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FEATURES8 Why Children Are Dying in the Nation’s Capital by James L. Payne

10 The Other Paradigm of Consumer Protection by Keith Wade

14 A New Old American Concept of Political Liberty by Norman Barry

19 Nullification: The Jeffersonian Brake on Government by Thomas E. Woods

26 On Guests and Customers by Stephen G. Barone

27 The Virtues of Sweatshops by Stefan Spath

30 America’s Worst Enemy by George F. Smith

35 Prescription Drugs and Advertising by William L. Anderson

38 Protecting Precious Resources by Scott McPherson

42 Do Big Corporations Control America? by James Rolph Edwards

46 Beijing Erodes Hong Kong’s Laissez Faire by Christopher Lingle

48 Lead Balloons by Larry Schweikart

COLUMNS4 FROM THE PRESIDENT’S DESK—Japan and the Macroeconomic Debate

by Mark Skousen

12 IDEAS and CONSEQUENCES—The Man Who Ate Hamtramck’s Government by Lawrence W. Reed

24 POTOMAC PRINCIPLES—Free to Be Stupid by Doug Bandow

33 THE THERAPEUTIC STATE—Parity for Mental Illness, Disparity for Mental Patients by Thomas Szasz

40 ECONOMIC NOTIONS—The Cure Can Be Worse than the Disease by Dwight R. Lee

52 THOUGHTS on FREEDOM—Politics and Prohibition by Donald J. Boudreaux

63 THE PURSUIT of HAPPINESS—“We Can’t Get Rich Doing Each Other’s Laundry” by Russell Roberts

DEPARTMENTS2 Perspective—Commerce Triumphs by Sheldon Richman

6 Wartime Curbs on Liberty Are Costless? It Just Ain’t So! by Robert Higgs

51 Capital Letters54 Book Reviews

While America Sleeps: Self-Delusion, Military Weakness, and the Threat to Peace Today by Don-ald Kagan and Frederick W. Kagan, Present Dangers: Crisis and Opportunity in American ForeignPolicy and Defense Policy, edited by Robert Kagan and William Kristol, reviewed by DougBandow; A Nation of Cowards: Essays on the Ethics of Gun Control by Jeff Snyder, The Originof the Second Amendment: A Documentary History of the Bill of Rights, edited by David Young,reviewed by Dave Kopel; PC, M.D.: How Political Correctness Is Corrupting Medicine by SallySatel, M.D., reviewed by Sue A. Blevins; Escape from Leviathan: Liberty, Welfare and AnarchyReconciled by J. C. Lester, reviewed by Andrew I. Cohen; Competition or Compulsion? The NewMarket Economy versus the New Social Engineering, edited by Richard Ebeling, reviewed byGeorge C. Leef; Lenin: A Biography by Robert Service, reviewed by Yuri Maltsev.

March 2002 Vol. 52, No. 3

Lesson plans for articles are available at www.fee.org.

Thomas Jefferson

John Caldwell Calhoun

PERSPECTIVE

Commerce TriumphsThe day after the Taliban abandoned

Kabul in Afghanistan last November, theNew York Times’s David Rohde reported onthe quick revival of commerce in the capital.“Food appeared plentiful. A central marketthat lines the road leading into the city hadlarge amounts of fresh meat for sale, fruitjuices from Iran and even Coca-Cola, a tes-tament to the strength of smuggling net-works in the area.”

This is yet another tribute to the resiliencyof markets and the people who animatethem. Kabul had been under the thumb of arepressive, reactionary regime for years.Then it was thrown into chaos by massiveU.S. bombing and fighting between the Tal-iban and the Northern Alliance. Yet themoment there is calm, commerce flourishes.Merchants were selling CDs along with thevictuals. One man sold satellite dishes.

I’ve long thought that the best definition ofcapitalism is: the moral-legal-economic sys-tem that results when people are left alone.It’s the default position. Every time someruler has sought to abolish or severelyrestrict the market, he’s had to set up a secretpolice to keep an eye on the population lestthey act like capitalists. There is nothingmore natural than for people, of virtuallyany culture, to look for ways to improvetheir lots in life through investment, produc-tion, and trade. Governments may squelchthat activity and even execute its practition-ers, but they can never wipe it out. Givenhalf a chance, people find a way.

The Afghans have managed to find a wayamid the most adverse conditions. A goodword should be said for the smuggler. He’sgotten a bad rap historically. But the smug-gler is the one who risks life and limb to sat-isfy consumers when the government refusesto permit “anything that’s peaceful.” He wasan admired figure in America’s revolutionarydays. It was the customs officer who gottarred and feathered.

Long-term, permanent economic progressin Afghanistan will require the security pro-

Published byThe Foundation for Economic

EducationIrvington-on-Hudson, NY 10533Phone: (800) 960–4FEE; (914) 591–7230Fax: (914) 591–8910E-mail: iol@fee.orgFEE Home Page: www.fee.org

President: Mark Skousen

Editor: Sheldon Richman

Managing Editor: Beth A. Hoffman

Editor EmeritusPaul L. Poirot

Book Review EditorGeorge C. Leef

Editorial AssistantMary Ann Murphy

Contributing Editors

Ideas on Liberty (formerly The Freeman: Ideas on Liberty) isthe monthly publication of The Foundation for EconomicEducation, Inc., Irvington-on-Hudson, NY 10533. FEE, estab-lished in 1946 by Leonard E. Read, is a non-political, educa-tional champion of private property, the free market, and lim-ited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt organization.

Copyright © 2002 by The Foundation for Economic Educa-tion. Permission is granted to reprint any article in this issue,provided credit is given and two copies of the reprinted mate-rial are sent to FEE.

The costs of Foundation projects and services are metthrough donations, which are invited in any amount. Donorsof $30.00 or more receive a subscription to Ideas on Liberty.For delivery outside the United States: $45.00 to Canada;$55.00 to all other countries. Student subscriptions are $10.00for the nine-month academic year; $5.00 per semester. Addi-tional copies of this issue of Ideas on Liberty are $3.00 each.

Bound volumes of The Freeman are available from TheFoundation for calendar years 1972 to 2000. The magazine isavailable in microform from University Microfilms, 300 N.Zeeb Rd., Ann Arbor, MI 48106.

Norman BarryPeter J. BoettkeClarence B. CarsonThomas J. DiLorenzoBurton W. Folsom, Jr.Joseph S. FuldaBettina Bien GreavesRobert HiggsJohn HospersRaymond J. KeatingDaniel B. Klein

Wendy McElroyTibor R. MachanAndrew P. MorrissRonald NashEdmund A. OpitzJames L. PayneWilliam H. PetersonLowell PonteJane S. ShawRichard H. TimberlakeLawrence H. White

ColumnistsCharles W. BairdDoug BandowDonald J. BoudreauxDwight R. LeeLawrence W. ReedRussell RobertsThomas SzaszWalter E. Williams

Cover art: Courtesy of Monticello/Thomas Jefferson Foundation,Inc. From an 1858 James L. Dick copy of Rembrandt Peale’s 1805second life portrait of Jefferson.

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vided by formal property rights and the ruleof law. That in turn will depend on the atti-tudes of the people there. But it is inspiringto see what people can do on short noticeunder less-than-optimal conditions.

* * *

Those who look to government to accom-plish big things, like defending our liberty,might contemplate its apparent inability tokeep the children in its own custody alive.James Payne has the heartbreaking storyfrom Washington, D.C.

Buyer need not beware because the gov-ernment is watching out for you. Right?Then why, Keith Wade asks, is the marketgenerating private protection?

The American system rests on the premisethat words on parchment read by judges canprotect liberty. At the time of the founding,not everyone thought it would work. Nor-man Barry revisits the doubts that plaguedthe anti-federalists.

Those doubts led to a search for devices tokeep the national government confined to itsconstitutional dimensions. Thomas WoodsJr. discusses one of those devices.

