profits" campaign (super-

market operators and meatpackershave also been singled out), with itsveiled implication that perhapsprofit itself is somehow unethical,the larger question is: Just what isprofit and how, if at all, is it earned?

Critics from antiquity on haveequated profit with greed and self­ishness. In a typical vein, Cicerowrote in his De Officiis: ~~Those whobuy to sell again as soon as they canare to be accounted as vulgar; forthey can make no profit except by acertain amount of falsehood, andnothing is meaner than falsehood."In 1704 Bernard de Mandeville sawprofit as vile in origin but positive ineffect in his Fable of the Bees: Pri­vate Vices, Public Benefits. Man­deville's idea was that not onlywealth but also the arts andsciences-indeed all civilization-isthe result of not the nobility of manbut rather his baser nature. In otherwords, Mandeville labeled as vicesnormal longings for the good thingsof life-luxury, comfort, well-beingand all the other pleasures stem­ming from man's natural wants.And more recently, to cite anotherexample, in the introduction to theModern Library 1937 edition ofAdam Smith's classic Wealth ofNa­tions (1776), Max Lerner calledSmith u an unconscious mercenaryin the service of the rising capitalistclass," and held that he gave eta newdignity to greed and a new sanctifi­cation to the predatory impulses."

178 THE FREEMAN March

In truth, profit does extend be­yond business and finance. It is,frankly, gain, advantage, self­interest; and it applies to every man,woman and child-even to the al­truist, who seeks to profit others. Itcan parade under other colors­wages, salaries, fees, interest, tui­tion, rent and so on. It can be seen inthe winning of nonfinancial re­wards-say, the captaincy of a foot­ball team, a prize in a bridge tour­nament, a jury's verdict of ((notguilty." (Conversely, not winningthese things involves losses in onedegree or another.)

A Natural Motive

The profit-and-loss idea can bereadily inferred from the writings ofphilosophers from Aristotle to San­tayana' of psychologists from Freudto Skinner. It can be seen in allhuman motivation, in every humanaction, said Austrian economistLudwig von Mises, holding thatprofit and loss are ultimatelypsychic phenomena.

Broadly speaking, I think thatwhat every individual really wantsis, in the word of early 20th centurylabor leader Samuel Gompers,((more"-more as the individual seesit. More happiness as a rule. Andmore is but another name for profit.Again, I think that given theprimordial economic law of scarcity,of the universal urgency to allocatelimited resources, including time,

man must seek the most for theleast, to maximize gain, to minimizeloss. Profit-seeking is part of humannature. Nobody is exempt.

Adam Smith saw the immensityand pervasiveness of human incen­tive, of self-interest, of the profitmotive in human affairs when hewrote in The Wealth ofNations: ~~It

is not from the benevolence of thebutcher, the brewer, or the bakerthat we expect our dinner, but fromtheir regard to their own interest.We address ourselves, not to theirhumanity but to their self-love, andnever talk to them of our own neces­sities but of their advantages."

This is not to glorify profit. Likesex, the profit drive is subject toabuse. When profit overrides indi­vidual rights as in fraud or force,obviously the social fabric is torn.The mugger in Central Park, forexample, is obeying his self-interestbut to the detriment of his fellowman.

But in any free exchange bothparties profit or expect to profit, elsethe exchange would not take place.Advantage is two-way. Gain ismutual. Moreover, it invariably in­volves service to the other or others,and it is immediately reciprocated.It is, in this sense, the Golden Rulein action. The exchangers-buyersand sellers-are saying to eachother, in the words of Adam Smith:~(Give me that which I want, and youshall have this which you want."

1980 THE INVISIBLE HAND-1980 179

The profit motive is also a greatcivilizer. It promotes not only civil­ity and individual responsibility butdivision of labor and specialization,social cooperation and still more ex­changes. Hence productivity im­provement emerges as does in timean economic surplus beyond mereprovisioning of necessities. Hencethe surplus permits the flowering ofcharity, religion, music, painting,literature, education, science.Hence-if I may accelerate thethought-Western Civilization.

