the

FreemanVOL. 35, NO. 4 • APRIL 1985

Winners and Losers-A Page on Freedom, No. 18

In free trade, both parties win.

Profit-Maker-Friend or Foe?How the market economy serves us.

Inflation: Soviet Style, 1945A runaway market in fiat money.

Some Things to Think AboutThe coercive versus the voluntary way.

Brian Summers

Howard Baetjer Jr.

William H. Peterson

Hal Watkins

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196

207

209

Limited Government Steven E. Daskal 215National stability through limited government and market freedom.

Laws Against Plant Closings Hans F. Sennholz 219Labor unions and government combine to thwart business adjustments.

Essay on Caring Ridgway K. Foley, Jr. 230Pitfalls in the political process of caring for others.

Do Machines Destroy Jobs?Bastiat's lesson on the blessings of capital.

Dean Russell 235

Set the Standard High Dennis L. Peterson 243Social improvement comes through self-improvement.

Information in the MarketThis information may be harmful to you.

Joe Cobb 247

Book Reviews: 251"The Good News is the Bad News is Wrong" by Ben Wattenberg"Inside the Criminal Mind" by Stanton Samenow"Ideas Have Consequences" by Richard N. Weaver

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

the

FreemanAMONTHLY JOURNAL OF IDEAS ON LIBERTY

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Contributing Editors: Robert G. AndersonHoward Baetjer Jr.Bettina Bien GreavesCharles H. HamiltonEdmund A. Opitz (Book Reviews)Brian Summers

THE FREEMAN is published monthly by theFoundation for Economic Education, Inc., anonpolitical, nonprofit, educational champion ofprivate property, the free market, the profit andloss system, and limited government.

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A Page on Freedom Number 18

Winners and LosersIT all seems so obvious. For every winner there must be a loser. Thisis true in sports, gambling, love and war. Shouldn't it also be truefor economics?

But in economics, as we shall see, what at first glance appears tobe obvious often turns out to be false.

Suppose you buy a toaster for twenty dollars. You buy it becauseyou feel that the toaster, for you, is worth more than twenty dollars.You gain from the transaction, otherwise you wouldn't make thepurchase. You are a winner.

But the seller is also a winner. He sells the toaster because, forhim, the twenty dollars is worth more than the toaster. If he didn'tfeel that way, he wouldn't make the sale.

In this simple example, both parties, by their own standards, arewinners. And this is true for every transaction freely entered into,in which fraud and coercion are absent.

But sometimes examples seem to be more complicated. Suppose,for instance, the toaster was made in a foreign country. Wouldn'tthat change things?

To be sure, this would change some of the details. But the basicprinciple remains the same: The customer will buy only if he feelshe will be better off. The same holds for the seller. In free trade, bothparties are winners.

This principle helps us to understand every economic transaction.Whenever we see someone buy a product, take a job, or enter intoa contract in the absence of force and fraud, we know that he expectsto be a winner. @

-Brian Summers

THE FOUNDATION FOR ECONOMIC EDUCATION, INC.IRVINGTON-ON-HUDSON, NEW YORK 10533

195

Howard Baetjer Jr.

Profit·Maker­Friend or Foe?

Is one who makes profits an ex­ploiter, as is so often claimed? Or isthat person a social benefactor? Doprofits arise from harming others ormaking them better off? Do profit­makers deserve resentment or grat­itude? To examine this question, wewill need to look at opposing eco­nomic theories of value and profits.But before that, we had better beclear about the nature of wealth,what it is and how it comes to be.

What is wealth, precisely? Ismoney wealth? Suppose you couldwave a magic wand, and becomeowner of millions of dollars, billionsof marks, trillions of yen, and goldand silver coins by the truckload.Would that be sufficient to make youwealthy?

Suppose that as you waved that

Howard Baetjer Jr. is a member of the staff of TheFoundation for Economic Education, primarily re­sponsible for taking FEE's message to schools andcolleges.

196

magic wand, you found yourself,with all that money, on the very spotyou now occupy, in 1585. If you arein North America, there would benothing in sight but the rocks andtrees and grasses and streams, andmaybe a stray India:t:l.

You would be a trillionaire, butwould you be as wealthy as you areat this moment, no matter how mea­ger your bank account might be? No.Real wealth is not money. Wealth inthe strictest sense is valuablethings-things we can use to supportand enrich our lives. It is goods andservices: food, clothing, shelter, elec­tric light, symphony orchestras, die­sel engines, milkshakes and so on.That is the first point: wealth is val­uable goods and services.

For the second point, how doeswealth come to be? Does it showerdown like manna from heaven, orgrow out of the ground all ready forour use? Do houses spring up from

PROFIT-MAKER-FRIEND OR FOE? 197

the earth and furnish themselves forus; do big jetliners lay eggs fromwhich hatch little jets? No. Thesethings have to be created; they haveto be built; they have to be broughtinto existence by the ingenuity andlabor of people. That's the secondpoint. Wealth is created by people.

But, out of what do people createthis wealth-with what do they buildit? Do they snap their fingers orwave a magic wand, and produce itfrom nothing? No. They build it outof what is already here. To take aphrase from my colleague BettinaGreaves, we have progressed fromcaves to computers simply by mov­ing things around-most thought­fully and exactly, to be sure-but justby moving things around. The clay,iron and other substances that com­pose buildings have existed as longas the earth has, but they are moreusefully arranged now into cinder­blocks and steel beams. The elec­trons going through f1uorescentlamps were here, too, but not ar­ranged in that clever combinationwith glass tubes and vapor so as tomake light. What makes wealth ofraw substances is the value of theirarrangement. The third point, then,is that people create wealth by clev­erly rearranging and recombiningthe natural things that make up theearth.

To sum up, wealth is valuablegoods and services, which ingeniouspeople create, by rearranging and

recombining the physical stuff of theearth. The last part of this is mostsignificant: wealth comes to be whensomebody discovers and produces abetter, more valuable arrangement ofthings.

What Determines Value?

We can accept the above proposi­tion that wealth is essentially a val­uable arrangement of things, butthat invites the question: Whatmakes something valuable? Why aresome things wealth and other thingsworthless? Why do Cadillacs costmore than matchbox toys, sirloinsteak more than hamburger, ticketsto see Michael Jackson more thantickets to see the Chicago Sym­phony? What determines value?

This is a fundamental question, onthe right and wrong answers towhich are built right and wrong the­ories of profits, and entirely differ­ent answers to our main questionabout whether the profit-maker is anexploiter or a benefactor. We beginwith the generally accepted theory,which also happens to be wrong.

Labor?

One of the greatest economistsever, Adam Smith, misunderstoodvalue, and thereby started a longchain of confusion. Smith was a pro­ponent of the labor theory of value,which holds in essence that the valueof a thing is determined by the

198 THE FREEMAN April

amount of labor that went into mak­ing it. To quote from The Wealth ofNations, "Labour, therefore, is thereal measure of the exchangeablevalue of all commodities." Notwith­standing the brilliance of most ofSmith's other ideas, this is an error.

Karl Marx picked up S.mith's errorand added more mistakes on top ofit to produce his theory of profit. Heargued that since the value ofa thingis determined by the labor that wentinto it, laborers-and laborers only­are responsible for the thing's value.

If you are a worker on a ranch, forexample, and you fertilize a field,plant alfalfa seed, irrigate it, cut theripe alfalfa, bale it and stack it upfor delivery; you, the laborer, are re­sponsible for transforming the al­falfa seed and other raw materialsinto, say, $1000 worth of feed for cat­tle. Suppose the raw materials-thefertilizer and seed, the gasoline forthe cutters and balers, the balingwire and the like-cost the owner ofthe ranch, your employer, $400. The"labor value" Marx says you added,then, is $600.

But all you get for your work isyour wages, say, $500. This leavesyour employer a hefty profit of $100.But he didn't labor at all; how is itthat he has extra money? Accordingto Marx's theory, this profit for youremployer is "surplus value," the la­bor value you put into the hay, thathe didn't pay you for. You did $600worth of work, but only got paid

$500. You deserve all $600. Your em­ployer has appropriated from you­stolen from you-$100 worth of theproduct of your labor.

To move on to the third part of thisfoolish but widely believed theory, inthis way employers "exploit" theirworkers. Your employer takes hisprofit, the "surplus value" of yourlabor, at your expense. It was cre­ated by you; therefore it rightly be­longs to you, according to this the­ory. The very fact of profit, then,shows there has been exploitation.

The "Zero-Sum" Idea

This whole ideological package­the labor theory of value, profits assurplus labor value, and the exploi­tation of working for wages-de­pends on and illustrates another fair­sounding but wrong idea, the zero­sum view of the world. This is theidea that if somebody profits, some­body else must be harmed, becauseafter all there is only a certainamount to go around. If we add up,or sum the changes in economic con­dition of everybody, we must alwayscome out to zero, because one personcan gain only what another loses.Business activity simply shiftsaround existing wealth. That's thezero-sum view.

Those who believe in the labor the­ory of value-who hold the zero-sumview of life-necessarily see theprofit-maker as an exploiter. This in­cludes not just Marxists, but also

1985 PROFIT-MAKER-FRIEND OR FOE? 199

milder leftists. A congressman, forexample, once criticized the oil com­panies for making "obscene profits."And, sad to say, many men andwomen in business somehow thinkall this is true. They want to makeprofits, of course, and they strivevery hard to make them. But theyfeel guilty about it. They worry thatthey are profiting at the expense ofothers, that in truth, they are ex­ploiters-vicious capitalists who preyon their fellows.

This worry shows how very pow­erful error can be, because it justisn't so.

The Subjective Theory of Value

Though the labor theory has a cer­tain plausibility, we can see that itis false by a simple example. Sup­pose the amount of work that wentinto making a commodity did deter­mine its value. Then supJ?ose that onneighboring ranches, two differentcrops are produced, each requiringand getting the same amount of la­bor. Suppose one ranch raises al­falfa, and the other raises poison ivy.Ifthe labor theory ofvalue were true,the two crops would have to be worththe same!

But obviously they are not worththe same. People will pay much morefor hay, which nourishes cattle, thanfor poison ivy, which makes peopleitch. And therein lies the key to thetrue theory of value. People's per­sonal preferences determine value

and price. They will pay more forwhat they want more. The true the­ory of value is a subjective theory ofvalue. Value exists not in the thingvalued, but in the minds of thevaluers.

This subjective theory of value is acritically important economic con­cept, one of the crucial insights onwhich the so-called "Austrian"school of economics is based. It wasdiscovered by three economists, CarlMenger, Stanley Jevons, and LeonWalras, all working independently,at just about the same time-theearly 1870s. With it they clearedaway Adam Smith's labor theory er­ror, and opened up the way to aproper understanding of profits.

Once the labor theory of valuegoes, of course, the Marxian theoryof profits immediately goes with it.Since there is no such thing as "la­bor value," then clearly the Marxiannotion of profits as "surplus laborvalue" is false.

An accurate view of profits is builton two implications of the "Aus­trian" subjective value theory. Thefirst is this: a certain thing does nothave one value for all people in alldifferent times and situations. Val­ues are different for different people,and they change all the time. (Imight add that in speaking ofvaluesas subjective I do not mean moralvalues such as courage and honesty,which are always fundamentallyvaluable in their way, but only per-

200 THE FREEMAN April

sonal valuations of marketablegoods.)

Values change and vary. This iscrucial. The same thing can havedifferent values for the same personin different times and situations, andit can have different values for dif­ferent people at the same time andin the same situation. For example,right after you have eaten a fullmeal, you probably would not paymuch for a large milkshake. But astime goes by you start to get hungryagain, and gradually the price youwould pay for a milkshake in­creases. If you have to go withoutfood for a long time, especially in hotweather, you might eventually bewilling to pay five or six dollars fora milkshake. Its value for youchanges with your situation.

When Trade Is VoluntaryBoth Parties Benefit

This obvious truism, that valuesvary and change, leads in turn to asecond important insight: When anexchange is made in a free setting,both parties to the exchange benefit.The things exchanged are not ofequal value, as has so often beenthought, but of different value-tothe people exchanging. Indeed, thatis why they make the exchange.Consider yourself, for example, whenyou do business with a milkshakevendor. The value you put on themilkshake in your situation isgreater than that of the people sell-

ing it. You value the milkshake morethan the money; they value themoney more than the milkshake.Otherwise there would be no ex­change at all. You give up yourmoney; they give up the milkshake.Both parties say thank you; bothparties are happy; both havebenefited.

The situation is similar where theexchange is not of ice cream formoney, but of labor for money. Con­sider those of us who worked as sum­mer laborers on a Nevada ranch har­vesting alfalfa. We drove themachines, built fences, painted stor­age tanks and so on, earning slightlyover minimum wage. When we tookthose jobs, offering the ranch ownerour work in exchange for his money,we valued the money he gave usmore than the time and labor wegave him, and he valued our workmore than the money he gave us.There was benefit on both sides.

Marx's exploitation theory thusreverses the truth. Workers are notexploited by their employers. On thecontrary, in a free exchange they arebenefited by their employers-andvice versa. That's the nature of freeexchange. True, we might havewished that our efforts were worthmore-that we could have com­manded a higher wage-but in ourparticular situation in that time andplace, that job at thatwage was bet­ter than any other available use ofour time and effort.

1985 PROFIT-MAKER-FRIEND OR FOE? 201

Free Exchange Is Positive Sum

In a free exchange, both partiesbenefit. Note that this fact disprovesthe zero-sum assumption of eco­nomic life. In a free-market ex­change, neither party loses for thebenefit of the other; both partiesbenefit, or they would not exchangeat all. Free exchange in a marketsetting is not a zero-sum game, buta positive sum game.

While we're on it, let's make an­other point about this zero-sum idea.Those who believe it often remind usthat resources are finite: they implyby this that therefore wealth is fi­nite. True, resources are finite, if byresources they mean only raw ma­terials. But the ultimate resource, asJulian Simon has pointed out in abook by that name, is people-hu­man ingenuity and creativity. Ofthat resource there seems to be nolimit at all. Human beings are as­tonishingly ingenious, creative crea­tures. They have a seemingly un­bounded capacity to figure out betterarrangements for these finite rawmaterials.

And for this reason, the finitenessof physical resources does not putany bounds on wealth. Wealth, as wesaw at the outset, is not in sub­stances, but in their arrangement.With the same physical substances,creative people can increase theamount of wealth until the crack ofdoom, through ever-better arrange­ments of those substances.

Profits

To understand fully what profitsare and how they are made, we needto add one more concept to those wehave already observed. We have seenthat people create wealth by favor­ably rearranging and recombiningphysical things, and that differentpeople place different values onthings. To these concepts we add onemore thought: our knowledge is im­perfect. Most importantly, we havevery imperfect knowledge about themost valuable ways to arrange andcombine things. Often we do notknow of mutually beneficial ex­changes we might make with others.Or, knowing of exchanges we wouldlike to make, often we don't knowhow to manage them inexpensivelyenough. And nobody knows of val­uable products and methods thathave not yet been discovered.

With these three concepts we candefine profits. Profits are what resultfrom somebody's overcoming imper­fections of knowledge, discoveringand producing a more valuable ar­rangement of things. Put anotherway, profits are a person's reward forincreasing value, for increasingwealth. Remember that wealth is inthe arrangement, not in the sub­stances: he or she increases wealthwho comes up with a more valuablearrangement.

Let's illustrate this with anexample.

