the

FreemanVOL. 32 NO.1 • JANUARY 1982

Exploitation·and Knowledge Gary North 3Concerning the importance of accurate information and awarenessof opportunities.

And Now for Some Good Economic News! Russell Shannon 12Computers and other innovations in technology signal marketprogress.

Co-Determination in West Germany Hans F: Sennholz 15The power of decision amounts to ownership and control-and maydestroy competitive enterprise.

The Humanity of Trade Frank Chodorov 23Far better that men come together for peaceful trade than meet ona battlefield.

They Solve Tomorrow's Problems Brian Summers 30Preventive maintenance of the market economy.

The Civil War andPolitical Nationalization Clarence B. Carson 32

Concerning the extension of Federal intervention and control in theaftermath of the Civil War.

Adam Smith's Economics of Freedom John Montgomery 47Our debt to one of the. great advocates of the market economy.

Some Mistakes of Marx Wm.. Henry Chamberlin 55A 1956 appraisal of the more obvious failures of sociialism.

Book Reviews: 62"Enterprise Zones: Greenlining the Inner Cities" by Stuart M. Butler

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. Permission granted toreprint any article from this issue, with appropriate credit, except "Exploitation and Knowl­edge."

Gary North

Exploitatlonand

Knowledge

THE PROFIT MOTIVE: Everyone knowsthat the free market economic sys­tem operates in terms of the profitmotive. The trouble. is, hardly any­one understands where profits comefrom. This includes businessmen whomake them. This failure to under­stand the source of profits has givena real advantage to the critics of themarket. When the supposed defend­ers of the market argue that thehope for profit is the motivating forceof capitalism, yet they cannot stateclearly where profits come from, theyhave left themselves intellectuallydefenseless.

The critics claim that profits comefrom the ability of the stronger,richer, and more ruthless members

© Gary North, 1982. Gary North, Ph.D., is Presidentof the Institute for Christian Economics. The ICE pUb­lishes a newsletter, Biblical Economics Today. A freesix-month trial SUbscription is available by writing toSubscription OffIce, ICE, P. O. Box 8000, Tyler, Texas75711.

of the society to exploit their weakerneighbors. Tbe word "exploitation"has been a favorite one in socialistcircles. Marx made the word aweapon ag&ip.st capitalism. Theworkers are •exploited by the capi­talists, Marx said, because the capi­talists can extract surplus value fromlaborers. The •laborer has to work,say, three hours in order to haveenough money to buy minimum foodand shelter, but the capitalist keepshim on the job many hours longer.Thus, the capItalist "exploits" extramoney from hi.s workers.

The theory was absolutely wrong,and it was demolished by the Aus­trian economist, Eugen von Bohm­Bawerk, befor~Marx died. l Workers

IThe Exploitation Theory ofSocialism-Com­munism by Eugeni von Bohm-Bawerk. An ex­tract from Capital and Interest. Third revisededition 1975, 17(),pp. paperback. LibertarianPress, P. O. Box 218, South Holland, Illinois60473.

4 THE FREEMAN January

are paid the value of their output, orvery close to it. When they are notpaid according to the value of theiroutput, other profit-seeking employ­ers start offering them more, sincethey want the "surplus value" forthemselves.-The market price of theformerly "exploited" labor servicesclimbs, since no capitalist wants toallow his competitors the advantageof hiring underpriced labor services.Capitalists may well be greedy; thisis the best assurance for workersthat they are being paid what theyare worth.

The Ignorance Factor

It might be argued that laborersreally do not know what their laborservices are worth on the free mar­ket. Therefore, they refuse to take achance and threaten to quit. Theyare afraid of losing their jobs, andthey are not aware of the better op­portunities available to them else­where.

This is quite true; accurate infor­mation is not a free good. It is, per­haps more than any other scare eco­nomic resource, the most valuable ofassets. If men are unaware of an op­portunity, then they cannot take ad­vantage of it. But all men do notneed to be informed of the existenceof higher wages, or better workingconditions, or jobs that offer moredays ofpaid vacation per year. A fewworkers are sufficient to alert all theothers. "Say, did you hear that XYZ

Widgets have raised their pay scale25 per cent?" That story, if true, isall that is needed to alert workers.The information comes to a few. Theystart quitting. Others wonder whytheir old friends are, leaving the job.Nothing spreads faster than infor­mation about opportunities. Rumorsare efficient means of spreading in­formation; in fact, the problem fac­ing the listener is to sort out falsefrom true information. But there isan economic incentive for laborersto check out rumors of major em­ployment opportunities.

Consider a particular worker. Forthe sake of the argument, let us as­sume that he is indeed "exploited."His employer knows that he is worth,say, $10 per hour. But we will notcall them dollars, since inflationtends to make dollar-denominatedarguments look silly after a fewyears, or at least very old-fashioned.So we will not pay him in dollars.We will pay him in a hypotheticalcurrency units, shekels. (A shekel inancient Israel was a unit of weight,which made it easier for people toknow what units they were dealingwith: shekels of silver, shekels ofgold, etc.) The employer is payinghim only eight shekels per hour, andthe company is pocketing the extratwo shekels. Or maybe the companyis only pocketing one shekel, but ischarging less for the product, and isthereby underbidding the competi­tion' and increasing its share of the

1982 EXPLOITATION AND KNOWLEDGE 5

market. Whatever the case happensto be, the laborer is not receiving thevalue of his output.

What Can He Do?

What can he do to better himself?He can start investing. He startsputting time and effort into a "newcompany," himself. He starts invest­ing in a search for information. Helooks in the classified ad columns ofhis newspaper to see what other cor­porations are paying for labor ser­vices like his. He starts calling oldfriends on the phone, asking themwhat conditions are like at ABCWidgets, Inc. He starts calling thepersonnel offices of rival companies.Sooner or later, if he is really beingexploited, he may find proof of theexploitation: some firm that is offer­ing more than eight shekels per hourfor labor services like his.

This investment involves sacri­fice. When he searches for better in­formation concerning the market heis participating in, he is an inve~tor.

He is a kind of capitalist. More im­portant, he becomes an entrepre­neur. He thinks ~here is a better op­portunity around. He hopes he canfind it by investing time and effortinto his search. He expects to betterhimself if he discovers higher pay,or better working conditions, beingoffered by another company. Hewants to take advantage of any suchoffer. But the key fact is this: ini­tially, he does not know lor certain.

If he knew for sure; he would nothave to spend time searching. Hewould simply take the better offer.There is ignorance involved. He maynot be exploited after all. Perhapshis employer is paying him a mar­ket wage. In fact, perhaps the mar­ket is about. to drop; his employermay be paying him too much, bymistake. Also, even if a better offeris ready and waiting, he may notfind it in time. He may never find itat all. There is no way for him to besure just wh~tithe market is offeringto people who sell services compa­rable to his. And even if he finds abetter deal, he may not be able toconvince the prospective employerthat he, as a skilled worker, actuallypossesses the i qualifications. Afterall, the prospective employer reallyis not certain just who this prospec­tiveemployee ,is, or what he can doon the job. The ignorance factor isinescapable.

The worker •. who begins a searchto better his position is, in fact, anentrepreneur. He is making a fore­cast: with work, and time, and tele­phone calls, h¢ thinks he can find abetter opport~nity. He cannot becertain, but he thinks so. He facesan uncertain f¥ture. He is not omni­scient. No p~rson is omniscient.Nevertheless, he "senses" that thereare better opportunities available.He is willing to invest time in thesearch. He skJPs Saturday afternoontelevision in. order to find a better

6 THE FREEMAN January

opportunity. He skips bowling withthe boys. He skips an afternoon offishing. In other words, he invests ascarce resource-leisure-by forfeit­ing it. He tries to get a return on hisinvestment: money, or working con­ditions, or a job that offers possibili­ties of advancement, that will bemore valuable to him in the futurethan the leisure time activities arevaluable to him in the present.

Is He Exploited?

Is the worker really exploited? Howhas his present employer exploitedhim? Only by not giving him a gift,namely, the precious gift of accurateknowledge. He has not come to theworker and said to him, "Look,Charlie, I'm paying you eight shek­els an hour, but ABC Widgets ispaying at least ten per hour. I'veknown that for a long time. I feelguilty for not telling you. Now, ifyou want to call the personnel de­partment at ABC Widgets, go ahead.See if you can get a job lined upthere. If you do, come to me and tellme. Then I'll be forced to give you araise. Fair enough? Have a nice day."How can we distinguish "exploita­tion" from a mere refusal to giveaway information that is economi­cally detrimental to the income ofthe one who is giving it? (And howcould we distinguish the gift of in­formation from possible stupidity onthe part of the company's manage­ment?)

Furthermore, how can we distin­guish the worker who goes shoppingfor a better job from a capitalist?And if he finds the job, and refusesto run to all his fellow workers totell them about the job down at ABCWidgets that pays 25 per cent more,how can we distinguish him from anexploiter of labor himself? After all,he has information that would helphis buddies. He wants to take ad­vantage of the information to in­crease his income. But that is pre­cisely what his present employer isdoing to him: taking advantage ofbetter information. If there is onlyone job available at ten shekels perhour, and he takes advantage of it,has he become a selfish exploiter ofhis fellow man? If he forfeits theraise, despite his investment of timeand effort in searching for a betterdeal for himself, has he acted ratio­nally? Is rational action-takingadvantage of the opportunity a mansearches for-inevitably immoral,selfish, and exploitative?

Employer-Entrepreneur vs.Worker-Entrepreneur

How can we distinguish the workerfrom the employer? What is differ­ent about an employer-entrepre­neur, who takes advantage ofhis ac­cess to information by refusing togive that information away, from aworker-entrepreneur, who takes ad­vantage of his access to informationby refusing to give that information

1982 EXPLOITATION AND KNOWLEDGE 7

away? The employer-entrepreneurspent years in establishing his busi­ness, and his profits stem from usingaccurate information wisely. He hasinvested in information-gathering,and it has finally paid off. He isbeating his competition, since ABCWidgets does not· know that thereare workers available-or at leastone worker available-who will workfor slightly over eight shekels perhour. He is profiting at the expenseof the competition: the other Widgetcompany. He is also profiting fromthe worker's lack of knowledge. Butif the worker finds out, and otherworkers do not find out, then theworker is also profiting at the ex­pense of the other workers (his com­petition) and his present employer,who now will have to pay him more,or do without his services. What isthe difference?

The people who proclaim that cap­italism exploits workers are reallyproclaiming something very, verydifferent: capitalism allows peopleto take advantage of better infor­mation, at least until the competi­tion finds out and starts taking ad­vantage of it themselves. What theopponents of capitalism are reallyproclaiming is that men have a moraland legal obligation to give away theworld's most valuable scarce eco­nomic resource: accurate, profitableknowledge. The critics expect mento give away a resource as if it werea free good, when we all know it is

anything but a free good. It takes aninvestment in an uncertain future togain ownership of this asset. Yet thecritics want us to believe that it isexploitative to use it once we havediscovered it~ 'l'he critics want to killthe private markets for information.

Hidden Treasure

Some of the finest economic wis­dom in history can be found in Je­sus' parables. He aimed His para­bles at the average listener. He knewthat they were not trained theolo­gians. They would not respond to de­tailed theological analysis. So hewent to them with parables, andseveral were. '~pocketbook parables."(Others were agricultural parables:seeds, growtn~ sowing, reaping.) Hisparable of the buried treasure wasbased on His. understanding of themarket's process of searching for in­formation and using it to one's ad­vantage: Again, the kingdom ofheaven is like;unto treasure hid in afield; the which when a man hathfound, he hideth, and for joy thereofgoeth and selZeth all that he hath,and buyeth . that field (Matthew13:44).

Consider what the man in theparable was. doing. He stumblesacross an important piece of infor­mation. There is a valuable treasurehidden in a field. He is not sure justwho it was who hid it, but it is there.He presumes i that the person whohid it was not the present owner of

8 THE FREEMAN January

the field. He is not certain of this atfirst, but he is willing to take a ma­jor step. He hides the treasure again,and goes out and sells everythingthat he owns. I suppose he did somepreliminary investigating, just to seeif the present owner will sell it. Butthe present owner may change hismind. Or he may have known aboutthe treasure all the time, and he isluring the speculator into a disas­trous decision. The discoverer can­not be certain. But he takes a chance.He sells everything, and goes to theowner with his money. He buys thefield. Now he owns the treasure. Hetook advantage of special informa­tion: his knowledge of the existenceof a treasure in a particular field. Hetook a risk when he sold everythingthat he owned to come up with thepurchase price. Then he went backto the owner, thereby alerting theowner to a possible opportunity-thepossibility that something valuableis connected to the field. Maybe itwould be unwise to sell it after all.But finally he decides to sell. Theentrepreneur-the man with the in­formation and some venture capi­tal-has closed the deal. He has at­tained his goal.

The Socialist View

The modern socialist would beoutraged at this parable. The entre­preneur, who was striving to betterhis position, was clearly immoral.First, the land he was on should

have been owned by the people,through the State. Second, he hadno business being on the land, with­out proper papers having been filedwith the State in advance. Third, heshould never have hidden the trea­sure again. It was the State's. Fourth,if it was not the property of the State,then he should have notified the pri­vate owner of the property. Fifth,failing this, he was immoral to makethe offer to buy the property. He wasstealing from the poor man whoowned the property. Sixth, shouldhe attempt to sell the treasure, theState ought to tax him at a mini­mum rate of 80 per cent. Seventh, ifhe refuses to sell, the State shouldimpose a property tax, or a directcapital tax, to force him to sell.

What the socialist-redistribution­ist objects to is the lack ofmankind'somniscience. The economy shouldoperate as smoothly, as efficiently,and as profit-free as an economy inwhich all participants had equallygood knowledge-perfect knowl­edge-as all other participants.Knowledge, in a "decent" social or­der, is a universally available freegood, equally available to all, andequally acted upon by all. It is onlythe existence of private property, andpersonal greed, and a willingness toexploit the poor, that has createdour world of scarcity, profits, andlosses. Knowledge about the futureshould be regarded as a free good.Profits are therefore evil, not to

1982 EXPLOITATION AND KNOWLEDGE 9

mention unnecessary, in a soundeconomy. This has been the argu­ment-the real, underlying, im­plicit argument---:-of all those whoequate profits and exploitation. Menare not God; they are not omni­scient. This angers the socialists, andthey strike out in wrath against themarket order which seeks to encour­age men to search for better infor­mation so that they can profit fromits application in economic affairs.The socialists prefer to stop thesearch for information concerningthe uncertain future, rather than toallow private citizens to profit per­sonally from the use ofknowledge insociety.

The Transfer of Knowledge

Accurate knowledge of the futureis a valuable asset. How can societyprofit from its discovery and appli­cation? Not everyone wants to takethe time and trouble to search outthe future. No one can take the timeand trouble to search out all the pos­sible bits of information concerningan uncertain future that might beuseful to him or his family. So weallow others to do the work, bear therisk of action, and sell us the resultsat a price we are willing and able topay. We consumers become the users,and therefore the beneficiaries, ofthe entrepreneur's willingness andability to peer into the future, takesteps to meet the demand of the un­certain future, and deliver the fin-

ished product,-+-consumer good, con­sumer service, or spiritual insight­at a price we are willing to pay. Whyshould we care what price he paid,or what risks: he bore, when we paythe price? Sure, if we knew what hepaid, we might guess that he is will­ing to take less than what he is ask­ing, but why should we care from amoral standpoint what he paid ver­sus what he is asking us to pay?

Besides, the 'existence of his profiton any trans8iction encourages otherentrepreneurs to search out similaropportunities to present to us in thefuture. Let us consider our old friend,the entrepreneur-worker. He ac­cepts the job with ABC Widgets. Theother workers throw a farewell partyfor him. The conversation inevitablygets around to' the reason why he isleaving. "Hey, iCharlie, why are youleaving XYZ, Widgets? Haven't wehad great times together? What areyou trying to do, get on their bowl­ing team or something?" And Char­lie may be wiUing to say, now thathe knows he has his job, and thereare others just like it available. Nowhe can look liike a smart cookie infront of his friends. "I'm leaving be­cause I'm going to make 25 per centmore each week, that's why. Whyshould I stay. here at XYZ Widgetsand work for iless than I'm worth?"That bit of information will makeitself felt in the labor market ofXYZWidgets very, very fast. The man­agement at XYZ Widgets will have

10 THE FREEMAN January

to do some explaining, and perhapsmake some wage adjustments forthe workers, as the effects of thatnew knowledge are felt. The spreadof information is rapid because thepay-off for those who have it is im­mediate, and personally beneficial forthose who act in terms of it.