Orwell once wrote that sloppy languageleads to sloppy thinking. So why do we letthe IRS get away with calling us “cus-tomers”? Stephen Barone wants to know.

Nothing is more despised by college stu-dents and union workers than third-worldsweatshops. A little sound economics, writesStefan Spath, can clear things up quickly.

In the aftermath of September 11, what’sthe American people’s greatest enemy?George F. Smith says it’s the same as it wasbefore the day of terror.

Big advertising budgets account for thehigh price of pharmaceutical drugs. So saythe pundits and politicians. Industry spokes-

men say it’s R&D. William Anderson saysthey’re all wrong.

Discussions about resources, such as theANWR oil, often imply that they belong tothe nation or the government. That kind ofthinking, writes Scott McPherson, can onlyget us into trouble.

It’s widely believed that the people whorun large corporations dictate public policyas well. James Rolph Edwards points outsome facts that don’t fit the theory.

China agreed to keep its hands off HongKong when it regained jurisdiction over theformer British colony. Unfortunately,Christopher Lingle is seeing ominous signsof interference with the laissez-faire haven.

The states scored big when they sued thetobacco companies. They also found a novelway to capture resources without raisingtaxes. Larry Schweikart sees the next roundcoming.

Here’s what our columnists have cookedup this month: Mark Skousen examinesJapan’s economic woes. Lawrence Reed pre-sents a case study of municipal privatization.Doug Bandow marvels at post-September 11stupidity. Thomas Szasz examines insuranceparity for mental illness. Dwight Lee looksat the question of public goods. DonaldBoudreaux wonders what it’ll take to endthe drug war. Russell Roberts defends service-sector jobs. And Robert Higgs, reading a his-torian’s claim that past wartime limits onfreedom have done no harm, protests, “ItJust Ain’t So!”

In the book department, reviewers dissectvolumes on U.S. foreign and military policy,the right to keep and bear arms, medicalpolitical correctness, a new approach todefending the freedom philosophy, socialengineering, and Lenin.

—SHELDON RICHMAN

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There is no better example of today’sheated debate over macroeconomicsthan Japan. What policy should thisnation—economically the second

largest in the world—adopt to start growingagain after a decade of sluggish perfor-mance?

It seems that Japan has tried all the tradi-tional remedies since it collapsed into reces-sion in the early 1990s and lost out as aworld economic model. The Bank of Japanlowered short-term interest rates to zero.Tokyo raised taxes, ran huge deficits, andspent billions on public-works projects. Butneither an easy-money policy nor an aggres-sive fiscal policy has done the trick. Japan isstill mired in recession and rising unemploy-ment, and now faces the largest debt burdenamong industrial nations.

In the late 1980s, Japan was consideredthe model of prosperity. Economists predict-ed that it would surpass the U.S. economy in2000; the next century belonged to thisAsian giant. Its lifetime-employment andbonus system was considered a superior

business-labor management strategy. But theweaknesses of the Japanese economy becameapparent in the 1990s—its model was toostatic and homogeneous for the dynamicglobal new economy. In 1990 the FraserInstitute’s economic freedom report rankedJapan ninth in the world. Now it is rankedonly 20th primarily due to the growth ofgovernment and the mismanagement of thebanking system.3

I witnessed firsthand this endless story ofeconomic frustration when my wife and Ispent a few days in Tokyo last June. Thegovernment has spent several trillion yenbuilding a massive underwater highwaycalled Aqualine. Now Tokyo residents havea fast alternate route outside the city. But thegovernment charges $50 one way to go fivemiles under water and, as a result, even theJapanese are reluctant to use Aqualine.

Classical economists long taught that thegovernment should produce only viable public works, where the benefits clearly out-weigh the costs. But John Maynard Keynesturned the world upside down when he pro-claimed that in a downturn, “To dig holes inthe ground, paid out of savings, willincrease, not only employment, but the real

Mark Skousen (mskousen@fee.org) is president ofFEE. His Web site is www.mskousen.com.

From The President’s Desk

by Mark Skousen

Japan and theMacroeconomic Debate

A.E.I.O.U.

“Economics is a very dangerous science.”—JOHN MAYNARD KEYNES1

“Economics is haunted by more fallacies than any otherstudy known to man.”

—HENRY HAZLITT2

MARCH 2002

national dividend of useful goods and ser-vices.”4 Apparently several Japanese primeministers have fallen under the Keynesianspell, but to no avail.

New Medicine: Print More Yen!Several prominent economists have urged

the charismatic new prime minister, Junichi-ro Koizumi, to adopt a more radical propos-al—flood the country with yen. “Japanneeds to spur demand,” argue Jeffrey Sachsof Harvard and Paul Krugman of Princeton.Even Milton Friedman, the celebrated free-market economist (famous for his refrain,“There’s no such thing as a free lunch”), hasjoined forces with top Keynesians to pro-mote aggressive easy money as a way tojump-start a weak economy and counterdeflation. Friedman has supported a rapidincrease in the money supply in Japan sincelate 1997.5

At the Mont Pelerin Society meetings inSeptember 1999, I confronted Friedman onthis issue. He and his wife had organized theprogram under the topic “Can CreepingSocialism Be Stopped?” In one of the break-out sessions I asked him about his easy-money solution to Japan’s economic prob-lems. I held up his article in the Wall StreetJournal and noted how it made no referenceto cutting taxes, deregulation, or opening upthe Japanese economy; only inflation wasproposed as a solution. “Isn’t printing moremoney another example of creeping social-ism?” I asked. He was not amused. Fried-man said that historically increasing themoney supply stimulates economic growth,and fast monetary growth was necessarygiven Japan’s fragile condition. “Then there

is a free lunch?” I asked. “A free disaster!”responded Friedman. Afterwards, ProfessorJim Gwartney came up to me and said, “Youattacked God today!” Indeed. Yet even free-market icons can make mistakes.

Fortunately, Prime Minister Koizumi hasrejected this artificial stimulus and favors asupply-side agenda. He supports a regimenof capping government spending, requiringbanks to write off and restructure theirmammoth $1.2 trillion in bad loans, and pri-vatizing the massive postal saving system,which funded much of the misconceivedpublic works of the 1990s. Tax cuts wouldalso be highly beneficial. Koizumi would bewise to follow the lead of the Obuchi admin-istration (1998–99), which pushed throughmoderate tax cuts in personal and corporateincome taxes. But he has postponed this vitalsupply-side ingredient until the crushinggovernment-debt burden can be reduced.

Structural reform, as opposed to easymoney and public spending, can work won-ders in getting the Japanese economy backon track. For example, in 1994, when Japanderegulated the cell-phone industry, pricesdropped and sales skyrocketed, and this yearcellular-related revenues are expected toexceed $72 billion, nearly 2 percent of eco-nomic output.

The lesson is clear: Free the economy andprosperity will follow. �

1. John Maynard Keynes, Essays in Biography (New York:Norton, 1951), p. 107.

2. Henry Hazlitt, Economics in One Lesson, 3rd ed. (NewYork: Arlington House, 1979), p. 15.

3. James Gwartney et al., Economic Freedom of the WorldAnnual Report 2001 (Vancouver, B.C.: Fraser Institute, 2001),p. 182.

4. John Maynard Keynes, The General Theory of Employ-ment, Interest and Money (London: Macmillan, 1936), p. 220.

5. Milton Friedman, “Rx for Japan,” Wall Street Journal,December 17, 1997.

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In one of the most provocative opinion arti-cles of recent times, “Security ComesBefore Liberty” (Wall Street Journal,

October 23, 2001), Jay Winik argued (1)that in previous national emergencies, U.S.presidents took strong repressive measuresagainst citizens and other residents of thecountry, (2) that the repressive measuresimplemented so far by the Bush administra-tion are comparatively mild, and (3) thatnotwithstanding the more Draconian mea-sures taken during previous crises, “normal-cy returned, and so too did civil liberties,invariably stronger than before.” Hence,Winik concluded, even if the Bush adminis-tration “deems it necessary to enact morerestrictive steps, we need not fear.”