Suppose Mr. Phelps, the owner of

202 THE FREEMAN April

the ranch where I worked, has anumber of big stacks of hay that hewould like to sell. In that situation,Mr. Phelps puts a relatively lowvalue on hay. Let's suppose he wouldtake as little as five dollars a balefor it. His knowledge is imperfect. Heknows that there are lots of dairyfarmers in California and New Mex­ico and Nevada who would like tobuy his hay, but he does not knowexactly who they are, how much theyneed, or what they would pay for it.Furthermore, he does not knowwhere to get trucks and drivers toship his hay. At the same time thereare lots of dairy farmers who put arelatively high value on hay. Theywould be glad to pay up to six dollarsa bale for it. They know there areranchers with hay to sell, but theyaren't sure where those ranchers are,or how much they can deliver. Andthey don't know where to get trucksand drivers either. This is a problemfor both Mr. Phelps, who has the hay,and the dairy farmers, who need it.

These folks are in a situationwhere they might make a mutuallybeneficial exchange, but they can'tmanage it. What they need now isfor somebody to discover this unfa­vorable arrangement, figure out howto fix it, and do so. They will be gladto reward someone who does.

At the same time there are peopleleasing eighteen-wheeled flatbedtrucks that might be used to shiphay, but they don't know about

Phelps and the dairy farmers. Andthere are oil distributors, selling die­sel fuel that could run those trucksfrom Nevada to California, but theydon't even know what alfalfa is. Andthere are truck drivers who wouldlike to make the run, if somebodytold them where to go, and offeredthem a better deal doing that thansomething else.

All the potential is there for half adozen mutually desirable ex­changes. But so far, nothing hap­pens. The hay sits in the lot, thedairy farmers fret, and the trucks,the gas, and the drivers are beingused to deliver things less importantthan that wonderful, high-proteinhay. All these resources need some­body to coordinate them properly, torearrange and recombine them intogreater wealth than they make up intheir present arrangement. What isneeded is an entrepreneur.

The Role of the Entrepreneur

Along comes the hay broker. Heleases the eighteen-wheeled trucks,buys the diesel fuel, and hires thedrivers, giving each one directions toMr. Phelps' Ranch and from there tothe dairies. He negotiates with Mr.Phelps to buy hay at, say, $5.25 abale, and with the dairy farmers tosell it at, say, $5.75 a bale.

Now, is Mr. Phelps better off? Yes,he has made 25 cents a bale morethan he would have accepted. Arethe farmers better off? Yes, they had

1985 PROFIT-MAKER-FRIEND OR FOE? 203

to pay 25 cents less than they wouldhave paid. Is the leasing companybetter off? Yes, they expect to be, orthey never would have rented outtheir trucks. Likewise the fuel dis­tributor and the drivers would nothave dealt with our entrepreneurunless they thought they would ben­efit by it. So everything our entre­preneur has done so far has meantbenefits for those around him.

Now let us suppose the entrepre­neur's expenses add up to 25 cents abale. This includes all the costs ofdoing business: wages for the driv­ers, fuel costs, maintenance on an of­fice, payments for the trucks, insur­ance premiums, clerical costs, phonebills, the wage value of his own timeand so on. Added to the $5.25 he paidfor the hay, that brings the totalmarket value of the starting ar­rangement of things (call it the costof inputs) to $5.50 a bale. But sincethe market value of the final ar­rangement (call it the yield) is $5.75a bale, he has 25 cents a bale leftover.

That is his profit. It is the yieldmi­nus the costs. It is his reward for in­creasing wealth, for taking what isvalued less, and transforming it intowhat is valued more. It is his pay­ment for discovering and producinga more valuable arrangement ofthings. He does not profit at the ex­pense of those around him; he profitsprecisely because the result ofhis ac­tivity, when all is said and done, is

more valuable than the state of af­fairs that existed when he started­by 25 cents a bale.

Note that the size of the profit de­pends on the amount of improve­ment overall, the size of the differ­ence between the less valuablestarting arrangement (the costs) andthe more valuable finishing ar­rangement (the yield). It depends onthe overall increase in value. The haybroker does not just have to discoverwho has hay and who needs it, andsell it for more than he buys it. Healso has to discover good trucks touse, quick and efficient means ofloading and unloading, cheap fuel,good mechanics, dependable drivers,short routes and so on, so that allthese costs together are less thanwhat he makes on the hay itself. Hisprofit, if any, depends on his effi­ciency, on his producing more valuethan he consumes.

This efficiency is itself a social ser­vice, because it saves valuable goodsfor other purposes. The quicker hisloads are delivered, the less hay isspoiled and wasted. The less fuel heburns and driver time he uses, themore of these are left over to deliverother valuable goods.

Losses

The opportunity for profit alwaysinvolves the possibility of loss. Prof­its are never guaranteed in this un­certain world. The entrepreneurloses when his costs, the total value

204 THE FREEMAN April

of the resources he uses up, aregreater than the yield, the value ofthe new arrangement. He loses, andsociety loses, because the total stockof wealth is decreased. Suppose ourhay broker is inefficient. Suppose hewastes fuel, that his drivers wastetime loading and unloading, and getlost making deliveries. Suppose heleases smaller trucks than he should,so that he needs more trips to deliverthe same amount. These inefficien­cies might push up his total cost ofdelivering each bale to 50 cents, in­stead of 25. And his slow deliverywill allow more spoilage of the hay,so that perhaps he will be able to sellit for only $5.65 a bale, instead of$5.75. Now his costs are greater thanhis yield, so instead of profits, hemakes losses, of 10 cents a bale. Thismeans-indeed, it is the same thingas saying-that he has used up morevaluable resources than he has pro­duced, at a rate of 10 cents a bale.He loses, because society overallloses.

Mr. Phelps still gains, of course, asdo the dairy farmers and the truckleasers and the fuel sellers and thedrivers. They would not deal withhim if they did not see an advantagein doing so. But the society overallis worse off; it would have been bet­ter on the whole if this hay brokerhad never made the deliveries, if thetrucks, the fuel and the drivers hadbeen left at their· previous uses (as­suming they were profitable).

The greater the entrepreneur'sprofit, the better off his society mustbe. Bigger profits mean bigger im­provements, bigger differences be­tween the resources consumed andthe value produced. (They also en­courage competition, of course,which tends to increase supply, lowerprices, and thus reduce profits; butthat's another subject.) Profits can­not be obscene; the bigger the better!They are all to the good for society.Far from being exploiters, entrepre­neurs who make profits are socialbenefactors of the first order, for theyare the ones who create wealth, whoincrease the total amount of valua­ble goods in the world.

Who Deserves the Profits?

I first appreciated the importanceof entrepreneurial brainwork, andthe difficulty of the entrepreneur'sjob, after work the first day I drovea baler. At the same time I realizedhow silly is the popular notion of"unfairness" in the laborer's doing"aU the work" for nothing more thanwages, while the entrepreneur doesno labor but earns all the profits.

I had been on the baler all day, theusual ten hours, from seven to sixwith an hour for lunch. The Nevadasun was hot, and the work was dusty.As usual, Mr. Phelps had been cruis­ing around, checking on us from hisair-conditioned, white Lincoln Con­tinental. We were sweating for justover minimum wage. He wasn't

1985 PROFIT-MAKER-FRIEND OR FOE? 205

working, but he was making theprofits. It doesn't look fair, does it?It didn't to me-until I looked closely.

I had had fun, and when I saw himin the machine shop talking to hisforemen I called out proudly, "Hey,Mr. Phelps, I learned how to run abaler today!" He gave me a smilewith a friendly sneer and said,"Baetjer, you didn't learn to run abaler, you learned to point a baler."In a moment of insight I understoodhow dependent the laborer's contri­bution is on that ofthe entrepreneur,and why the entrepreneur deservesevery penny of his profits.

What he said was true. I had baleda whole lot of hay that day, but Ididn't know a thing about it. Icouldn't even fix the small problemsI had with my machine, let alone ser­vice it properly or make a major re­pair. Any worker could do what I haddone, steering the tractor up anddown the fields, but it took skilledmechanics to keep the balers run­ning, and adjust them so that thebales would be the right size andweight. It had taken careful plan­ning and inventory control to seethat there was always baling wireand fuel on hand, and to keep spareparts in stock (they say they havethem for every part of every ma­chineD. The effectiveness of my sim­ple, thoughtless work pulling thatbaler was utterly dependent on Mr.Phelps, who had arranged to get itthere, had it prepared for use, and

put me aboard it in a field of new-cuthay.

Sure, I had baled the hay, but whogot it there to be baled? Think of theextraordinary sequence of precise,interdependent rearrangements ofphysical resources, labor and tech­nical know-how that Mr. Phelps hadarranged in order to produce thatcrop. The soil chemistry of the landhad to be analyzed; on the basis ofthat analysis fertilizer had to be cho­sen, ordered and spread. The fieldsare not naturally even, so they hadto be smoothed as well as possible,and sloped at the ideal rate for irri­gation. (Most recently this smoothingof the fields is done by a laser-plane,in itself an extraordinary entrepre­neurial achievement of hydraulicsand laser technology.)

The alfalfa seed had to be chosenfrom among different strains, boughtand sown, at the right time and inthe right amounts. Since the valleygets very little rainfall, a complex ir­rigation system had to be built andmaintained, and the irrigation car­ried out on time, in the rightamounts, and at the right rate. Whenthe alfalfa started to bloom, it had tobe cut, weather permitting, as closeas possible to that brief time whenthe protein content in the plants ishighest. The drying hay had to bemonitored for moisture, so that thebales would be neither damp nordried out.

At each step of the harvest process,

206 THE FREEMAN

the necessary machines, costing tensof thousands of dollars each, had tobe ready. There are the "swathers,"which cut, crimp and pile the hayinto windrows; the balers; and theharobeds, computerized marvels oflevers and platforms, which pick up,load and stack the bales. All must bein use on time, because once the hayis cut, it must be dried, baled andstacked without delay to maintainits value. During the harvest, thehay broker must be contacted andnegotiated with, the fields and irri­gation ditches repaired, and the nextround of irrigation planned.

Every step of this extraordinaryprocess must be directed by Mr.Phelps, the entrepreneur. Each cru­cial decision, on which depends suc­cess or failure, profit or loss, must bemade by him, either directly orthrough the men he has hired tomake them. In any case, the respon-

Reprints . ..

sibility for the result, be it credit orblame, is his. One good decisionmade in that white Lincoln Conti­nental was worth a whole day'sworth of pointing a baler, and awhole summer's worth of balingcould not make up for one bad de­cision. All I did was steer. He did thethinking. That is why the entrepre­neur deserves the profits: he makesthem possible!

The successful entrepreneur, onewho makes business profits in amarket economy, is a social benefac­tor. (In a mixed economy, with gov­ernment intervention and privilege,things are often different, but that,too, is another subject.) Indeed, theprofiter is the most important, mostsignificant kind ofbenefactor any so­ciety has, because such a person pro­vides, in ever greater measure, thewealth all the rest of us depend onto support and enrich our lives. ®

A Page on FreedomEach of these brief messages is a handy way to share with friends,teachers, editors, clergymen, employees and others a thought-starteron liberty. It also serves to introduce the reader to our work at FEE.

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Inflation:Soviet Style,1945

IF inflation is a matter of sharp run­ups in the money supply ("too muchmoney chasing too few goods"), I wit­nessed that phenomenon first-hand,and it was a lesson I'll never forget.

The time was the summer of 1945.The place was Berlin, site of fourmilitary powers-the U.S., France,Britain and the Soviet Union-oc­cupying an utterly ruined, once­beautiful metropolis.

As a member of the Americanarmed forces, I saw right away whatStars and Stripes, the Army news­paper, was reporting: that a sizeableflea market had sprung up behindthe burnt-out Reich chancellery on acorner of the Tiergarten (not far from

Dr. Peterson Is the director of the Center for Eco­nomic Education and the Scott L. Probasco Jr. Pro­fessor of Free Enterprise at the University of Ten­nessee at Chattanooga.

the bunker in which Hitler had com­mitted suicide), that the marketfunctioned daily at all hours, slow­ing down only for darkness ordrenching rain, that the number oftraders was usually in the dozens butswelling to the hundreds on Sundayafternoons, that the trading-andhiggling-was never in booths butalways· on foot with traders circlingaround to get the best bid-and-askprices, with most merchandise soldgenerally passing from pocket topocket.

The traders were not Germansnearly so much as uniformed Rus­sians and Americans with fewerBritish and French soldiersparticipating.

With German money worthless,the currency was occupation marks­lots of it. Soviet plates were supplied

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208 THE FREEMAN

by the U.S. Treasury Department,according to Stars and Stripes, theSoviet occupying forces were sud­denly given months and months ofback pay-in occupation currency.Russian officers frequently carriedsatchels full of it. Russian enlistedmen often had bagfuls.

Prices zoomed. German men andwomen, for the most part ragged,hollow-eyed, thin, forlorn-looking,peddled what wealth had escaped thebombing and burning-silver, jew­elry, Zeiss binoculars, Leica cam­eras, Meissen china (frequentlychipped) and bric-a-brac includingashtrays, lamps, clocks and cheappaintings-all at fancy prices. I sawa used commonplace alarm clock gofor the equivalent of $85-in 1945dollars.

The main stock in trade, however,consisted of wrist watches and cig­arettes (which became a kind of sec­ondary currency). The watches and

cigarettes were overwhelminglysupplied by the Americans, much ofthese items flown in unofficially byU.S. airmen, and overwhelminglybought by the Russians.

Prices became crazier. A carton ofcigarettes went for $200. I sawMickey Mouse wrist watches (whichsold at home for about $5.95) com­mand $150 and Waltham watches,retailing in the States for around$16.95, sell for $300.

Understandably, the U.S. ArmyPost Office in Berlin did a land-officebusiness in money orders, with the82nd Airborne Division, the mainU.S. contingent stationed in the Ger­man capital, sending home far moremoney than it had been paid. In theend, some $250 million worth of So­viet occupation currency, accordingto estimates, had been converted intodollars-with the bill of coursepicked up by the American taxpayer.Who else? ®

IDEAS ON

LIBERTY

Obliteration of Thrift

As VALUES became more and more uncertain, there was no longer anymotive for care or economy, but every motive for immediate expenditureand present enjoyment. So came upon the nation the obliteration ofthrift·In this mania for yielding to present enjoyment rather than providingfor future comfort were the seeds of new growths of wretchedness: lux­ury, senseless and extravagant, set in. This, too, spread as a fashion. Tofeed it, there came cheatery in the nation at large and corruption amongofficials and persons holding trusts.

ANDREW DICKSON WHITE, Fiat Money Inflation in France

Hal Watkins

Some Things toThink About

LUDWIG VON MISES is rememberedand respected as a great economist,but it is significant that his mostmemorable work is a book called Hu­man Action. Classic libertarians usethis volume as their textbook on eco­nomics. Mises recognized that ma­terialism is not the basic motivationfor human action, but that there aremore subtle stimulae involved.

Materialism is not synonymouswith self-interest, but many intelli­gent, sincere people think it is. Bytaking advantage of this confusionsocialists/communists are able to selltheir delusion to the unsuspecting.These interventionists take advan­tage of a primitive motive that man­ifests itself prominently in earlychildhood: covetousness. When you

The Reverend Mr. Watkins edits and pUblishes ThePrinted Preacher, a monthly gospel message, 303North Third, Dayton, Washington 99328.

put two one-year-old children in aplaypen with a few toys, this motivebecomes obvious. If one picks up atoy, the other will want it and reachfor it. About that time, the parentsbegin their lessons in sharing, andthe children are completely baffledby such a concept.