So Montaigne and Marx had it allwrong when they argued one man'sprofit involves another man's loss,that production for profit is at var­iance with production for use.

The Market at Work

The fact is that the prospect ofprofit-along with its magnitude­motivates and activates producers,steering production into those usesmost demanded by consumers, i.e.,into products broadly considered tobe the most useful. This is supplyand demand in action, the marketplace at work. As University ofChicago economist Yale Brozen andothers have noted, production forprofit is production for use.

Indeed, the genius of the free en­terprise system is that it can takethe profit motive-this innate, ines­capable and potentially destructivehuman trait of self-interest-andpeacefully, harmoniously and, above

all, voluntarily convert it into con­structive channels of human effort,cooperation, service and advance­ment. Are profits, then, earned?Most assuredly, yes.

In this light the concept of a~~windfall" profits tax on oil becomes,however inadvertently, a greatdeception-a tax ultimately bornenot by the companies but by theAmerican consumer, a tax that willhamper the discovery and develop­ment of new domestic oil supplies.Windfall? Again, it is the U.S. Gov­ernment itself that has repressed oilprices, beginning in 1971.

To be sure, repressing and decon­trolling prices and then taxing~~windfall" gains are done under thename of the public interest. Butself-interest in a market systemusually advances the public interestmore than those who profess to servethe public interest (apart from theirown inevitable personal interest).As Adam Smith observed, the indi­vidual ((neither intends to promotethe public interest nor knows howmuch he is promoting it.... By ...directing (his) industry in such amanner as its produce may be of thegreatest value, he intends only hisown gain, and he is in this, as inmany other cases, led by an invisiblehand to promote an end which wasno part of his intention."

Energy availability. Inflation al­leviation. Economic growth. Profitmotive. All are of one piece. ®

Leslie Snyder

The administration of a republic issupposed to be directed by certainfundamental principles of right andjustice, from which there cannot,because there ought not to, be anydeviation; and whenever any devia­tion appears, there is a kind ofstepping out of the republican prin­ciple, and an approach toward thedespotic one. -Thomas Paine

* * *JUSTICE is the only foundation uponwhich a society of free and indepen­dent people can exist. Justice is aconcrete, recognizable, and objectiveprinciple. It is not a matter of opin­ion.

In our day and age the word jus­tice is rarely used in political andeconomic discussions. The entirereason for the existence of com­munities, laws, governments andcourt systems has been forgotten.

180

But if life and property are to beprotected and secured, which is thepurpose of society, then justice mustbe the rule. To quote Paine again,~~A republic, properly understood, isa sovereignty of justice."

According to a 1931 Webster's dic­tionary, justice is the ~~quality ofbeing just; impartiality." Just isHconforming to right; normal; equit­able." A 1961 Webster's dictionarysays justice is ~~The principle of rec­titude and just dealings of menwith each other-one of the cardinalvirtues. Administration of law ..."A 1975 edition of a Grolier Websterdictionary says justice is HEquita­bleness; what is rightly due; lawful­ness...."

Since 1931 a new. meaning of theword justice has been added, that oflawfulness, which is not only er­roneous, but deceitful and mislead­ing. Justice is not based on law;

JUSTICE AND FREEDOM 181

rather, law ought to be based onjustice. It is only common sense, formen lived and worked together be­fore laws were formed. Generallylaws are passed to formalize whathas preceded under common prac­tice, what has stood the test of timeas being just and equitable. Lawsare common practice put down inblack and white for all to see andknow.

Leslie Snyder has specialized infinance and economics, businessand investments. The growingpressure of new laws has arousedher concern for the principledand peaceful return to justice.