Several commentators quickly took issuewith Winik’s argument. Most important, thecritics challenged the claim that “despitethese previous and numerous extreme mea-sures, there was little long-term or corrosiveeffect on society after the security threat hadsubsided.” In fact, each episode of nationalemergency left the liberties of Americans not“stronger than before,” but severely maimedand weakened.

During World War I, the Wilson adminis-tration took sweeping actions to suppressnot only individuals’ freedom of action buteven their freedom of expression. The 1918Sedition Act must be read to be believed.Under it, one might be, as some 2,000 per-sons were, prosecuted for daring to “utter,print, write, or publish any disloyal, profane,scurrilous, or abusive language about theform of government of the United States, orthe Constitution of the United States, or themilitary or naval forces of the United States,

or the flag of the United States, or the uni-form of the Army or Navy of the UnitedStates, or any language intended to bring theform of government of the United States, orthe Constitution of the United States, or themilitary or naval forces of the United States,or the flag of the United States, or the uni-form of the Army or Navy of the UnitedSates into contempt, scorn, contumely, ordisrepute.” Nor was this all the statute for-bade!

When convictions under the Sedition Actwere challenged in the courts, the U.S.Supreme Court upheld the statute. To hiseternal shame, Justice Oliver WendellHolmes, Jr., wrote: “When a nation is atwar, many things that might be said in timeof peace are such a hindrance to its effortthat their utterance will not be endured solong as men fight and no Court could regardthem as protected by any constitutionalright.” This decision and others upholdingunconstitutional measures undertaken bythe Wilson administration might strike theproverbial Man from Mars as odd, becausethe Constitution itself makes no provisionfor its own evisceration during wartime orother crisis, yet time and again duringnational emergencies the justices haveallowed the legislative branch and especiallythe executive branch of government to tran-scend their constitutionally enumeratedpowers and to nullify individual rights pro-claimed in the Constitution.

The Wilson administration conscriptedsome 2.8 million men—70 percent of thosewho served in the army. The Supreme Courtcould find no constitutional infirmity in thatinvoluntary servitude, and its ruling has beena decisive precedent for judges ever since. Thegovernment also intervened massively in eco-nomic affairs, setting prices, allocating rawmaterials, and even going so far as to nation-alize the interstate railroad, ocean shipping,and telecommunications industries. Thosemeasures established precedents that wouldreturn to haunt subsequent generations and

It Just Ain’t So!

Wartime Curbs on Liberty Are Costless?

MARCH 2002

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undercut their liberties in later crises—eco-nomic depressions as well as wars—each timeentering more deeply into the fiber of Ameri-can life, with malign effects on the traditionalAmerican devotion to liberty.

World War II became the occasion forunprecedented repressive actions by the U.S.government. More than 10 million youngmen—about 63 percent of all those whoserved in the armed forces during the war—were drafted to fight, and hundreds of thou-sands of them died or suffered seriouswounds. The government imprisoned nearly6,000 conscientious objectors, most of themJehovah’s Witnesses, who refused to obeythe conscription laws. Totally without dueprocess of law, the government confinedsome 112,000 innocent persons of Japaneseancestry, most of them U.S. citizens, in con-centration camps in desolate areas of thewest. Perceived enemies of FDR’s adminis-tration came under surveillance by the FBI,whose special-agent ranks mushroomedfrom 785 to 4,370 during the war.

The government built a massive apparatusof economic controls between 1941 and1945 and displaced free markets for theduration. No one should pooh-pooh thewartime economic controls because theyentailed a sacrifice of “mere” economic lib-erties, as opposed to “precious” civil liber-ties. Men were sent to prison for violatingprice controls, and people were displacedfrom their homes to make way for militaryconstruction projects. Wartime taxationitself was no trivial assault.

To pay for the gargantuan munitions pro-duction, the government imposed new taxesand raised the rates of existing taxes tounprecedented heights. Payroll withholdingof income taxes was instituted, as portentousan action as any, because it created a virtu-ally automatic means of snatching people’searnings and thereby greatly facilitated thegovernment’s subsequent financing of itsever-growing expenditures. Despite the vast-ly increased taxation, the government had toborrow most of its wartime revenue, and thenational debt swelled by $200 billion (equiv-alent to roughly ten times that amount intoday’s dollars), or about fivefold, creating

liabilities that would hover over taxpayersever afterward.

Can-Do GovernmentWorld War II gave a tremendous fillip to

the federal government’s reputation as a“can-do” organization, which helped to sus-tain various wartime economic controls,most notoriously New York City’s never-abandoned rent controls. Moreover, aseconomist Calvin Hoover observed, the war“conditioned [American businessmen] toaccept a degree of governmental interventionand control after the war which they haddeeply resented prior to it.”

During the prolonged Cold War emer-gency, an apprehensive nation grew accus-tomed to extensive domestic surveillance,government infiltration of dissident politicalgroups, and even the murder of persons per-ceived by the government as threats to“national security.” In the light of these andcountless other facts, one wonders howWinik managed to conclude that “ourdemocracy can, and has, outlived temporaryrestrictions and continued to thrive”?

Winik would have us believe that, even ifthe government should adopt much morerepressive measures to fight its declared“war on terrorism”—and indeed it has doneso since his article appeared—we shall ulti-mately get past them, back to our gloriousdemocracy, with the dangers surmountedand our freedoms undiminished. Vice Presi-dent Dick Cheney, however, sees the matterin a different light. The present war “maynever end,” Cheney said on October 19.“It’s a new normalcy.”

In the weeks that have passed since theVice President uttered those ominous words,the government has continued to act in waysthat confirm the worst fears of those whocherish a free society. Many of the measuresbeing taken will have little effect on terrorismbut much effect on ordinary Americans, andmany of those measures will surely persisteven when the present crisis has passed.

—ROBERT HIGGS

(rhiggs@independent.org)The Independent Institute

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Why Children Are Dying inthe Nation’s Capitalby James L. Payne

The recent anxiety about terrorism seemsto have led the public to look to gov-ernment with a new confidence, as if itwere a father figure capable of taking

care of us. Before we get too enthusiastic,however, we ought to remind ourselves whatwe have learned from many decades of expe-rience with Washington, D.C. Private compa-nies may have shortcomings, and voluntaryarrangements may not cover all the bases, butit doesn’t follow that government is the solu-tion. The record shows that governmentagencies often fail, and fail miserably. It alsoshows that when a government agency goessour, it can be very difficult to fix.

For several decades, Washington has hadon its own doorstep a glaring case of agencyfailure: Child and Family Services, the unit ofthe city government that is supposed to takecare of abused and neglected children. Poli-cymakers and editorialists who expect gov-ernment to save us would profit from a closelook at the history of this agency.

In this day and age the public doesn’t havehigh expectations for a government welfareagency. We don’t expect it to provide love.We don’t expect it to build character, or toinspire children, or even to teach them goodmanners. All the public demands, really, isthat it keep its charges alive. D.C.’s Child

and Family Services hasn’t even been able toaccomplish that.

As newspaper headlines have been remind-ing the city for years, the children in its caredie—or are killed—in alarming numbers. Aninvestigation by the Washington Post foundthat from 1993 to 2000, 229 children endedup dead after coming under the supervisionof this agency. In some cases, governmentworkers were informed that a child was in alife-threatening situation and they ignored it.In many others, social workers placed a childin a foster home or institution that wasneglectful or abusive. This program, the Postconcluded in an editorial back in 1991, “hasabused the children almost as much as thebattered families and broken homes fromwhich they were rescued.”

Washington is a city laden with democra-tic political institutions and also with demo-cratic (small and large “d”) politicians; so, intheory, the “children’s ordeal” (as the Postcalled it) ought to have been quickly ended.Well, it hasn’t been, not by the District’selected mayor and elected city council, norby the federal government, which supervisesand funds the District.