Communists also teach sharing,sharing with the State. The Statethen "shares" with the less fortu­nate-if the less fortunate meet allthe ideological criteria laid down bythe oligarchy in charge of the State.This is raw materialism, based onthe idea that it is impossible for ahuman being to rise above covetous­ness. Actually, communists prefer itthat way. They find it difficult tokeep their serfs in subjection whenthey develop motives on a higherplane. This is the fundamental rea­son for communist opposition to re­ligion. Christianity denigrates cov-

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210 THE FREEMAN April

etousness and replaces it with loftiermotives.

"Finally, brothers, whatever istrue, whatever is noble, whatever isright, whatever is pure, whatever islovely, whatever is admirable-ifanything is excellent or praisewor­thy-think about such things" (Phi­lippians 4:8). The Christian scrip­tures encourage us to think aboutwhat is true, noble, right, pure,lovely, admirable, excellent, praise­worthy. I am convinced there is noconflict here with the free marketsystem. Contrariwise, this qualitylist can be said to be almost 100 percent opposed to socialism. (I am us­ing the qualifying word "almost" inthe event there may be something Ihave overlooked, but I seriouslydoubt the word is useful here.)

The Truth About Freedom

Does freedom in the marketplacehave the ring of truth about it? Iscompetition an advantage to the con­sumer, or would he be better servedif the State (politboro, council of eco­nomic advisors, or whatever) deter­mined what he should buy, howmany and what quality? Back in the1930s the college professors told methe capitalistic system wasted enor­mous quantities of goods and energybecause of its competitive nature. Itwould be better if the Technocrats(socialists, communists, fascists)should assemble in their boardrooms and determine just what was

needed and how much. This wouldeliminate waste and everyone wouldbe amply supplied. That was a lie,but at that time I did not know it. Iwas being fed such books as TheChallenge of Russia, by Kirby Page.That wonderful experiment in theU.S.S.R. was pointing up the falla­cies in the free market system.

Nearly 50 years have gone by sincethose days, and history has provedtheir propaganda to be utopian lies.The Soviet Union cannot feed itself.It has to steal industrial secrets. Itmust fence its people in. It exportsits doctrines by force. Its educationalsystem is a continuous process ofbrainwashing. Where is· the truth incommunism? If there is any, even itsown disciples have been unable tofind it!

How about the nobility of the Rus­sian experiment? I submit there isnone to be found in the leadership,the rulers. They have starved, tor­tured and killed millions oftheir ownpeople. Wherever they have tried toexport their philosophy they haveachieved the same result. Much ofthe Third World is suffering the mis­eries of starvation and war becauseMarxists have infiltrated under­developed countries in order to makehavoc ofthem. Then, when the depthof tragedy has been reached, theystep in and take control. Where isthere anything noble about such asystem? Nobility is found in the Gu­lags, the prisons and the exiles.

1985 SOME THINGS TO THINK ABOUT 211

Is there anything right aboutMarxism (socialism, communism,fascism, Nazism)? A current expres­sion in America to describe some­thing that works is, "They must bedoing something right." What arethey doing right in Russia, Cuba,China? If they are doing anythingright, why do they have to be bailedout all the time? I agree totally withthe Guatemalan leader, Dr. ManuelF. Ayau, when he says, "I, for one,believe that socialism would havedisappeared from the face of theearth long ago if it were not keptalive by the United States." Theirregimes continue in power by meansof repression, violence and terror.They cannot afford to allow an op­posing party to exist within theirborders.

It probably has never occurred toanyone, either in or out of commu­nism, to describe the system as pureor lovely. But the apostle. Paul sayswe should think on such things. So­cialism/communism is so full of de­ceit, coercion, intrigue, shortages,hunger, privation, and class warfare(planners vs. plannees), that one ishard pressed to discover purity andloveliness therein.

Is there anything that could be de­scribed as excellent in the practicalapplications of Marxism? We searchin vain in the testimony ofthose whohave managed to escape Russia,China, Cuba, et al., to find anythingthat can be given unqualified praise.

The best to be said for their industry,research and development, housing,education, quality of life and morals,is that they might, in some in­stances, be called mediocre. Morefrequently the descriptions run fromfair to poor to terrible. Excellence isseldom achieved via coercion; it de­pends on inner motivation, some­thing that is singularly absent in aslave state.

The last item in our list is "praise­worthy," something worthy ofpraise.Occasionally, we hear communistsreferred to as dedicated, and surelydedication is praiseworthy. But arethey really dedicated? I know thatsomeone will cite the Russian andEast German athletes and their nu­merous accomplishments as evi­dence. Admittedly they get highmarks and set records in their var­ious specialties. But why? Party bu­reaucrats scour the nation lookingfor promising young athletes, givethem special training, housing, andperks, all of which give them the il­lusion of being emancipated fromrun-of-the-mill slavery so common insocialist countries.

Sometimes we think of the KGBagents as being dedicated, but arethey? Let's face it. The pay is good,and if they can be trusted they getto live outside of Russia (or Cuba). Idoubt ifwe should even use the wordefficient to describe the KGB. If thisvast spy network were -really effi­cient, it could survive and even do a

212 THE FREEMAN April

better job with 25 per cent of its pres- it; one would have to die to escapeent personnel requirements. our subject.

Perhaps there are historians who The United States of America hasare saying, "Yes, but see how com- Christian roots, and the predomi­munism has spread since its incep- nant religion of our country is stilltion," as though they expected praise Christianity. The guidebook· forfor such an accomplishment. On the Christianity is the Bible, so let ussame basis, we could commend the ask the question again: Is there anbubonic plague of the Middle Ages. economic system that is compatibleI saw a bumper sticker recently with what we as Christians believe?which read "God loves you, and I'm Happily, there is. It is the free mar­trying." Well, I've tried to find some- ket, free enterprise, unfettered cap­thing praiseworthy in intervention- italism. Let's examine it together,ist governments, but so far such - just as we did socialism. Can we giveitems have escaped me. our minds and hearts to that which

is true and still promote a free mar-The Science of Scarce Goods ket? Ideally, how could a free market

Let's turn our attention away from succeed except in an atmosphere ofstatism and ask ourselves if there truth? A free market assumes lim­really is an economic system that is ited government which guaranteescompatible with the admonition of (to the extent of its ability) life, lib­Paul, the apostle, in the Scripture erty and property, the enforcementverse we quoted. Economics, the sci-of contracts, and the punishment ofence (if it may be called that) of fraud. Truth is the cornerstone in thescarce goods, touches the life ofevery foundation of such an economy.human being on earth, even though Christians, regardless of whethermost of them may never have heard they are in positions of ownership,the term. We cannot escape econom- management or employees, wouldics, any more than we can avoid eat- feel compelled to seek the truth anding and breathing. Even astronauts, embrace it in all their economic af­although they may be away from the fairs. The competitive free market­earth for days, weeks or months at place would even tend to makea time, cannot remain aloof from "Christians" of the unbelievers, oreconomics. In fact, a sortie away they would eventually be out offrom earth will involve them even business.more deeply. Air, water, and food- Can we apply the term noble to thethings they may have accepted quite free market? Webster's definitionslightly on the ground-become very we wish to apply here are: "havingprecious to them in space. Let'sface or showing high moral qualities or

1985 SOME THINGS TO THINK ABOUT 213

ideals, or greatness of character,lofty." The truly free market is al­ways controlled by the buyers, theconsumers. They have the privilegeof examining what is being offeredfor sale to determine the quality andcompetitive price range. If, for anyreason, the potential buyers decidethey had rather not buy a particularproduct, they can withhold theirbusiness or take it elsewhere. If theseller alleges his product to be some­thing which it is not, the buyer hasrecourse within the framework ofthelaw. Such an arrangement tends to­ward nobility on the part of all con­cerned. The producer is free to sellto whomever he pleases, and the con­sumer is free to buy from whomeverhe pleases. The net result of this ar­rangement is that the producer doesall within his power to provide thebest possible product at a cost to theconsumer which is attractive to him.

We are told in our text to thinkabout what is right, so join me for amoment in considering the rightnessof free enterprise. Let Webster re­fresh our memories: "Right: what isright, or just, lawful, morally good,proper, correct...." The free marketsystem measures up well to eachfacet of the definition, with the pos­sible exception of one: lawful. Itshould not be, but here is the bigproblem area. The Constitution ofthe United States was designed andwritten to protect the rights of thecitizens and promote the general

welfare of all of them, but over theensuing years many politicians lostsight of this worthy intent. They be­gan to abuse their position and au­thority and enacted laws that ben­efited a few, to the detriment of themany. Because of this, the statutebooks are filled with labor legisla­tion, interstate commerce laws, min­imum wage laws, tariffs, and so on.

Legal Restraints

The free market system is right,just, good, and proper, but the legalfrustrations imposed upon it by itswitting or unwitting enemies haveplaced so many boundaries around itthat they who would practice it findthemselves bumping their heads andstubbing their toes. Then, to com­pound the frustration, wheneverthere is a problem in the economiccommunity, free enterprise isblamed for it! So, we find ourselvescontemplating a concept which isright, but in many respects, not law­ful. Shall we eliminate that which isright, or shall we erase the legal re­straints against it?

Let's see how the free market sys­tem fits within the context of pure,lovely, and admirable. The term "un­adulterated" certainly comes tomind at this point. We have all stoodon the banks of streams and riversat flood stage and felt dismay at theamount of silt and debris being car­ried downstream. At other times wehave enjoyed watching mountain

214 THE FREEMAN

streams tumbling over rocks andsand and noted that the water wasso clean we could drink it. Socialismis a system clogged with the silt oftrash produced by the State anddumped into the stream, leaving thebuyers no choice but to consume it.The managed economy is a riverwhose flow is slowed by all kinds oflegal restrictions resulting in risingprices and a limited selection for theconsumer.

In Summation

Is the free economy excellent andpraiseworthy? It is hard to answerthis question without being redun­dant. A current expression goessomething like this, "If it isn't bro­ken, don't fix it." I think it would bewell to apply this philosophy to oursubject. History tells us that when­ever and wherever the free markethas been tried, it worked. Then whytry to "fix" it? Those who wanted tofix it, and have too often succeeded,

may be called liars, thieves, orignorant.

Communism (socialism) has neverbeen a grassroots movement, but itmust always be imposed on the un­suspecting by gangsters who lust forpower. Instead of granting freedomto the people, they impose more andmore restrictions over life and prop­erty. They even regiment whatevercharity happens to survive in thehearts ofthe people. Freedom (withinthe laws to prevent fraud), on theother hand, allows for the fullest re­alization of the desires and ambi­tions of those who drink of its purewaters. All who are willing and ablecan do what they want and workwhere they will. Those who cannotparticipate will be cared for out ofthe hearts of those who can.

I believe a root of our dilemma inthe twentieth century is the fact thatwe have not listened to the Apostlewho told us to "think about suchthings." I

(DEASON

LIBERTY

Thomas Jefferson

Resolved . .. that it would be a dangerous delusion were a confidence inthe men of our choice to silence our fears for the safety of our rights:that confidence is everywhere the parent of despotism: free governmentis founded in jealousy and not in confidence; it is jealousy and not con­fidence which prescribes limited Constitutions to bind down those whomwe are obliged to trust with power. . . . In questions of power then letno more be heard of confidence in man, but bind him down from mischiefby the chains of the Constitution.

Steven E. Daskal

Limited Government-and the Stability of Nations

THE importance of limited govern­ment to the cause of individual lib­erty has often been discussedin these pages. In short, limitedgovernment allows for maximumindividual freedom and self­actualization, free from coercion. Toparaphrase Thomas Jefferson, gov­ernment is a necessary evil; usually,the less of it, the better.

Limited government is intimatelyconnected with a free market econ­omy, which allows for the ever­changing, infinitely variable natureof human economic activity far bet­ter than a series of mathematicalpredictions, popular "laws," or bu­reaucratic regulations. A govern­ment that can meddle with marketmechanisms has great power, andcan always manage to gain evenmore power through its manipula­tions. Similarly, a government that

Mr. Daskal of Annandale, Virginia, is a defense sys­tems analyst and writer.

is restrained from upsetting themarket system is, by definition, lim­ited, since a significant portion of allhuman endeavor can be classified aseconomic activity, governed by themarket rather than by majority ruleor government order.

To illustrate the power govern­ment gains over individual freedomthrough economic controls, considerthe possibility in licensing busi­nesses. Most nations, even in "free"nations, require businesses to be li­censed, usually as an "innocent" aidin the collection of taxes. However,in many nations, such as Allende'sChile and Sandinista Nicaragua,these licenses have been revoked inthe case of certain non-violent, tax­paying businesses. The businessesthus made illegal (and violentlyforced out of business) were opposi­tion newspapers. A seemingly harm­less government regulation can betwisted to malevolent ends, without

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216 THE FREEMAN April

a single change in the law. It is safernot to give such power to govern­ment than to trust to "traditions" orthe "sanctity of human rights." Thefreedom to own and use property,without specific government permis­sion, is the ultimate safeguard of po­litical and economic freedom.

Traditions of Freedom

The importance of limited govern­ments and the free market in otherparts of the world is perhaps evenmore critical than it is in the UnitedStates and Canada. We have strongtraditio~s of respect for humanrights; the American Declaration ofIndependence holds them to be "self­evident" truths, a basic premise thatcannot be challenged by thinkingpeople. Our nations have also beenblessed by relative peace and stabil­ity. Massive upheavals in govern­ment are rare; civil wars and rebel­lions even rarer. Ethnic and religiouschauvinism, though intense attimes, has never resulted in majorsectarian conflicts.

In other parts of the world, theblessings of internal peace and sta­bility are much less common. Innu­merable countries in Europe, Africa,and Asia have been ripped apart byethnic, religious, or tribal animosi­ties. I suspect that there is some­thing common to all of the nationsexperiencing this terrible, self­destructive turmoil and the viciouscycle of violence and repression it

has created. The common thread un­derlying much of this chaos and war­fare is the failure of these peoples tolimit government and allow freeminds and the free market to en­courage development through vol­untary cooperation and the processof supply and demand.

Looking at most developing na­tions, and even some "developed" in­dustrial nations in the rest of theworld, one sees a significant lack oflimited government and a coincidentlack offree market economies. Thesestates are on the same endless tread­mill, outlined below, which can betermed the "revolutionary spoilssystem" of government.

(1) The poor, the intelligentsia, theworkers, the army, or whomever, revolt;they see no hope of the current systemaddressing their grievances, and arewilling to risk destruction and death toput a "more just" system in place.

(2) The revolt becomes a revolution; anew government is created, theoreticallyor actually representing the group orgroups who began the revolt.

(3) To get and keep power, these newleaders plan a new system of laws, re­organize the economy, and often strip thegroup previously "on top" of their eco­nomic and political liberty. Their prop­erty is expropriated, they lose their pri­vacy, and their freedom to speak, write,or assemble is limited or eliminated.

(4) This newly disenfrapchised, op­pressed class, in a matter of years, or atmost generations, begins its own re­volt ... returning to step 1.

1985 LIMITED GOVERNMENT 217

Most political historians tend toemphasize steps one and two as themost important. We often stress the"newness" of the revolutionary gov­ernment, often missing the fact thatwhether they are "left" or "right,""Islamic," "Peronist," or "Commu­nist," the results are sadly similar.A new privileged elite is created, andis given wealth and power throughthe forcible theft of the freedom andwealth ofother groups ofpeople. Thenet result is an economic debit, be­cause most revolutions cause mas­sive destruction of economic assets(farms and crops, homes and facto­ries, transportation capital, humanworkers and inventors) which nei­ther winner nor loser can use again.A corollary result is the growing,continual fear of further turmoil,which leads to faulty economic de­cisions by both individuals and gov­ernments such as investing wealthoutside one's own country, investingin portable wealth (gold, gems, for­eign currencies), or investing inweapons and security forces neededto keep the elite in power and protecttheir ill-gotten gains.