A Chance· to Profit fromthe Use of Better Knowledge

If knowledge is a scarce economicresource, and ifit is a good thing formembers of society to act in terms ofaccurate information, then it is cer­tainly a wise policy to allow citizensto profit from the use of betterknowledge. That way, there is aneconomic incentive for others to en­ter the "knowledge market" and takeadvantage of whatever knowledge isavailable. The spread of accurateknowledge is increased because ofthe profit potential offered to actingindividuals. If better knowledge is avaluable asset, then its sale in themarket should be encouraged.

Inaccurate knowledge should bedropped rapidly. How do we best stopthe transfer of inaccurate knowl­edge? Make it expensive to act interms of inaccurate knowledge. Thisis why we need opportunities to makelosses as well as profits. Make theuse of inaccurate knowledge expen­sive to those who use it, and you willdiscourage its transfer through thewhole society. This is perhaps moreimportant than encouraging the

production or discovery of new, ac­curate knowledge. There are alwaysmore good ideas available than cap­ital to finance them. But the contin­ueduse of bad' ideas-loss-produc­ing ideas-inhibits the build-up ofcapital. It is always very risky tolaunch a new project, since there areso many variables. But dropping abad idea is an immediate benefit tosociety, for it increases the capitalbase-the information base-by re­moving a major source of capitalconsumption. The existence of lossestestifies to the existence of inappro­priate plans in an economy. Withoutnegative feedback-the loss portionof the profit-and-loss sheet-societyhas no effective way to eliminatebad ideas. If men see the danger ofestablishing censorship boards toreduce the spread of knowledge, theyhad better cling to the free market'smechanism of eliminating resource­absorbing, erroneous information.

Conclusion

The word "exploitation" should beunderstood by those people who arelikely to be the victims of true ex­ploitation. Exploitation in a marketorder means the personally benefi­cial use of accurate economic infor­mation. Socialist programs to re­duce exploitation are, in the finalanalysis, programs to make it un­profitable for forecasters to launchrisky ventures based on their pre­dictions concerning the uncertain

1982 EXPLOITATION AND KNOWLEDGE 11

future. These socialist programs arealso based on a false view of knowl­edge: that it is a free good that isavailable to all, if only private own­ership were abolished. By abolish­ing "exploitation"-the profitable useof knowledge-the socialists will in­evitably reduce the flow of accurateknowledge of economic conditions.The public will have more inaccu­rate knowledge in its capital struc­ture, and therefore more losses, withfewer profits to compensate for thelosses. Men will not be the benefici­aries of uncertainty-bearing fore­casters. The State becomes the ac­tive suppressor of the spread ofaccurate knowledge. If this is notexploitation, what is?

What we need is a means ofreduc­ing "exploitation"-the profitabilityof suppressing knowledge. The ex­ploitation of another man's igno­rance cannot long continue in a so­ciety in which there is freedom ofexpression, if this freedom is accom­panied by the freedom to act on theinformation provided by the free­dom of expression. It means thateach man's "exploitation" of the re­source of knowledge is alwaysthreatened by his competitors' "ex­ploitation" of that same knowledge,as well as the "exploited" person'suse of the knowledge. Knowledge islike any other asset: it is not a freegood. Those who want it must payfor it.

The socialist brings a moral cri-

tique of profits: "Capitalists wouldtry to reduce exploitation by makingopportunities for exploitation avail­able to all. They tell us that thespread of the legal right of exploit­ing others leads to a reduction of ex­ploitation. Who can believe suchnonsense? Exploitation should bemade illegaL The best way to stopexploitation is to make it costly tobe an exploit~r." But this assumesalways that knbwledge is a free good.But it is a scarce good. So· the bestway to produce better knowledge­that is, the best way to reduce thezones of ignorance in a society by in­creasing the fU~w of accurate knowl­edge-is to get everyone who wantsto be in the "discovery business" theright to get involved. The best wayto obtain better knowledge is to makeit profitable for people to increasethe producti~n of knowledge. Bygiving all mert the right to sell allthat they have and buy the fields ofthe world-if the sellers have theright to turndown the offer (Le.,have the right to keep ''buying'' theirfields, day by day)-the hidden trea­sures of life will see the light of day.There is no treasure more preciousthan knowledge of the truth. That iswhy the kingdom of heaven is like afield in which a treasure is hidden.Give all men an incentive to searchout the treasures of life. If we wantmore treasure$, we had better en­courage men 'tQ go out and look forthem. ,

Russell Shannon

And Now forSome GOODEconomic News!

THIS PAST SUMMER, the economicnews was good. Congress and theReagan Administration agreed onan unprecedented package ofbudgetcuts and tax incentives designed tocurb inflation and boost the econ­omy. The Dow Jones average roseabove 1000. The much-taunted"supply-side" economics had ar­rived, and the stock market, seeingit, found it good.

Then came the fall. Prospects ofhuge budget deficits and persistentdouble-digit inflation kept interestrates high and interest in stock pur­chases low. The construction indus­try continued to flounder, and sav­ings and loan associations hoveredon the brink of catastrophe.

What's worse, alarming signssuggested extensive government

Russell Shannon Is a professor in the Department ofEconomics, College of Industrial Management andTextile Science, Clemson University.

12

controls and subsidies could be re­stored. The Reagan Administra­tion's agreement to limit Japaneseauto imports served as a frighteningprecedent for other industries to seeksimilar trade restraints. Farmgroups, having lent their support forReagan's tax and budget adjust­ments, pressed for further federal fi­nancial aid. l In short, the outlookbecame so bleak that "supply-side"economics now seemed likely to be­come just another version of whatCarlyle called the "dismal science."

Yet a pleasant prospect glows be­neath the gloom. Harking back tothe refreshing optimism expressedby Adam Smith, the founder of mod­ern economics, it relies upon thedramatic possibilities for expandingoutput via the advantages of spe­cialization, innovation, and freetrade.

Smith showed what the division

AND NOW FOR SOME GOOD ECONOMIC NEWS! 13

of labor did just to the production ofpins. One pin-maker, working alone,said Smith, "could scarce, perhaps,with his utmost industry, make onepin in a day, and certainly could notmake twenty." But specializationchanged all that. Now one man, asSmith described it, "draws out thewire, another straights it, a thirdcuts it, a fourth points it, a fifthgrinds it at the top for receiving thehead."

Altogether, Smith said, the pro­cess ofmaking pins had been brokenup into "about eighteen distinct op­erations." But with what marvel­lous results! Each person, Smith re­ported, ended up making not just 20but the equivalent of about 4,800pins in a day.2 What a fabulous in­crease in productivity! What a strongargument for maintaining free andopen markets in which to sell thisprodigious output!

About a century after Adam Smithwrote, the moving assembly linefurther enhanced the productionprocess. Usually we associate thename of Henry Ford and automo­biles with that feat. In fact, Gus­tavus Swift was more instrumentaland the product was meat.

As quoted by the historian DanielJ. Boorstin, Upton Sinclair de­scribed the new assembly line forprocessing in his novel The Jungle:"The carcass hog was strung up bymachinery and sent upon anothertrolley ride." It then passed between

two lines of men, "each doing a cer­tain single thing to the carcass as itcame to him.· One scraped the out­side of a leg; '~nother scraped the in­side of the same leg. One with aswift stroke cut the throat," and soon.3

Swift imaginatively combined theassembly-line dismembering ofhogswith distribution of the finishedproduct via refrigerated railroad cars.So sharply did Swift cut costs and sovastly did he increase production thathe was able to market meat not onlythroughout the U.S. but in Europeand the Orient as well.4

Now anoth~r century has elapsedsince Adam. Smith wrote, and wefind ourselves face to face with theprospect of a further momentous up­surge in productivity launched bythe computer. ,Gene Bylinsky gave aglimpse of the amazing future thatit promises in! the October 5 issue ofFortune magazine.

Specifically~ the innovation Bylin­sky describes' is called CAD/CAM(Computer Aided Design/ComputerAided Manufacturing). Bylinsky usesfor an example the tubes whichNorthrup needs for its aircraft. Priorto the new coroputer process, "it tookNorthrup six weeks from release ofengineering drawing to bent tube inhand." But the use ofCAD/CAM col­lapsed the time from six weeks to 18minutes! Similarly, Pratt & Whit­ney report that CAD/CAM allows a50 to one reduction in labor, and GM

14 THE FREEMAN

now "turns out car-body componentssuch as fenders in half the time ittook with manual techniques."5

Of course, there are those who willdespair at these fabulous prospects.What, they ask in dismay, will peo­ple do for jobs if computers merci­lessly replace all those diligentworkers?

One who does not share such agloomy view is Alvin Toffier. Writ­ing in his recent book, The ThirdWave, Toffler notes: "Between 1963and 1973 Japan had the highest rateof investment in new technology, asa percentage of value added, of anycountry in a seven-nation study. Italso had the highest growth in em­ployment. Britain, .whose invest­ment in machinery was the lowest,showed the greatest loss ofjobs."6

Now the labor unions are upsetwith President Reagan for his treat­ment of the air traffic controllers.Many people look with dismay atthe perceived dismantling of gov­ernment social programs by an Ad­ministration bent on balancing itsbudget.

But there is a vital question whichmust be squarely faced: Can labor

Alfred North WhiteheadIDEAS ON

unions, or social programs, or traderestrictions possibly provide for thehealth and welfare of Americanworkers and consumers even a smallfraction of what the innovationsin technology, ranging from pinmaking, to meat dressing, to com­puter designing, have demonstrablyachieved? Expressed another way,can the promises of shallow social­ism and meager mercantilism everhope to match the powerful impactof creative capitalism? The impres­sive evidence of the past two centu­ries surely suggests that the answeris "no." ,

-FOOTNOTES-

l"The Ripples of a Farm Recession," BusinessWeek, September 28, 1981,27.

2Adam Smith, An Inquiry into the Natureand Causes of the Wealth ofNations (New York:Modern Library, 1973; originally published in1776),4,5.

3Daniel J. Boorstin, The Americans: TheDemocratic Experience (New York: VintageBooks, Random House, 1974),319.

4Ibid., pp. 318-20.5Gene Bylinsky, ''A New Industrial Revolu­

tion Is on the Way." Fortune, October 5, 1981,106-14.

6Alvin Tomer, The Third Wave (New York:Bantam Books, 1981), 192.

LIBERTY

WITHOUT a society in which life and property are to some extent secure,existence can continue only at the lowest levels-you cannot have agood life for those you love, nor can you devote your energies to life ona higher level.

Hans ~ Sennholz

CO-DETERMINATIONIN

WEST GERMANY

MOST AMERICANS are aware that la­bor unions are enjoying legal privi­leges and immunities, that theirmembers and officials are free tocommit wrongs to person and prop­erty, to deprive individuals of theright to earn a livelihood, to breakcontracts and trespass upon otherpeople's property, to restrain indus­try, trade and commerce. All theseimmunities and privileges weregranted by law, embellished bycourts and agencies, under the polit­ical pressure and power which laborunions possess in contemporary so­ciety.

Many unions and their numerousspokesmen in education and the newsmedia are clamoring for more legis­lation. They are demanding a "de­mocratization of the economy,"

Dr. Sennholz heads the Department of Economics atGrove City College in Pennsylvania. He's a noted wri­ter and lecturer on economic, political and monetaryaffairs.

"equal rights~'Jor employees, a gen­uine "social' partnership" for em­ployers and workers, "equal powerfor capital and' labor." Many point atWest Germany where labor unionsare enjoying' unprecedented powerthrough equal representation oncorporate boa~ds of directors.

In no other country of the West dounion officials exert as much influ­ence ·on econQmic decision-makingas in West Qermany. Their influ­ence rests on •legislation that goesback to 1947 when the Allied occu­pation power~ ·introduced equal rep­resentation in'the steel industry. In1951 the German Bundestag yield­ing to union pressure made it appli­cable also to c0al mining. In 1956 itapplied and expanded the concept toholding comp~nies in the coal andsteel industries. In 1952 and 1972 itincorporated eo-determination in theEnterprise Organization Acts, andin 1976 it passed the Co-Determi-

16 THE FREEMAN January

nation Act. Depending on the na­ture of the industry, its structureand size, and the legal organizationof the enterprise, the laws are appli­cable to most privately owned busi­nesses.!

The Coal and Steel Co-Determi­nation Act of 1951 provides for equalrepresentation on the boards of di­rectors. That is, the number ofunionofficials or shop stewards elected tothe board of directors by employeesmust equal the number of boardmembers elected by stockholders.Moreover, both groups of directorsmust agree on and elect a "neutralmember" who is expected to breakany potential deadlock in decision­making. The law also created theposition of a full-time "labor direc­tor" serving on the executive com­mittee who cannot be removed ex­cept by majority decision of the labordirectors.

The Enterprise Organization Actsof 1952 and 1972 stipulated that theboard of directors of all corporationsconsist of one-third employee-direc­tors. The same was ordered for allother business organizations withlimited liability and to cooperativeswith more than 500 employees. Thelaw also directed the creation ofworkers' councils or committees inall such enterprises with five or more.

lCf. Walter Hamm, Erfahrungen mit derMitbestimmung in der BundesrepublikDeutschland, Schweizerischer Handels- undIndustrie-Verein, #25, Sept. 1981.

employees. The committees wereendowed with far-reaching co-deter­mination rights in social, personaland economic matters. But the lawwas not to apply to so-called "pur­pose enterprises" pursuing objec­tives in politics, labor unions, reli­gion, education, science, art, andsimilar pursuits. Moreover, the lawdoes not cover enterprisesof the fed­eral, state and local governmentsand other public corporations.

Contractual Co-Determinationthrough Collective Bargaining

The Co-Determination Act of 1976is applicable only to corporationswith more than 2000 employees. Theboards of directors of such enter­prises must consist of an equal num­ber of directors elected by stockhold­ers and by employees. Thestockholders may elect the chair­man of the board who in case ofdeadlock may cast the decisive vote.

In addition to these legal provi­sions imposing co-determination.onGerman commerce and industrythere is contractual co-determina­tion resulting from collective bar­gaining. As a condition for coopera­tion with management on such issuesas reorganization or production ad­justments, or to settle a costly strike,many companies not covered by lawwere forced to introduce the kind ofco-determination imposed on the coaland steel industries, that is, parityrepresentation by labor. To the

1982 CO-DETERMINATION IN WEST GERMANY 17

unions this is the only co-determi­nation worthy of the name. The Co­Determination Act of 1976 is re­jected as unsatisfactory because itgrants the decisive vote to the chair­man of the board who is elected bythe owners.

Altogether, 600,000 employees ofthe coal and steel industries haveparity co-determination rights. Onemillion workers possess the rightsgranted by the Enterprise Organi­zation Acts, and more than four mil­lion employees in some 500 largecorporations are covered by the Co­Determination Act. All in all, one­fourth of all West German employ­ees are grantees of co-determinationrights. But this does not mean thatthese millions of workers actuallyview their rights as urgent or im­portant, or that they are co-deter­mination conscious. Every publicopinion poll seems to confirm thatthe masses of workers are uncon­cerned and uninterested, which leadsmany labor leaders to voice theirdisappointment. It seems that theinterest in labor co-determination islimited primarily to union officials.

Three Types of Co-Determination

It cannot be surprising that thelaws created voting blocs consistingof owner-directors and labor-direc­tors. Each bloc meets well in ad­vance of a board meeting in order toarrive at a consensus that will bepresented and defended in unison at

the meeting ~ Nevertheless, in thecoal and st¢el industries subject tofull parity l~gislationthere is no se­rious confrontation. Both blocs arefully aware that they may be. out­voted by the "neutral director." Itleads them ,to make every effortthrough lengthy and painstakingconsultations and negotiations toarrive at some compromise. Manydecisions are finally made by unan­imous vote.

The situation is quite different inthe corporations subject to the Co­Determination Act. There is littlebargaining · and maneuvering forcompromises as the chairman of theboard can be expected to cast his de­cisive vote with his colleagues, thestockholderH,lirectors, in oppositionto the bloc of labor-directors. More­over, some corporations managed toreduce the' tasks and functions oftheir boards to the legally permissi­ble minimum, which has led to sig­nificant changes in the corporatestructure. Union officials obviouslyare distressed and perturbed by thepower of the chairman and the re­duction inboard functions, whichthey interpret as flagrant examplesof anti-labor· and anti-union behav­ior. Of course, the boards organizedunder the Enterprise OrganizationActs of 1952 and 1972, on which theowner-directors outvote the one-thirdlabor-directors without much ado,are the favorite objects of union scornand contempt.