Jolted by screaming headlines, the politi-cians have thrown money at the problem,but that hasn’t worked. With a budget of$147 million, Child and Family Servicesspends $610,000 per social-worker employ-ee, and $45,000 a year for each child undersupervision. (When a bureaucracy tries totake care of children, it is expensive!)

Contributing editor James Payne (jlpayne@netw.com) is the author of Overcoming Welfare:Expecting More from the Poor—and From Our-selves (Basic Books).

MARCH 2002

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Some say that the way to fix agency failureis to write regulations that clearly instructthe employees on what they must do in eachcase. That’s been tried, and it hasn’t worked.In fact, overregulation may have made theproblem worse. In the early 1990s itemerged that a social worker dealing with acustody case had to write up and submitnine documents within 24 hours—a hugedeterrent to action. An effort was made tostreamline these regulations, but it backfired.The new, comprehensive regulations issuedin 1995 were 400 pages long.

When all else had failed, the lawyers camewith their lawsuits. In 1989, the AmericanCivil Liberties Union filed a class-action suiton behalf of abused and neglected children.That lawsuit dragged along until April 1991when the U.S. District Court judge hearingthe case, Thomas Hogan, concluded that theagency was a “travesty” that was creating a“lost generation of children whose tragicplight is being repeated every day.” Thiscourt decision led to a treaty-like agreementbetween the city government and the ACLUlawyers, stipulating a number of formal tar-gets (like preparing the aforementionedbook of regulations) that Child and FamilyServices agreed to meet.

Missed the TargetsYears passed. The agency failed to meet

most of the targets, and lawyers, agencystaff, and the judge were bogged down inincessant wrangling. Even the ACLU lawyerwho had filed the lawsuit was disenchanted.“There was just an endless process and noresults,” she said. “We have to go back tocourt on almost everything.” And the systemkept on abusing children.

So in May 1995 the judge took full con-trol of the agency and put it in the care of areceiver. At first there was euphoria. “This isfantastic,” said one foster parent familiarwith the incompetence and abuses of theagency. “There’s no way a bureaucracy isgoing to stop me,” said Jerome Miller, thenewly appointed receiver.

Brave words, but they amounted to little.In 2001, six years later, Child and FamilyServices has been through three receivers, yetit remains, according to the WashingtonPost, “one of the most dysfunctional childprotection agencies in the nation.” Its adop-tion and foster-care functions are still snarledin delay and misunderstanding, leaving hun-dreds of children in a perpetual and stressfullimbo. Children in the system spend an aver-age of 3.7 years being shunted around in tem-porary care. (The Adoption and Safe FamiliesAct of 1997 mandates that permanentarrangements be made within one year.)

The court supervision continues, produc-ing Kafkaesque tangles as the judiciaryattempts to micromanage the haplessagency. For example, in October 2001, afederal judge ordered an employee to bejailed for “willful disregard of a court order”requiring her to file reports on two neglectedchildren. The social worker claimed that,being overworked, she didn’t have time towrite the reports.

She had a point. For more than a decade,the agency has had a problem of inadequatestaffing, and every administrator, judge, andlawyer connected with the program haspromised to correct it. But they haven’t suc-ceeded. Today the agency has 90 unfilledcaseworker positions. It has the money, itjust can’t retain workers. In 1999–2000,one-third of its social workers quit, turnedoff by incompetence, red tape, stress, andmicromanagement. After all, who wouldwant to work in an agency where judgessend you to jail for not filing reports?

So Child and Family Services limps alongdespite the best-intentioned efforts to reformit. Judges and administrators keep promis-ing, and editorialists wring their hands, yetchildren keep dying while under the supervi-sion of this agency. There have been sevenmore deaths since last June.

For those feeling the urge to set up gov-ernment programs, it’s a case history to keepin mind. From afar, government may seem areassuring father figure, but up close it canprove to be shockingly incompetent. �

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The Other Paradigm ofConsumer Protectionby Keith Wade

One question that comes up in nearlyevery session of my business informa-tion systems class is, “Is it safe to do business on the Internet?” My

answer has always been yes, but heretoforemy reasoning has been that the encryptionroutines used by many Internet merchantsare far more robust than those used in manyATMs. More important, however, has beena resurgence of the other paradigm of con-sumer protection: self-help.

I will confess to being a savvy user of thegovernment consumer-protection system.Each time I receive a call from a telemar-keter, I fill out a complaint form with theFlorida Department of Agriculture, which,in return for my annual payment of $5,criminalizes making telemarketing calls tomy home and imposes sanctions on thosewho do it anyway. When a major retailerrefused either to refund my money or deliv-er my product, I sent details to the Securitiesand Exchange Commission together with mytheories as to why this company’s balancesheets deserved major scrutiny. When mythen-wife’s insurance was not renewedbecause of erroneous data in a secret auto-mobile insurance industry database—whichwe were denied an opportunity to review or

correct—I complained (unsuccessfully) tothe Florida Department of Insurance.

While this system often produces “suc-cess” in that it gets the consumer’s moneyback or produces the results contracted for,one major flaw is that it does not preventconsumers from entering into transactionswith disreputable merchants in the first place.

Further, it does not always work: jurisdic-tional issues arise, companies move, and thewheels of government can sometimes moveslowly.

Long ago and far away, on my first day ofwork at Dun & Bradstreet, I was told thestory of Abraham Lincoln (one of severalAmerican presidents who worked there) rid-ing his circuit and sending his credit reportsback to headquarters. In those days beforethe Federal Trade Commission, the FloridaDepartment of Agriculture, and a myriad ofother consumer protection agencies, it wasimportant for people to know whom theywere dealing with. So Mr. Dun began col-lecting this information and selling it to sub-scribers, allowing them to have some assur-ance that persons in the then-remote reachesof America could be relied on to pay theirbills. The theory was that when it came toreputation, history is often a good indicatorof the future.

This system of private reporting on theintegrity of businesses survives to this daywith little hindrance. Indeed, one of my littlepleasures during my time at Dun and Brad-street was informing the occasional rude per-

Keith Wade (keithwade@usa.net) is the vice presi-dent of administration and chief financial officerat Florida Cypress Gardens, an adjunct professorof business at Webster University, Lakeland, and a doctor of business administration student atArgosy University, Sarasota.

MARCH 2002

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son that notwithstanding his loud and color-fully stated desire not to have his businessreported on, there really was nothing hecould do about it (as long as what I said wastrue). As one can imagine, it was never nec-essary to have this conversation with some-one whose sterling business practices hadearned his business a glowing report.

What is new is that consumers are finallygetting into the act. Dun and Bradstreet, andmost of its competitors, have designed theirinformation for and sold it to the “businessto business” market. The reports often costmore than a consumer stands to lose if a firmis fraudulent. Further, they often containinformation that a consumer just isn’t allthat concerned with (for example, how time-ly a company pays its bills).

In recent years, however, consumer-basedsystems have evolved. Buy or sell somethingon eBay, for example, and the other partyhas the opportunity to leave feedback. Eachbuyer or seller develops a “scorecard” thatshows a tally of positive, negative, and neu-tral experiences. In addition, a prospectivebuyer or seller can read comments—ren-dered nearly indelible by eBay policy—frompeople who have dealt with a given buyer orseller before.

Amazon.com gives its customers the oppor-tunity to post reviews of books they purchase(and some of them are mercilessly honest!).Many online merchants now send customersto BizRate.com at the conclusion of transac-tions, where they are asked to rate the busi-ness’s prices, ease of site navigation, andmore. Follow-up e-mails come shortly afterthe merchandise should have arrived to elicitconsumers’ feelings regarding actual versuspromised delivery time.