This cycle is repeated with infinitevariations in dozens ofcountries. Therefusal of governments to provideevery person equal and honest jus­tice and the opportunity of each tomake his own course through lifeinevitably leads to suspicion, ani­mosity, and ultimately violence.

Repeatedly, when the demands of

rebels in these countries are heard,they complain that they have beendenied equal opportunity, equal jus­tice before the law, equal access tothe media, and equal security intheir homes and businesses.Whether they be Muslims in Leba­non, Turkish Cypriots in Cyprus,Basques in Spain, Palestinians in Is­rael, non-Slavs in the Soviet Union,or ethnic Chinese in Vietnam orUganda, they share common com­plaints. They are not allowed tospeak their languages, build theirbusinesses, educate their children,and be·.assured of physical securityto the same extent that the group inpower is. This isn't surprising, sincethe group in power is busily takingadvantage of the oppressed group toimprove their own wealth and posi­tion rather than giving equal oppor­tunity and protection to all.

The solution to these problems isso straightforward, it is amazingthat it has not been grasped by theUnited Nations, or the UnitedStates government, and shown tothe various "leaders" who wish torestore stability to their countries.The basic concepts are nothing newor alien. They are the concepts de­veloped through good sense, intui­tion, and experience by our ownFounding Fathers.

(1) A federal form of national govern­ment, allowing for different ethnic, reli­gious, or tribal groups to practice theirown cultures without oppression or os-

218 THE FREEMAN

tracism within their own autonomous lo­cality, while allowing for easy economicand social commerce between theselocalities.

(2) A limited government, that cannotand does not attempt to redistributewealth or direct activities within the lo­calities, except to ensure the basic lib­erties essential to legal equality, physicalsecurity, and honest business practices ina free economy.

(3) A representative government, withappropriate checks and balances, that al­lows individuals to have their views onnational issues heard in the highest lev­els of the nation, and that allows eachgroup or locality to have equalrepresentation.

It is increasingly urgent in ourtense, heavily armed world, that thecoercive "revolutionary spoils sys­tem" be replaced by peaceful, lim­ited, federal nations with free mar­ket economies and free trade. Onlythrough these essentially peaceful,stable governmental structures willthe terrible economic and social bur­dens of the developing nations beable to be corrected through bal-

anced economic development. Strongconstitutions, with rigid checks andbalances, must be instituted to keepout the "spoils seekers," and attractpeople of good sense and good willinto the government and intobusiness.

The right of all peoples to main­tain their religion, their culture,their heritage, and their languageamongst themselves, must be ac­knowledged by all governments. Theright of each individual to seek hisor her own destiny, and be allowedto keep the wealth and property ac­crued through honest industry, mustalso be made sacrosanct. If the na­tions of the world fail to recognizethese basic realities, they aredoomed to endless repetition of thecycle of revolution, destruction, andoppression they have already en­dured too long. As the destructivecapability of Man becomes greater,this cycle puts the people of all na­tions, even those relatively "free" of ,the cycle, at ever-increasing risk. ®

IDEAS ON

LIBERTY

Alexander Addison

How LITILE do men see, who promote insurrection or revolution, andhope to lead it, that they must soon sink under its force, and be amongthe first victims of the fury which they excite! However honest may bethe views of its promoters, in the progress of insurrection or revolution,ignorant, violent, and wicked men will soon take the lead, and conductan enraged people to any extremity.

Hans F. Sennholz

Laws AgainstPlant Closings

"Never again in Massachusetts,"Governor Michael S. Dukakis re­cently promised factory workers, willthey "lose their livelihoods with nowarning, no health insurance fortheir families and no chance to planwhat comes next." The governor hadjust signed a law for the protectionof workers against plant closings,imposing severance-pay require­ments on employers and exactingother benefits for displaced workers.Three other states-Connecticut,Maine and Wisconsin-have similarlaws. The legislatures oftwenty-fourstates repeatedly considered plant­closing bills; two cities-Philadel­phia and Pittsburgh-passed ordi­nances. Moreover, the courts andNational Labor Relations Board aredoing their part in making plant-

Dr. Hans Sennholz heads the Department of Econom­ics at Grove City College in Pennsylvania. He is anoted writer and lecturer on economic, political andmonetary affairs.

closing restrictions the law of theland.

Plant closings always impose pain­ful costs on the participants-ownersand managers, workers, local gov­ernments and local businesses. Themedia describe the burdens in vividcolors-the loss of jobs and liveli­hood, the poverty and despair, therevenue loss and fiscal distress, thebusiness decline and community de­cay. But it is most significant that,in all their intense coverage, not aword is uttered about the tremen­dous adjustment costs to the owners.In fact, all discussions and proposalsfor relief merely pertain to the typeand magnitude of benefits to be ex­acted from the owners. Typical pro­visions of plant-closing laws exactowner-paid severance benefits,owner reimbursement for employeeretraining, continuation of healthinsurance coverage for specified pe­riods after termination, payments to

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220 THE FREEMAN April

government ofspecific proportions ofthe annual wage bill, reimburse­ment for employee relocation ex­penses, paid leave time, etc., etc.1

Need versus Greed

The argument made in defense ofsuch employer levies usually isthreefold. First, the basic need ofworkers for work, wage and suste­nance morally takes precedence overthe owner quest for profits. In thelanguage of displaced workers,worker livelihood takes precedenceover employer greed. Second, em­ployers are morally obliged to rein­vest their profits in the plant inwhich they were earned so that theworkers who earned the profits maybenefit from them. Iflabor is a sourceof profit it is rightful and just thatlabor should be a beneficiary ofprofit. Third, labor legislation andNational Labor Relations Board reg­ulations have created unchallenge­able job rights that shelter orga­nized labor from the competition ofindependent labor. If organized la­bor has job priority over competinglabor, it may also have proprietaryrights. If organized workers have alegal right to their jobs it must notbe denied by the owners. After all,human rights are said to take pre­cedence over property rights.

When presented in such contra­position, which is borrowed from thestratagems of debate, the answer isas plain as the nose on one's face.

Basic needs proceed from life, whichis God's creation. Who would wantto argue against the priority of suchneeds? However, most needs are notfrom nature, but from custom andeducation. The American steelworker who faces disemploymentwaxes about his needs that exceedgreatly those of other Americanworkers and surpass by far the sim­ple wants of his foreign peers.

Case studies of plant closingclearly reveal that it affects primar­ily high-seniority workers. Youngworkers are laid off long before theclosing, during periods of stagnationand decline when losses are sufferedand output is reduced. They are theprimary victims of unemployment.The workers who are left when thegates shut permanently usually are40 to 55 years old, have high job sen­iority, enjoy occupational status,have little education, and earn ex­ceptionally high wages.2 In 1982 thesteel worker whose plant closeddown was earning some 189 percentof wages and benefits paid in allmanufactures. The automobileworker whose plant shut down wasearning 165 percent of wages andbenefits paid in all manufactures.3

Both the steel worker and automo­bile worker were senior members ofpowerful labor unions.

It is doubtful that most owners canmatch the incomes of steel and autoworkers. There are millions of stock­holders who directly and indirectly

1985 LAWS AGAINST PLANT CLOSINGS 221

invest their savings in corporateownership. Most stockholders aremiddle-class Americans with aver­age incomes who, for a greater andsafer future, save a percentage oftheir incomes. They may own stockdirectly or through intermediariessuch as pension funds, life insurancecompanies, investment companiesand credit unions. When seen in thislight, there are few Americans whodo not invest in corporate produc­tion; 998,000 men and women di­rectly own General Motors Corpo­ration, 216,000 own U.S. Steel.4 Themedian earnings ofAmerican males,in 1982, were estimated at $19,292,and those of women at $12,532.5 Butsteel and auto workers were earningbetween $23 and $25 an hour, or$46,000 to $50,000 per year. It isdoubtful that they earned less thanmost stockholders. Some 75,080 U.S.Steel stockholders were women; it isunlikely that many earned morethan steelworkers.

Plant closi~gmakes the loss of thejob definite and final. Disemployedworkers may encounter great diffi­culties finding comparable posi­tions. But stockholders may be ableto salvage all or most of their in­vestments; they may gather theirprofits and desert the ship-at least,this is how many workers are view­ing the situation. If it were actuallytrue that plant closings are so prof­itable to owners, thousands of fac­tories and workshops would be clos-

ing every day of the week. Whyshould there be any production ifshutdowns are more profitable? Infact, a shutdown is a desperate mea­sure designed to minimize losses andtaken in frustration and despairabout a hopeless situation. It usu­ally inflicts severe losses on owners.When production stops, both wagesand capital income grind to a halt.The owner may lose not only his in­come but also his savings, that is, hiscapital substance, which may havetaken many years to accumulate.

Two particular situations short ofbankruptcy may induce an owner tocall a halt to production. When hisplant or workshop is expected to suf­fer losses that in time are bound toconsume his capital, he can be ex­pected to order the shutdown. If hefails to give the order a bankruptcyjudge will give it in the end. Or cred­itors may call a halt by refusing togrant any more credits and demand­ing repayment. To avoid losses is toprotect not only one's material sub­stance but also the jobs of fellowworkers. It safeguards the appara­tus ofproduction that generates bothcapital yield and labor income andpreserves labor productivity and lev­els of living. If these are moral ob­jectives it follows that avoidance ofloss is a moral task.

The owner may rightfully andmorally consider a shutdown whenhis plant or workshop is expected toearn net returns that are consis-

222 THE FREEMAN April

tently lower than the market rate. Itis a basic principle of the privateproperty order that the rate of re­turn indicates the urgency of humanwants and the efficiency with whichthey are served. A twenty percentreturn, for instance, may indicateservice of a relatively urgent want,a two percent return a low-priQritywant. A twenty percent return maybe a reward for a job well done andan inducement for reinvestment; atwo percent return may signal con­sumer reluctance or withdrawal. Toserve the latter is to ignore the for­mer and allocate scarce resources tothe satisfaction of less importantwants. It impairs the economic well­being ofconsumers, prevents the for­mation of capital, and rendersexpansion and modernization mostdifficult. Where would we be todayifour forebears had consistently pur­sued least urgent wants and ne­glected to create productive capital?

Many factors enter into the own­er's decision to halt production. Hemust weigh the anticipated lossesfrom continuing production againstthe particular losses resulting fromshutdown. Valuable fixed assets maybe reduced to uselessness, specifictools and equipment to scrap iron,materials and supplies to surplusmerchandise to be' sold at bargainprices. Labor costs of a shutdownmay be staggering as a result of thew·aste and unproductiveness of laborduring the shutdown process, the

contractual obligations for pensionand severance pay, moving expensesin case some activities and employ­ees are transferred to other companyfacilities. Undoubtedly there will belegal defense costs from claims andcharges lodged by labor, regulatorsand tax collectors. If all these costsconstitute the lesser evil, the ownermay choose to close his plant.

The Obligation to Reinvest

Where economic life is free, plantsopen and close in an unending pro­cess of adjustment and readjust­ment. Ever catering to the wishesand choices of consumers, business­men make capital investments,change them, withdraw them, or re­place them by more productive in­vestments. They respond contin­ually to changes in consumerchoices, to changing techniques ofproduction, changing labor costs, en­vironmental costs, government lev­ies, and many other factors that af­fect productivity. Uninhibited flowof scarce capital from firm to firm,industry to industry, and location tolocation, leads to highest productiv­ity not only for the owners of capitalbut also for other people as workersand consumers. Working and livingconditions improved when the black­smith shop gave way to the auto re­pair shop, and the buggy factory tothe auto assembly line.

There is no obligation, economic ormoral, to reinvest profits in the plant

1985 LAWS AGAINST PLANT CLOSINGS 223

in which they were earned "so thatthe workers who earned the profitsmay benefit from them." For theblacksmith, to reinvest his dwin­dling returns in better tools of pro­duction would not have altered theoutcome. But he could have earneda handsome profit and simultane­ously benefited society by investinghis funds in automobile productionand service. He would not haveserved the true interests ofhis work­ers by keeping them on the payroll.Labor, like capital, is under constantpressure to adjust. It, too, receivesits market value and price from theservices it renders to consumers who,through buying or abstention frombuying, issue the production orders.The worker who quickly learns anew technology, seeks employmentin a new industry, or moves to a newlocation where jobs abound, is re­warded for his effort. The workerwho for any reason refuses to adjustto new situations, may cease to serve·other people.

Consumers Allocate Returns

It is erroneous to conclude thatcapitalists owe their profits to the ef­forts and labors ofworkingmen, whothereby earn a residual right to prof­its. Workers have no better claim tothe interest earned by capitalists orthe profits collected by entrepre­neurs than these have valid claimsto workers' wages. Production is co­operation in which each production

factor receives income according tothe value ascribed to its services bythe supreme directors-consumers.

Labor receives its full wages ac­cording to inexorable value princi­ples, the providers of capital receivethe market rate of interest, and en­trepreneurs may earn profits or suf­fer losses. They -all are paid in full.For labor to claim a right to invest­ment capital is to claim the right tocommand someone's savings, for thebricklayer who pours the foundationand lays the bricks to claim owner­ship rights to the house, and thesteelworker earning 189 percent ofaverage industrial wages to press hisclaim to the steel mill. If govern­ment were to enforce such claims,there would be few houses and evenfewer steel mills.

The notion ofworkers' rights to theplant is rooted in popular doctrinesofMarx and other socialistic writers.They are making the point that theefforts and labors of workingmengenerate a "surplus" over and abovethe wages they are getting, and thatthis surplus goes first into profitsand other property incomes, then inlarge part into new investments, in­creasing the quantity of capital andreducing the demand for labor. Tothem, unemployment primarily is aninvestment phenomenon that bringsforth a substitution of capital goodsfor labor. It permits capitalists to ex­ploit labor and invest their feloniousgains in ever more capital and power.

224 THE FREEMAN April

There is no need for a detailed re­futation of Marxism and other ver­sions of socialism. Other writershave elaborated and articulated theerrors in great detai1.6 But it shouldbe pointed out again that workers donot generate surpluses over andabove the wages they are getting.They engender no profits. If it wereso profitable to be an employer ofmen, there would be no business fail­ures, no bankruptcies, and above all,no unemployment. Employers wouldbe bidding feverishly for more laborand reaping profits in direct propor­tion to their payrolls. All such no­tions contradict both themselves andeconomic reality.

Job Rights versus Property Rights

Under the influence of exploita­tion thought, legislators and regu­lators have created unchallengeablejob rights for organized labor. RoscoePound, the eminent legal philoso­pher and Dean of Harvard School ofLaw, called them legal immunitiesand privileges for labor unions, theirmembers and their officials. Orga­nized labor is free to commit wrongsto person and property, and deprivenonmembers of the means of earn­ing a livelihood-things which noone else can do with impunity. It en­joys special privileges as a result ofcertain features of American laborlaw, such as the elimination ofproven methods of law enforcement,failure to distinguish unlawful ac-

tion by labor organizations, theirleaders and their members, doneoutside of the employer-employee re­lation, from practice in that relation,and the practice of committing allmatters affecting labor organizationto administrative agencies insteadofcourts oflaw.7 The legal privilegesand immunities of organized laborclearly reveal great political powerthat is brought to bear on legisla­tors. This power now is put to use fornew favors in the form of plant-clos­ing laws.