18 THE FREEMAN January

A New Breed of DirectorsCo-determination in the true par­

ity sense exists only in the coal andsteel industries. The law imposingthe co-determination effected far­reaching changes in the compositionof the boards of directors, in the be­havior of board members, and incompany policies, which in turn af­fect not only the employees but alsothe public at large.

To the labor union agents on aboard, the election of new stock­holder-members is of utmost impor­tance. As it is most difficult to beelected without the consenting votesof the labor,..directors, only candi­dates with proven willingness to"cooperate" can be expected to beelected to the board. Surely, thechairman of the board usually se­lects and recommends the candi­dates. But he must be ever mindfulthat they must be acceptable to thelabor-directors. The selection there­fore concentrates on "friendly" can­didates whose board behavior can besurmised in advance.

In every board meeting and withevery vote the owner-director mayjeopardize his professional future. Ifhe aspires to be elected to the boardsof other companies he faces the riskthat the union agents on the boardmay be in contact with other agentson other boards and bar his election.The union may even black-list him,which would signal the end of hiscareer.

Surely, the capabilities and tal­ents on the boards of directors in thecoal and steel industries havechanged materially. Young owner­directors work diligently to currythe favors of labor-directors in orderto enhance their professional ca­reers. The labor-directors are ex­pected to be uncompromisingly loyalto their unions, and owner-directorsare expected to be cooperative withthe labor-directors. At any rate, theformer must at least be dependedupon to be very silent and sympa­thetic to the. actions of labor-direc­tors. It cannot be surprising, there­fore, that any and all insider criticismof parity co-determination has beenmuzzled and the freedom of speech,at least for owner-directors, abridged.A new breed of directors is crowdingthe boards jealously guarding theinterests of employees as inter­preted by the labor-directors. Em­ployee benefits are always para­mount-even if they should be verycostly, inflict losses, or even jeop­ardize the future of the company. Infinal analysis, massive governmentsubsidies can be expected to coverthe losses of an ailing coal and steelindustry.

The law sought to avoid paralyz­ing situations in which both blocsare deadlocked and are unable tomake management decisions by cre­ating the position of a "neutralmember." As such situations occurrather frequently, excessive de~

1982 CO-DETERMINATION IN WEST GERMANY 19

mands are made on one person whousually has little or no professionalknowledge. He is expected to resolvedifficult issues on which the two di­rector blocs cannot agree, which leadshim to make very few resolute deci­sions. He may simply abstain fromvoting or alternate his vote betweenthe owner-directors and the labor­directors in order to retain the goodwill of both sides. After all, he, too,would like to be re-elected.

Co-determination has seriouslyimpeded the decision-making abil­ity of the board. There is little de­mand for expert knowledge of theenterprise or even the industry. Amember must be loyal to the laborteam and, as owner-director, besympathetic to the other team. Theboards which in bygone days used toguide the affairs of their enterprisesnow are spending considerable timeand energy on the discussion and so­lution of labor union problems. Ifenterprise questions are to be re­solved, their solution invariably ismade dependent upon the satisfac­tion of employee demands. Transac­tion costs are greatly increased, in­vestment returns are reduced, andthe profitability of the enterprise issacrificed anew to union objectives.And all such effects are the bitterfruit of many months or even yearsof feverish deliberations and nego­tiations.

At times, heterogeneous composi­tion .of the .owner-bloc compounds

the co-determination problems.Twenty-five·.per cent of the stock ofthe well-known Krupp enterprisesin Bochum, for instance, is owned bythe government of Iran. In June of1981 the Iranian representative onthe board 'single-handedly pre­vented a needed reorganization be­cause "Islamip principles elevate thefate of man above economic issues."Offsetting the vote of the neutral di­rector, the lone Iranian vote suc­ceeded in paralyzing the board.

A similar. heterogeneity of theowner bloc can be anticipated as aresult of certain union demands. Inrecent rounds of bargaining theunions insisted on profit sharing thatwould transfer company profits orpreferably company shares to anemployee fund managed by the la­bor union. Workers are to becomeowners of stock that is managed bythe union, which in turn entitles itsagents to be elected to the board asowner-directors.

Bargains Without Bargaining

Co-determination has changed thenature of coHective bargaining. Thenotion that both sides meet at thebargaining table in order to come toamicable agreements on employ­ment conditions cannot hold true ifboth sides ar~ represented by or areloyal to a labor union. There are notwo sides if the members of the ex­ecutive board. who are to representthe interests of the company can be

20 THE FREEMAN January

appointed only with union support.When difficult decisions must be

made by the board, such as a reduc­tion of output or the closing of aplant, a temporary impasse can be ;expected which, in the end, will beresolved at the expense of owners.The severance pay to employees, eventhough they may readily find em­ployment elsewhere or draw gener­ous unemployment compensation,may reach 40,000 DM (some $17,600)per person. If the company cannotbear such expense, the board is ex­pected to petition and pressure thegovernment for more subsidies, forprotection from cheap foreign com­petition, or for government guaran­tees of sales at higher prices. Duringthe 1950s and 1960s when coal min­ing was laboring under the compet­itive pressures of cheap oil imports,it became the most subsidized WestGerman industry. During the 1970salso the steel industry needed ex­tensive government aid and sup­port.

Public discussion of co-determi­nation in Germany usually is lim­ited to the confrontation betweenowners and employees, to the prosand cons of parity power betweenowner-management and laborunions. Little is said about the eco­nomic, social and political effects ofco-determination, or about its moraland ideological aspects. And littlemention is made of countless con­sumers whose economic well-being

depends on the industries, and mil­lions of taxpayers who are calledupon to subsidize the companies.

Parity co-determination has notbrought peace to the labor markets.A long and ugly strike shut downthe steel industry from November1978 to January 1979. The key issuewas the union demand for a 35-hourwork week. The strike was settledwith a compromise that retained the40-hour work week, but granted in­creased holidays and vacations toemployees.

Co-Determination is Expropriation

Co-determination brings intoquestion the very foundation of theprivate property order. It grantsequal rights of property to individu­als who did not provide it. If laborunions or their agents have equalrights of management they are equalpartners in ownership. No new rightsare created; existing property rightsare merely redistributed, that is,seized by political force from theowners and given to labor unions.

An inevitable consequence of sucha seizure is the im.mediate closure ofall new sources of equity capital. Noone can be expected to invest orreinvest his savings in an enterprisein which someone else has parityrights to his investments. No one islikely to risk his capital in economicproduction if he bears all the riskand someone else has equal rightsnot only to the returns but to the

1982 CO-DETERMINATION IN WEST GERMANY 21

capital itself. Any industry withparity co-determination, therefore,loses its access to the equity marketand is relegated to the credit marketor to the public treasury.. The ever-rising operating costs notonly depress the returns on the cap­ital invested, but sooner or later leadto losses which in turn cause the in­dustry to constrict. Despite the mil­itant union opposition to productioncurtailments, to shut-downs of plantsand facilities, the number of jobstends to shrink continually and out­put declines. The industry loses itsability to adjust to changing marketconstellations and to compete effec­tively with foreign enterprisesworking without the co-determina­tion handicap. If it were not for newgovernment intervention in order toeffect the rescue of co-determinationindustries, such as· government sup­port prices, import restrictions orgenerous subsidies, the co-determi­nation industries would self-de­struct, giving way to foreign com­petition.

Unseen Consequences

In the short run the employees ofa company with parity co-determi­nation may enjoy the benefits theyreap from union work rules, fromless work and higher pay, frommanagement limitations and costlyfringe benefits. They may savor theconsumption of investors' capital andthe returns that otherwise go to

them. But when the industry beginsto stagnate or: even constricts, whichis unavoidabl~ after a while, the co­determination benefits give way toco-determination losses. As plantsand mines shut down permanently,unemploymeIjLt rises, especiallyamong young, workers. Moreover, itbecomes increasingly difficult to findand tap new sources of benefits.When, as a· last resort, the publictreasury becom.es the primary source,a national I ,economic "crisis" or"emergency" needs to be declared tocome to the I, rescue of the co-deter­mination industries.

The "emergency" proves to be se­vere and tenacious. It just won't goaway; but it can be alleviated tem­porarily through bigger and biggersubsidies. To' listen to the moaningof the co-determination directors ismost interesting and amusing: "TheArabs are qausing the energy cri­sis." "The U.S. dollar is too weak.""It is too strong." "We are runningout of cheap, energy"-and so on.The blame invariably is laid on someextraneous factor, preferably abroad.

The public is paying a co-deter­mination priqe in the form of highergoods prices~ }Vhich signal lower lev­els of living. iWhen the public trea­sury must finally be tapped to sus­tain the industry and pay thebenefits, th¢ public pays againthrough higher taxes or, in the caseof debt monetization, through moreinflation. ADm finally, the people in

22 THE FREEMAN

neighboring countries trading withthe co-determination country areadversely affected as trade and com­merce are shrinking and trade bar­riers are rising. Everyone loses be­cause the co-determination industry ,no longer functions efficiently and isconsuming or misusing economic re­sources.

Eroding the Market Order

The private-property competitiveorder depends on the unhamperedchoices and decisions of countlessindividuals seeking to satisfy theirwants and desires. Entrepreneurs asmanagers or investors guide theproduction process which is a con­tinuous process ofadjustment of eco­nomic resources to the whims andwishes of consumers. Successful ad­justment generates profits, ineffi­cient operation inflicts losses.

Labor-directors who are not guidedby profit and loss and are unaffectedby the consequences of their actions,are hampering or thwarting the ad­justment process. Intentionally orinstinctively they are sabotaging themarket process in order to preserveor expand their own economic powerand ultimately to replace the mar­ket order with a political commandsystem, that is, with socialism.

It is a fact verifiable in words anddeeds that many labor-directors fa­vor a command system in which theythemselves would man the centralcontrols. Their ideological bent raises

the question whether their boarddecisions, aiming to thwart marketadjustments and to turn profits tolosses, may not be designed to provethe "failure" of the market orderand to promote the command order.

West German labor unions areplaying an ominous game. They areruthiessly employing political powerto gain economic power, which inturn is paving the way for a politicalcommand order. It must not be for­gotten that parity co-determinationcame into existence by sheer laborunion intimidation. On April 10,1951, the Bundestag cast its finalvote against it. But Carlo Schmid,the speaker of the House, refusingto announce the outcome of the vote,called the leadership into specialsession in order to inform it anew ofthe seriousness of the situation. Withthe union posted for a general strikehe made the Bundestag vote againuntil it agreed to co-determination.The "democratization" of industrythus was born by antidemocraticmeans.

The German miracle of economicrecovery after World War II nevertouched the coal and steel indus­tries. On the contrary, they mili­tated against it and vitiated it untilthe miracle gave way to stagnationand decline. The ideology and policythat gave rise to co-determination,and other government interventionin the private-property competitiveorder, must answer for the decline.'

Frank Chodorov

WHEREVER two boys swap tops formarbles, that is the market place.The simple barter is in terms ofhu­man happiness no different from atrade transaction involving bankingoperations, insurance, ships, rail­roads, wholesale and retail estab­lishments; for in any case the effectand purpose of trade is to make up alack of satisfactions. The boy with apocketful of marbles is handicappedin the enjoyment of life by his lackof tops, while the other is similarlydiscomfited by his need for marbles;both have a better time of it afterthe swap, while their respective sur­pluses before the swap are nui­sances. In like manner, the Detroitworker who has helped to pile up aheap of automobiles in the ware­house is none the better off for hisefforts until the product has beenshipped to Brazil in exchange for hismorning cup of coffee. Trade is noth-

ing but the release of what one hasin abundance in order to obtain someother thing he wants. It is as perti­nent for the· buyer to say "thankyou" as for the seller.

The market place is not necessar­ily a specific site, although everytrade must take place somewhere. Itis more exactly a system of channel­ing goods or services from one workerto another, from fabricator to con­sumer, from where a superfluity ex­ists to where there is a need. It is amethod devised by man in his pur­suit of happiness to diffuse satisfac­tions, and operating only by the hu­man instinct of value. Its function isnot only to transfer ownership fromone person tp another, but also todirect the current of human exer­tion; for the· price-indicator on thechart of the market place registersthe desires <;>f people, and the inten­sity of thes¢, desires, so that other

23

24 THE FREEMAN January

people (looking to their own profit)may know how best to employ them­selves.

Living without trade may be pos­sible, but it would hardly be living;at best it would be mere existence.Until the market place appears, menare reduced to getting by with whatthey can find in nature in the way offood and raiment; nothing more. Butthe will to live is not merely a crav­ing for existence; it is rather an urgeto reach out in all directions for afuller enjoyment of life, and it is bytrade that this inner drive achievessome measure of fulfillment. Thegreater the volume and fluidity ofmarket place transactions the higherthe wage-level of Society; and, inso­far as things and services make forhappiness, the higher the wage-levelthe greater the fund of happiness.

Policing the Market

The importance of the marketplace to the enjoyment of life is il­lustrated by a custom recorded byFranz Oppenheimer in The State. Inancient times, on days designated asholy, the market place and its ap­proaches were held inviolable evenby professional robbers; in fact,stepping out of character, these rob­bers acted as policemen for the traderoutes, seeing to it that merchantsand caravans were not molested.Why? Because they had accumu­lated a superfluity of loot of one kind,more than they could consume, and /

the easiest way of transmuting itinto other satisfactions was throughtrade. Too much of anything is toomuch.

Frank Chodorov (1887-1966) taughtin and later directed the HenryGeorge School of Social Scienceand edited the School's paper, TheFreeman. Later he founded his ownjournal, analysis, eventually merg­ing it with the Washington newslet­ter, Human Events. In 1954-55 heedited The Freeman for The Foun­dation for Economic Education, andcontinued to appear in later issuesof the journal.

This article, reprinted from the July1956 issue, is especially pertinent inlight of the trade wars plaguing theworld today.

The market place serves not onlyto diffuse the abundances that hu­man specialization makes possible,but it is also a distributor of the mu­nificences of nature. For, in her in­scrutable way, nature has spreadthe raw materials by which humanslive over the face of the globe; andunless some way were devised fordistributing these raw materials,they would serve no human purpose.Thus, through the conduit of tradethe fish of the sea reach the miner'stable and fuel from the inland mineor well reaches the boiler of the fish­ing boat; tropical fruits are madeavailable to northerners, whose iron

1982 THE HUMANITY OF TRADE 25

mines, in the shape of tools, makeproduction easier in the tropics. It isby trade that the far-flung ware­houses of nature are made accessi­ble to all the peoples of the worldand life on this planet becomes thatmuch more enjoyable.

We think of trade as the barter oftangible things simply because thatis obvious. But a correlative of theexchange of things is the exchangeof ideas, of the knowledge and cul­tural accumulations of the parties tothe transaction. In fact, embodied inthe goods is the intelligence of theproducers; the excellent woolens im­ported from England carry evidenceof thought that has been given tothe art of weaving, and Japanesesilks arouse curiosity as to the ideasthat went into their fabrication. Weacquire knowledge of people throughthe goods we get from them. Asidefrom that correlative of trade, thereis the fact that trading involves hu­man contacts; and when humansmeet, either physically or by meansof communication, ideas are ex­changed. "Visiting" is the oil thatlubricates every market place oper­ation.

It was only after Cuba and thePhilippines were drawn into ourtrading orbit that interest in theSpanish language and customs wasenlivened, and the interest in­creased in proportion to the volumeof our trade with South America. Asa consequence, Americans of the

present generation are as familiarwith Spanish dancing and music astheir forefathers, under the influ­ence of commercial contacts withEurope, were at home with theFrench minuet and the Viennesewaltz. When ships started comingfrom Japan, they brought with themstories of an interesting people, sto­ries that enriched our literature,broadened our art concepts, andadded to our operatic repertoire.

It is not only that trading in itselfnecessitates some understanding ofthe customs of the people one tradeswith, but that the cargoes have away of arousing curiosity as to theirsource, and ships laden with goodsare followed with others carryingexplorers of ideas; the open port is amagnet for the curious. So, the ten­dency of trade is to break down thenarrowness of provincialism, to liq­uidate the mistrust of ignorance. So­ciety, then, in its most comprehen­sive sense, inCludes all who for theimprovement •of their several cir­cumstances engage in trade with oneanother; its. ideational charactertends toward ,a blend of the hetero­geneous cultures of the traders. Themarket place unifies Society.