Businesses Know Good BusinessWhile Better Business Bureaus have been

around for a long time and offer services

such as pre-purchase company ratings and after-purchase mediation, a variety of companies are taking advantage of the Internet’s creation of a realm that is difficultfor government-based consumer-protectionagencies to police (both because of jurisdic-tional issues and manpower constraints).Proving that nature abhors a vacuum, anumber of private firms have stepped intothe “lawless Internet arena” to provide theequivalent of gated communities’ privatesecurity guards.

Credit card companies—which have longoffered consumer protection in the form ofthe chargeback—have gone even further.American Express, for example, offers Pri-vate Payments—a one-use-only credit-cardnumber designed for purchasing things onthe Internet. Most credit cards offer somesort of fraud protection.

In addition to its feedback, eBay offers afraud-protection program (since usersmust give credit-card numbers and agreeto a member agreement before selling any-thing, eBay does have recourse againstrogue merchants) and actively polices itssite for fraud and other threats to its viability.

Third parties have even sprung up—fromSquare Deal, a service that eBay merchantscan join, requiring them to abide by certainethical standards and engage in mediation,to PlanetFeedback.com, an online databaseof consumer ratings, complaints, compli-ments, feedback, and letters for a vast arrayof companies.

While government entities have spokenabout a (quite legitimate) need to insure thatmerchants in cyberspace fulfill their con-tracts, private industry has rushed in to fillthe void. As is proven over and over, if aneed is real the market will insure it is satis-fied. Left alone, the market will come upwith the most effective, efficient, and cost-justified tools to do the job. �

11

In November 2000 Louis Schimmel sweptaway the government of Hamtramck,Michigan, and literally took over thecity—lock, stock, and barrel. Appointed

by Governor John Engler under a 1990 lawthat allows the state to assume temporarycontrol of a dysfunctional municipality,Schimmel has transformed the finances andthe infrastructure of Hamtramck. The resultspeaks volumes about the virtues of thingslike common sense and privatization.

But first some background. How did thistown of 23,000, an independent enclaveentirely surrounded by the city of Detroit,get into dire straits to begin with? It’s a casestudy of unions run amok and politiciansunmindful of other people’s money.

Poorly negotiated contracts with cityemployees’ unions failed to establish astrong link between job performance andpay levels. For example, Hamtramck’s contract with the American Federation ofState, County, and Municipal Employees(AFSCME), the union that represents cityclerical and Department of Public Works(DPW) employees, provided for annual wageincreases of as much as four times the rate ofprice inflation. Work rules stymied produc-tivity, and while the city’s population fell by more than half during the last 50 years, the size and expense of the city workforce resisted any adjustment. AFSCME-

represented city employees were entitled toup to 40 paid vacation days a year, plus 15paid sick days, 13 paid holidays, three paidemergency leave days, and three paid per-sonal days. On top of all that, each employ-ee also got a paid day for his birthday!

City services deteriorated, driving taxpay-ing people and businesses elsewhere, but cityworkers made out like bandits. They neglect-ed their jobs, sometimes to the point ofthreatening the health and safety of citizens.Garbage lay in the streets for as long asseven weeks, dramatically increasing Ham-tramck’s population of rats and other disease-carrying scavengers and pests.

The DPW suffered from poor equipment,inadequate supplies, and lax supervision.The city had 95 fire hydrants that either didnot work or were in need of repair, andDPW did not know how to fix them. Tomake matters worse, Hamtramck officialswere prohibited by union contracts fromsubcontracting out any work, including fire-hydrant repair and garbage collection.

When the governor put Schimmel incharge of the city, the council and mayorwere at loggerheads over everything, even asa deficit of $3 million in a budget of $16 mil-lion stared them in the face. About his firstday on the job, Schimmel told the MetroTimes, “Everything was such a mess.”

Yes, dear readers, this was what a govern-ment had done to itself and to the citizens itwas supposed to serve. All that talk aboutselfless “public service” was laid bare interms more vivid and tragic than in anyother Michigan city in recent memory. This

Ideas and Consequences by Lawrence W. Reed

The Man Who AteHamtramck’s Government

Lawrence Reed (Reed@mackinac.org) is presidentof the Mackinac Center for Public Policy (www.mackinac.org), a free-market research and educa-tional organization in Midland, Michigan.

MARCH 2002

12

wasn’t public service; it was more like serveyourself at the expense of the public.

Work Force SlashedWith dictatorial powers that essentially

put the mayor and city council out of busi-ness, Schimmel lost no time in making big changes. Just weeks into the job he firednine people and eliminated 21 jobs that had been unfilled for some time. That wasonly the beginning. By the end of his firstyear, he reduced the bloated, featherbeddedwork force by 17 percent, from 162 to 135employees.

He negotiated a new contract to providefor privatization of all DPW work. Thisarrangement has allowed the city to contractcompetitively with private-sector firms fortrash pickup, fire-hydrant repair, tree trim-ming, snow plowing, street repairs, waterand sewer line repairs, and nearly all otherservices formerly provided by the DPW. Bypublic auction, he sold off unnecessary cityvehicles and equipment for $186,000. Ser-vices have improved dramatically. At muchlower cost, garbage actually gets picked upon time now, trees really do get trimmed,snow actually gets plowed, and across theboard, a day’s work for a day’s pay genuine-ly takes place in Hamtramck.

It didn’t come easily. Schimmel had to sitdown, look the union bosses squarely in theeye, and tell them in no uncertain terms thattimes had changed. “You’re going to have towork. You have to put in an eight-hourday,” he advised them from across the bar-gaining table. They squealed and theysquirmed but in the end, they had no choicebut to get honest with the taxpaying publicthat was paying their salaries.

One reason, perhaps the main reason, thatthe unions came around was that Schimmel’strack record clearly suggested he was a manof action. For four years in the late 1980s, hewas the court-appointed receiver for thebankrupt city of Ecorse, about a 20-minute

drive downriver from Hamtramck. There heprivatized almost everything, disciplined theunruly unions, and eliminated a huge citydeficit.

Before the Hamtramck takeover, the cityowned a fairly large amount of untappedcapital in the form of idle land. UnderSchimmel, the city is leasing land for a cell-phone tower that now generates $26,000annually. He is in the process of selling otherland to local commercial enterprises.

Before Schimmel arrived, the city operateda parking-meter system that was in a con-stant state of disrepair. A large number ofmeters did not work, and parking enforce-ment was almost nonexistent. The systemhas been the subject of scandal, with allega-tions of money being stolen from the meters.City parking lots were in disrepair as well.Schimmel directed the city to sign a leasewith its own Downtown DevelopmentAuthority (DDA) to provide for the opera-tion of the parking system. The DDA, inturn, is repairing the parking meters underSchimmel’s watchful eye and at the sametime, contracting out the management of theparking system.

Schimmel has renegotiated police and firepersonnel contracts that had been over gen-erous (annual pay hikes of nearly 10 percentper year for police officers, for example).Wage hikes in the new contracts wereadjusted to be more in line with inflation,departments were reorganized, and 15 posi-tions were eliminated. The annual savingsfrom those measures alone have amountedto $1.6 million.

Louis Schimmel is still busy fixing Ham-tramck and downsizing its public sector, buthe’s looking forward to finishing the job bythe end of the year. He’ll leave behind adecidedly smaller city government, lots ofnewly privatized and spiffed-up services, anda city that has a chance to function andattract people and business once again.

Once again, the private sector has come tothe rescue of the public. �

13

A New Old AmericanConcept of Political Libertyby Norman Barry

I t is odd that a libertarian should have aconception of political liberty at all. Isn’tit the case that there is a permanent warbetween freedom and politics? Surely any

reduction in the political sphere produces aconcomitant increase in individual liberty.Has not choice in the market, characterizedby personal autonomy and spontaneity, beenthe biggest victim of the voracious appetitesof the rent-seekers (privilege-seekers) whoconstitute the political class? Does not themost meretricious and superficially appeal-ing form of coercion come exclusively frompolitics? Sometimes this is so skillfully mar-keted that it is not even noticed as coercion,especially when it is linked to the allure ofdemocracy. But, of course, democracy hasnot restrained Leviathan and modern lib-eral democracies generate little more thancoalitions of private interests intent on redistribution.