Socialist doctrine clothes labor in­come with the sacrosanctity of "hu­man rights" and vilifies other in­comes as the evil effects of"unearned property rights." The for­mer is said to be anchored in the in­alienable right to life and liberty; thelatter is said to be a product of con­vention and tradition, a creature ofcapitalism. This is why the rights ofsteelworkers who earn nearly twicethe average American industrial in­come are to take precedence over therights of stockholders no matterwhat their earnings should be. Thisis why a teacher's claim to incomefrom a few shares of common stock,owned directly or by her pensionfund, is to yield to a steelworker'sclaim for plant closing benefits.

"Human rights" income is deniednot only to owners but also to un­organized labor. After all, the basicmethod of unionism is restriction oflabor competition; the basic effect is

1985 LAWS AGAINST PLANT CLOSINGS 225

unemployment. Union bargaining iscollective bargaining by a selectgroup, which means the denial of theright to bargaining by outsiders.Unions claim. the right to strike,which is the right to force other peo­ple to join the strike. Unions claim"human rights," which include theprivilege to deny "human rights" toothers. The fate of excluded people isofno concern to the union. When, de­spite the legal protection from com­petition, it finally prices most of itsmembers out of the market, andturns a profitable company into ahopeless undertaking, it calls forplant-closing laws and governmentbailouts.

Restrictions on ClosingsAre Restrictions on Openings

There is a striking resemblancebetween plant-closing laws in theU.S. and "economic developmentlaws" in many undeveloped coun­tries. Foreign governments oftenwelcome the immediate investmentof American funds for purposes ofproductivity and employment, andsimultaneously give many reasonsfor blocking and seizing the fundswhen the owner seeks to repatriatehis property. They construct com­plex traps for capital and then won­der why, despite all the noisy entice­ments, little capital is venturing in.Similarly, the sponsors of plant-clos­ing laws are demanding plant in­vestments and reinvestments, but

when owners seek to withdraw theirfunds, or merely liquidate the left­overs, plant-closing laws are to seizetheir assets and distribute themamong the workers. It takes greatcourage and irrepressible optimismto launch an enterprise in a statewith a plant-closing law.

Many entrepreneurs are optimis­tic by nature, which may lead themto ignore plant-closing laws, refus­ing to contemplate business failure.In old, established concerns facingminimal danger of closure and liq­uidation, closure benefits and exac­tions may indeed be discounted.However, for new enterprises therisk of failure is considerablygreater, which makes plant-closinglaws especially onerous to them.Where business mortality is high thelaws may help to reduce it by dis­couraging businessmen from eventrying. In industries that are subjectto great variations in demand orchanges in technology, the laws mayerect serious obstacles to new in­vestment. In unionized industriesthat are stagnating or contracting,they may render new investment ut­terly prohibitive. In every case theclosure laws reduce the demand forlabor and depress wage rates. Whenorganized labor resists the down­ward pressure it causes mass un­employment. In the end, the law thatmeans to prevent unemployment byorder of politicians, judges and po­licemen, actually creates it.

226 THE FREEMAN April

Plant-closing benefits must beviewed as just another brand offringe benefits that may raise thecost of labor and reduce the demandfor labor. To employers, they are justanother levy similar to those exact­ing unemployment compensation,workers' compensation, Social Se­curity contribution, and all the othermandated exactions. In the long run,they tend to reduce take-home payby forcing employers to allocate moreof a worker's earnings to his fringebenefits. Take-home pay must fallwhen fringe benefits rise. But thisadjustment process, which takestime, is strenuously resisted by or­ganized labor. It refuses to learn thatinability to cover labor costs by laborproductivity brings forth more un­employment. It is so difficult to ad­mit that unemployment is a costphenomenon that purges loss-inflict­ing labor.

Plant-closing laws give employersa powerful incentive to build plantsand facilities in states that do nothave closing restrictions. And ifcompanies are located in such statesthey have an incentive to substitutecapital for labor wherever possible,which reduces the demand for par­ticular labor and depresses its wagerates. In situations of wage rigidityand labor resistance it causes un­employment. In the end, economicprinciple always prevails over thepower of legislators, tax collectorsand policemen.

Keeping Business in TownNumerous plant-closing bills are

proposing requirements for lengthyprenotification, generous severancepay to workers and confiscatory tax­ation, called community restitu­tion.8 They are seeking to keep busi­ness in town by rendering closuresand departures financially prohibi­tive. But all the threats of confisca­tion and restriction imposed on own­ers cannot make business any moredurable.

A business that fails to compete ef­fectively in the production of goodsand services is bound to fail in theend. It will fail if it is found wantingin product price or quality and if, forany reason, the costs of productionleave no competitive margin of re­turn to the owners of capital. A pro­ducer who can pay only $1 per hourfor skilled labor is not competitive inthe American labor market; a pro­ducer who can earn only three per­cent on equity capital is not compet­itive in the American capitalmarket. Both are destined to fail inthe end. Threats of dire conse­quences may make them contract oreven discontinue all the sooner. Norcan Federal subsidies, grants andloans to workers and communitiesavert the ultimate consequences ofbusiness inability to compete.

Contrary to labor dogma, businessprofitability provides job protection.The best employer is a profitable em­ployer who plans to expand his op-

1985 LAWS AGAINST PLANT CLOSINGS 227

erations and needs more labor. To at­tract qualified labor he musteffectively compete not only in wagerates and fringe benefits, but also inworking conditions and steadiness ofwork. He must be more attractivethan his competitors.

Employers who for any reason suf­fer losses cannot offer job protectionbecause their bosses, the consumers,do not grant protection to them. Intime, losses tend to consume busi­ness capital, give rise to debt, andforce business to contract and dis­charge labor. Alert workers observ­ing the decline and foreseeing theend seek employment elsewhere.They abandon the ship before it runsaground. Other workers with lessforesight and mobility may decide tostay to the bitter end. After all, un­employment compensation, sever­ance pay, and other transfer benefitsencourage them to wait and see.Plant-closing laws may encouragethem to cling to failing employers aslong as some assets are left.

In many cases workers are not justinnocent bystanders and victims ofbusiness failure; they may be activeparties and contributors to the di­lemma. Acting in unison through amilitant union, they may exact max­imum pay for minimum work. Or­ganized steel workers receive 189percent ofwages and benefits paid inall manufactures, automobile work­ers earn 165 percent. They earnthese amounts for work performed

according to union work rules thatreduce effort and output and signif­icantly raise labor cost. And last butnot least, union labor usually is an­gry labor with long lists of griev­'ances. It is hostile labor that is un­able and unwilling to compete.9

Adjusting Labor Costs

There are countless reasons forbusiness decline and plant closing.But no matter what they should be,workers can nearly always ward offthe decline and avert the closing. Inmany processes of production laboris the most important factor of pro­duction inasmuch as its costs exceedall other costs. A small reduction inlabor cost may make a plant profit­able and competitive again. A steelmill, no matter how old-fashioned itsequipment, can be made to be prof­itable and competitive through a re­duction in labor costs. Any automo­bile plant can be made to functionagain through savings in labor costs.

It is utterly senseless for any plantto shut down when labor costs arefar above the average and unionrules remain in effect. And yet, allover the country countless mills, fac­tories and workshops are abandonedwith labor costs at their peak. A fewconcessions and "givebacks" grantedin exchange for future claims and fa­vors rarely make a difference. It issad when great steel cities turn intorust cities with union pay rates andunion work rules in full force. It is

228 THE·FREEMAN April

tragic when jobs are lost forever andplant and mills are razed with laborcosts at record levels.

Nearly every plant, mill and work­shop could be saved and the disasterof economic loss and unemploymentbe avoided through improvements inlabor productivity and reductions inlabor costs. How the American steelindustry would prosper again if la­bor costs were lowered to marketproductivity levels! How the auto­mobile industry would thrive againif the cost of labor were determinedby the free choices of car buyers!Many a plant would become com­petitive again if only the union workrules would be rescinded and man­agement be permitted to direct laboragain. And many a mill could besaved if workers would labor in ear­nest instead of"spreading the work"or pressing grievances against hap­less employers. Rusty mills andabandoned factories would come tolife again if organized labor were toacquiesce in the market wage, whichis the productivity wage.

Labor unions never relax theirpressures for maximum labor costregardless of the pain inflicted onmany workers and investors. Theypersevere in defense of basic unionideology and their very existence. Ifthey would listen to the warnings ofone employer they would have to lis­ten to all. If they would relax theirgrip on one they would have to relaxon all. They would be returning to

market wages and conditions thatare determined by labor productiv­ity rather than union power. By im­plication they would also be admit­ting that their own policy ofmaximum pay for minimum work isan important cause of stagnationand unemployment. But they wouldrather linger in depression and callfor plant-closing laws than to drawthis conclusion.

The Cost of Government

Next to the cost of labor is the costof government as the greatest bur­den of business. Most corporationspay much more in taxes than theyyield in dividends to their owners. Inthe U.S. they face painful exactionsby three levels of taxing authorities:the federal, state and local govern­ments. State and local levies differgreatly depending on the voters' con­ception ofentitlement and social jus­tice. In some locations they oftenreach confiscatory levels at whichbusinesses by the score are forced toclose their doors; in other states andplaces where the levies are lower,business may prosper a:p.d expand.In international trade and com­merce the combined load of federal,state and local levies and regula­tions may determine the competi­tiveness of enterprises.

In situations of depression and un­employment, government is akin toorganized labor: It refuses to relaxits hold on the victims. In fact, state

1985 LAWS AGAINST PLANT CLOSINGS 229

and local authorities usually in­crease their tax rates when revenuedeclines for any reason. They re­main deaf to the cries of business be­cause they would have to listen to allif they were to listen to one. Theykeep on taxing, regulating and con­trolling regardless of the deepeningdepression around them. Politicalentitlement and transfer take pre­cedence over any aspect of busi­ness. 10 It is sad to observe the declineof commerce and industry with taxrates at record levels. It is tragic towitness the closing of factory gateswith tax collectors and union agentsarguing over the possession of thegates.

Plant closings always inflict greatpain on the participants. Discussionand proposals for relief usually dealwith benefits to be exacted fromowners, that is, more pain to be in­flicted on owners. The noisiest pro­ponents are politicians, tax collec­tors, and labor leaders. And yet, themore pain they manage to inflict onentrepreneurs and investors, thedeeper workers sink into depressionand unemployment. I

-FOOTNOTES-

IDaniel A. Littman and Myung-Hoon Lee,"Plant Closings and Worker Dislocation,"Richard B. McKenzie, ed., Plant Closings: Pub­lic or Private Choices? (Washington, D.C.: CatoInstitute, 1984), p. 127.

2Ibid., p. 132.3Keinin, Mordechai E., "Wage Competitive­

ness in the U.S. Auto and Steel Industries,"Contemporary Policy Issues 4 (January 1984),pp.39-50.

4General Motors Annual Report1983 (Detroit1984); U.S. Steel Corporation 1983 Annual Re­port (Pittsburgh 1984).

5U.S. Department of Labor, Bureau of LaborStatistics, Handbook of Labor Statistics Bul­letin 2175 (December 1983), p. 98.

6Two Austrian economists, Eugen von Bohm­Bawerk and Ludwig von Mises, have explodedevery aspect ofthe exploitation doctrine. Bohmdemonstrated that it contradicts both itselfandthe realities of the world. Cf. Capital and In­terest, 3 vQls. (South Holland, Ill.: LibertarianPress, 1960); Mises penned a comprehensivetheoretical and philosophical refutation. Cf.Socialism (New Haven, Conn.: Yale UniversityPress, 1951), also Human Action (New Haven:Yale University Press, 1949).

7Roscoe Pound, Legal Immunities of LaborUnions (Washington, D.C.: American Enter­prise Association, Inc., 1957).

aU.S. Representative William D. Ford,"Statements in Support of the National Em­ployment Priorities Act," in Plant Closings:Public or Private Choices? ed. Richard B.McKenzie (Washington, D.C.: Cato Institute,1984), Appendix.

9In the steel cities of Western Pennsylvania,Eastern Ohio and West Virginia, where un­employment among steel workers exceeds fiftypercent, labor is especially hostile and angry.In Youngstown, Ohio, 989 angry school teach­ers and other support personnel such as li­brarians, counselors, and psychologists re­cently voted for union representation, ninetyabstained from voting, and seven voted to re­main free. (Youngstown, Ohio: The Vindicator,October 19, 1984), p. 1. What can be expectedofworking people if their teachers long for anddepend on union representation?

lORobert M. Bleiberg, "Oh Albany!" Bar­ron's, December 10, 1984, p. 9.

Ridgway K. Foley, Jr.

~:==========~Jr

Essay onCaring

~\.~,=============~

POLITICAL ASPIRANTS are notably"concerned and caring" for the com­mon man. But is theirs a genuinecompassion, or does it lead to plansand actions opposed to their pro­fessed aims?

I suspect that the political/eco­nomic notion of "caring" generallyamounts to ideological and practicalextortion.

A significant number of the self­chosen saviors of mankind employthe caring concept as a tool for self­satisfaction and aggrandizement.Just as some men and women erectconcert halls and athletic field­houses as modern pyramids to pro­claim the importance of their being,so too do other individuals seek rec­ognition and remembrance by the

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

230

concoction oforganized programs de­signed to alleviate real or feigned in­justices besetting the world aboutthem.

In some cases, the benefactorachieves substantial and tangiblepleasure by participating in such aplan-he becomes involved in someactivity which provides meaning toan otherwise desultory life. In otherinstances, his reward takes on amuch more material flavor-propo­nents of many pseudo-charitable de­vices make a very good living fromtheir parade of good works, derivingpower or prestige from these en­deavors. Yet another gaggle of com­passionate souls creates the intan­gible pleasures incident to con­verting the resistant and erringheathen to a particular philosophi­calor theological point of view.

ESSAY ON CARING 231

There is, of course, a fourth divi­sion-men and women who devotetheir efforts to assisting others inneed without hope of tangible or in­tangible earthly rewards. Unfortu­nately, the numbers of this lattergroup appear to be declining.

The Dividing Line

A remarkable duality pervades theconcept of caring and its current im­plementation. Force represents thedividing line. Application or refrainfrom coercion separates the wrong­ful intrusion into the sanctity of thelife of another from the permissiblecompassionate endeavor. The lawought not impede attempts to aidothers or to solve problems wherethose enterprises occur without com­pulsion. This should be true wherethe majority decries the problem asridiculous or the solution as ill­advised; after all, the crowd oftenproves ineluctably wrong and, in anyevent, no human being possesseseither the ability or the moral priv­ilege to substitute his judgment forthat of another choosing sentientbeing.

Conversely, no one should employthe legal monopoly offorce to compeladherence to, participation in, orcompliance with an artifice designedto better another, no matter how wellintentioned or meritorious the plan.No individual should be permitted tothrust a decision or shunt responsi­bility for the consequences of his

choice upon another, unwilling hu­man being. Disregard of this salientprinciple necessarily denies thedignity of that other individual,since moral choice and accountabil­ity constitute an essential elementin the human condition.

Those who -purport to care, then,must submit to a. test of means andmotive.

The law (rules and orders createdand enforced by mankind) should notaddress the means employed bythose who promote compassion as apolitical or economic discipline ex­cept to assure that no individual orentity compels a dissenter to assentto, support or participate in a pro­posal disagreeable to the latter forany reason.

All too often, those who preach car­ing, compassion and concern resttheir case upon the root of envy:Loathe the rich and trust the poor;take from the evil producer and giveto the high-principled but helplessvictim of circumstance and oppres­sion. Such caring persons really donot care at all about others: The cre­ators must be plundered, the usersmust be pandered, by force and viol­ence, by false premises and prom­ises, in order to salve the promoter'sinordinate ego and to effect hisflawed view of mankind and theworld. In these, the vast majority ofinstances, one can always countupon the concerned to care-forthemselves!