This article is excerpted, bypermission, from her latest book,Justice Or Revolution, publishedin 1979 and available from:

Books In Focus, Inc.Suite 318160 East 38th StreetNew York, New York 10016

194 pages. $10.95

The ancient philosophers saidthat justice is speaking the truthand paying your debts, giving toeach man what is proper to him,doing good to friends and evil toenemies. Therefore, there must besomething more basic, more funda­mental than laws on which to foundjustice. In fact, the French juristCharles de Montesquieu (1689­1755) ably contended that ~~before

laws were made, there were rela-

tions of possible justice. To say thatthere is nothing just or unjust butwhat is commanded or forbidden bypositive laws, is the same as sayingthat before the describing of a circleall the radii were not equal."

Minding One's Own Business

The Greek philosophers had thesimplest definition of justice. ToPlato (c. 428-348 B.C.), in The Re­public, Book IV, justice is simply~~doing one's own business, and notbeing a busybody.... A man mayneither take what is another's, norbe deprived of what is his own....This is the ultimate cause and con­dition of the existence of all" othervirtues in the State, ~~and while re­maining in them is also their pre­servative."

In Book XII of Plato's Laws, theconclusion is drawn that ~~by therelaxation of that justice which isthe uniting principle of all constitu­tions, every power in the state isrent asunder from every other." Inother words, without justice thethreads of society unravel and soci­ety disintegrates into barbarism.

Aristotle (384-322 B.C.) inNicomachean Ethics, Book V, givesgreater perception to what justice is.It ~~is found among men who sharetheir life with a view to self­sufficiency, men who are free. . . .Thereforejustice is essentially some­thing human." (Emphasis added.) Inother words, free men may choose to

182 THE FREEMAN March

bejust or unjust. Justice, as an ethi­cal term, is voluntary; ~( ... a manacts unjustly or justly whenever hedoes such acts voluntarily." Whenwrong is done and done voluntarily,it then becomes an act of injustice.In short, HAll virtue is summed up indealing justly," said Aristotle.

More concretely, Aristotle claims,in Rhetoric, Book I, ~(Justice is thevirtue through which everybody en­joys his own possessions in accor­dance with the law; its opposite isinjustice, through which men enjoythe possessions of others in defianceof the law." There is the problem ofusing the law to legalize theft and toredistribute the property of onegroup to another group, but for thetime being, we must assume Aris­totle means the use of laws that arerightful and just. For when he says~Justice has been acknowledged byus to be a social virtue, and it im­plies all others," he has laid thefoundation of a just society.

Furthermore, Aristotle maintainsthat ~~legal justice is the discrimina­tion of the just and the unjust." And,~~Of political justice part is natural,part legal-natural, that whicheverywhere has the same force anddoes not exist by people's thinkingthis or that." Natural justice mustprecede law and form the basis oflaw thereon.

In the sixteenth century Michel deMontaigne (1533-1592), in his TheEssays, eloquently said: ~~The justice

which in itself is natural and uni­versal, is otherwise and more noblyordered, than that other justice,which is special, national, and con­strained to the ends of government."He continues, ~~There cannot a worsestate of things be imagined, thanwhere wickedness comes to belegitimate, and assumes with themagistrate's permission, the cloak ofvirtue.... The extremest sort ofinjustice, according to Plato, iswhere that which is unjust, shouldbe reputed for just."

Hobbes on Natural Justice

In Thomas Hobbes' (1588-1679)Leviathan, further ground is laid onwhich to base natural justice. Thenames just and unjust, says Hobbes,when they are attributed to men'sactions, signify conformity or non­conformity to reason. Therefore,~~Justice . . . is a rule of reason bywhich we are forbidden to do any­thing destructive to our life, andconsequently a law of nature."

Then Hobbes leads beautifullyinto the virtue ofjust actions: ~(That

which gives to human actions therelish of justice is a certain noble­ness or gallantness of courage,rarely found, by which a man scornsto be beholding for the contentmentof his life to fraud, or breach ofpromise. This justice of the mannersis that which is meant where justiceis called a virtue; and injustice, avice."