Yet libertarianism (also called classical lib-eralism) is undoubtedly concerned with pol-itics: even an attempt to reduce seriously therange of politics is a kind of a political act.And it is true that libertarians have writtenextensively about politics, albeit from a neg-ative perspective. This can be summed up in

one question: how do we reduce the range ofhuman activities subject to collective-choiceprocedures? For although communism maybe more or less dead, it is the increasingrange of human actions subject to collectiveprocedures that is the most pressing concernof our times.

For classical liberals this is partly a problemof welfare economics: if the market has beenremoved from economics, what mechanism isthere for determining the production of so-called public goods that is consistent withindividual choice? But also it is a matter forethics: what moral philosophy can mandatethe state in its exercise of that power whichpeaceful and moral citizens do not have?

Libertarians have traditionally answeredboth questions from a constitutionalist’s per-spective. A constitution not subject tomajoritarian procedures could both delin-eate the appropriate range of public activi-ties and provide protection for individualrights. In a libertarian political (but constitu-tional) world there would be a set of delin-eated rights, with economic and civil rightsbeing symmetrical. Even if that were a common-law order without a rights docu-ment, its unspecified liberties would beimmunized from the otherwise remorselesscontagion of statute, which has been the fateof Great Britain.1

However, the libertarian’s depoliticizedconstitutional order has proved to be littlemore than a utopia; it has been unable toresist the seemingly inexorable encroach-

Contributing editor Norman Barry (Norman.barry@buckingham.ac.uk) is professor of socialand political theory at the University of Bucking-ham in the U.K. This is a shortened version of “AClassical Liberal’s Conception of Political Liberty:America and Europe Compared,” published in theEuropean Journal, vol. 9, no. 3, 2001.

MARCH 2002

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ment of politics on our liberties. Mere“parchment protections” have proved to befragile defenses against vote-maximizing in ademocracy. Indeed, in Europe the replace-ment of allegedly arbitrary monarchies bydemocracies has probably reduced libertyand generated a new type of lawlessness.

But the unleashed majority has not beenthe only agent in this process, for one of themuch-vaunted protectors of liberty hasproved to be a significant factor in its corro-sion—I mean the judiciary. As we shall see,in America especially, some of the most deci-sive events in the retreat from liberty havebeen controversial judicial decisions, manyof which, ironically, did not even have theimprimatur of the majority.

One of the major reasons for the declineof liberal constitutionalism has been thegradual judicial destruction of the one liberty-preserving aspect of that order—competitivefederalism.2 Just as choice in the market-place ensures the best goods and services, sochoice in the market for law and other pub-lic goods guarantees a meaningful politicalliberty. In America constitutionally protect-ed (specifically by the Tenth Amendment)competitive federalism has been whittledaway. In Europe, which does not have a con-stitution, it is being eliminated by the declineof jurisdictional competition between themember states of the European Union.

Competitive federalism to a great extentremoves the malign influence of the judicia-ry in the determination of crucial elements inthe legal order and reduces the role of themonopoly state in the production of publicgoods. It does this by restoring choice andremoving the need for complex and unwork-able constitutional rules for the limitation ofpolitical authority. Most important of all, itmakes exit a realistic option compared to thecostly, freedom-reducing, and cumbersomemethod of voice in the determination of pol-icy. If you don’t like the regime under whichyou live, you simply leave it subject only toa narrow framework of rules that guaranteesthe right of entry and exit.

Competitive federalism requires minimalconstitutional rules. This is not devolution,or even conventional federalism with its vain

attempt to preserve appropriate spheres forlayers of governments. Importantly, itexcludes the possibility of “subordinate”tiers in a federal regime externalizing theircosts onto the center, that is, the taxpayer.This is a process that leads to massive rent-seeking by employees of the “national” gov-ernment. Note that the much-heralded wel-fare reform in the United States in 1996 wasthought to be partly a triumph of federalismsince taxpayers’ money was returned to thestates for them to spend as they wished. Butit wasn’t competitive federalism since itremoved financial autonomy from the states.Under competitive federalism they need haveno welfare at all; whether they did would bea function of the choice of citizens with theexit option for those who object. If they didhave welfare the states’ taxpayers wouldhave to pay for it themselves. A welfare sys-tem would, presumably, be unattractive inthe political market.

Competitive Federalism and theAmerican Founding

We can get a good idea of what competi-tive federalism means by looking back at thefounding of the United States.3 Under theArticles of Confederation (ratified in 1781)there was no executive government and thepassing of any law was a matter of unanim-ity of the component states, as was the col-lection of taxes. This meant that in practicethe 13 states were entirely self-governing. Inthe debate between the federalists and theanti-federalists the defects of the prevailingsystem were undoubtedly exaggerated. Andthey were certainly not insoluble. Even theinternal tariffs that apparently existed underthe confederacy would have eventually beencompeted away: that is what competitivefederalism does.

But the reflections on human nature andpolitical man of the federalists and the anti-federalists were remarkably similar. Bothsides took a realistic, pessimistic view ofman. The potential depravity of politicalman was recognized and with it the need forappropriate institutions to protect freedom

15

and property. Both were aware of the“social dilemma,” namely, the fact thatunbridled egoism, especially outside themarket, would produce outcomes unwel-come to everybody, including the egoists.Self-interest is not always benign, especiallyin politics. Those in office would use theprivileges of government to their own advan-tage unless there were agreed-on rules ofrestraint. The anti-federalists shared Madi-son’s fear of factions: groups smaller thanthe whole that would use politics to secureincome they could not earn in the market.They were especially cognizant of the perilposed by majority factions.

Where they differed was over the remediesfor these deficiencies. The anti-federalistsfavored political competition, the federalistsa sanitized state and constitutional order,though it is apparent that Madison wasgroping toward some notion of politicalcompetition. In a famous phrase from Feder-alist 51 he said that “ambition must coun-teract ambition” and went on to describe asystem that he hoped would provide theright incentives to make individual strivingconsistent with the public good. He proba-bly thought that the federal system hedevised would provide a surrogate version ofmarket competition.

But in his equally famous demonstrationof the virtues of republicanism, as opposedto democracy, he revealed his misunder-standing of federalism. In Federalist 10Madison claimed that the worst effects offactions would be dissipated by the “extend-ed republic.” That over a wide area andunder two layers of government, state andfederal, factions would not be able to orga-

nize effectively to divert income and powerto themselves. However, that proved not tobe the case, and the federal governmentineluctably increased its power and accumu-lated the citizens’ wealth despite the elabo-rate protective devices of the Constitution.

It was not just the amendments addedlater, such as Fourteenth (1868), the Six-teenth (federal income tax, 1913), and theSeventeenth (direct election of senators,1913), that were decisive, though I do notwish to underestimate their importance. Theseeds of ultimate decay were already writteninto the original document, for example, thedirect effect of laws (bypassing the states),the power to raise revenue, and extensivejudicial review exercised by the SupremeCourt. (While some argue that the Constitu-tion contains no authority for judicialreview, the anti-federalists feared the judicialpowers as stated in the Constitution anddescribed in The Federalist Papers.)

What the anti-federalists were supremelyaware of was the difficulty for the citizens tocontrol their governors over a wide area andwith an increasing population; the extendedrepublic reduced the power of the citizens.The anti-federalists were quite familiar withwhat is called by modern public-choice the-ory “rational ignorance.” The costs andbenefits of political activity are such that itis just not in the rational self-interest ofmost people to expend any time and energyon it. This means that only a minority,whose opportunity costs are quite low, willbother to participate. They are the least like-ly to promote the public good and the mostlikely to grab the economic rent created byothers.

Ideas on Liberty • March 2002

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What the anti-federalists were supremely aware of was thedifficulty for the citizens to control their governors over a widearea and with an increasing population; the extended republicreduced the power of the citizens.