232 THE FREEMAN April

Do Caring ProgramsImprove Our Lot?

Ignore for the moment the moralissue of might-makes-right in a goodcause. Assume high-minded benev­olence on the part of those who ex­press concern. An essential questionremains: Do the programs proposedby the "caring people" achieve mer­itorious results-do the solutions al­leviate hunger, suffering and hurt?

Few individuals-and none of thevocal proponents of structured com­passion-even pose this fundamen­tal question, and for good reason:The undeniably negative responsecasts overwhelming doubt not onlyupon the efficacy of the particularsolution but also upon the very sub­stance upon which the adoring ad­vocates ofgovernmental charity basetheir lives! Make no mistake: Allcompulsive charities employ thestate as the ultimate solution to anypreconceived ill. One must searchlong and hard today to learn of or­ganized attacks on human despairwhich resolutely avoid partaking ofgovernmental subsidy or other coer­cive aid. Yet the presence or absenceofforce represents the imperative se­lector, the pIumbline segregating ac­ceptable and unacceptable charita­ble response.

Analysis of the effect of coerciveprograms must focus upon two dis­crete truths: First, the forceful re­sponse always produces unintendedand unwanted consequences which

render the program counterproduc­tive. Second, the institutional re­sponse to a problem is always lesshelpful than the individual response.

Initially, the unseen consequenceso unerringly and eloquently de­scribed by Bastiat and Hazlitt inev­itably rises up to smite those whowill do good with other people's livesand property. Consider the currentplight of the starving legions in Af­rica. Only the truly cruel eschewcompassion for the suffering of an­other human being.

Nonetheless, most of Africa en­counters famine, plague and pestil­ence with great regularity. Rhodesia(until its recent transmutation intoZimbabwe) and the Republic ofSouth Africa serve as the most re­markable exceptions to this rule. Theperceptive should inquire as to thereason for this recurring condition.After all, Africa contains a store­house of natural resources, a ple­thora of exceptional ports, varietiesof climate and rainfall, and other in­dicia of an ability to provide its den­izens with an adequate living.Nevertheless, other nations on othercontinents lacking equivalent nat­ural resources and gifts must pro­vide both continuing subsistence andemergency foodstuffs to the people ofthe African Continent.

Delve beneath the superficial andone discerns the reason for this ex­traordinary seeming dichotomy.Slavery impoverishes; freedom feeds.

1985 ESSAY ON CARING 233

Africa contains myriad venal, op­pressive and murderous political re­gimes dedicated to the unyieldingrepression of liberty and the en­trenchment of socialism. A free so­ciety-necessarily including a freeeconomy-would and always willproduce an abundant outpouring ofgoods, services and ideas in Africa aselsewhere. Instead, the caring peo­ple importune (sometimes with force,sometimes with manipulation) theirfellows to aid the starving Africans,apparently oblivious to the fact thatbad values and bloody dictators havecaused the current and ever-presentdespair. The gift of largess does littleto alleviate long-term hunger in Af­rica. And donations strangely turnup in the pockets of dictators, dic­tocrats and gunrunners. Unfortu­nately, ~ concomitant effect impedesthe productive from future produc­tion. Human beings robbed of thefruits of their labors tend to reducetheir future production, boding ill forthe next generation of starvingAfricans.

Other examples abound, but thepoint is clear. Those politicians whoaccuse their critics of cruel and in­human conduct if they resist trans­portation of great gobs of money tothe poor, the helpless, and the dis­advantaged, necessarily posit theaxiom that it is not cruel and inhu­man to steal and distribute as a mod­ern Robin Hood. Not only are suchpoliticians wrong but also their very

actions will increase, not diminish,the problem perceived! As a dear andwise mentor early taught me, "Noproblem exists which the meddlingof politicians will not make worse."

Sadly, the liberal faith in democ­racy resolutely clings to a belief ingovernment as the essential vehicleto help the less fortunate. Even the"old right" concurs that the statemust aid those incapable of self-as­sistance, and the debate between the"old right" and the "old left" nor­mally devolves into a controversy ofdefinitions and a discussion of thelevel of the state most desirable torender the assistance.

Proper Role of the State

Unfortunately, acceptance of thecliche avoids the seminal questionconcerning the proper role of thestate. The inquiry cannot be phrasedin terms of "states rights," for statespossess no "rights," only powers ofcoercion. The proper issue is: Giventhe existence of human misfortune,who shall attempt to alleviate thatcondition? Surely not the state, theeternal compulsory bungler. Alle­viation of distress calls for creativeaction. The state possesses only de­structive powers. In face ofcalamity,we all believe that others shouldcome to our assistance, yet charityand compulsion are mutually exclu­sive terms. Man ought to performproperly, and natural law (not thevictim, not the positive law) ought to

234 THE FREEMAN

exact the penalty for failure to do so.Again, the moral and the efficient

coincide. The individual response toa problem is always better than theinstitutional response. It is morepersonal, more meaningful, more ef­ficient, more direct. It tends to reachthe heart of the issue with a mini­mum of overhead and delay, to resistexcesses, and to avoid muchweeping.

I am so very tired of caring peopleand sharing people who search formaterial or emotional monumentsfor their good works. They care aboutthemselves; they do not share theirown, but that belonging to another.I glory in the occasional iconoclast

who disdains symbols and slogansand probes straight to the essence ofa neighbor's concern, with love andwithout fanfare. The overworkedphrase "unsung heroes" truly de­scribes the men and women who visitthe sick, comfort the elderly, soothethe confused children and performall manner of good works. It is mucheasier to lobby legislators to send"aid" (tax dollars) to Africa than itis to spend an afternoon in a nursinghome, or Thanksgiving serving thehomeless a turkey in a volunteermission. I think that such a rarebreed truly cares many times morethan all those who blather openlyabout their commitment. @

IDEAS ON

LIBERTY

Socialism in Ethiopia

SOME YEARS ago I was arrested and underwent interrogation by officersin the Ethiopian army, the police, and finally by the Criminal Investi­gation. One of the charges against me (the only true one) was that I hadgiven charity to some widows and orphans who were not approved bythe State for private charity. I was repeatedly told that charity is thework of the State and if I wanted to help people, I must give my con­tributions to the governing body to distribute. (In the U.S. one is not yetarrested for helping poor widows and orphans, but charity is popularlydeemed to be the work of the State and not of individuals, families, andvoluntary institutions.)

Peace, economic progress, and freedom is the goal of most people, evenofmultitudes who profess adherence to socialist ideology. It is inevitable,however, that socialism in Africa or elsewhere is incapable of attainingthese goals.

FRANCIS E. MAHAFFY, 1976

Dean Russell

Do Machines

Destroy Jobs?

YES, machines do destroy jobs. Infact, that's the purpose of machines,Le., to do the work formerly done bylabor. And if a machine doesn't re­place human labor, the making ofthat machine has been a waste ofscarce resources, including theskilled labor that invented and con­structed the machine in the firstplace.

Usually, however, this relation­ship between machines and jobs isexpressed more softly, e.g., machinesdecrease the costs ofproduction, thuspermitting lower prices to consum­ers; or machines are helpful to man-

Dr. Russell, recently retired from a full schedule ofacademic work, continues free-lance consulting, lec­turing and writing from his home In WestchesterCounty, New York.

This Is one of a series of articles examining currentinterventions of the welfare state In the light of warn­ings from the French economist and statesman,Frederic Bastlat (1801-1850).

kind because they can do the boringand repetitive tasks, thus freeinghuman laborers for the more inter­esting aspects of production. Bothstatements are true, of course. Butin every case, the purpose of a ma­chine is to replace human beings andwipe out existing jobs. That's good,however, not bad; for that process isthe basis of all human progress.

In various of his essays andspeeches, Frederic Bastiat clearlysaw this relationship between ma­chines and jobs. And as usual, afterpointing out "what is seen," he alsolooked behind popular opinion for"what is not seen."

"I see some machine replacing 20or 100 workers," wrote Bastiat.("Human versus Mechanical La­bor") But if it's true, he contin­ued,"that the domain of invention[machines] and that of labor [jobs]

235

236 THE FREEMAN April

cannot expand except at each other'sexpense, then it must be in placeswhere there are the most ma­chines-in the [textile districts ofEngland], for example-that oneshould expect to find the fewestworkers." But there's where youfind many thousands of workers attheir new jobs ofoperating those ma­chines! Bastiat continued:

The mistake made by the opponents of... machines is in evaluating them ac­cording to their immediate and tempo­rary effects instead of following themout to their general and ultimateconsequences.

The immediate effect of an ingeniousmachine is to make a certain quantity ofmanual labor superfluous for the attain­ment ofa given result. But its action doesnot stop there. Precisely because this re­sult is obtained with less effort, its prod­uct is made available to the public at alower price; and the total savings thus re­alized by all purchasers enables them tosatisfy other wants, that is, to encouragemanual labor in general to exactly thesame extent that it was saved in the par­ticular branch of industry that was re­cently mechanized. The result is that thelevel of employment does not fall, eventhough the quantity of consumers' goodshas increased.

Let us give a concrete example of thiswhole chain of effects.

Suppose that the French people buy tenmillion hats at fifteen francs each; thisgives the hatmaking industry an incomeof 150 million francs. Someone invents amachine that permits the sale of hats atten francs. The income of this industry is

reduced to 100 million francs, providedthat the demand for hats does not in­crease. But the other fifty million francsare certainly not for that reason with­drawn from the support of human labor.Since this sum has been saved by the pur­chasers ofhats, it will enable them to sat­isfy other wants and consequently tospend an equivalent amount for goodsand services of every kind. With thesefive francs saved, John will buy a pair ofshoes; James, a book; Jerome, a piece offurniture, etc. Human labor, taken as awhole, will thus continue to be supportedto the extent of 150 million francs; butthis sum will provide the same numberof hats as before, and, in addition, satisfyother needs and wants to the extent ofthe fifty million francs that the machinewill have saved. These additional goodsare the net gain that France will havederived from the invention. It is a gra­tuitous gift, a tribute that man's geniuswill have exacted from Nature. We do notdeny that in the course of the transfor­mation a certain amount of labor willhave been displaced; but we cannot agreethat it will have been destroyed or evenlessened.

Machines Mean Progress

The beneficial effects of machinesare far greater than Bastiat stated­or even imagined in the 1840s inFrance. One of his examples of howmachines increase production with­out decreasing the number of jobswas the textile industry in England.So I'll start there too, and dwellbriefly on the fantastic outpouring ofmachines during the Industrial Rev-

1985 DO MACHINES DESTROY JOBS? 237

olution, and the effect that devel­opment had on jobs and the "qualityand length of life."

I'll begin by citing a few statisticsI believe to be correct. And since fig­ures never speak for themselves, butYn.U-g-t a.l"<N'9-'Yg h~ g~ok~n fo-r, I'll offe-rmy interpretation of their meaning.

Population of England and Wales

Year PopUlation

1600 5 million (rough estimate)1700 5112 million (rough estimate)1750 6112 million (rough estimate)1801 9 million (census)1820 12 million (census)1831 16 million (census)

In London in 1750, about 70 percent of all children died before agefive.

In London in 1830 (80 years later),about 30 per cent of all children diedbefore age five.

The so-called Industrial Revolu­tion in England had no particularbeginning date; it was a long andslow development. But the hundredyears between 1750 and 1850 are thedates most often used when refer­ring to the advent of power-drivenmachinery, the development of thefactory system, rapid industrializa­tion, and the laissez-faire or "freemarket" economy. And that's the pe­riod Bastiat usually had in mindwhen he referred to the effects ofma­chinery and mass production.

At the time Karl Marx was de-'

scribing the degrading living con­ditions of the people who worked inthose early factory towns of indus­trial England, these statistics werereadily available to him. For it wasin "the world's greatest library" (theBritish. Museum) that he did most ofhis research and writing on the "ex­ploitation theory" that he developedinto a book that shook the world.There's just no way he could haveoverlooked those statistics on thepopulation-explosion that occurredin England with the advent ofpower­driven machinery and mass produc­tion. Since there's no reason to sug­gest he didn't believe what he wassaying, perhaps he just didn't be­lieve the statistics.

Since I can't know, I'll leave it withthis: Karl Marx was a far better re­porter than he was an economist andphilosopher. The terrible and de­praved living conditions of the"working classes in England" wereas he described them, perhaps evenworse. But he was so busy looking atthe rotten trees that he never did seethe flourishing forest in which theywere located.

Children Lived Longer

With the advent of machinery andchild labor in factories, children wereliving longer; a drop in the death ratefrom 70 per cent to 30 per cent in 80years is a mark of tremendous prog­ress by any measurement. An explo­sion of the population from a some-

238 THE FREEMAN April

what static level of six or so millionin 1750 to more than 16 million in80 years is almost unbelievable.(Perhaps that's why Karl Marx ig­nored the statistics; they strainedcredulity.)

At any rate, he predicted categor­ically that widespread poverty, massstarvation, and death among theworking classes would be the inevi­table results ofcapital formation andindustrialization in a market (non­socialist) economy of private own­ership. His prediction was totallywrong.

The population exploded becausepeople began to live longer. After1830, the rise was even faster, ashundreds of thousands of Britonspoured out of those islands and set­tled all over the world. But I stoppedmy statistics with 1831 in order toforestall any possible use of invalidreasons for those impressive figures.

For example, public health mea­sures were almost nonexistent inEngland in 1830; in fact, the crowdedconditions in those industrial townscaused them to become far more un­sanitary and disease-ridden thanthey had been a hundred years be­fore. So that possibility for the in­creasing life span can be ruled out.

Nor were there any breakthroughsin medicine. The vaccines that wereto save the lives of so many childrendidn't even begin to come along foranother 30 years or so.

Nor was there a "green revolu-

tion" to increase the supply of food.True, the potato was coming intopopularity around 1800, with itsfour-fold increase in food productioneven on marginal agricultural lands.But that was occurring mostly inIreland and Poland. The potatodidn't become a staple in Englandand Wales until the middle of th ~

cent~ry.

Increasing Freedom

Even if government welfareschemes and controls over the econ­omy could cause a rise in the mate­rial level of living, that was not afactor in this particular increase inlongevity. For government interven­tions in the economy were actuallydecreasing during this period. Per­centagewise, there was less govern­ment welfare instead of more. Theeconomy became increasingly free.

I can find only one reason for theincrease in longevity and popula­tion. With machines, people pro­duced more than they did withoutmachines, and they were paid wagesfor their work. True enough, theywere paid only a pittance for theirlong hours of exhausting and dan­gerous labor. But at least they werepaid more than they had been paidbefore entering those primitive fac­tories and mines. And with the littlemoney they were paid, they couldbuy food, something they couldn't dobefore they had any jobs at all.

As a result of their spending of the

1985 DO MACHINES DESTROY JOBS? 239

pennies (wages) they earned, food be­gan to come into England from allover the world. And even thoughthose workers had only a little foodin their bellies, they and their chil­dren lived longer than they did with­out any food at all. As the machinesimproved, the operators of the ma­chines produced still more, and theywere paid more; not much more, it'strue, but a little more. Thus theycould buy even more food and liveeven longer-especially the children.

Finally there was enough capital(machines) available to enable a manto produce enough to put his chil­dren into schools, if he wished to doso. It was machines under privateownership, not child labor laws, thatfinally took children out of the fac­tories and put them into schools. Ifthis surprises you, think of whatwould necessarily happen to chil­dren today if there were no ma­chines; we would all be grubbingfrom dawn to dusk-most likely forgrubs themselves. And millions of uswould soon die of starvation.