The Trading Community

The concentration of populationdetermines the character of Societyonly becausecontinguity facilitatesexchange. But contiguity is a rela­tive matter, depending on the means

26 THE FREEMAN January

for making contacts; the neutraliza­tion of time and space by mechani­cal means makes the whole worldcontiguous. The isolationism thatbreeds an ingrown culture, and amistrust of outside cultures, meltsaway as faster ships, faster trains,and faster planes bring goods andideas from the great beyond. The pe­rimeter of Society is not fixed by po­litical frontiers but by the radius ofits commercial contacts. All peoplewho trade with one another are bythat very act brought into commu­nity.

The point is emphasized by thestrategy of war. The first objectiveof a general staff is to destroy themarket place mechanisms of the en­emy; the destruction of his army isonly incidental to that purpose. Thearmy could well enough be left in­tact if his internal means of com­munication were destroyed, his portsof entry immobilized, so that spe­cialized production, which dependson trade, could no longer be carriedon; the people, reduced to primitiveexistence, thus lose the will to warand sue for peace. That is the gen­eral pattern of all wars. The morehighly integrated the economy thestronger will be the nation in war,simply because of its ability toproduce an abundance of both mili­tary implements and economic goods;on the other hand, if its ability toproduce is destroyed, if the flow ofgoods is interrupted, the more sus-

ceptible to defeat it is, because itspeople, unaccustomed as they are toprimitive conditions, are the moreeasily discouraged. There is no pointto the argument as to whether "guns"or "butter" are more important inthe prosecution of war.

Intervention Is War

It follows that any interferencewith the operation of the marketplace, however done, is analogous toan act ofwar. A tariff is such an act.When we are "protected" againstArgentine beef, the effect (as in­tended) is to make beef harder toget, and that is exactly what an in­vading army would do. Since theduty does not diminish our desire forbeef, we are compelled by the dimin­ished supply to put out more laborto satisfy that desire; our range ofpossibilities is foreshortened, for weare faced with the choice of gettingalong with less beef or abstainingfrom the enjoymAnt of some othergood. The absence of a plenitude ofmeat from the market place lowersthe purchasing power of our labor.We are poorer, even as is a nationwhose ports have been blockaded.

Moreover, since every buyer is aseller, and vice versa, the prohibi­tion against their beef makes it dif­ficult for Argentineans to buy ourautomobiles and this expression ofour skills is constricted. The effectof a tariff is to drive a potentialbuyer out of the market place. The

1982 THE HUMANITY OF TRADE 27

argument that "protection" providesjobs is patently fallacious. It is theconsumer who gives the worker ajob, and the consumer who is pre­vented from consuming might as wellbe dead, as far as providing produc­tive employment.

Incidentally, is it jobs we want, oris it beef? Our instinct is to get themost out of life with the least expen­diture of labor. We labor only be­cause we want; the opportunity toproduce is not a boon, it is a neces­sity. Neither the domestic nor theforeign producer "dumps" anythinginto our laps. There is a price on ev­erything we want and the price isalways the weariness of toil. What­ever causes us to put out more toilto acquire a given amount or kind ofsatisfactions is undesirable, for itconflicts with our natural urge for amore abundant life. Such is a tariff,an embargo, an import quota or themodern device ofraising the price offoreign goods by arbitrarily lower­ing the value of our money. Any re­striction of trade, internal or exter­nal, does violence to a man'sprimordial drive to improve his cir­cumstances.

The Seeds of Conflict

Just as trade brings people to­gether, tending to minimize culturaldifferences, and makes for mutualunderstanding, so do impedimentsto .trade have the opposite effect. Ifthe customer is always "right," it is

easy to assume that there is some­thing wrong with the non-buyer. Thefaults ofthose'who refuse to do busi­ness with us are accentuated notonly by our loss but also by the stingof personal a~ront. Should the boywith the tops refuse to trade withthe boy who· has marbles, they canno longer play together; and this de­socialization can easily stir up anargument over the relative demeritsof their dogs: or parents. Just so, forall our protestations of good neigh­borliness, the Argentinean has hisdoubts about. our intentions whenwe bolt our commercial doors againsthim; compelled to look elsewhere formore substantial friendship, he isinclined to think less of our nationalcharacter and culture.

The by-product of trade isolation­ism is the feeling that the "outsider"is a "different kind" of person, andtherefore inferior, with whom socialcontact is at least undesirable if notdangerous. To what extent this seg­regation of people by trade restric­tions is the •cause of war is a mootquestion, but! there can be no doubtthat such restrictions are irritantsthat can give other causes for warmore plausibHity; it makes no senseto attack a good customer, one whobuys as much of our products as hecan use and pays his bills regularly.Perhaps the) removal of trade re­strictions throughout the worldwould do mote for the cause of uni­versal peace than can any political

28 THE FREEMAN January

union of peoples separated by tradebarriers; indeed, can there be a via­ble political union while these bar­riers exist? And, if freedom of tradewere the universal practice, would apolitical union be necessary?

Testing the Logic

Let us test the claims of "protec­tionists" with an experiment in logic.If a people prosper by the amount offoreign goods they are not permittedto have, then a complete embargo,rather than a restriction, would dothem the most good. Continuing thatline of reasoning, would it not bebetter all around if each communitywere hermetically sealed off from itsneighbor, like Philadelphia fromNew York? Better still, would notevery household have more on itstable if it were compelled to live onits own production? Silly as this re­ductio ad absurdum is, it is no sillierthan the "protectionist" argumentthat a nation is enriched by theamount of foreign goods it keeps outof its market, or the "balance oftrade" argument that a nation pros­pers by the excess of its exports overimports.

Yet, if we detach ourselves men­tally from entrenched myths, we seethat acts of internal isolationism suchas described in our syllogism are notinfrequent. A notorious instance ofthis is the French octroi, a tax leviedon products entering one district fromanother. Under cover of "quaran-

tine" regulations, Flo~ida and Cali­fornia have mutually excluded cit­rus fruits grown in the other state.Labor unions are violent advocatesof opulence-through-scarcity, aswhen they restrict, by direct vio­lence or by laws they have had en­acted, the importation of materialsmade outside their jurisdiction. Atax on trucks entering one state fromanother is of a piece with this line ofreasoning. Thus, the "protectionist"theory of fence-building is internal­ized, and in the light of these factsour reductio ad absurdum is not sofarfetched. The market place, ofcourse, scoffs at such scarcity-mak­ing measures, for it yields no morethan it receives; if its offerings aremade scarce· by trade restrictions,that which remains becomes harderto get, calls for an expenditure ofmore labor to acquire. The wage-levelof Society is lowered.

The Labor Theory ofValue-and Prosperity

The myth of "protectionism" restson the notion that the be-all andend-all ofhuman life is laboring, notconsumption-and certainly not lei­sure. If that were so, then the slaveswho built pyramids were most ide­ally situated; they worked much andreceived little. Likewise, the Rus­sians chained to "five year plans"have achieved heaven on earth, andso did the workers who, during thedepression, were put to moving dirt

1982 THE HUMANITY OF TRADE 29

from one side of the road to the other.Extending this notion that exertionfor the sake of exertion is the way toprosperity, then a people would bemost prosperous if they all laboredon projects with no reference to theirindividual sense of value. What iseuphemistically called "war produc­tion" is a case in point; there is infact no such thing, since the purposeof production is consumption; and itis not on record that any workerbuilt a battleship because he wantedit and proved his craving by will­ingly giving up anything in ex­change for it. Keeping in mind theexaltation of laboring, would not apeople be most uplifted if all of themwere set to building battleships,nothing else, in return for the nec-

Trade and Productivity

essaries that would enable them tokeep building battleships? They cer­tainly would not be unemployed.

Yet, if we •base our thinking onthe natural urge of the individual tobetter his circumstances and widenhis horizon,Qperating always underthe natural law of parsimony (themost for the least effort), we arecompelled to ,the conclusion that ef­fort which does not add to the abun­dance of the market place is uselesseffort. Society thrives on trade sim­ply because trade makes specializa­tion possible, specialization in­creases output, and increased outputreduces the cost in toil for the satis­factions me~l'live by. That being so,the market p[ace is a most humaneinstitution. ,

IDEAS ON

LIBERTY

THE RULE to remember is that what hurts consumers hurts business,and what hurts business hurts proficiency.• After all, what is profi­ciency? Simply the power to produce. The power to produce is best de­termined by free trade, and not by bureaucratic decree. The power toproduce is a corollary of the power to trade.' Thus the more trade themore production, and the more production the more trade.

Protection, on the other hand, is aimed atthe power to trade. In this,the protectionist government does indeed aid: some industries, but onlyat the expense of all industry. Under protection, all domestic industryis deprived of markets at home and abroad. All domestic industry ishurt by the higher costs of labor and materials. Thus by restricting thepower to trade and locking in inefficiency, the protectionist governmentrestricts the power to produce.

This means, in turn, that consumers will. have less, for productionconstitutes the sole means of consumption. The power to produce, afterall, is the power to consume.

WILLIAM H. PETERSON, "Barriers to World Commerce"

Brian Summers

30

My NEIGHBOR JOE is a friendly chapwith a sharp eye on current affairs.Thus, one Saturday morning after Ihad mowed the lawn, I strolled overto get his considered views on thestate of the world.

"This country faces a lot of prob­lems," he told me as he slid underhis car to change the oil. "Every­thing seems to be falling apart. Lastnight I was an hour late gettinghome because the subway brokedown. I don't know why they can'tmaintain those trains any better."

"You seem to be doing a prettygood job maintaining your car," I ob­served.

"Sure," he said. "I have to keepthis car in good condition. I want tosell it next year."

"Too bad we can't sell the sub­ways."

''What?'' he asked, poking his headfrom under the chassis.

"Suppose you held a share in aprivately owned subway. Wouldn'tyou want the managers to maintainthe value of your share by keepingthe trains in good working order?"

"Sure. If they didn't, I-would sellmy stock."

"Ofcourse. And as people sold theirshares, the price of the company'sstock would fall. This could lead to astockholder revolt or corporate take­over. Either way, management would

Mr. Summers is a member of the staff of The Foun­dation for Economic Education.

THEY SOLVE TOMORROW'S PROBLEMS 31

be compelled to fix the trains. As ageneral rule, when things are pri­vately owned, people try to main­tain their value by anticipating fu­ture maintenance problems."

"What about the apartments acrosstown?" he asked as he reached foran oil filter. "Why don't the ownersmaintain them?"

"Rent controls have destroyed theincentive," I answered. "The ownersknow that controls will keep themfrom getting higher rents, even ifthey make extensive repairs. Fur­thermore, they can't get full marketvalue if they try to sell. Who wantsto buy a rent controlled apartmentbuilding, even if it is in perfect con­dition?"

"A free market may encouragepeople to maintain their own prop­erty," Joe allowed, "but this countryfaces some bigger problems. We arerunning low on natural resources.Each year, for instance, loggers cutdown more trees."

"Yes," I agreed, "but each yearforest product companies plant moretrees. They try to maintain the valueof their land, the same as you try tomaintain the value ofyour car. Hereagain, private ownership is the keyto heading off tomorrow's problems."

"What about the energy short­age?" he asked as he opened a can ofoil. "Private owners don't go aroundplanting more oil."

"Yes, but with price controls beinglifted, they do 'go around looking formore oil. AnQ. you and I may behelping in the! search."

"How is that?""When we save our money, we

make more capital available for pri­vate investment. The money you putinto yourban~may help provide theloan capital. oil companies need tolease equipment."

"I never thought of it that way. Iam just trying to make some invest­ments to provide for my retirement."

"Sure. But by trying to provide foryour own future, you help solve to­morrow's prOblems."

"Come again?""Well, consider your mutual fund.

The fund's managers try to antici­pate tomorrow's problems, and tryto invest in the corporations mostlikely to profit by solving theseproblems. For instance, some ofyourmoney may I be furnishing equitycapital for ani oil exploration firm."

"You make it sound as if free en­terprise will solve all our problems."

"No, people will have problemsunder any social system. But weshould examine the incentives in­herent in each system. Some incen­tives tend to create problems; otherswill solve them."

"This is all very new to me," Joesaid as he closed the hood. "I'll haveto think about it." ,

THE CIVIL WAR was a watershed inAmerican economic history. Duringthe war, and the Reconstruction ofthe South which followed, the stagewas set for major economic develop­ments. The political nationalizationwhich occurred provided the frame­work for large-scale economic devel­opment. A nation-wide rail trans­portation network was soon formed.Interstate commerce grew rapidly,and some businesses became nation­wide in scope. Foreign investmentand domestic accumulation pro­vided the capital for large indus­tries.

It would be a mistake, however, toattribute these developments to thewarfare itself. At least, that is notmy meaning. Warfare is destructive

Dr. Carson has written and taught extensively, spe­cializing in American intellectual history. He is theauthor of several books and a frequent contributor toThe Freeman and other scholarly Journals.

32

of capital, of materials, and of man­power. It has been shown, too, thatthe most immediate impact of theCivil War was a decline in the growthof production of consumer goods, andthat it took several years before therate of growth that had been goingon before the war was achievedagain. Certainly, the devastation andpolitical disruptions within the Southwere anything but conducive to eco­nomic development.

Rather, my point has to do withthe control and disposition of politi­cal power. The secession of the Southbrought a new political party, theRepublican party, to power. The vic­tory of the North and the policiesfollowed during Reconstruction con­solidated the Republican party inpower for several decades. Involvedin this development was a basic shiftof political power from the South tothe Northeast and Midwest. Most

THE CIVIL WAR AND POLITICAL NATIONALIZATION 33

important, it meant a change in theends for which the power of theUnited States government was to beused.

The Gilded Age

An understanding of the shift inthe role of government in the econ­omy is critical to the interpretationof the period which historians havelong called the Gilded Age. But by

.whatever name it may be called, theperiod from 1870 to 1910, or there­abouts, left a distinctive mark onAmerica. It was the age of the greatentrepreneurs, of John D. Rockefel­ler, Jay Gould, Philip Armour, Le­land Stanford, Andrew Carnegie,James J. Hill, Jim Fiske, Collis P.Huntington, Cornelius Vanderbilt,J. P. Morgan, and many others. Itwas an age of spectacular economicdevelopments: of great rail systemsthrust across the plains, over themountains, and to the Pacific, of theemergence of large industrial cor­porations, of the growth of large cit­ies as manufacturing and commer­cial centers, and of the opening up ofmillions of acres of land to farmingand ranching.

These dramatic developmentsprovided the substance, such as ex­isted, for a number of myths, someof which have been given genericnames, such as the Robber Baronsmyth, the Horatio Alger myth, andso on. Probably, the most persistentmyth. is the one that the economic

thrust in the. latter part of the nine­teenth century was simply a resultof freedom. This position was force­fully stated by Vernon L. Parring­ton in these words:

It was an abundant harvest of thosefreedoms that America had long beenstruggling to achieve, and it was makingready the ground for later harvests thatwould be less to its liking. Freedom hadbecome individualism, and individual­ism had becom~ the inalienable right topre-empt, to exploit, to squander....From the sober testraints of aristocracy,the old inhibitions of Puritanism, theniggardliness 'o:f an exacting domesticeconomy, it swung far back in reaction,and with the discovery of limitless oppor­tunities for exploitation it allowed itselfto get drunk. Figures of earth, they fol­lowed after their own dreams. Some werebuilders with grandiose plans in theirpockets; others were wreckers with noplans at all. It. was an anarchistic worldof strong, capable men, selfish, unen­lightened, amoral-an excellent exam­ple of what human nature will do withundisciplined freedom.!

The other side of the coin of thismyth ofunlimited economic freedomwas that it provided a justificationfor government regulation, restric­tion, and control of the economy.Freedom must' be curbed, obviously,if it produces such results as Par­rington and other mythmakers de­scribe. Freedom is nothing short ofa destructive :menace by their inter­pretation.

There is a profound misunder-

34 THE FREEMAN January

standing of the free market and freeenterprise entangled in this myth.What some, at least, of the myth­makers are leaving out of account isthat government was intervening inthe economy during these years, anddoing so to a significant and some­times determinate extent. There aretwo distinct types of government in­tervention. One is when govern­ment grants favors to some kinds ofeconomic development, promotessome industries, grants class privi­leges, and aids and abets in the es­tablishment of monopolies. The othertype is government regulation andrestriction of economic undertak­ings.

Both types of intervention are in­terferences with the market. Eachproduces its own kinds of distor­tions, favors some and disadvan­tages others. That some business­men, for example, may seek and getgovernment privileges should not betaken to mean that such things arein accord with freedom. That muchof the intervention between 1860 and1900 was of the first type means assurely that there was interventionand distortion as it would if the sec­ond type had prevailed.