Local Government FavoredThe answer, according to the anti-federalists,

was not the extended republic but enhancedlocal self-government. That governmentwhich is closer to the people is more easilycontrolled by them and, ultimately, remov-able by them. Under proper competitive fed-eralism people would leave jurisdictions thatdid not meet with their approval. Any orderthat persisted with costly import controls,high taxes, and regulation would quickly bepunished by the market—a much more effec-tive mechanism than the democratic vote ora written constitution for the protection ofliberty. Note how the congressional powerto regulate interstate commerce, originallydesigned to ensure free trade between thestates, eventually, with the help of theSupreme Court, became the power to regu-late intrastate commerce. This did not meana freer market—quite the reverse.

And the anti-federalists grasped a keypoint about modern democratic federalismwhen they observed that while it may be relatively easy to impose new legal restric-tions on trade and personal liberty, in aworld of rational ignorance and voter apa-thy it is extraordinarily difficult to get themremoved.

The anti-federalists also saw that protec-tion for liberty provided by an independentjudiciary was paper-thin. In their view thefederal judiciary was ultimately a body ofthe central government and was thereforebound to pass judgments favorable to it.That is exactly what has happened. TheSupreme Court has struck down little morethan a hundred congressional statutes whileit has outlawed thousands emanating fromthe states. And in an uncanny premonitionof modern liberal jurisprudence, the anti-federalists noted how activist judges wouldtry to distort the meaning of the law in adeceptive attempt to capture its hiddenmeaning. As “Brutus” brilliantly put: “Andin their decisions they [the judges] will notconfine themselves to any fixed or estab-lished rules, but will determine, according towhat appears to them, the reason and spiritof the constitution.”4 This is the perfect

anticipation of modern liberal jurisprudence,with its notion of the “living Constitution.”

Uncanny PredictionsIn retrospect, it is amazing how so many

of the predictions of the anti-federalistsproved to be true. Or not at all surprising iftheir comments on human nature are accu-rate, as libertarians believe they are. In theabsence of competition, they noted, theinherent profligacy of government was virtu-ally uncontrollable.

And once again it was the percipient Bru-tus who posed the serious question: wouldthe new government “absorb and swallowup the state governments”?5 Under the pro-posed constitution he thought that it would.And he was right. At the turn of the twenti-eth century, 70 percent of public spendingwas by the states and a mere 7 percent by thefederal government (the rest was by localgovernments). Now the position is almostexactly reversed and all attempts to controlfederal spending under the present constitu-tional rules have failed. In law, the old con-stitutional constraints are more or less senes-cent and in economic matters the federalgovernment can do almost what it likes.

Under “liberal” justices the arm of thefederal government has extended to repres-sive economic regulation; and they havevastly expanded “civil rights” in a mannernot authorized by the Constitution. Bothforms of intervention favor particulargroups (factions) and render the rule of lawmeaningless. And it was the Supreme Courtthat officially declared the death of federal-ism in Garcia v. San Antonio TransitAuthority (1985). Here, the Tenth Amend-ment, which states that all powers not grant-ed to the Congress under Article 1, arereserved to the states (or the people), wasignored and federalism was redefined tomean the representation of the states in Con-gress. But without constitutional (asopposed to political) protection, federalismis a fragile instrument indeed.

Many libertarians in America, especiallypublic-choice theorists,6 recommend a con-stitutional revolution by which they hope to

A New Old American Concept of Political Liberty

17

recapture the form of the original system: torestore proper federalism, dilute taxationpower, reduce the power of the executiveunder a rewritten separation of powers, andseverely limit the power of government,especially the federal element. But I wonderwhether such a reconstruction would beadequate, for it still depends on the delin-eation of the various powers and enforce-ment by an impartial judicial system com-mitted to not expanding these powers. Itstill licenses government rather than strictlylimits it.

Only in Switzerland have federal con-straints been preserved: there the 26 cantonsstill spend more than the federal governmentand, despite some nationalized welfare, theystill handle the things that affect peopledirectly. The original federalist intent, inAmerica and elsewhere, can only be restoredif the original political liberty is recaptured:that means jurisdictional competition under-pinned by the ultimate right of secession.

The European Union had a splendid oppor-tunity to foster jurisdictional competitionwithin an international framework, but itquickly embarked on a centralizing path, ledby politicians and an activist EuropeanCourt of Justice and proceeding at an even

faster rate than the American federal union.The right of secession has never been includ-ed in the treaties that make up the curiousconstitutional order of Europe. “Harmo-nization,” not jurisdictional competition,has become the lodestar of European poli-tics; with some brave resistance from Britainand Ireland, which have preserved someindependence in taxation.

All written constitutions are inadequatesurrogates for a genuine political liberty. Fortrue freedom is found in the active exerciseof choice: either in the market for goods andservices or the competition for laws andinstitutions. If that competition is attenuat-ed, and citizens are left with only the thread-bare protections of democracy and anactivist judiciary, they will soon have littleliberty at all. �

1. See F.A. Hayek, Law, Legislation and Liberty, vol. 3(London: Routledge and Kegan Paul, 1979).

2. See Thomas R. Dye, American Federalism: Competitionamong Governments (Lexington, Mass.: Lexington-Heath,1990).

3. I have taken much of the following from an unpublishedpaper by the late Peter Aranson, “Federalism at the Founding,”Liberty Fund, Bad Homburg, May 1991.

4. The Anti-Federalist Papers, Herbert J. Storing, ed. (Chica-go: University of Chicago Press, 1981), p. 165.

5. Ibid., p. 138.6. Known collectively as the Virginia school. Prominent fig-

ures are James Buchanan and Gordon Tullock.

Ideas on Liberty • March 2002

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Nullification: The Jeffersonian Brake on Governmentby Thomas E. Woods Jr.

Thinkers in the classical-liberal tradi-tion, to the extent that they support acoercive state at all, speak routinely ofthe importance of keeping government

strictly limited. To that end, the UnitedStates has a written Constitution, which enu-merates the relatively brief list of tasksentrusted to the federal government andwhose Tenth Amendment makes clear thatany power not granted to the federal gov-ernment resides in the states, the authors ofthe federal compact.

That is all well and good, but how does atheoretically limited government remain so?Some have argued that it is impossible torestrain a government over time.1 Theframers of the Constitution, for their part,were well aware of the tendency for powerto concentrate and expand. Thomas Jeffer-son spoke of the calamity that would resultif all power were vested in the federal gov-ernment. To be sure, the Constitution wassomething of a barrier to such tendencies,but any constitution is, after all, only a pieceof paper and cannot enforce itself. Checksand balances among the executive, legisla-tive, and judicial branches, a prominent fea-

ture of the Constitution, also provide littleguarantee of limited government, since thesethree federal branches can simply uniteagainst the independence of the states andthe reserved rights of the people. That is pre-cisely what Jefferson warned WilliamBranch Giles was already happening in1825: “[I]t is but too evident, that the threeruling branches of [the Federal government]are in combination to strip their colleagues,the State authorities, of the powers reservedby them, and to exercise themselves all func-tions foreign and domestic.”2

What is necessary, therefore, is somemechanism whereby the federal governmentmay be kept limited and unconstitutionalmeasures frustrated and overthrown. In1798 Jefferson believed he had identifiedsuch a mechanism: the constitutional remedyknown as nullification.

First, some historical background. Amidstthe naval skirmishes and diplomatic tensionassociated with what historians refer to asthe Quasi-War with France, the Federalistsmanaged to enact legislation that wouldbecome notorious: the Alien and SeditionActs. The prohibition of seditious libel con-cerned them most.

For Jefferson, the objection wasn’t onlythat the prohibition would be enforced in apartisan way—though of course it was, with

Thomas Woods Jr. holds a Ph.D. from ColumbiaUniversity and is a professor of history at SuffolkCommunity College in Brentwood, New York.