In addition to a dramatic increasein the life span of human beings ingeneral, machines also rendered an­other signal service; specifically, ma­chines were mostly responsible forthe abolition of human slavery, amass wiping-out of the jobs of mil­lions of human beings. But, again,that's the purpose of machines, i.e.,to abolish jobs by replacing humanlabor with mechanical labor.

The Columbia Encyclopedia tellsus that "The British, in abolishingslavery, were primarily motivated byeconomic, not humanitarian, inter­ests. While the institution producedgreat wealth under the mercantilistsystem, it became. unprofitable withthe rise of industrial capitalism."

Machines Displaced Slaves

H. G. Wells, in The Outline ofHis­tory, discusses the same idea: "A vastproportion of mankind in the earlycivilizations was employed in purelymechanical drudgery. At its onset,power-driven machinery did notseem to promise any release fromsuch unintelligent toil. ...[But asthe mechanical revolution] went on,the plain logic of the new situationasserted itself more clearly. Humanbeings were no longer wanted as asource of mere indiscriminatedpower. What could be done mechan­ically by a human being could bedone faster and better by amachine."

Whatever else slaves might beused for, it's certain they couldn't betrusted with the responsibility of op­erating the power-driven ships,trains, and factory machines thatwere becoming increasingly com­mon in the western world of the late18th and early 19th centuries. Thusthe ever-present moral argumentsagainst slavery were soon but­tressed by the overriding economicarguments against it.

240 THE FREEMAN April

Beginning in 1833, the BritishParliament rapidly outlawed thepractice of slavery throughout theirvast empire. Of course, it could havebeen merely a remarkable coinci­dence that slavery diminished asmechanical sources of power in­creased. For example, what aboutslavery in the United States? Sincethis nation had many machines, whywasn't slavery voluntarily abolishedhere?

Slavery in America

The history of human bondage inthe United States also lends support(with a reverse twist) to the theorythat machines, rather than moralityor education, may have been of pri­mary importance in determining theissue of slavery. Roger Burlingame,in his Backgrounds of Power, ex­plains that reverse twist while dis­cussing Eli Whitney's 1793 inven­tion of the gin for cleaning cotton.

"The gin led directly to a social,economic, and political crisis. By in­creasing a hundred fold the produc­tivity per worker in separating short­staple cotton from its tenaciousseeds, it produced an unbalance be­tween cleaning and picking, plant­ing and cultivation. The faster thecotton was cleaned, the more laborwas required in the field. Thus slav­ery, moribund in 1790, became adominant institution...."

Before the cotton gin, not muchcotton was grown in the South be-

cause it was too expensive to cleanby hand, even when the hands be­longed to a slave. But Whitney's firstcrude machine enabled a man toclean 50 pounds of cotton a day, andrapid improvements to the machinesoon doubled that amount. The re­sulting demand for cotton caused itscultivation to become highly profit­able. But picking cotton was such abackbreaking and monotonous taskthat it was the last job a free manwould take. Since, at that time, therewas no machine to relieve the drudg­ery of the job-and since no educa­tion or skill was required-it auto­matically fell to slaves.

Those are two tremendous ad­vances in the well-being of mankindthat can be attributed directly tomachines that were designed to putmen out of work, and did. (1) Withmachines, we produce more, andhave more, and live longer-eventhough we actually work less. (2)Since human slaves can't competewith inhuman machines, millions ofslaves lost their jobs.

When you stop to think about it,that's a remarkable achievement forsomething (mechanization) that'straditionally considered the deadlyenemy ofthe working man. The masseducation that's made possible onlyby machines, seems 'merely to haveintensified our hatred and fear ofourbenefactor.

As Bastiat said, machines do in­deed eliminate specific jobs. But the

1985 DO MACHINES DESTROY JOBS? 241

net result of the machines (capitalformation) is to actually increase thenumber ofjobs available in the econ­omy. You can satisfy yourself on thispoint by using a five-year period tomeasure it.

For example, in 1980, there were agiven number of jobs in the UnitedStates, along with a given amount ofcapital (machines). During the five­year period from 1980 to 1985, thosemachines eliminated hundreds ofthousands of jobs. But if you com­pare the number of jobs at the be­ginning and end of that five-year pe­riod, there will be more jobs nowthan in 1980.

Further, the new jobs will tend tobe less physically demanding,· be­cause of the machines, than the jobsthey replaced. The total pay for theadded jobs will be higher (on the av­erage) than for the jobs of five yearsago. In addition, there is likely to bea decrease in the number of hoursworked for the higher pay. That'swhat machines are all about.

This relationship holds true, how­ever, only as long as our laws are de­signed to encourage capital forma­tion, Le., more machines. If theadvent of more efficient machines isforbidden or impeded, the result willindeed be more jobs-but hours ofwork will lengthen, the work will be­come more physically demanding,and pay will plummet dowt:Lw~rd.

Frederic Bastiat's satirical para­graph written 135 years ago could

just as easily have been written to­day: "A curse on machines! Everyyear, their increasing power con­demns to pauperism millions ofworkers, taking their jobs away fromthem, and with their jobs theirwages, and with their wages theirbread! .A curse on machines!"

An Increasing Reliance onGovernment Welfare

Why do we continue to think ofmachines as "the enemy"? I don'treally know. I can easily understandwhy "an automated welding pro­cess" would be thought of as an en­emy by the man who just lost his jobto one. And even though I don't ad­vocate any government interven­tions against peaceful people in afree market economy, I don't protestunduly the "retraining programs,"or "unemployment compensation" tooffer temporary support to a willingworker seriously searching for an­other job, or any other "politicallyrealistic" measures designed to easethe transition from a lost job to an­other job. I tend to look on thosemeasures like taxes, Le., a cost forliving in reasonable harmony withhundreds of millions of people withdifferent viewpoints.

But that's not the problem; afterall, those "job transitions" involvethousands (not millions) of people.Thus the problem goes much deeper.I suspect it's a general fear ofthe freemarket that's based on personal re-

242 THE FREEMAN

sponsibility for our own free choices.We enjoy freedom to choose, ofcourse. And as long as our choicesturn out reasonably well, we'll de­fend it as a "human and inalienableright." But when the choices turn outto be unfavorable, we turn to a"greater power" for help. That's cer­tainly understandable; it proves onlythat we're human beings. That"power" used to be God and, per-

haps, voluntary help from our neigh­bors. Increasingly, however, we'returning to government for help-allover the world.

With Bastiat, I can only recom­mend that we think beyond what isimmediately seen, to what is notseen; think beyond the short-term ef­fects, to the long-term effects. I knowonly that "more government" is notthe answer. @ID

THE LAW by Frederic Bastiat

The law, it has been said, is nothing more than the will of tyrants. Soit has been many times in history. But just laws depend upon a lawwhich underlies the law passed by legislatures or declared by rulers.It is a law which provides the framework of liberty. Emancipation fromthe doleful theories of the compulsive state awaits discerning readersof this brief treatise.

This remarkable volume, translated in 1950 by Dean Russell, hasbeen a best seller since then-one of the most clear and concise ar­guments of the case for limiting government in the cause of freedom.

76 pagesClothPaperback

$3.50$2.00

Special offer: 60 cents each for 100 or more copies (paperback) to asingle address. Order from:

The Foundation for Economic Education, Inc.Irvington-on-Hudson, NY 10533

(Postage paid on prepaid orders; otherwise $2.00 per order for billing.)

Dennis L. Peterson

Set theStandard

High

ONE of my former colleagues devel­oped a reputation for strictness as ateacher. He was a stern disciplinar­ian, a stickler for detail, and a fa­natic for punctuality.

Although negative comments werefrequently heard from his students,after their graduation they invari­ably looked back on his classes andexpressed appreciation for histoughness. They recognized that itwas because of his high expectationsthat they had learned English gram­mar and literature.

It is a time-proven fact that onetends to get out of organizations andindividuals what he expects of them.

Mr. Peterson Is a free-lance writer in East Greenville,Pennsylvania, anxious to share some of the lessonshe's learned concerning the freedom philosophy.

We even see this principle at workin ourselves with what has beencalled self-fulfilling prophecy.

We have a need, both as a nationand as individuals, to set our stan­dards high. This includes our expec­tations for our governments andtheir officials, our educational insti­tutions and their teachers, and ourreligious organizations and theirleaders. But it is even more impor­tant that we set high standards forourselves as individuals.

Too often we are guilty of expect­ing more from others than we daredemand of ourselves. The individualis the foundation of society, and "Ifthe foundations be destroyed, whatcan the righteous do?" (Psalm 11:3)On the other hand, ifeach individual

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244 THE FREEMAN April

keeps his own standards high, theother elements of society will takecare of themselves.

How can this be accomplished?First, we can demand honesty and

integrity ofourselves in business andpersonal life. We can pledge our­selves to maintain personal moralsand professional ethics that areabove reproach. We can temper allof our actions by the consistent ap­plication of the Golden Rule: "There­fore all things whatsoever ye wouldthat men should do to you, do ye evenso to them." (Matthew 7:12)

Second, we can discipline our­selves to continue our own self­improvement and self-education.Will Rogers, that august philoso­pher and conveyor of common sense,put it so clearly when he said,"Everybody is ignorant, only on dif­ferent subjects."

Successful men, in all callings,never stop acquiring special­ized knowledge related to theirmajor purpose, business, orprofession.

-Napoleon Hill

In his book Think and Grow Rich,Napoleon Hill wrote, "Successfulmen, in all callings, never stop ac­quiring specialized knowledge re­lated to their major purpose, busi­ness, or profession." One who is notcontinually learning is doomed to

failure. On the other hand, there isno limit to the successes that can beachieved by the one who will con­tinue learning.

Third, those of us who have fami­lies of our own can pass our highstandards on to our children. Con­tinual education by itself is insuffi­cient. "The improvement of the un­derstanding is for two ends," wroteJohn Locke, "first, our own increaseof knowledge; secondly, to enable usto deliver that knowledge to others."Why shouldn't we start with thoseclosest to us, our families?

The improvement of the under­standing is for two ends: first,our own increase of knowledge;secondly, to enable us to de­liver that knowledge to others.

-John Locke

We can teach our children to re­spect the Iives, rights, and proper­ties of others; to appreciate and de­fend their own freedoms; to faithfullyfulfill their personal duties and re­sponsibilities; and to work hard, giv­ing a day's work for a day's pay. Wecan teach them, by word and ex­ample, a positive attitude toward thelife of freedom. We can encouragethem to produce to their maximumpotential, which may require someseemingly impossible expectations,but, as John Stuart Mill wrote, "Apupil from whom nothing is ever de-

1985 SET THE STANDARD HIGH 245

manded which he cannot do neverdoes all he can."

Finally, we can look to the futurewith the view of perpetuating andimproving upon the "Americandream." As individuals are success­ful in setting and achieving theirown increasingly idealistic goals, thenation as a whole will benefit andwill become more successful in ful­filling and perpetuating that dream.By raising our standards as individ­uals, high standards can be effectedin government, education, religion,and the rest of society around us. AsSamuel Smiles wrote, "Every man'sfirst duty is to improve, to educate,and to elevate himself, helping for­ward his brethren at the same timeby all reasonable methods. The manwho improves himself improves theworld."

Every man's first duty is to im­prove, to educate and to ele­vate himself, helping forwardhis brethren at the same timeby all reasonable methods. Theman who improves himself im­proves the world.

-Samuel Smiles

High personal standards will pro­duce high political standards. A freepolitical system tends to produceleaders who are representative ofthepeople who elect them. If those whovote have low expectations of those

they elect, the elected tend to exhibitlow ethical standards with impun­ity. And as Geoffrey Chaucer wrotein The Canterbury Tales, "If golddoth rust, what shall iron do?"

On the other hand, if we, as a na­tion of individuals, set high stan­dards for government in the areas ofleadership, justice, and freedom,unethical and disreputable office­holders find it more difficult to "dotheir own thing." They tend to rec­ognize their responsibilities to theelectorate. They promote the inter­ests of freedom and steer govern­ment toward the fulfillment of itsonly legitimate function, Le., theprotection of life, liberty, andproperty.

A pupil from whom nothing isever demanded which he can­not do never does all he can.

-John Stuart Mill

At the same time, however, wemust be alert to the presence of evilforces at work that would lead oursociety into ever-degenerating so­cialism and serfdom. John PhilpotCurran sounded this warning in aspeech in 1790: "The condition uponwhich God hath given liberty to manis eternal vigilance; which conditionif he break, servitude is at once theconsequence of his crime and thepunishment of his guilt."

246 THE FREEMAN

We as individuals can also set highstandards for our educational sys­tems, both public and private. Wecan insist on freedom of choice, non­interference from government in themarketplace of education, and highquality in curricula and achieve­ment. We can work to insure that allprivate educational institutions­whether operated for financial, re­ligious, or philosophical motives­remain free to offer their services tothe consumers and to provide a broadspectrum of viewpoints.

The condition upon which Godhath given liberty to man iseternal vigilance; which condi­tion if he break, servitude is· atonce the consequence of hiscrime and the punishment of hisguilt.

-John Philpot Curran

When people are free politicallyand economically, freedom of reli­gion will also be evident. In the freemarket one religion need not fearany other religion. There is completeopenness and liberty. Governmentacts only as a peacekeeper, protect­ing the free exercise of each religionwhile refraining from establishingany single one as the sole, approvedreligion. This is guaranteed in theFirst Amendment of our Constitu­tion: "Congress shall make no lawrespecting an establishment of reli-

gion, or prohibiting the free exercisethereof...."

The opposite of religious freedomis a state religion forced upon all re­gardless of conviction or personalpreference. History clearly recordsthe results of such a condition,whether it be a Roman Catholic In­quisition in Europe, an atheistic hu­manism in Communist nations, aPuritan witch-hunt in New Eng­land, or an Islamicjihad in the Mid­dle East. Religious dictatorship isnever compatible with personal oreconomic freedom.

Living as we do in a nation whichpurports to defend freedom of reli­gion, we can expect our religiousleaders to guide us into the spiritualtruths which best bring about indi­vidual and societal stability, free­dom, and prosperity. We can medi­tate upon and practice our beliefswithout fear ofpersecution. And ifatany time we believe another religionor sect provides for our needs betterthan the one to which we currentlysubscribe, we can reject the old andembrace the new.

Yes, we need to set the standardhigh in our nation. But, as in all as­pects of a free society, the burden ofresponsibility lies on the shouldersofthe individual. That's you and me.Let's not expect the government todo it for us. Let's not wait for some­one else to take the lead. Let's seizethe initiative and do our part. @

Informationin theMarket

Joe Cobb

DURING the "energy crisis" of the197Os there were many false rumorsabout major oil companies hoardingpetroleum to keep prices high. Whenthe U.S. Department of Energy wascreated in 1977, one of its mainbranches was the Energy Informa­tion Administration. This agencyhas an annual budget of about $60million to compile statistics on theenergy resources and energy pro­duction in the United States.

Few people oppose collecting thiskind of information. Even oil and gasproducers thought it might be a goodthing to dispel hostile rumors. Yet,there is a theory behind this pro­gram that is basically flawed. TheEnergy Information Administrationwas created to provide a reliable cen­tral data base for the National En-

Joe Cobb is an economist with the CongressionalJoint Economic Committee.

ergy Plan. The kind of information. that a government agency like theEnergy Information Administrationcollects, however, is completely use­less in a free market.

There are two different theories ofinformation. When we understandthe differences between these theo­ries, and the concepts of economicsthat rely upon one theory or theother, we are much better equippedto explain to friends, associates, andeven politicians why the free marketis the only way to solve things likean energy crisis.