Curbing Intervention

The main political thrust of thefirst half of the nineteenth centurywas to get the United States govern­ment out of involvement with or in­tervention in the economy. There

were two main elements behind thisthrust. One was that many of theintellectual and political leaders fa­vored a free market in principle. Theother was that the South (or slavestates, as they became known, in­cluding not only those states whichwould eventually be a part of theConfederacy but also Maryland,Delaware, Kentucky, and Missouri)both generally opposed interventionby the United States government inthe economy and favored a free mar­ket. The South was the major ex­porting region during this era, fa­vored the development of inter­national trade, and looked towardEurope both as a market for its goodsand as a source of imports.

And, the South dominated na­tional politics from 1800 to 1860, or,at least, Southerners did. Southern­ers served in the Presidency for ap­proximately 41 years from 1801 to1861. There were only two ChiefJustices of the Supreme Court from1801 to 1864, John Marshall of Vir­ginia and Roger Taney of Maryland.Southerners served as Speaker ofthe House of Representatives for ap­proximately 49 years between 1801­1861.

Southern Dominance

How or why the South should havebeen so dominant politically is notreadily apparent. From the outset,the South had a minority. If disfran­chised blacks had not been counted

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 35

in the census, their minority statuswould have been even more pro­nounced. It was the prominence· ofthe South in one political party thatenabled Southerners to exercise theirdominant political role. The Jeffer­sonian Republican party and theJacksonian Democratic party, whichsucceeded it, were in control of thegovernment for all but a few yearsfrom 1801 to 1861. While both theseparties, if they be considered dis­tinct from one another, had a na­tional following, their greateststrength was in the South. So it wasthat Southerners maintained theirleverage over the government dur­ing these years.

So it was, too, that the oppositionto using the power of the generalgovernment to develop a nationallyintegrated economy triumphed dur­ing the era before the Civil War.Both the Jeffersonians and Jackson­ians were basically states' rightsparties. Both generally opposed gov­ernment intervention and favoredfree trade and free markets. J effer­son's party had been born out of op­position to what might be called theeconomic nationalism of Hamilton'spolicies. Jackson's party was shapedin opposition to the National Repub­licans and Whigs, at least in part, inopposition to Henry Clay's "Ameri­can System" and John Quincy Ad­ams' nationalist ideas.

The critical economic issues from1800 down to about 1845 were the

protective tariff, a national bankingsystem, and internal improvements(roads and canals mainly, to thatdate). These were joined from about1845 onward: QY immigration, slav­ery expansion,: and railroad promo­tion for internal improvement. Gen­erally, the J efl'ersonians and Jack­sonians opposed a protective tariff,a national bank, federal appropria­tions for internal improvements, and,in the years 'before the Civil War,favored the expansion of slavery. Theopposition to the national bank andfederally aided internal improve­ment reached· its peak during Jack­son's presidency, and is symbolizedby his veto of, the Maysville RoadBill and the Bin for rechartering ofthe Second United States Bank.Jackson got. caught in politicalcrossfires on the tariff question, buthis followers generally opposed theprotective tariff as well.

Seeds of Conflict

Those who would use the power ofthe United Sta~es government to de­velop a national economy were gen­erally thwarted up to the Civil War,and undoubtedly they were morethan a little frustrated. Some histo­rians have maintained that thefrustration mOUl1ted in the years justbefore the war. Charles A. Beardheld that it wasi.Northern capitalistsranged against 'Southern slavehold­ers that precipitated the conflict. Thedesire for a protective tariff did ap-

36 THE FREEMAN January

parently spread after the depressionwhich began in 1857. There is nodoubt that the necessity for expand­ing slavery if the South was to re­gain its parity in the Senate becamemore pressing after 1850. Thatslaveholders (actual and potential)suffered from a capital (or credit)crunch attributable mainly to therising cost of slaves can be, and hasbeen, documented ad nauseam. Thatmade them competitors, at the least,with Northern industrialists forcapital.

But it is neither my purpose tomake an economic interpretation ofa portion of United States historynor to explain the coming of the CivilWar. Rather, I· wish to show thechange· in direction that took placeby way of political centralization ornationalization during and after thewar. To do that at all effectively, itneeds to be done against the back­ground ofwhat had happened beforethe war.

Sectional Interests

The main features ofpre-Civil WarAmerica were: widespread economicfreedom, decreasing intervention inthe economy by the national govern­ment, and developing sectionalism,regionalism, and localism. The sec­tionalism was not a consequence ofeconomic freedom, but of slavery,which is its opposite. The regional­ism and localism were, however, atleast according to its critics, a prod-

uct ofnon-involvement by the UnitedStates. One thing is clear: while theConstitution removed or forbade theerection of political obstacles to acommon market in the United States,the general government did very lit­tle to overcome the natural obsta­cles to a nation-wide market. A casecan be made that building roads, ca­nals, and railroads is not the busi­ness of government, and that posi­tion had vigorous advocates duringthese years. Also, it should be notedthat much building of transporta­tion routes and linking of regionswas done during this period, both byprivate investors and with the aid ofstate governments. But for virtuallythe whole period they were linksfrom the inland to seaports, not con­nections between inland areas.

Aside from the difficulties oftransportation, one of the greatestobstacles to a national market dur­ing much of this period was the ab­sence of a generally agreed uponand acceptable currency. To put itmore precisely, a good many differ­ent kinds and varieties of money, orwould be money, vied to become thecurrency. The Constitution seemedto bend the United States toward agold and silver coin currency. Thatran into trouble early on, however,because of Hamilton's effort to es­tablish bimetallism. He set a ratioof 15 to 1 between silver and gold.This undervalued gold and overval­ued silver. In consequence, only sil-

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 37

ver was presented to the mint forcoining. But that ran into difficul­ties, too, because the American dol­lar was slightly lighter than theSpanish silver dollar. It tended toleave this country to be exchangedfor the Spanish dollar. The mint hadlittle to employ it, so the ever frugalJefferson had it closed in 1806.2

Thereafter, until the 1830s, Ameri­cans relied mainly on foreign coinsfor minted money.

Government Control of Banking

Meanwhile, banks took up theslack by issuing paper money whichwas sometimes redeemable in spe­cie. The First United States Bankwas chartered in 1791 and lasteduntil 1811. The Second United StatesBank was chartered in 1816 and ex­pired in 1836. During their tenure,these banks usually supplied a com­mon currency for the United States,one limited in its quantity by lawand redeemable ordinarily in specie.Further, they held in check the is­sues of paper money by state banksby discounting their paper money.Thus, the United States Banks pro­vided a standard of measurement ofthe value of all circulating media ofexchange in the country. With thedemise of the second bank there wasno longer any generally acceptablemeasure of the worth of state bankissues.

Before its demise, however, a newmint had been established by the

United States, and a 16 to 1 ratiobetween gold and silver promul­gated. This overvalued gold and un­dervalued silver. In consequence,gold was brought in for minting. 3

Whether thelJJnited States then hada gold standard may be debatable,but it is certain that thereafter sil­ver dollars,. ,following Gresham'sLaw, did not remain long in circu­lation. After·. t~e gold discoveries ofthe late 1840~, even the subsidiarysilver coins had to be debased tokeep them in circulation.

Market Possiibilities

If governments had withdrawnentirely from the monetary field, ex­cept for specifying in what formsthey would ac~ept payment of taxesand for land, i~ is quite possible thata common currency would have de­veloped in the United States. Pri­vate mints could have supplied thecoins, and the troublesome questionof a fixed ratio between preciousmetals could·. nave been settled byhaving none.•The weight in ouncesof what metal \could have been en­graved on all cQins. Merchants couldhave set their! prices, and adjustedthem from time to time, in terms ofounces of gold, silver, copper, or whathave you. Paper money might evenhave circulated with a guarantee ofredeemability certified by 100 percent reserve in,specie backing it. (Amajor difficulty! with this scenario isthat there would be little profit, if

38 THE FREEMAN January

any, for the mints and none, so faras I can see, for the issuers of papermoney. Counterfeiting and fraudmight not be prohibitive difficulties,but they would remain as problemsnonetheless.)

There was a movement, of sorts,against banks and against their is­suance of paper money whichmounted in the 1830s and probablyreached a peak in the 1840s.4 It gotunderway with Jackson's veto of thebill to recharter the Second Bankof the United States. Animositymounted following Jackson's issu­ance of the Specie Circular, requir­ing the payment for governmentlands in specie. There were numer­ous bank failures as banks werepressed to redeem their paper moneyin specie. President Martin VanBuren proposed an IndependentTreasury, which was eventuallypassed into law in the 1840s. Thismeant that money received and heldby the United States would not gointo the banking system (or lack ofsystem) at all, and could not, there­fore, be used by banks as a reserveagainst their paper money. Severalstates in the West adopted constitu­tional provisions prohibiting theirlegislatures to charter banks. Oth­ers adopted strenuous limitationsupon banking.

Even so, governments remainedentangled in the monetary situa­tion. The federal government wasminting gold coins and had set a ra-

tio between gold and silver. Moststates continued to charter bankswhich could and did issue papermoney. Those states that did notwere usually flooded with papermoney from surrounding states. Thepaper money was not legal tender,ofcourse, but it did pass as currency,or at least some of it did. It is prob­ably true that good money will drivebad money out of circulation, in theabsence of tender laws, but while itis doing so the paper continues topass as currency. Moreover, duringthe 1840s and 1850s, as well as ear­lier, there were usually plenty ofnew banks to put out some more.Besides, some of the paper was notbad money, and it was not readilyapparent which was which in manycases.

In Massachusetts, the currencywas stabilized by a consortiurn ofbankers. In New York, the state en­forced a reserve system that workedtolerably well. Elsewhere, there wasusually chaos. A contemporary de­scribed the situation this way:

In the West, the people have sufferedfor years from the issues of almost everystate in the Union, much of which is soirredeemable, so insecure and so unpop­ular as to be known by opprobriousnames... There the frequently worth­less issues of the State of Maine, theshinplasters of Michigan, the wildcats ofGeorgia, of Canada and Pennsylvania,the red dogs of Indiana and Nebraska,the miserably engraved notes of NorthCarolina, Kentucky, Missouri and Vir-

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 39

ginia and the not-to-be-forgotten stump­tails of Illinois and Wisconsin are mixedindiscriminately with the par currencyof New York and Boston....5

For Lack of a Common Currency

The main point that I would makeis that there was considerable diffi­culty in having a common marketwithout a common currency, thattrade between manufacturing cen­ters, such as there were, and thehinterlands, for example, was madeunusually difficult by the variety ofcurrencies and the absence of up-to­date discount rates. (Discount rateswere published, but some of themwere apt to be obsolete by the timethey were printed.) In consequenceof this, as well as other obstacles,most production of manufacturedarticles was for local markets up tothe Civil War. As one historian says,"Most firms sold only in certain nat­ural geographic regions, shippingonly limited distances and depend­ing upon consumer satisfaction andlocal advertising for the spread oftheir wares."6

With one or two exceptions, thefederal government's posture wasneutral toward economic develop­ment. A good example of this neu­trality is what happened followingthe Panic of 1837. Many states hadbecome deeply involved in road, ca­nal, and some railroad building inthe 1830s. Large issues ofbonds hadbeen sold, especially to foreign

investors, particularly the English.When hard times hit, many of thestates defaulted on the payment ofthe debts. Effprts to get the federalgovernment to bail them out, to as­sume the loans or enforce payment,were of no avail. In consequence,foreign sources ofcapital almost driedup for Americans. Not even the se­curities of the United States couldfind subscribers in the 1840s. "Youmay tell your government," said oneof the Rothscllilds, "that you haveseen the man 'who is at the head ofthe finances of Europe, and that hehas told you,that they cannot bor­row a dollar, not a dollar."7

States did offer the means for theconsolidation of capital from inves­tors by way of the limited liabilitycorporation. ·,In the early 1800s,however, corporate charters couldonly be obtained by special acts oflegislatures. Such charters were dif­ficult to obtain, were conducive tobribery, and '. were tainted becausethey were special privileges. Toovercome these objections, a move­ment began in the 1830s for statesto pass general acts for incorpora­tion. By 1860, the following stateshad passed SUCh acts: Connecticut,Maryland, New Jersey, New York,Pennsylvania,. Indiana, Massachu­setts, and Virginia. 8

There was ai difficulty with stateincorporation, however. It was notclear what rights a corporationchartered in one state would enjoy

40 THE FREEMAN January

in others, ifit chose to operate there.Would its property be secure there?Might it not be subject to disablingtaxation, regulation, or other puni­tive measures? Whether the UnitedStates government had the author­ity to protect foreign (i.e., out of state)corporations, or whether it would ifit could, were open questions.

A Pro-Slavery Trend

The political trends of the 1840sand 1850s were not very reassuring.This brings us to the major excep­tion to the neutrality of the federalgovernment toward economic devel­opment, its position regarding slav­ery. It is possible to argue that priorto the 1840s the government wasneutral toward slavery, except forprohibiting the importation of slaves.But in the last decade or so beforethe war, the Southern leverage overthe government was being used toexpand and protect slavery.

The annexation of Texas and theterritorial acquisitions from Mexicofollowing the Mexican War wereviewed at the time as moves to ex­pand territory open to slavery. AFugitive Slave Act was passed inthe wake of the Compromise of 1850which put the government in thebusiness ofcapturing runaway slavesand returning them to their owners.The Kansas-Nebraska Act openedup Kansas to slavery, if the voterswanted it. The revelations of the Os­tend Manifesto brought out into the

open proposals for annexing Cuba asa potential slave state. The DredScott decision held that Congresshad no power to determine whereslaves could be taken in the UnitedStates.

The trend was to circumscribe thepowers of the federal governmentand augment those of the states.Southern leaders were becoming lessand less willing to compromise, andthey were bending the United StatesConstitution in the direction thatthey would write into fundamentallaw in the Confederate Constitu­tion.

A Republican Party

The modern Republican party wasbrought into being to counter thesetrends and directions. It ran its firstpresidential candidate in 1856. Theplatform called for the repeal of theMissouri Compromise, the admis­sion of Kansas as a free state, thestamping out of slavery in the un­organized territories, federal aid tobuild a Pacific railroad, and a fed­eral program for internal improve­ments. The appeal of the new partywas clearly demonstrated, for it car­ried several Northeastern and Mid­western states.9

The Democratic party broke up in1860. The Northern Democratsnominated Stephen A. Douglas, theSouthern Democrats, John C.Breckinridge, and a new party, theConstitutional Union, was devised

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 41

for those who wanted neither. Itnominated John Bell of Tennesseeas its candidate. With the disruptionof the Democratic party went almostcertainly the Southern dominance ofnational politics. The Republicansseized the opportunity, nominatedAbraham Lincoln for President, andadopted a platform which had nodiscernible appeal in the South.

While the Republican platform didnot come out in favor of the abolitionof slavery, did not even condemn theFugitive Slave Act or slavery in theDistrict of Columbia, it did reaffirmits opposition to slavery expansionin the territories. It denied thatCongress had the authority "to givelegal assistance to slavery in theterritories," viewed with horror theillegal reopening of the slave trade,and once again demanded the ad­mission of Kansas to the union as afree state. In contrast to the plat­form of 1856, it came out in favor ofa protective tariff, declaring thatduties should be adjusted so as "toencourage the development of theindustrial interests of the wholecountry."l0 It opposed any change inthe naturalization laws, i. e., fa­vored a liberal immigration policy,and came out for a new homesteadlaw which would make governmentland available virtually free. Or, asone contemporary newspaper ex­pressed it, the platform offered pro­tection for industry, "economy in theconduct of the government, home-

steads for settlers on the public do­main, retrenchment and account­ability in the' public expenditures,appropriation for rivers and har­bors, the adroi$sion of Kansas, anda radical reform in the govern­ment."ll

As soon as it became certain thatLincoln had been elected, Southernstates began to secede to form aConfederacy. When all who wouldhad seceded, control over the UnitedStates governntlent was fully in thehands of the Republican party. Thecontrol was consolidated during Re­construction, .• mainly by Congres­sional dictation of the terms of read­mission to the! Union of Southernstates. Not until 1884 was a Demo­crat elected to. the presidency, andhe was the only one to serve (if An­drew Johnson be excepted) from 1861to 1913. One or the other houses ofCongress was .. from time to timeDemocratic, but in general Republi­cans dominated 1the government fromthe Civil War to the eve of WorldWar I.