1980 JUSTICE AND FREEDOM 183

Earlier it was established thatjustice is the social virtue on which ajust society is constructed. Hobbesadds to this not only by tying vir­tues to the laws of nature, but tomoral philosophy as well. ~~Now thescience of virtue and vice is moralphilosophy; and therefore the truedoctrine of the laws of nature is thetrue moral philosophy.... For moralphilosophy is nothing. else but thescience of what is good and evil inthe conversation and society ofmankind." Thus, Hobbes establishesthe fact that ajust society is a moralsociety.

Saint Augustine (354-430) in TheCity of God, Book XIX, declares~~Where, therefore, there is no truejustice there can be no right. Forthat which is done right is justlydone, and what is unjustly donecannot be done by right." Hence,justice precedes Hrights."

Joseph Joubert eloquentlyphrased justice as truth in action.

Since practicing the virtue of jus­tice is voluntary, man ought to havethe courage to stand up and fight forwhat is right and against what iswrong. Cato the Younger said it thisway: ~~ ... a man has it in his powerto be just, if he have but the will tobe so, and therefore injustice isthought the most dishonorable be­cause it is least excusable."

Another way to consider what jus­tice is, is to compare it with injus­tice. For example, in Utilitarianism,

John Stuart Mill (1806-1873) statesthat (( ... it is just to respect, unjustto violate, the legal rights of anyone." Second, U ••• injustice consistsin taking or withholding from anyperson that to which he has a moralright." Third, ((It is universally con-sidered just that each person shouldobtain that (whether good or evil)which he deserves." Fourth, ((It isconfessedly unjust to break faithwith anyone: to violate an engage­ment, either expressed or im­plied...." Fifth, HIt is, by univer­sal admission, inconsistent with jus­tice to be partial."

A Moral Issue

Mill, too,sees justice as a moralissue. He concludes: ((Whether theinjustice consists in depriving a per­son of a possession, or in breakingfaith with him, or in treating himworse than he deserves, or worsethan other people who have nogreater claims, in each case the sup­position implies two things-awrong done, and some assignableperson who is wronged. Injusticemay also be done by treating a per­son better than ot_hers; but thewrong in this case is to his competi­tors, who are also assignable per­sons.... Justice implies somethingwhich it is not only right to do, andwrong not to do, but which someindividual person can claim from usas his moral right."

Thomas Paine's Dissertations

184 THE FREEMAN March

speak about justice where the publicgood is concerned. He maintainsthat, ~~The foundation-principle ofpublic good is justice, and whereverjustice is impartially administered,the public good is promoted; for as itis to the good of every man that noinjustice be done to him, so likewiseit is to his good that the principlewhich secures him should not beviolated in the person of another,because such a violation weakenshis security, and leaves to chancewhat ought to be to him a rock tostand on."

The great American constitu­tional lawyer of the nineteenth cen­tury, Lysander Spooner, wrote apamphlet entitled: Natural Law, orThe Science of Justice, which suc­cinctly summarizes what justice is:

The science of mine and thine-thescience of justice-is the science of allhuman rights; of all a man's rights ofperson and property; of all his rights Wlife, liberty, and the pursuit of happi­ness.

lt is the science which alone can tellany man what he can, and cannot, do;what he can, and cannot, have; what hecan, and cannot, say, without infringingthe rights of any other person.

It is the science of peace; and the onlyscience of peace; since it is the sciencewhich alone can tell us on what condi­tions mankind can live in peace, or oughtto live in peace, with each other.

These conditions are simply these: viz.,first, that each man shall do, towardsevery other, all that justice requires himto do; as, for example, that he shall pay

his debts, that he shall return borrowedor stolen property to its owner, and thathe shall make reparation for any injuryhe may have done to the person or prop­erty of another.

The second condition is, that each manshall abstain from doing to another, any­thing which justice forbids him to do; as,for example, that he shall abstain fromcommitting theft, robbery, arson, mur­der, or any other crime against the per­son or property of another.

So long as these conditions are fulfilledmen are at peace, and ought to remain atpeace, with each other. But when eitherof these conditions is violated, men are atwar. And they must necessarily remainat war until justice is re-established.