Information is absolutely criticalfor any kind ofplanning, both the so­cialist idea of centralized nationalplanning and the free-marketmethod of decentralized entrepre­neurial planning. Ludwig von Misesidentified planning for the future asthe main human quality that sets us

247

248 THE FREEMAN April

apart from lower forms of life. Someanimals prepare for the coming ofwinter, like squirrels by storing nuts,but only mankind plans for the fu­ture by forgoing consumption todayto create tools, capital goods, to enjoygreater wealth through higher pro­ductivity later on.

Two Models

There are two basic models of theeconomic process in most people'sminds. One is the decentralized,incentive-led market where consum­ers are the final judges of businessperformance, where bad decisionsare punished by economic loss. Theother is a centralized model, in whichthe economy is like one big company,headed by the President with theCongress serving as a Board ofDirectors.

In a corporation, the managersneed reliable information to choosewhat to produce and where to offerit for sale. A staff of statistical mar­keting specialists and cost account­ants, as well as computer modelsthat can simulate different "whatif" situations, are valuable tools forbusiness planning. In this case, busi­nessmen are trying to make the bestdecisions they can, but they knowthat most forecasting is just guess­work. They can't control the con­sumers' buying habits. If the buyersreject their products or services,heads may roll.

Although the corporate model of

economic planning is helpful forbusinessmen, it is a logical fallacy tothink about the larger economic sys­tem as one big company. The task ofeveryone in the "extended order ofhuman cooperation," to rise the termfavored by Nobel-laureate F. A.Hayek, is to discover information andact upon it to meet the needs andeconomic demands of other people,most ofwhom cannot be identified inadvance.

This kind of information cannot bereduced to statistics and stored in acomputer. It is often not known inadvance. Only after the consumershave judged the businessmen's at­tempts can anyone see who made aprofit and who made a loss. Profitsare informative and help the suc­cessful business planners obtainmore capital to expand their activ­ity. Losses are also informative, andthey diminish the supply of capitalin the hands of poor business plan­ners. Information about success andfailure is the real, hard data in a freemarket economy. Investors monitorwinners and losers very closely.

Even for the business planners,who can benefit by using computermodels and statistics, the most im­portant facts are the relative pricesof the raw materials and labor theymust buy before bringing a newproduct to market. Is it less costly toproduce a product like shoes withcomputerized equipment and a feweducated workers in the United

1985 INFORMATION IN THE MARKET 249

States, or by hiring hundreds ofskilled handcraftsmen in Asia? Therelative prices of capital and laborwill determine the answer, and theprices can only be seen accurately ina free market.

Market Price InformationEssential to Business Planners

If the business planners don't havefree-market price information, theircost accountants can't tell them whatto do. If they don't have accurateprice information about the consum­ers' other alternatives, their statis­tical marketing specialists can'tforecast sales and other "what if"questions. Before computers can helpanyone, they have to be fed facts andfigures that can only come from afree, competitive market-from thechoices and buying decisions ofconsumers.

The reason why business planningis useful but "national planning" isworse than useless-it is destructiveto progress-is that when the gov­ernment tries to take over planning,it wipes out the most importantsource of planning information, therelative prices of all the different

products and services that permitcomputers and statistics to be ofvalue to businessmen.

This is the reason why govern­ment statistics programs are such awaste of money. The Energy Infor­mation Administration is useless tothe producers of oil, gas, and elec­tricity. It doesn't do anything for theconsumer. It just creates jobs for asmall number of well paid statisti­cians and computer operators. If thiswere all, however, it would be asharmless as an old warehouse full ofobsolete, military surplus tents.

Unfortunately, programs like theEnergy Inforniation Administrationare regarded by Congressmen andothers who worry about the possi­bility of another energy crisis as "es­sential" for emergency planning andcoping with any problem that mayarise. The socialist theory of abolish­ing the free market and replacing itwith the corporate model wheneverit seems expedient is alive and wellin Washington. Like a time bomb,this false theory of information willsomeday destroy us unless those whosee what is wrong with it speak outand dismantle it. ®

(DEASON

UBERTY

The Function of Price

PRICE has an important function to perform. It equates the wanting ofthings with the supplying of things. The two are in balance only at thefree market price. Any other price, either higher or lower, causes a sur­plus or a shortage.

F. A. HARPER

1985 Summer Seminars at FEE

June 23-29July 14-20August 4-10

For twenty-two years our annual summer seminars have offered a thor­ough introduction to the principles of limited government and the mar­ket economy. Our sessions attract lively and diverse groups of people­including students, teachers, business proprietors and employees.

The week includes thirty-five hours of lecture and discussion, withample time for participants to meet informally with both staff and dis­tinguished guest lecturers. The Foundation, situated on a five-acre es­tate in a quiet suburb near New York City, provides an ideal setting fora week of study and reflection.

The charge for a seminar-tuition, supplies, room and board-is$400. Fellowships (including partial travel grants) are available. A de­tailed seminar brochure will be sent on request.

Please address all requests for applications and further information to:

Summer SeminarsFoundation for Econom ic EducationIrvington, New York 10533(914) 591-7230

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN

Good News and Bad

BEN WATTENBERG, as a political par­tisan of the late Senator "Scoop"Jackson of the State of Washington,has been at odds with his politicalparty for a good many years. A FreeTrade Democrat, he thinks the spe­cial interests and the collectivistsof various stripes have laid theircuckoo eggs in a nest that is notrightfully their own. He blames themedia, both print and electronic, formuch of the sad state of affairs.Hence the title of his new book, TheGood News is the Bad News is Wrong(New York: Simon and Schuster, 431pp., $17.95).

Wattenberg rips the conventionalwisdom to shreds by constant re­currence to his own profession as ademographer. He will be called aPollyanna or a Dr. Pangloss by many,but actually he doesn't believe it isthe best of all possible worlds. He

merely thinks we are holding ourown ground in a number of impor­tant ways, and he has the demo­graphic evidence to prove it.

He begins with life expectancy,which, in the western nations, keepslengthening from decade to decade.Then he shifts to the birth rate,which, in the non-Malthusian partsof the world, has been going down.(He calls it the birth dearth.) The ru­mors of a Population Bomb he deemsto be utter nonsense for the UnitedStates at least.

The birth dearth, he says, couldhurt our country, which depends ona reasonable increase in its popula­tion to keep the economic systemgoing. Fortunately, immigration tothis country shows no signs of slack­ening. The worries about illegal im­migration do not bother Wattenbergin the slightest. Anyone with the

251

252 THE FREEMAN April

gumption to get up and go can makea welcome addition to the workingpopulation so far as Ben Wattenbergis concerned.

The Baby Boom that occurred af­ter World War II may have been re­sponsible for many of the youthfulexcesses of the Sixties, but Watten­berg is satisfied that the "do yourown thing" idiocy of the Baby Boom­ers is a phenomenon of the past.What we now have is an Adult Boom.The Young Urban Professionals, orYuppies, are now getting marriedand starting households oftheir own.They may settle for 1.7 children perfamily, but the children of immi­grants will make up a needed differ­ence. At any rate, the Yuppies willbe buying new dwelling space, bothof the split level variety and condo­miniums. The high mortgage rateswon't stop them. The constructionboom will spill over into other booms.Wattenberg doesn't necessarily ap­prove of the Federal deficit, but hedoesn't see it as killing prosperity inthe near future if sincere efforts aremade to get it under control.

Employment

Wattenberg thinks the bad newsabout unemployment is more thancompensated for by the good newsabout employment. His own readingof the statistics here collides withanything you might learn by listen­ing to the TV anchormen. Thesmokestack industries may not be

John Chamberlain's book re­views have been a regular fea­ture of The Freeman since 1950.We are doubly grateful to Johnand to Henry Regnery for nowmaking available John's auto­biography, A Life with thePrinted Word. Copies of th is re­markable account of a man andhis times-our times-areavailable at $6.00 from TheFoundation for Economic Edu­cation, Irvington-on-Hudson,New York 10533.

what they were, but the unemploy­ment in steel and automobile townshas been mitigated by what has beenhappening in other towns that areoften just over the horizon. Indus­trial jobs stood at close to 20 millionin 1970. The figure is practically thesame today, but the jobs have shiftedfrom steel factories to plants turningout computers, high-tech officeequipment and robots.

Meanwhile there has been a vastexplosion in the service industries.There were some 600,000 new busi­nesses started last year. They arewhat has been bringing the unem­ployment figures down to some­where around 7 per cent, which isclose to the "frictional" margin.Wattenberg thinks it significant thatthe median period of unemploymenteven at the depth of the recent reces­sion was only 10.1 weeks. And un-

1985 GOOD NEWS AND BAD 253

employment compensation took careof most of that.

Wattenberg thinks the teen-ageunemployment figures are ex­tremely misleading. Kids who arestill in school get listed as job-hunt­ers, but it is no great tragedy if theyremain unemployed in any regularsense until their school days are over.This goes for black kids as well aswhite. The most important thingabout adolescence, says Wattenberg,is that it is soon over. Even­tually the teen-ager will become anadult employee.

Education

Wattenberg does not deny thatmuch of the hard data about our ed­ucation system is bad. The averagesfor our SAT, or Scholastic AptitudeTests, have been declining over along period of time. But this could beattributable to the fact that we nowkeep many more children in schoolfor longer periods. The unintelligenttake the tests along with the aca­demically gifted. This brings downthe average scores. But even withthis concession to the egalitariansthe SAT marks have recently startedto go up. Wattenberg thinks we couldbe doing something right.

When it comes to revamping cur­ricula, however, Wattenberg is all forlistening to the critics who think ournew standards for Excellence in Ed­ucation demand a greater attentionto so-called core revisions. He wants

to see fewer Mickey Mouse courses.He sees no reason, however, to getrid ofdriver training and a few other"practical" courses. "After all," hesays, "who wants to live in a countrywhere pregnant teen-agers-over­drawn at the bank, unable to cookeven a simple souffle-crack upthe car."

Wattenberg considers that our BadNews Bias keeps our politicians frommaking reasonable compromiseswith those whose prime concern iswith the size of the budget. He is nolibertarian, and he believes in theconcept ofthe Safety Net. But his ar­dor for the Welfare State has cooledrapidly over the past few years. Asa neo-conservative Wattenberg findshimself at home with such figures asIrving Kristol. This means he is partof the new Fabian drift to the Right.

®

INSIDE THE CRIMINAL MINDby Stanton Samenow(Times Books, 130 Fifth Avenue, NewYork, NY 10011), 1984285 pages. $15.50 cloth

Reviewed by Haven Bradford Gow

PRESIDENT RONALD REAGAN, in hisaddress to the International Asso­ciation of Chiefs of Police, pointedout that every 30 minutes in theUnited States at least one person ismurdered, nine women are raped, 67people are robbed, 97 are assaulted

254 THE FREEMAN April

and 389 homes are burglarized. Andjust as tragic is that many of thesecriminals are "repeat offenders."

Crime casts a shadow over the livesof virtually everyone of us. We in­stall burglar alarms in our homes,put anti-theft devices on our cars,avoid the New York subways, stayindoors after dark because thestreets are taken over by criminals.The criminal justice system is widelydistrusted and millions of Ameri­cans buy hand guns for self-defense.Why this epidemic of crime?

At the core of the problem is a falseview ofhuman nature. Too many cri­minologists, penologists, and evenjudges accept the pernicious notionthat the individual person is a crea­ture of his environment, shaped bysocial forces into whatever he hap­pens to be. The criminal is corruptedby the institutions of his society andtherefore is not responsible for him­self and his actions. Blame attachesto the society whose product he is.

It follows that the criminal is notpersonally answerable for hiscrimes; blame his slum background,his broken home, his shady compan­ions, or whatever. The criminal, inshort, is a "victim," who should betreated and not punished.

Dr. Samenow, who has spent yearsdealing with criminals takes a rad­ically different tack: "Criminalscause crime," he writes, "not badneighborhoods, inadequate parents,television, schools, drugs, or unem-

ployment. Crime resides within theminds of human beings and is notcaused by social conditions. Once weas a society recognize this simplefact, we shall take measures radi­cally different from current ones. Tobe sure, we shall continue to remedyintolerable social conditions for thisis worthwhile in and ofitself. But weshall not expect criminals to changebecause of such efforts."

Dr. Samenow adds that "Behavioris largely a product of thinking.Everything we do is preceded, ac­companied, and followed by think­ing. A train cannot fly for it is notso equipped. Similarly, as he is, acriminal is not equipped to be re­sponsible. A drastic alteration mustoccur, and to accomplish this, a crim­inal requires help. The criminalmust learn to identify and thenabandon thinking patterns that haveguided his benavior for years. Hemust be taught new thinking pat­terns that are self-evident and au­tomatic for responsible people butare totally foreign to him. Short ofthis occurring, he will continue tocommit crimes."

To alleviate the pervasive and per­sistent problem of crime, we need tohave a realistic and tough-mindedview ofhuman nature, criminals andcrime. Then we can develop and im­plement some equally realistic andtough-minded approaches to dealwith the problem. @

1985 OTHER BOOKS 255

IDEAS HAVE CONSEQUENCESby Richard N. Weaver(University of Chicago Press,5801 S. Ellis Ave.,Chicago, III. 60637)190 pages. $6.95 paperqack

Reviewed by Tommy W Rogers

THIS renowned volume stirred up avigorous controversy when it firstappeared in 1948; its title contrib­uted a pregnant phrase to contem­porary discourse and since the au­thor's death his name heads aprogram to encourage young schol­ars. Ideas Have Consequences is oneof a handful ofbooks to appear in themiddle and late forties whichbreached the ranks of liberal ortho­doxy and opened a way for the re­surgence of the freedom philosophywhich is so marked a phenomenon ofthe past several decades.

The "consequences" Weaver con­demns are many, but they come intofocus in our time in the armedcamps, otherwise known as modernnations. The State now depersonal­izes man, mechanizes life, collectiv­izes property, and defers only topower. In his quest of the ideas whichlaid the groundwork for the presentsituation Weaver goes back as far asWilliam of Occam who, declaringthat only particular things are real,discredited general truths. With sus-

tained argument and lofty eloquenceWeaver traces the history of a ma­lign set of ideas from the break-up ofthe Middle Ages down to the modernperiod.

Weaver taught English at the Uni­versity of Chicago, but came out ofa Southern agrarian backgroundwhich remained so much a part ofhim that he could never be comfort­able with those aspects of modernitywhich grate harshly against whatBurke referred to as "the basic innsand nesting places of humannature."

Weaver believed that liberty ismost secure in a society character­ized by the distributive ownership ofsmall properties in the form of in­dependent farms, local businesses,homes owned by their occupants.Widespread private ownershiplinked ineluctably to responsibility,provides the context in which onecould become a complete person. Pri­vate property makes a person inde­pendent; it makes existence physi­cally possible for the protester;livelihood independent of the Stateprovides a metaphysical base, so tospeak, for opponents of Leviathan."To combat swirling forces of socialcollapse," he writes, "we must havesome form of retrenchment, and es­pecially do we need sanctuary frompagan statism ... The attack on pri­vate property is but a further expres­sion of the distrust of reason ... Forliberty and right reason go hand in

256 THE FREEMAN

hand, and it is impossible to impugnone without casting reflection on theother."

Because ideas do have conse­quences, people who live accordingto a distorted or incomplete or fal­sified picture of reality (The GreatStereopticon, Weaver called it),sooner or later meet up with suchdisasters as have been visited uponthe twentieth century. People whowalk the road to serfdom are even­tually victims of omnipotent govern­ment. Because of the validity of itspremise and the substantive in­sights of its argument, Weaver'sbook has an enduring message. @

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