The South Dis,possessed

Not only was the South dispos­sessed of most of its political powerby secession, war, and reconstruc­tion but also of much of its wealthand the basis of its economy. The ab­olition of slavery resulted in a lossof capital (in slaves) reckoned atsomething on the order of $400 mil­lion. The Fourteenth Amendment

42 THE FREEMAN January

prohibited both the United Statesgovernments and those of any statesfrom compensating owners for anyloss of property in slaves. Moreover,neither were permitted to assume orpay any debts contracted for theprosecution of the war by the Con­federacy. The Confederate moneywas then worthless as were all bondsand securities sold by the Confeder­acy or states that were in rebellion.On top of this, many of the larger.cities were burned or destroyed,railroads destroyed, plantationspIundered, and so on. Whateverpower and fortune there had been inthe South to defend the powers ofthe states or thwart centralizing andnationalizing tendencies was, asMargaret Mitchell well said, GoneWith the Wind.

With the South as an obstacle tocentralization removed, with a warto fight and a South to remake, alarge scale nationalization of powertook place. The most far-reachingstep toward nationalization wasmade in Section 1 of the FourteenthAmendment, which said, in part: "NoState shall make or enforce any lawwhich shall abridge the privileges orimmunities of citizens of the UnitedStates; nor shall any State depriveany person of life, liberty, or prop­erty, without due process of law; nordeny to any person within its juris­diction the equal protection of thelaw." In theory, at least, this gaveCongress and the federal courts

oversight over all state acts and leg­islation, for there was little theycould do that would not involve inone way or another, privileges andimmunities or life, liberty, andproperty. When the courts later ruledthat a corporation was a "person" inthe sense intended by the amend­ment, they also enjoyed this protec­tion from state governments.

Protectionism

But well before the FourteenthAmendment had been either pro­posed or ratified the government hadadopted considerable legislation witha nationalizing tendency. The Re­publicans in power moved with aright good will to use the govern­ment to promote economic develop­ment along lines congenial to them.While there is hyperbole in his sum­mation, there is truth too in Wilbur'Cash's harsh assessment of North­ern aims, when he said: "The CivilWar and Reconstruction representin their primary aspect an attempton the part of the Yankee to achieveby force what he had failed to achieveby political means: first, a free handin the nation for the thievish aimsof the tariff gang, and secondly, andfar more fundamentally, the satis­faction of the instinctive urge of menin the mass to put down whateverdiffers from themselves...."12

Whether the aims were thievishor not, the Southern representativeswere hardly out of Congress before

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 43

the movement was afoot to adopt afullfledged protective tariff. It cameto fruition in the Tariff Act of July14,1862, which "increased the rateson articles of non-American produc­tion, gave protective increases in thecase of many articles which couldnot be produced at home, and greatlyreduced the free list."l3 Tariffsreached a wartime peak after thepassage of the Tariff Act of 1864.The average of duties on importswas 47 per cent and some rose ashigh as 100 per cent. 14

Nor was Congress any slower ingetting around to authorizing thebuilding of a railroad to the Pacific.Federal corporations to be namedthe Union Pacific and Central P~­

cific were authorized to build andoperate the roads. Large induce­ments were offered to the builders ofthe road, first in 1862, but thesewere supplemented by another actin 1864. Among the inducementswere the full use of the power of thefederal government to obtain rightsof way: the extinguishment of anyIndian titles to land along the route;the availability of armed forces todrive off any trespassing Indians;the power of eminent domain wouldbe exercised to acquire land. In ad­dition large land grants were made,and millions of dollars in bonds. 15

With such privileges in hand, finan­ciers were able to raise much capitalfor the undertaking.

State bank notes were finally ban-

ished once and for all after the pas­sage of the National Bank Act of1864. This act authorized the for­mation of national banks, grantedthem the power to issue bank notes,made them depositories of federalfunds, and required them to pur­chase United States bonds to the ex­tent of one-tHird of their capital.When banks did not rush to becomenational bank~, Congress levied a10 per cent tax on state bank notes,and those banks which remainedstate banks stopped issuing papermoney.

Financial Concentration

It should be noted that reservesagainst both bank notes and depos­its had to be· kept in specified "re­serve cities." So it was that much ofthe reserves of'llational banks cameto be held in New York City banks. 16

It is worth pointing out, too, that af­ter the war ba.nk note issues wereconcentrated i.n the Northeast. Theywere supposed·. to be distributed onthe basis of population, or at leastalong those lines. It did not happenthat way: New England and theMiddle Atlantic states got the lion'sshare, and the ISouth hardly any atall. As one historian pointed out,"The little sta.te of Connecticut hadmore nationalbank circulation thanMichigan, Wisqonsin, Iowa, Minne­sota, Kansas,. Missouri, Kentuckyand Tennessee3H7

Much of the liquid wealth in the

44 THE FREEMAN January

country was bound up with, tied to,and dependent on the national gov­ernment in the course of the warand its aftermath. This came aboutmainly by way of the financing ofthe war. The National Bank Act was,in part, a device for financing a partof the cost of the war initially. Therequirement that banks buy bondsserved that purpose, and the banknotes augmented the money supply.Taxes were more widely levied dur­ing the war than had ever been thecase under the Constitution. An in­come tax was even imposed. Mainly,though, the war was financed by theselling of bonds and the issue ofGreenbacks. The Greenbacks werenot quite fiat money, for they didcarry a promise of eventual redemp­tion, though no time was specified.They were made legal tender bothfor the payment of government ob­ligations, except interest on bonds,and for taxes to the United States.The largest portion of the cost of thewar was paid for by the sale of bonds.

Another way to look at it is that agreat concentration of wealth, hence,of potential capital, took place dur­ing the war. The instrument for thisconcentration was the federal gov­ernment. The concentration was ac­complished in two ways during thecourse of the war: by taxation andby promises to pay in the future.The national bank notes, the Green­backs, and government bonds werepromises to pay, or debt, and the

concentration took place by way ofthe wealth they drew into the trea­sury at the time.

Government Distorts the Economy

This concentration had two majorimpacts on the accumulation andconcentration of private capital. Inthe first place, it was paid out by thegovernment for goods and services,for ships, for munitions, for armyand navy supplies, for salaries andbonuses, and such like. Governmentcontracts for supplies brought prof­its, and, when they were saved, fu­ture capital for industrialists. Forexample, in meat packing, one his­torian says: "It was no accident thatthe men who obtained Civil Wargovernment contracts-Jacob Dold,Philip D. Armour, Nelson Morris­were to emerge by 1865 ... as thepackers of modern-day capitalist en­terprise."18

The other major impact occurredas the debts were paid and the cur­rency redeemed. Unlike what hashappened since WorId War II, thegovernment did not long continuemost of its inflationary war prac­tices. It moved toward retirement ofthe bonded indebtedness as the bondsmatured. Eventually it redeemed, oroffered to redeem, the Greenbacksin specie. National bank notes incirculation were reduced or retiredas the government reduced its debt.Since the bonds had floated in themarket and the Greenbacks depre-

1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 45

ciated after they were issued, it waspossible to trade in these for profit.Since interest on the bonds was al­ways payable in specie, exceedinglygood returns were possible by buy­ing them at discount and collectinginterest in premium money. Therewere widespread accusations, too, inthe decades after the war that gov­ernment bonds had been bought with50-cent dollars and paid back withIOO-cent dollars. There was somesubstance to the charge, but my pointis that handsome private accumula­tions of capital could be had at theexpense of taxpayers generally inthis situation.

Since it is easy to misinterpretthese events, and since it has beendone often enough, let me restatethe broad point I am making andsummarize what has been presentedso as to bring it as directly as possi­ble to bear on that point. The con­ception I am working with is thatwhen government intervenes in theeconomy it produces distortions andmay have determinative impact onthe direction of economic develop­ment. Further, my broad point isthat a sectional party, the Republi­can party, came to power at the timeof the Civil War, that it centralizedpower in the national government,and used that power to intervene inthe economy so as to promote a na­tionally integrated economy, espe­cially by the promotion of capitalconcentration, manufacturing, and

the developm¢nt of transportation.The developm¢nts which followed inthe latter part of the nineteenthcentury were shot through with theimpact of government intervention.

The Destruction of Wealth

The most d~astic intervention, ofcourse, was the destruction of a largeportion of theiwealth of the South.The emancipa~ion of the slaves­surely, a desirable outcome-wasaccomplished in the most disruptiveand vindictive;manner conceivable,and the canceling of all debts leftmany Souther:q.ers in financial ruin.The protective tariffs were the mostdirect sort of intervention, aimed atdiscouraging fqreign trade and pro­moting domestjc manufactures andgoods. The gONernment commenceda policy of large grants for the pro­motion of transportation. The inter­ventions in the money supply weremultiple: fostering national banks,giving precedence to their banknotes, stopping redemption in specieduring the war,': issuing Greenbacks,and gaining na~ional control of themoney supply. It was this surrepti­tious financing! of the war ratherthan the later r~demptionsthat wasthe interventioh and the source ofthe ills.

It was these and other interven­tions that contr~buted so heavily tothe ills most historians have identi­fied in the latter part of the nine­teenth century: the greatly acceler-

46 THE FREEMAN

ated, hasty and shoddy railroadbuilding, the lopsided thrust to in­dustrialization, the financial she­nanigans, the surge of farmers intoWestern lands that could not sup­port them, and the booms and buststhat followed upon expansions andreductions of the money supply.Economic freedom does no more thanprovide opportunities; governmentintervention thrusts economic de­velopment along political lines thatare dangerous to the well-being ofthe populace. ®

-FOOTNOTES-

IVernon L. Parrington, The Beginnings ofCritical Realism in America: 1860-1920 (NewYork: Harcourt, Brace and World, 1930), p. 17.Emphasis added.

2Clarence H. Cramer, American Enterprise:Free and Not So Free (Boston: Little, Brownand Co., 1972), p. 145.

3/bid., p. 159.4See Bray Hammond, "Banking in the Early

West: Monopoly, Prohibition, and Laissez Faire"

Causes of War

in Thomas C. Cochran and Thomas B. Brewer,Views of American Economic Growth, vol. I(New York: McGraw-Hill, 1966), pp. 171-88.

5Quoted in Louis M. Hacker, The Triumph ofAmerican Capitalism (New York: ColumbiaUniversity Press, 1947), pp. 333-34.

6Thomas C. Cochran, "Business Organiza­tion and the Development of an Industrial Dis­cipline" in Cochran and Brewer, op. cit., p. 227.

7Thomas C. Cochran and William Miller, TheAge of Enterprise (New York: Harper & Row,1961), pp. 48-49.

8Cochran, "Business Organization," op. cit.,p.218.

9Hacker, op. cit., pp. 315-16.IOQuoted in James F. Rhodes, History of the

United States, vol. II (New York: Harper &Brothers, 1893), p. 464.

llQuoted in Hacker, op. cit., p. 338.I2Wilbur J. Cash, The Mind of the South

(Garden City, N. Y.: Doubleday Anchor Books,1954), p. 113.

I3J. G. Randall and David Donald, The CivilWar and Reconstruction (Boston: D. C. Heath,1961, 2nd ed.), p. 287.

I4Ibid.I5/bid., pp. 288-89.I6/bid., p. 351.I7Quoted in ibid., p. 352.I8Hacker, op. cit., pp. 256-57.

IDEAS ON

LIBERTY

REFERENCE to the just and unjust causes of war can be particularlyvaluable when we try to expose the fallacy in what is perhaps the "lib­erals' " most persuasive contention: that the programs of the welfarestate aim to help those who are really in need of great help. Theyusually do not deny that the "social gains" they are seeking are attain­able only if the money of some is forcibly seized and granted to others.They do deny that any impropriety is involved in the process; on thecontrary, they proudly announce, the welfare state merely enforces theundoubted axiom that one man's need has precedence over anotherman's luxury.

CRAIG HOWELL, "Aggression Is Always Wrong"

John Montgomery

ADAM SMITH'SECONOM'IICSOF FREEDOM

THE REPUTATION of Adam Smith'sThe Wealth ofNations has survivedits bicentennial, which is not alwaysthe case with anniversaries ofweighty scientific or literary works.But Smith's portrayal of the free­market economy remains the cen­terpiece of economic theory, oftenchallenged but never replaced. And,even after the passage of more thantwo centuries, it clearly speaks tothe economic dilemma of today.

To start with one misconception,economics did not begin with thegreat 18th-century Scotsman, AdamSmith. Economic thought can betraced back through St. ThomasAquinas all the way to Aristotle.Nor was Smith the first economist.In his time there was a group oftheorists in France which antici­pated some of his ideas. They arenow known as the Physiocrats, ex­cept that they called themselves

Mr. Montgomery is a newspaperman and writer onsocioeconomic issues who lives in Closter, New Jer­sey.

economistes. In England at the timemany pamphlets, tracts and bookson economic questions were beingwritten by businessmen, bankers andscholars of various sorts. The domi­nant point of view then, Mercantil­ism, thought of economics as strat­egy in the comp~titionamong tradingnations. This fiJist epoch of the "sci­ence" of economics did not begin withAdam Smith; it culminated in him.

What Smith did in the watershedyear of 1776 wa~ to come out with agreat tome of a thousand pages withthe abridged title of The Wealth ofNations. In time it was to become ablockbuster in eConomics and it hasbeen called one of the world's trulygreat books. Wh.at Smith did in thebook was to survey all the scatteredideas and writiDjgs about economicsbefore him and· then assemble theminto a coherent whole which, for thefirst time, compelled the recognitionthat economics was and deserved tobe a single, speeial field. In AdamSmith political· economy, as it was

48 THE FREEMAN January

known then, was the beginning ofmodern economic thought.

The complete title of his book wasAn Inquiry into the Nature andCauses ofthe Wealth ofNations, andthat well describes his point of de­parture. Economic debate in the 18thcentury focused on the source of na­tional wealth. Was it agriculture,labor or commerce? The answer sug­gested by the quickening of businessactivity in England at the time wascommerce.

Not Just Precious Metals, But AllItems of Commerce

The Mercantilists held that wealthwas gold and silver, mostly acquiredin foreign trade. But Smith saw itdifferently: Wealth was the nation'sproduction of the "necessaries, com­forts and conveniences of life" or, ashe also put it, the "annual produceof the land and the labor of the peo­ple." This is what is now called GNP,gross national product. As for thesource of this wealth, Smith startedwith what economists would call a"labor theory of value." For Smithand his followers, and for all Marx­ists to this day, human labor wasthe ultimate source of wealth.

Smith pointed out the great in­crease in human productivity yieldedby what he called the "division oflabor," that is, the growing practiceof splitting up the job of makingsomething into separate tasks as­signed to different workers. In ef-

fect, he was describing an early stagein the development of mass produc­tion and, to illustrate it, he chosethe pin factory of his time.

He asserted that "... a workmannot educated to this business ... noracquainted with the machinery em­ployed in it ... could scarce, per­haps, with his utmost industry, makeone pin in a day, and certainly couldnot make twenty. But in the way inwhich this business is now carriedon ... One man draws out the wire,another straights it, a third cuts it,a fourth points it, a fifth grinds it atthe top for receiving the head; tomake the head requires two or threedistinct operations; to put it on, is apeculiar business, to whiten the pinsis another; it is even a trade in itselfto put them into the paper; and theimportant business of making a pinis, in this manner, divided into abouteighteen distinct operations, which,in some manufactories, are all per­formed by distinct hands, though inothers the same man will sometimesperform two or three of them. I haveseen a small manufactory of thiskind where ten men only were em­ployed, and where some of them con­sequently performed two or threedistinct operations. But though theywere very poor, and therefore butindifferently accommodated with thenecessary machinery, they could,when they exerted themselves, makeamong them about twelve pounds ofpins in a day. There are in a pound

1982 ADAM SMITH'S ECONOMICS OF FREEDOM 49

upwards of four thousand pins of amiddling size. These ten persons,therefore, could make among themupwards of forty-eight thousand pinsin a day."

Thus, Smith made his point aboutthe productivity realized by meansof the division of labor-and in asmall shop employing ten men atthe very beginning of the IndustrialRevolution.

Smith went on to describe how thedivision of labor operated not just ina shop or factory but also in a wholenational economy made up ofdiverse,'specializing firms and industries inthe different localities and regions,taking advantage of local differ­ences in climate, soil, location, nat­ural resources, the characteristics ofthe local population: all of thosethings which can make possible moreefficient and lower-cost productionof particular goods than can be ac­complished elsewhere. And, simi­larly, Smith described an interna­tional division of labor in theproduction of commodities for for­eign trade among the diverse na­tions and regions of the world.

Economic Growth

From that starting point, Smithwent on to describe the system ofproduction of goods in a nationaleconomy and outlined what he con­ceived of as the forces which led tothe "progress of opulence," or whattoday would be called economic

growth. He saw the production ofmaterial wealtfu, that is, of goods, asrequiring thre~ things: the divisionof labor, the widening and extensionof markets for! the goods produced,and increasing ,"stock," his term forproduction equipment, machineryand working capital.