Through all time, so far as historyinforms us, wherever mankind have at­tempted to live in peace with each other,both the natural instincts, and the col­lective wisdom of the human race, haveacknowledged and prescribed, as an in­dispensable condition, obedience to thisone only universal obligation: viz., thateach should live honestly towards everyother.

The ancient maxim makes the sum ofman's legal duty to his fellow men to besimply this: "To live honestly, to hurt noone, to give to every one his due ..."

Never has such a complex subjectas justice been treated so clearly andsimply. To summarize justice thusfar: Justice means that each must beaccountable for his own actions, en­titled to the reward of his labor, andresponsible for the consequences ofhis wrong doings.

The love of justice should be in-

1980 JUSTICE AND FREEDOM 185

stilled in every man, woman andchild-all should wish to see justicedone. For without justice the rule ofmen (dictatorship), not of law, as­sumes power. Without justice, soci­ety disintegrates into barbarism,where courts of law are adminis­tered by favor and pull instead ofobjective law, and without objectivelaws, the individual is at the mercyof the ruling power and its agents.The ancient atrocities return, suchas no trial by jury, confiscatorytaxes on life and properly, the pur­chasing of judges, legislators, andsheriffs; all previous forms of theprior administration of justice be­come part of the current machinerywhich administers not justice, butinjustice or tyranny.

In short, all that is good rests onjustice. Where there is no justice,there is no morality-no right orwrong-anything goes and usuallydoes. Justice is a social virtue to bepracticed by individuals. Justicedemands that the individual rewardor recognize good and condemn evil.To practice justice one should knowa man for what he is and treat himaccordingly, whether he be honest,dishonest, friend or thief. The goodshould be rewarded, the badpunished.

The Highest Goal

Society cannot place before it ahigher or nobler goal than the ad­ministration ofjustice. Thus, here is

a bit of advice from Conversationswith Goethe, March 22, 1825: cCAgreat deal may be done by severity,more by love, but most by cleardiscernment and impartial justice."

Once the meaning of justice hasbeen established, next comes theunderstanding of freedom and lib­erty, which are crucial because onlyunder freedom can the individualachieve his highest potential andpursue his happiness.

To speak of liberty and freedom isto speak first of natural laws or theright of nature. Hobbes lays an ex­cellent foundation ofnatural laws orrights. He affirms that the right ofnature is the liberty each man has touse his own power for the preserva­tion of his own life, and his ownjudgment and reason are the bestmeans for achieving it.

The first law of nature, accordingto Jean Jacques Rousseau (1712­1778), results from man's nature.cCHis first law is to provide for hisown preservation, his first cares arethose which he owes to himself; and,as soon as he reaches years ofdiscre­tion, he is the sole judge of theproper means of preserving him­self...."

Therefore, ifman's first obligationis to provide for his own life, hemust live under the proper condi­tions in which to sustain his life,namely, liberty. By liberty is under­stood the absence of external im­pediments, the absence of opposition.

186 THE FREEMAN March

Hayek on LibertyIn The Constitution of Liberty,

Nobel-prize winner FriedrichA.Hayek points out that liberty is anegative concept like peace. ((It be­comes positive only through whatwe make of it. It does not assure usof any particular opportunities, butleaves it to us to decide what use weshall make of the circumstances inwhich we find ourselves.... " Hecontinues, ((Liberty not only meansthat the individual has both the op­portunity and the burden of choice;it also means that he must bear theconsequences of his actions and willreceive praise or blame for them.Liberty and responsibility are in­separable." (Emphasis added.)

To expound further, Mill explainsthat one cannot take away another'sfreedom no matter how sincerelyone tries to protect another. Only byour own hands can any positive andlasting improvement in our lives beworked out. And through ((the influ­ence of these two principles all freecommunities have both been moreexempt from social injustice andcrime, and have attained morebrilliant prosperity, than anyothers...."

Further, ((. . . any restriction onliberty reduces the number of thingstried and so reduces the rate ofprog­ress. In such a society freedom ofaction is granted to the individual,not because it gives him greatersatisfaction but because if allowed to

go his own way he will on the aver­age serve the rest of us better thanany orders we know how to give."

In short, liberty is the only objectwhich benefits all alike and shouldprovoke no sincere opposition. Lib­erty ((is not a means to a higherpolitical end. It is itself the highestpolitical end," says Lord Acton. It isrequired for security in the pursuitof the highest objects of private lifeand civil society.

Morality Requires Freedom

If liberty is to live upon one's ownterms and slavery is to live at themercy of another's, then it followsthat to live under one's own termsmeans the individual has a choice ofactions. He can be virtuous or not;he can be moral. Therefore, moralityrequires freedom. Thus, only freemen can be just men!

In his The Road to Serfdom,Hayek ties liberty to morality. Sincemorals are of necessity a phenome­non of individual conduct, to bemoral one must be free to makechoices. Where man is forced to actby coercion, the ability to choose hasbeen pre-empted. Only under libertyand freedom can man be moral. As aresult, only ((where we ourselves areresponsible for our own interests ...has our decision moral value. Free­dom to order our own conduct in thesphere where material circum­stances force a choice upon us, andresponsibility for the arrangement

1980 JUSTICE AND FREEDOM 187

of our own life according to our ownconscience, is the air in which alonemoral sense grows and in whichmoral values are daily recreated inthe free decision of the individual.Responsibility, not to a superior, butto one's conscience, the awareness ofa duty not exacted by compulsion ...and to bear the consequences ofone's own decision, are the very es­sence of any morals which deservethe name."

The facts have been establishedthus far that man must live underliberty to become as productive, asnoble, and as just as he can, sinceliberty is the condition under whichmorality thrives. Also, only the in­dividual knows what is best for him­self. And finally, liberty does notprovide opportunities, but leaves theindividual free to choose those ac­tions which he thinks will best suithim and to bear the consequences ofthose actions.

The Price of Freedom

There is one more thing to con­sider about freedom and liberty­the price. Tocqueville remarked,HSome abandon freedom thinking itdangerous, others thinking it im­possible." But there is a third rea­son. Some abandon freedom think­ing it too expensive. Freedom is notfree. ~~Those who expect to reap theblessings of freedom, must, likemen, undergo the fatigues of sup­porting it," noted Paine.

HFreedom is the most exactingform of civil government-it is, infact, the most demanding state of allfor man. That is because freedomdemands-depends upon-self­discipline from both the governedand the governing. The foundationof freedom is self-government andthe foundation of self-government isself-control," explains author RusWalton, of One Nation Under God.Freedom requires more, however. Itrequires a strong and vigilant de­fense. ~(The greater the threat of evil,the stronger that defense must be.That which is right does not surviveunattended; it, too, must have itsdefenders. . . . "

Is liberty worth the effort? Accord­ing to Frederic Bastiat, all you haveto do is look at the entire world todecide. That is, which ~~countries

contain the most peaceful, the mostmoral, and the happiest people?Those people are found in the coun­tries where the law least interfereswith private affairs; where govern­ment is least felt; where the indi­vidual has the greatest scope, andfree opinion the greatest influence;where administrative powers arefewest and simplest; where taxes arelightest and most nearly equal, andpopular discontent the least excitedand the least justifiable; where indi­viduals and groups most activelyassume their responsibilities, and,consequently, where the morals of... human beings are constantly im-

188 THE FREEMAN

proving; where trade, assemblies,and associations are the least re­stricted; ... where mankind mostnearly follow its own natural incli­nations; ... in short, the happiest,most moral, and most peaceful peo­ple are those who most nearly followthis principle: although mankind isnot perfect, still, all hope rests uponthe free and voluntary actions ofpersons within the limits of right;law or force is to be used for nothingexcept the administration ofuniver­sal justice."