In Smith's scheme, it was the ac­cumulation of capital which led tothe progress of opulence from an ag­ricultural econpmy to manufactur­ing to commerce. The resulting in­creased output of food and othergoods necessary to life permitted thesurvival of a larger population which,in turn, meant further extension ofmarkets, a larger and more skilledlabor force, and further accumula­tion of capital. ,In this way he sawthe economy spiraling to higher andhigher levels of development, rais­ing the whole sQcial order with it. Itwas an optimistic, almost buoyantview which was largely justified bythe times he lived in but was not tosurvive its author by very long.

It was Adam, Smith's descriptionof how a mariklet economy workedwhich was the! starting point of acomplex theoretical system whichwould become. the new "science ofeconomics." HiE? theory of marketswould be elaborated and refined byeconomists throughout the 19thcentury, and it bas remained centerstage in the 20tb century, at least inthe negative se~se of growing dis­agreement and retreat from it after

50 THE FREEMAN January

the debacle of theory in the GreatDepression. But the theory of mar­kets is too central a part of econom­ics to be quickly set aside, and muchof modern economic debate hasamounted to repeated attempts todislodge it in favor of corrective oralternative formulations.

Market Pricing

In effect, Smith conceived of theeconomy of a nation as one vastwhole with immense internal com­plexity but with interaction and in­terdependence, of internal forceswhich were self-adjusting and self­regulating. In Smith's scheme themarket was not a place but the to­tality of exchanges-that is, of buy­ing and selling-of the products ofall the different occupations and in­dustries in the national economy. Atthe center of this were prices, con­stantly changing in accordance withthe laws of supply and demand and,in turn, balancing supply and de­mand not just for goods but for theresources, both human and ma­terial, needed to produce them.

As for those resources-land, la­bor and capital, needed in varyingproportions to produce each good­their prices, mediated by supply anddemand, directed them to thoseplaces and those employments wherethey would produce the most for theeconomy and the population as awhole. Of course, money spent byone person iS'money received by an-

other. So, in Smith's system, thoseprices were also income: rent for thelandlords, wages for laborers, andprofits for the capitalists and busi­nessmen. These people, making upthe three great classes of the popu­lation of Great Britain in his time,divided up the total income gener­ated by the national economy,which amounted to the prices paidfor all of the goods and commoditiesproduced-that is, for all the "nec­essaries, comforts and conve­niences" of the people, the sovereignconsumers for whom the system op­erated.

The Role of the Businessman

In Smith's market theory peoplewere not only the beneficiaries butthe moving parts of the system:householders, workers, farmers, landowners, manufacturers, merchantsand traders, all of them rational eco­nomic men (and they were almostsolely male at that time) who werefree to pursue their own gain, thebest return for their own contribu­tions to the economic life of theircommunities and the country. ToSmith, the key to the success of thesystem was the capitalist business­men, whom he referred to as "undertakers," in the sense that they werethe ones who undertook businessventures. For it was the"undertakers" who coordinated themovements and combinations of allthe other participants in the econ-

1982 ADAM SMITH'S ECONOMICS OF FREEDOM 51

omy for their best possible employ­ments under existing conditions.

Smith mistrusted businessmen. Inone of the best known passages inhis book, he wrote: "People of thesame trade seldom meet together,even for merriment and diversion,but the conversation ends in a con­spiracy against the public, or in somecontrivance to raise prices." But hegave them credit for being the sav­ers who accumulated capital for newbusiness ventures, without whichthere would be no economic growth.He wrote that in contrast to theworkers, who were forced to spendall they earned on the necessaries,and the idle rich, who squanderedtheir incomes on the comforts andconveniences, the capitalist busi­nessmen put off immediate spend­ing for consumption to some extentand set aside part of their profits forinvestment in future undertakings,with no guarantee that the capitalthey risked might not be lost in anunsuccessful venture.

Mobility and Competition

Smith set forth two linked and in­dispensable conditions to be met ifthe economic system he describedwere to work: There must be freemovement for all in the system sothat each man might seek the bestopportunity for his labor or re­sources. And there must be freecompetition among all, for thebuyer's shilling, for markets, for la-

bor and for jobs. There must be nomonopolies or icombinations in re­straint of trade or limiting entryinto new fields,: and no government­granted privileges for a favored few.Smith railed a.t! the dense thicket ofgovernment regulations and restric­tions of his time, which he saw aspreventing the :fluid and free move­ment of men and capital throughoutthe economy that was necessary forprosperity and growth.

Smith sensed, an order in the eco­nomic universe:, not imposed fromabove but somehow the outcome ofthe almost infinite number of trans­actions in the e~changeeconomy. Ithas been said that the nature of thisorder was the "mystery" he set outto solve in his book. Instead of gov­ernment directit1>n of the economy asthe source of that order, Smith cameup with his famous metaphor of the"invisible handJ" It was, he wrote,as though there were an invisiblehand directing the efforts of every­one-even though each man waspursuing his own gain-in a waythat promoted the interests of soci­ety as a whole.

As a man of his time, Smith was adeist, and it was the hand of Provi­dence he meant. It was not that hethought the invi~iblehand was tug­ging on puppet strings to guide theeconomic behavior of each individ­ual. To Smith, ,the invisible handwas a metaphor for the workings ofthe market economy in the setting

52 THE FREEMAN January

of the institutions of political andeconomic freedom. It was Provi­dence' he thought, that had en­dowed mankind with the capacitiesand propensities which made possi­ble such a society and such a system.Today, what Smith called the invis­ible hand might be thought of in cy­bernetic terms as "feedback loops"­for example, as market prices beingregulated by negative feedback.

Smith knew, of course, that hisideal of the invisible hand operatingin a completely free, purely compet­itive market economy was never avery realistic picture of an economyin the real world. But he contendedthat the more nearly the ideal wasrealized, the better the economywould work. And it was that idealwhich was the unifying concept heapplied to the wilderness of eco­nomic phenomena to reveal an un­derlying order.

A Self-Regulating Arrangement

By now the idea of the self-regu­lating economy is a familiar one,whether accepted or not. And manyof the elements contained in the ideahad been described before Smith putthem all together. But how did hecome up with the whole "vision" andwhere did he get it from? In effect, itwas already at hand, in the climateof opinion and generally held ideasof that time---,.although in a differ­ent context.

In Smith's time the burgeoning

commercial society of England wasbeginning to generate the IndustrialRevolution, that great outburst ofinventions which meant the end ofthe old system of hand-crafted pro­duction and ushered in the modernage of mass production in factoriesequipped with power-driven ma­chinery. England was harnessingwater power and steam. Soon to comewere the giant textile mills in thenorth of England where uprootedcountry people, and their children,tended looms which disgorged im­mense quantities of cotton cloth fornew world markets. In its "satanicmills," capitalism was to produceenormous quantities of goods andamass hitherto unattainablewealth-as well as great fortunesfor a few.

It was this great national wealthwhich, in effect, bought and paid forthe British Empire, financing theRoyal Navy, the troops and the co­lonial administrations which wouldrule one-third of the world. But therewas a vital question posed by capi­talism, although the word was notyet then in currency. How was thisincredible machine to be controlled?It was showing signs of becoming ajuggernaut.

Smith had been professor of "moralphilosophy" at Glasgow Universityin Scotland. Economics or, rather,political economy as it was knownat the time, was still a branch ofmoral philosophy, which corre-

1982 ADAM SMITH'S ECONOMICS OF FREEDOM 53

sponded to the social sciences of to­day. Besides moral philosophy therewas natural philosophy, the physi­cal sciences.

The "Age of Enlightenment"

Eighteenth-century philosophers,in the "Age of Enlightenment," be­lieved they were beginning to makesense of the world in the light of sci­entific thought, which had eruptedin the century that preceded them.In the 17th century Isaac Newton'stheoretical physics with its conceptof the physical universe as a me­chanical system and its theory ofthe"natural laws" of the movements ofthe heavenly bodies had seemed toshow a harmony in nature, a cosmoswith all its parts reliably perform­ing their appropriate functions inthe over-all smooth working of thewhole.

Inspired by that concept, the menof the Enlightenment believed therewere also natural laws governingman's behavior. The social and moralsciences of that time were finding inthe world of man the possibility of asimilar, harmonious human-socialcosmos, a world of free individualspursuing the satisfaction of theirnatural desires and in so doing act­ing in ways that would fit into anorderly system of natural social pro­cesses.

But, outside of the libraries andstudies of the scholars of that time,there was change, ferment and dis-

order all around. The iron con­straints ofmediJeval society had longsince given way, and the ProtestantReformation had rejected the abso­lute authority Qver the individual ofGod's church. The people were be­ginning to ask questions about theirlot; there was'· a growing clamor forpersonal liberties and a chance toget in on the new opportunities tomake money.• !The social philoso­phers of the 17th century were forcedto confront some less than theoreti­cal questions: How does social orderemerge from the potential chaos ofan individualis~icsociety? Is there anatural social. order? What shouldbe the role of government?

By Adam Smith's time in the 18thcentury these questions had broughtan answer: a theory of liberal de­mocracy which ~as believed to reston natural law like the laws of thephysical world.• The theory harkedback to the philosopher John Lockein the previous'· century and, alongwith many others, was advanced inSmith's time bylhis close friend andfellow Scottish .philosopher, DavidHume.

According to ~he theory, each in­dividual was a:part of nature andtherefore was e~dowed with "natu­ral" rights: to life, liberty and prop­erty. Further, he was endowed withGod-given capaqitie§ and propensi­ties which would flower in a societythat served the ]Pest interests of all.To realize that society, a political

54 THE FREEMAN

system ofthe rule of law rather thanof a few powerful men was required.The laws would provide even-handedjustice, personal freedoms, minimalgovernment, private property, thesanctity of private contracts, eco­nomic freedoms, and free trade, bothdomestic and foreign. In the kind ofsociety made possible by such laws,free men would both compete withand cooperate with each other, ex­ercising their rights to pursue theirown visions and, at the same time,respecting the rights of others.

Classical LiberalismThis doctrine of classical liberal­

ism was patterned after Newton'sconcept of the physical universe as amechanical system embodying "nat­ural laws"; the doctrine amounted toa similar vision, that of a human­social system also embodying natu­ral laws. And, in much the sameway, what Smith did in his theory ofa liberal economy was to pattern it,too, after Newton's system, usingquasi-gravitational mechanics toexplain the workings of a self-regu­lating market economy. What madeit possible for Smith to do this washis encyclopedic knowledge of eco­nomic history and his authoritativemastery of the economic life of hisown time, which he described in re­alistic and convincing detail.

Classical liberalism provided thevision for political and social re­forms in England for two centuries.

By the 20th century that time hadlargely passed in England and inthe rest of Europe where intellec­tuals and social reformers were con­vinced by Marx's dissection of capi­talism and excited by the utopianspell of socialism. But the FoundingFathers of this country were verymuch men of the Enlightenment andit was the ideas of classical liberal­ism as expressed in the Declarationof Independence and the Constitu­tion that gave shape to the Ameri­can republic and have been thefoundation of our liberties ever since.

On publication, Adam Smith'sgreat tome was well received by hisfellow scholars both in Britain andabroad. But government, under­standably, was in no hurry to takeits advice, with one notable excep­tion: The younger Pitt, to becomeGeorge the Third's prime minister,was deeply influenced by the bookas a student and would be the firstEnglish statesman to be convertedto the doctrine of free trade.

Smith's death in 1790 attractedlittle notice. But the influence of hisbook continued to grow. By the timeanother 20 years had passed, hisreaders had become his followers andsuccessors, and had established himas the father of classical economics.His· book routed the Mercantilistideas that had prevailed in his life­time and for a while virtually blot­ted out the memory of those who hadcome before him. (i

William Henry Chamberlin

Some MistakeSofMarx

"The evil that men do lives afterthem." This maxim applies with sin­gular force to the work of Karl Marx.The life of this apostle of socialism,communism, and class war wasspent, for the most part, in obscureand sometimes squalid poverty. Marxwas unable to make even a humbleliving as a writer and journalist; hehad no other trade or profession. Hewould probably have' had to go onpoor relief, in his time less generousin England than it is now, if it hadnot been for handouts from his dis­ciple and collaborator, FriedrichEngels, who enjoyed the advantageof having a successful capitalist fa­ther.

Marx's record of political achieve­ment at the time ofhis death seemedquite sterile. Because, in a momentof bravado, he renounced Prussiancitizenship, he was unable to go toGermany or take any intimate partin the German socialist movement.He played no role in English poli­tics.

To put it mildly, Marx was not a

mellow or lovable character. Hishabits of excommunicating from thesocialist movement everyone whodisagreed with nim kept his circle offriends very li~ited.

There is an abundance of histori­cal evidence for Max Eastman'scaustic profile of Marx in Reflectionson the Failure ofSocialism:

If he ever performed a generous act, itis not to be found in the record. He was atotally undiscipliried, vain, slovenly, andegotistical spoiled! child. He was ready atthe drop of a hat with spiteful hate. Hecould be devious, <Jisloyal, snobbish, anti­Semitic, anti-Negro. He was by habit asponge, an intri~er, a tyrannical bigotwho would rather wreck his party thansee it succeed und~r another leader.

But if there. were few mourners,literally or figur~tively,at the graveof Marx the mall, the idea of Marx­ism, the vision <>f a world in whichthe proletariat, loppressed by capi­talism, was to become the architectof new millennial order, marchedfrom success to. success.

Before World War I Marx was re-

55

56 THE FREEMAN January

vered as the founding father of thesocialist parties which had sprungup in most European countries. Be­cause a Russian genius of revolu­tionary action, Vladimir IlyitchLenin, swallowed Marx's ideas wholewithout conscious reservation,Marxism became the creed of thenew communist regime in Russia.

William Henry Chamberlin (1897­1969) was a frequent contributor toThe Freeman. Author of the RussianRevolution and numerous otherbooks and articles on world affairs,h~ was uniquely qualified to discussMarxian errors by having lived andtraveled where such mistakes ateobvious.

It is especially timely to reviewwhat Chamberlin reported more thantwenty-five years ago to be some ofthe mistakes of Marx. This article isreprinted from the May 1956 Free­man.

This regime, which has never wa­vered in its belief that someday itspower will encompass the entireworld, represents a revolt againstall the values of Western civiliza­tion, against religion and the morallaw, against civil and personal lib­erties, against the right to ownproperty, which is one of the firstand most indispensable of humanliberties. After World War II com­munism, the offspring of Marxistteaching, extended its dominion over

China, over the countries of EasternEurope, so that today [1956] it hasbeen imposed as a dogmatic faith onmore than one third of the popula­tion of the world.

And the influence ofMarx is by nomeans restricted to nations undercommunist rule. The appeal ofMarxian ideas to European social­ists, to the half-baked intellectualsof newly emancipated countries inAsia has been considerable. And, al­though the number of persons whocan honestly claim to have readthrough with comprehension the dryand abstruse Capital must be small,the simplified version of Marxisttheory presented in The CommunistManifesto and elsewhere possessesstrong psychological appeal.

Marx Sets the ProletariatAgainst the Bourgeoisie

Marx professed to know all theanswers, to offer a complete expla­nation of human activity on the ba­sis of historic materialism. In theMarxian scheme there is a hero, theproletariat, a villain, the bourgeoi­sie; and the hero is represented as acertain ultimate winner. There is avision of revolutionary victory thatwill transform the conditions of hu­man existence and usher in a mil­lennium, of the nature of which, tobe· sure, Marx offers few and vaguehints. To trusting minds which ac­cept Marx's premises and assump­tions without question there comes

1982 SOME MISTAKES OF MARX 57

~ into~icating sense of being in stepwIth hIstory, of professing a creedthat is based on infallible science.

But it is just this myth of infalli­bility that is the Achilles' Heel ofMarx as a thinker, of Marxism as asystem. An examination of the worksof Marx and his collaborator Engelsreveals ten big mistakes, of whichsome are so fundamental that theycompletely discredit, as a preview ofthe future, the whole superstructureof faith in capitalist misery anddoom, and socialist prosperity andtriumph, which Marx laboriouslyreared on a foundation of Hegelianmetaphysics and minute research ingovernment reports on the seamysides of early British capitalism.These mistakes are as follows:

(1) The doom of capitalism is as­sured because under its operation therich will become richer and fewer;the poor will become poorer and morenumerous. To quote one of the morestriking rhetorical passages in Cap­ital:

While there is a progressive diminu­tion in the number of the capitalist mag­nates, there occurs a corresponding in­crease in the mass of poverty, oppression,enslavement, degeneration and exploi­tation. But at the same time there is asteady intensification of the wrath of theworking class-a class which grows evermore numerous and is disciplined, uni­fied and organized by the very mecha­nism of the capitalist method of produc-

tion. Capitalist monopoly becomes a fetterupon the method ofproduction which hasflourished with it and under it. The cen­tralization of the means of productionand the socialization of labor reach apoint where they prove incompatible withtheir capitalist hu~k. This bursts asun­der. The knell of c~pitalistprivate prop­erty sounds. The' ~xpropriators are ex­propriated.