What this means to us today isthat our society, so filled with gov­ernment regulations and laws, hastaken away many of our liberties.For example, we cannot go into somebusinesses without being licensed,

Justice vs. Charity

taxed, and regulated. We are pre­sumed guilty (of dishonesty) untilproven innocent (which is impossi­ble). Our reputations are continu­ally under attack and, for the mostpart, stand for nothing. Honesty andintegrity, once the backbone of oursociety, have been replaced by gov­ernment regulations and promises.Under this system of injustice all ofus are losing our liberties, wealth,and happiness.

What better way to summarizethe spirit of liberty and freedom andjustice than to quote Tocqueville,who said, ttl should have loved free­dom, I believe, at all times, but inthe time in which we live I am readyto worship it." @

IDEAS ON

UBERTY

JUSTICE is the execution of the law which treats all men equally. In itsexercise the state has the monopoly of the use of force.... The state hasthe power of the sword to execute justice.

Some feel that this idea of justice is a cold, heartless concept. Theywant the state to produce social and economic justice as well. They wantjustice to include a more equal distribution of the goods of this world.They want charity and sympathy to be effected by the power of the law.In the process of broadening the meaning of justice to include thesepolitical activities, real justice is destroyed. The use offorce to take fromsome to give to others is the very opposite ofjustice. Economic equalityor economic redistribution cannot be effected by force apart from anunequal, and thus unjust, treatment of individual citizens. When thisbecomes the policy of the state, justice no longer prevails.

FRANCIS E. MAHAFFY, "Social Justice"

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN

Reflections onHistory

WHEN Jacob Burckhardt, the Swisshistorian of art and culture, died in1897, he left a series of classroomlecture notes that he considered un­ready for book publication. It wasonly as he was dying that he gavepermission to his heirs to bringthem out if they saw fit. The noteswere originally published in Ger­many in 1905, but it was not untilsome forty years later, in the middleof a war against the very to­talitarianism that Burckhardt hadpredicted, that the first Englishtranslation was made.

The original American title, as of1943, was Force and Freedom;Reinhold Niebuhr and others seizedupon the book at once for its as­toundingly accurate propheciesabout the coming of the GoliathState. The odd thing was thatBurckhardt, no Hegelian, did not

believe in historical determinism.His fluid conception of history couldhave done wonders to counteract theMarxism and neo-Marxism thathave bemused so many of our intel­lectuals. But his influence has beenlimited, and his name has been pret­ty much forgotten.

Now, as part of a program that isseeing many neglected classics re­stored to contemporary use, the Lib­erty Fund of Indianapolis has repub­lished Force and Freedom as Reflec­tions on History (Liberty Classics,7440 North Shadeland, In­dianapolis, Indiana 46250, 354pages, $9.00 cloth; $4.00 paper),with a beautifully comprehensive in­troduction by Gottfried Dietze.What immediately strikes the readeris that Burckhardt, a man of thenineteenth century, explains the1980 headlines as no modern com-

189

190 THE FREEMAN March

mentator has succeeded in doing.Take his discussion of Islam, forexample. In the West, he. says, stateand church have not fused into Honeoppressive whole." But in Islam thefusion took place. ~~The whole of cul­ture," he wrote, Hwas dominated,shaped and colored by it. Islam hasonly one form of polity, of necessitydespotic, the consummation ofpower, secular, priestly, and theo­cratic.... This aridity, this drearyuniformity of Islam, which is so ter­ribly limited on the religious side,probably did more harm than goodto culture, if only because it ren­dered the peoples affected by it quiteincapable of going over to anotherculture."

If our editorialists had knownabout Burckhardt, they would nothave been caught so short by theapparition of the Ayatollah Kho­meini. And if our policy makers inWashington had absorbed some ofBurckhardt's wisdom, they wouldnever have been deluded into think­ing that detente with a totalitarianpower could ever come to anything.

Consequences of Intervention:A Subtle Understanding

Burckhardt did not believe in his­torical ~~laws." But if nothing wasfated, how could he have been such agood prophet? Only by a subtle un­derstanding of the word ~~if." Des­potism would result Hif" the Statewere to be permitted to absorb all

the activities of men. But such ab­sorption leads to stagnation and de­cay. History, as Burckhardt ob­served, is filled with overturns andinterruptions. Great men can makea difference, for good or for ill. Onewhole chapter in Reflections on His­tory is given over to a discussion ofluck. It was lucky that the Greeksconquered Persia and the RomansCarthage, unlucky that Athens wasdefeated by Sparta. It was unluckythat Caesar was murdered before hehad time to consolidate the RomanEmpire into u an adequate politicalform." In the eighth century it waslucky that Europe held Islam at bay.(Query: can we count on luck a sec­ond time around?)

Marx defined history as the his­tory of class struggles. Burckhardtsaid Hnonsense" to Marx and toMarx's master Hegel. InBurckhardt's estimation, historywas a result of the interaction ofState, religion, and culture, andcould take protean forms. Some­times culture (as determined by so­cial power) dominated the scene,sometimes it was religion. Therecould be totalitarianisms that wereatheistic; on the other hand, therecould be theocracies as despotic asany secular tyranny.

The Criminality of Rulers

Burckhardt regarded force as evil,but he had no illusions about itsinevitable exercise. Great men were

1980 REFLECTIONS ON HISTORY 191

quite capable of great crimes in con­solidating a state, and genius andmadness often went together. A jus­tification for the crimes of great menseemed to lie in the fact that bythem Han end could be put to thecrimes of countless others." ((Thegreatest example," said Burckhardt,((is offered by the Roman Empire,inaugurated by the most frightfulmethods . . . and completed by thesubjection ofEast and West in riversof blood." The end result of Romancrimes was the Hcreation of a com­mon world culture, which also madepossible the spread of a world reli­gion, both capable of being trans­mitted to the Teutonic barbarians ofthe Volkerwanderung as the futurebond of a new Europe."

But even though good may havecome from the evil of Romanmethods of conquest, Burckhardt re­fused to condone violence. The re­sults of violence could be overcomeas men strove ((to tum· mere powerinto law and order." But not everydestruction entails generation.Sometimes, so Burckhardt observed,«a people which has been too bru­tally handled will never recover."Asia, so it appeared to Burckhardt,has been broken by the two periodsof Mongol rule.

The Plague of Centralization

Burckhardt's ideal· civilization wasone in which culture and religionestablished unseen· but effective

boundaries which the State did notdare to pass. His own Switzerlandwas a case in point. As GottfriedDietze points out in his introduction,Burckhardt was a product of thearistocratic Swiss city of Basel,which had somehow escaped theleveling and centralizing effects ofthe French Revolution and theNapoleonic conquests.

Burckhardt admired the Germanyof Goethe, a land of small prin­cipalities and culture-loving courts.He considered Bismarck an evil ge­nius, and regarded the Franco­Prussian War as the beginning ofthe end of everything he had ad­mired in the Germany where he hadstudied under Ranke. Since Ger­many, under Bismarck, had takenpolitics as its principle, it wouldhave, so Burckhardt said, to con­tinue on that course. Dietze men­tions a letter Burckhardt wrote to afriend during the Franco-PrussianWar in which the prediction wasmade that the learned gentry ofGermany would have a rude awak­ening when they saw the spiritualsterility that would come with Prus­sian centralization.

The Italy that Burckhardt lovedas a student and historian ofart waspre-Garibaldi and pre-Cavour. Afterall, the Renaissance took place insmall independent principalitiesand cities, not in a land that made((unification" a virtue. Burckhardtstopped writing for publication

192 THE FREEMAN

when it became apparent that thecentralizers were going to wineverywhere. He had enjoyed writingabout Ubeautiful things" in his TheCivilization of the Renaissance inItaly (1860) and The History of theRenaissance (1867). But after theFranco-Prussian War he became, asErnst Cassirer said, a ~~pathologist"

of a civilization that he saw on thedowngrade. It was because he felt hecould no longer cheer his readersthat he wanted his reflections onworld history to remain unpub­lished. He wanted his gloomy prog­nostications to be limited to a re­stricted audience. Luckily for us, herelented at the last. ®

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