These are resPunding words, bututterly empty words, in view of thefact that social ~nd economic devel­opment in capit~.list countries hasproceeded along.a precisely oppositedirection from the one predicted byMarx. What was' in Marx's time asocial pyramid hFlS become more likea cube. The capitalist system hasbrought to the working class not in­creasing "oppres~ion, enslavement,degeneration anp! exploitation," butan increasing share of new inven­tions and comforts that did not evenexist for the wea~tltya hundred yearsago: automobiles" radios, televisionsets, washing m8Jchines, as well asmoney in the bank" stocks, and bonds.

(2) Socialism cOrn only come aboutwhen capitalism has exhausted itspossibilities of development. Or, asMarx puts it in his Critique ofPolit­ical Economy:

No form of society declines before ithas developed all the forces ofproductionin accordance with~ts own stage of de­velopment.

But, of the three countries which,

58 THE FREEMAN January

according to Marx, were ripest forthe transition to socialism, as mostindustrially developed, the UnitedStates is still, by and large, the freesteconomically.

The larger free part of Germany,after the terrific shock of the war,has achieved a remarkable recoveryby shedding Nazi and Allied con­trols and resorting to old-fashionedindividualistic incentives. GreatBritain has settled for a kind of so­cialistic New Deal, without violenceor outright expropriation and wellshort of Marx's "dictatorship of theproletariat."

On the other hand, the countrieswhere violent revolutions were car­ried out in the name of Marx, theSoviet Union and China, were, onMarx's own theory, completely un­ripe for socialism. Capitalism was ina fairly early stage of developmentin Russia. Much of China lived inprecapitalist conditions. Experiencehas shown that, in precise contra­diction of Marxist dogma, capital­ism is harder to overthrow as itstrikes deeper roots and shows whatit can accomplish. A plausible casecan be made out for the propositionthat, although political and eco­nomic change would have come toRussia, there would have been nocommunist revolution if World WarI had been avoided and Stolypin'spolicy of breaking up the old peas­ant communes and giving the peas­ant more sense of individual prop-

erty had developed long enough toyield results.

(3) The "dictatorship of the prole­tariat" is a just and feasible form ofgovernment. This is based on twofalse assumptions: that the "prole­tariat," or industrial working class,has some kind of divine right to ruleand that governing power can be di­rectly exercised by this group of thepopulation. Both are wrong. Marxnever clearly explained why· theproletariat, for which he foresaw in­creasing poverty and degradation,would be qualified to rule. ·And So­viet experience and Red Chinese ex­perlence offer the clearest proofs thatdictatorships of the proletariat, intheory, become ruthless dictatorshipover the proletariat, in practice. Ab­solute power in communist states isexercised not by workers in facto­ries, but by bureaucrats, of whomsome have never done any manualwork; others have long ceased to doany.

(4) Under socialism the state will"wither away." This grows out ofMarx's belief that the state is an in.;.strument for the suppression of oneclass by another. In the classless so­ciety of socialism, therefore~ therewill be no need for the state.

Events have played havoc withthis theory. Nowhere is the statemore powerful, more arbitrary, moreof a universal policeman, snooper,

1982 SOME MISTAKES OF MARX 59

and interventionist than in the So­viet Union. Yet it is here that thenew regime has abolished privateproperty in means of production,thereby, according to Marx, inau­gurating a classless society. One isleft to choose between two alterna­tive conclusions. Either the Marxisttheory of the state as an instrumentof class rule is a humbug or the kindof class rule that prevails in the So­viet Union must be uncommonlycrude and ruthless.

(5) Capitalism (in the nineteenthcentury) has exhausted its produc­tive possibilities. This flat statementis made by Marx's alter ego, Engels,in his Anti-Duhring, written beforethe internal-combustion engine, X­rays, aviation, synthetic chemistry,and a host of other enormously im­portant additions to the productiveprocess, brought into existence bythe stimulus of capitalism.

(6) All ideas, all forms of intellec­tual and artistic expression are a merereflection of the material interests ofthe class in power. This conceptionis expressed repeatedly in Marx'swritings, notably in German Ideol­ogy, where he writes: "The .classwhich has the dominant materialpower in society is at the same timethe dominant spiritual power.... Thedominant ideas are nothing but theideal expression of material condi­tions." One ofthe few wisecracks as-

sociated with the name of Marx isthat the Church! of England wouldrather give up all its Thirty-NineArticles of Faith than one thirty­ninth of its possessions.

The historical 1record shows thatthis interpretat1<>n of human con­duct is crudely ope-sided and inac­curate. Men die far more often forideas than for material interests. Thecommunist victory in Russia was notdue to the fact that material condi­tions for the m&sses became betterafter the Bolshevik Revolution. Thiswas emphatically not the case. Whatdid happen was that the organized,disciplined, communist minority ac­quired an iron grip on the masses byits double weaponlof propaganda andterror, kept passions of class hatredand class envy at'· the boiling point,whipped laggards i

! into line by ruth­less regimentation, and thereby pre­served their regime through yearsof civil war and famine. Sometimesthe materialistic, interpretation ofhistory becomes s~eer absurdity, asin the case of a Moscow musical an­nouncer, whom I' once heard offerthe following bit:

We will now he~r Glinka's overture,"Ruslan and LudmHla." This is a cheer­ful, buoyant piece ofwork, because whenit was written Russ~an trade capitalismwas expanding and conquering marketsin the Near East.

It would seem, 1that, in order tocarry any semblance of plausibility,

60 THE FREEMAN January

this should have been accompaniedby proof that Glinka owned stock inthe expanding companies-a highlyimprobable contingency, if one con­siders the economic status of Rus­sian musicians.

(7) Production depends on classantagonism. To quote Marx, in ThePoverty ofPhilosophy:

From the very moment in which civi­lization begins, production begins to bebased on the antagonism of orders, ofstates, of classes, and finally on the an­tagonism between capital and labor. Noantagonism, no progress. This is the lawwhich civilization has followed down toour own day.

Like many of Marx's "laws," thisis a mere unsupported assertion of apedantic dogma. No proof is ad­duced. The greatest human con­structive achievements, the cathe­drals of the Middle Ages, the greatdams and skyscrapers of moderntimes, are the fruit of cooperation,not of antagonism.

(8) Nationalism is a negligibleforce. Marx and Engels lived in anage of rising national consciousness.Conflicting nationalism was thestrongest force that let loose WorldWar I. Yet in all their writings theattitude toward nationalism is oneof contemptuous deprecation. AsIsaiah Berlin, a fairly sympatheticbiographer, writes (Karl Marx, p.188):

He consistently underestimated theforce of rising nationalism; his hatred ofall separatism, as of all institutionsfounded on some purely traditional oremotional basis, blinded him to their ac­tual influence.

(9) War is a product ofcapitalism.This idea has found some acceptanceoutside the ranks of the Marxistfaithful. The temptation to seek anoversimplified scapegoat for war isstrong. But while, theoretically, suchMarxian motives as struggle fortrade, colonies and commercialspheres of influence, might lead towar, there is no serious historicalevidence that any major conflict wasever touched off by such considera­tions. There were differences of eco­nomic interest between the indus­trializing North and the mainlyagricultural South before the CivilWar. But these could easily havebeen compromised. What made thefratricidal conflict "irrepressible," inSeward's phrase, were the two bigpolitical and moral issues: secessionand slavery.

World War I was purely politicalin origin. There was the clash be­tween Slav nationalism and Austro­Hungarian desire to hold together a.multinational empire. A system oftight and almost automatic alli­ances turned what might have beenan Austrian punitive expeditionagainst Serbia into a general war.

World War II was the handiwork

1982 SOME MISTAKES OF MARX 61

not of any magnates of capitalism,but ofa plebeian dictator, Adolf Hit­ler, pursuing aspirations ofconquestand military glory that far antedatethe modern capitalist system. Thethree countries that were best pre­pared for war were the communistdictatorship in the Soviet Union, theNazi dictatorship in Germany, theauthoritarian military regime inJapan. Capitalism makes. for freetrade, free markets, limited govern­mental power, and peace. And theprincipal war threat today comesfrom the expansionist urge of com­munist imperialism.

(10) The worker is cheated becausethe employer, instead of paying himthe full value of his work, holds outon him profit, interest, and rent. Or,as Marx himself states his theory of"surplus value" (Capital, ModernLibrary edition, p. 585):

All surplus value, whatever particularform (profit, interest, or rent) it may sub­sequently crystalize into, is in substancethe materialization of unpaid labor. Thesecret of the self-expansion of capital re­solves itself into having the disposal of adefinite quantity ofother people's unpaidlabor.

It requires little reflection or re­search to realize that "surplus value,"like many other Marxian catchphrases, is a myth. How, under anyeconomic system-capitalist, fas­cist, socialist, communist-could in­dustry expand and provide more

goods and more Jobs for more peopleif capital were· not withheld fromimmediate payment to finance fu­ture constructioni? Perhaps the bestrefutation of Marx's rabble-rousingmyth that surpl'Q.s value is a pecu­liar dirty trick of capitalists, prac­ticed against wor}{ers, is that the ex­traction of what might be calledsurplus value is ipracticed on a gi­gantic scale in ,the Soviet Unionthrough the medium of a sales orturnover tax that often exceeds 100per cent.

A Classic FailureIt is amazing that, with such a de­

monstrable record of failure to un­derstand either the world in whichhe was living or the direction inwhich that world, was going, Marxshould be hailed as an unerringprophet. The truth is that there isnothing remotely scientific aboutMarx's socialism. 'He started with aset of dogmatic a priori assumptionsand then scratched around in theBritish Museum for facts that wouldseem to bear out these assumptions.Like the EmperQIj in the fairy tale,Marxism, for all ~ts ponderous ap­pearances, really has no clothes onwhen examined jlllight of realities,in Marx's time and in our own. Hissupposedly infallible system of in­terpreting history ,and life is riddledwith mistakes, of rwhich the forego­ing ten are only the most obviousand the most glaring. I)

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN

Enterprise Zones

THE IDEA of establishing EnterpriseZones, small free trade enclaves withspecial tax concessions, in the slumareas of our decaying central cities,was brought to America by a Britisheconomist, Stuart M. Butler, whoworks for the Heritage Foundationin Washington, D.C. In a generousforeword to his book on the subject,Enterprise Zones: Greenlining theInner Cities (Universe Books, 381Park Ave. South, New York, NY10016, 175 pp., $12.95), Mr. Butlercredits the concept to the collabora­tive thinking of Professor Peter Hall,a former President of the socialistFabian Society, .and Sir GeoffreyHowe, a Conservative Member ofParliament.

For a Fabian "planner" to takepart in advocating the creation ofminiature Hong Kongs and Singa-

pores in British cities that are moreor less dominated by interventionisttrade unions may seem passingstrange. The British Trades UnionCongress doesn't like Professor Hall'sdefection at all-it has predicted that"rogue employers" would capitalizeon special tax concessions in Glas­gow, Liverpool, Manchester and theIsle of Dogs docking area in Londonto reproduce Hong Kong's "horrors."But Hall is willing to take a calcu­lated risk: "unorthodox ideas," hesays, are sometimes called for. Asfor Sir Geoffrey Howe, the Conser­vative, he doesn't regard the Enter­prise Zone idea as any risk at all.

Stuart Butler, while he remainsfearful that the British will mess upa good idea, thinks the EnterpriseZone is just the thing for America.He has a thorough grasp ofwhat has

ENTERPRISE ZONES 63

happened to change demographicpatterns in this country. Our north­eastern and Great Lakes cities havesuffered as industries and peoplehave moved to the Sun Belt. Skilledand educated people, in search ofmore pleasant life styles, have emi­grated to the suburbs. Port areasand railheads, while still important,cannot compete with interstatehighways as a locale for new busi­nesses.Fate has singled out specialcities for special blows-Buffalo wasby-passed by the opening of the St.Lawrence Seaway, and Detroit issuffering from being a one-industrytown that has lost much of its auto­mobile market to the Japanese.

Urban Blight

Our political efforts to halt urbandecay have been markedly unsuc­cessful. The zoning that eliminatessmall shops from public housingareas has deprived city blocks of thevariety needed to keep them alive.As Jane Jacobs has pointed out,crime ·doesn't flourish in mixedneighborhoods, where there are al­ways watchful people on the streetsand porches. But when "planning"segregates shopping and residentialareas, the mugger and the rapistflourish. And when rent control ispiled on top ofeverything, the wholehousing picture deteriorates. Land­lords can't afford to improve slumproperties, and new builders are dis­couraged.

To end the blig~t, Mr. Butler sug­gests that municilPal, state and fed­eral governments'get together to al­low islands of free competition togrow in such places as New YorkCity's South Bronx. A general pack­age of federal t~x and regulatoryconcessions (suspension of the mini­mum wage, modifications of SocialSecurity and thel,like) would be of­fered provided tne city agreed onmatching concessi9ns of its own. Thetax concessions would combine withthe plentiful existence of old build­ings to lure smaUenterprises to semi­abandoned areas.: There would beemployment for l()~al people, and thewelfare rolls would shrink.

On paper, the I, Enterprise Zonetheory sounds good. In England,bigger companies have shown· moreinterest in it than small innovativefirms. The dangeIt is that a big es­tablished company would b~ inter­ested in shifting: its location to anEnterprise Zone •. just to get awayfrom taxes it has been paying else­where. This would not result in anynet increase in. employment. Mr.Butler doesn't think this sort of thingwould necessarily.happen in Amer­ica, where there are plenty of inex­pensive "make-do" iold buildings stillstanding in slums',where new ideascould be hatched' without raisingcapital for construction costs. Newbusinesses need old edifices, says Mr.Butler. Tax incentives could begeared to favor new small compa-

64 THE FREEMAN

nies over mature companies thatwould merely be trying to relocate.

Jack Kemp Espouses

Congressman Jack Kemp wasquick to catch on to the EnterpriseZone idea. Significantly, he comes,from the Buffalo region of New YorkState, which has lost its importanceas a grain terminal now that shipssail past it to the Atlantic by way ofthe St. Lawrence Seaway. Kemp isa Republican, but he found no diffi­culty in getting a Democrat, Con­gressman Robert Garcia ofthe Bronx,to join him in introducing an Enter­prise Zone bill that has. had the fa­vorable attention ofthe White House.

The Kemp support of the Enter­prise Zone concept is attended witha bit of irony. For Kemp, more thananyone else in Congress, is commit­ted to the idea that the whole UnitedStates should be one large Enter­prise Zone. Kemp has thought of the5-10-10 Kemp-Roth tax cuts as amere beginning. If the annual in­come tax of thousands of business­men could be made sufficiently lowto leave them with something tan­gible to put into expanding theircompanies, the Enterprise Zonewould not be able to compete withthe rest of the country in job-mak­ing.

It could be, of course, that JackKemp, as an old professional quar-

terback, knows the value of havingalternative game plans. His advo­cacy of a return to the gold standardindicates that he doesn't believe taxcuts in themselves will solve ourproblems. The Enterprise Zone, withKemp, could be a stop-gap proposi­tion.

The trouble. is that it is the sort ofidea that Congress, with morepressing problems on its mind (notto mention the imminence ofcomingelections), can find very little timeto debate. The big picture seeminglycalls for an eternity spent on fight­ing over budget cuts and the needfor displaying "compassion." The talkis always of orphans and indigentold ladies who might suffer' if a taxrate is changed and an "entitle­ment" cut. There is no attempt tolook at things in dynamic terms. IfCongress could hurry up and enactthe legislation needed to create anEnterprise Zone in the South Bronx,Newark or Detroit, the need to worryabout "safety nets" and "entitle·ments" could diminish.

Maybe the Enterprise Zone ideawould come to little anyway. But i1would be good to test the virtue~

which Stuart Butler claims for it. I:it were to succeed even in one littlEarea, it would stand as an examplEfor the whole country. The wholEnation would be that much closer tcbecoming one big Hong Kong. @