MARCH 2002

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many Republican newspapers and spokes-men targeted for harassment, fines, and evenjail time. (Correspondence between Jeffersonand Madison at the time includes complaintsabout mail tampering.3) It wasn’t that sedi-tious libel could be arbitrarily or looselydefined—although, again, in practice it was:one poor soul who expressed the fond wishthat the presidential saluting cannon would“hit [President John] Adams in the ass,” wasfined $100.4 It wasn’t even the curbing offree speech per se, although Jefferson basedpart of his objection on what he consideredthe acts’ violation of the First Amendment.(At the time, however, the consensus appearsto have been that “the punishment of a sedi-tious libeler did not abridge the proper orlawful freedom of the press.”5)

The cornerstone of Jefferson’s objectionwas that the acts violated the Tenth Amend-ment, which to him was the foundation ofthe entire Constitution. Nowhere had thestates delegated any authority to the federalgovernment to pass legislation pertaining tothe freedom of speech or press. In doing so, then, the federal government hadencroached on a state prerogative. For Jef-ferson, who spoke of binding men by thechains of the Constitution, immediate actionwas necessary lest such federal usurpationsbegin to multiply.

Remedy Short of RevolutionWas there a constitutional remedy—that

is, a solution short of the extreme measuresof secession or violent revolution?6 Figureslike Daniel Webster and Joseph Story (andlater Abraham Lincoln) thought not. Sincethey subscribed to what might be called thenationalist theory of the Union, whereby theU.S. Constitution had been adopted by theentire American people in the aggregaterather than as a compact among sovereignstates, what will be described below as “nul-lification” appeared to them to be an unlaw-ful revolt by an arbitrary portion of the peo-ple rather than as an exercise of sovereigntyby a sovereign body.

James Kilpatrick put the question thisway: “Are the alternatives two only: submis-

sion, or arms? Is the choice truly confined toan acceptance of tyranny on the one hand,or a resort to the sword on the other? Everyconsideration of reason, common sense, andconstitutional theory demonstrate that in acivilized an enlightened society, disputes arenot to be so resolved.”7 Jefferson agreed.

Certainly the federal government, whichwas merely the agent of the states, could notbe permitted to have the exclusive authorityto make commanding judgments about theConstitution, since the obvious long-termconsequence would be the eventual concen-tration of power as it consistently handeddown rulings in favor of itself. The stateshad to be able to make their own interpreta-tions of the Constitution count for some-thing. Even Alexander Hamilton had envi-sioned a role for the states in restraining thefederal government, arguing in Federalist 28that “the State governments will, in all pos-sible contingencies, afford complete securityagainst invasions of the public liberty by thenational authority.”

As far as Jefferson could see, the only waya state could both remain in the Union andretain its liberties in the face of an unconsti-tutional act by the federal government wasfor that state to declare the federal actionnull and void and refuse to enforce it. This

Ideas on Liberty • March 2002

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Thomas Jefferson (1743–1826)

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was not a recourse to which a state shouldresort except in the most dire circumstances,of course. It is also a recourse that at firstmay well sound extreme and possiblyunworkable. But the skeptic is invited tosuggest another mechanism by which the“rights” of the states may be secured and thefederal government kept in check. If the fed-eral government has all the power to inter-pret the Constitution and the states none, noone has a right to be surprised when thestates, as in our own day, are totallyeclipsed.

There is, obviously, no provision in theConstitution that explicitly authorizes nulli-fication. That was not Jefferson’s point. He,and later John C. Calhoun, suggested that itwas in the nature of compacts that no oneside could have the exclusive right of inter-preting its terms. This was especially true inthe case of the federal compact, since Jeffer-son and Calhoun contended that the federalgovernment was not a party to it, havingitself been brought into being by the jointaction of the states in creating a compactamong themselves. Since the federal govern-ment was merely the agent of the states, itcould hardly presume to tell the states, withno room for disagreement or appeal, whattheir own Constitution meant.

An anonymous Jefferson (who was vicepresident at the time, it is useful to recall)penned what became known as the Ken-tucky Resolutions of 1798, which spelledout the objectionable aspects of the Alienand Sedition Acts as well as the states’ right-ful response: nullification. (No state actuallynullified these acts; the crisis with Francecame to an end, and the acts were slated toexpire in early 1801 in any case.) JamesMadison penned similar resolutions thatwere approved by the Virginia legislature.

Let us recall some of Jefferson’s mostpotent words, ratified by the Kentucky legis-lature:

Resolved, that the several States compos-ing the United States of America, are notunited on the principles of unlimited sub-mission to their General Government; butthat by compact under the style and titleof a Constitution for the United Statesand of amendments thereto, they consti-tuted a General Government for specialpurposes, delegated to that Governmentcertain definite powers, reserving eachState to itself, the residuary mass of rightto their own self Government; and thatwhensoever the General Governmentassumes undelegated powers, its acts areunauthoritative, void, and of no force:That to this compact each State accededas a State, and is an integral party, its co-States forming as to itself, the other party:That the Government created by thiscompact was not made the exclusive orfinal judge of the extent of the powers del-egated to itself, since that would havemade its discretion, and not the Constitu-tion, the measure of its powers; but thatas in all other cases of compact amongparties having no common Judge, eachparty has an equal right to judge of itself,as well of infractions as of the mode andmeasure of redress.8

The great theorist of nullification was Cal-houn, one of the most brilliant and creativepolitical thinkers in American history. TheLiberty Press edition of Calhoun’s writings,Union and Liberty, is indispensable for any-

Nullification: The Jeffersonian Brake on Government

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John Caldwell Calhoun (1782–1850)

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one interested in this subject—especially hisFort Hill Address, a concise and elegant casefor nullification. Calhoun imagined a stateholding a special nullification convention,much like the ratifying conventions thestates had held when debating the Constitu-tion, and settling the matter there. This ishow it worked in practice in the great stand-off between South Carolina and AndrewJackson: when South Carolina nullified aprotective tariff in 1832 (its argument beingthat the Constitution authorized the tariffpower for the purpose of revenue only, notto encourage manufactures or to profit onesection of the country at the expense ofanother—a violation of the general-welfareclause), it held just such a nullification con-vention.

Madison’s Last Word?That Madison indicated in 1830 that he

had never meant to propose either nullifica-tion or secession either in his work on theConstitution or in his Virginia Resolutionsof 1798 is frequently taken as the last wordon the subject.9 But Madison’s frequentchange of position is well known.10 AlbertTaylor Bledsoe was blunt: “The truth seemsto be, that Mr. Madison was more solicitousto preserve the integrity of the Union, thanthe coherency of his own thoughts.”11

It is true that, at the time, Virginia andKentucky found little support among theother states for their resolutions (since someof those states were strongly Federalist, theyfrankly supported the anti-sedition legisla-tion) and South Carolina was all alone in1832–33. But actions speak louder thanwords, and if Northern states sharply criti-cized the nullification of the Tariffs of 1828and 1832, on the other hand they liftedentire phrases from the Virginia and Ken-tucky Resolutions of 1798 when themselvesnullifying the fugitive slave laws.12

The most common argument against nul-lification is that it would produce chaos,with a bewildering array of states constantlynullifying a bewildering array of federallaws. Given the character of the vast major-ity of federal legislation over the past several

decades (and longer), it is difficult to imaginea libertarian viewing this as an especiallygrave difficulty.

Having said that, there is little reason tobelieve that chaos would actually ensue.Consider the historical record. That Ameri-cans generally acknowledged the right of astate to secede from the Union—a far moreextreme remedy, surely, than nullification—is evident from the number of cases in whichstates threatened to exercise this option.13

Abolitionist and pro-slavery spokesman,protectionist and free trader, all at one timeor another counseled secession. Yet was theUnion overwhelmed with acts of secessionbefore 1860? Most people have little desireto endure a state of crisis for frivolous rea-sons. But there can be no doubt that theever-present threat that an oppressed statemight withdraw had the salutary effect ofrestraining the federal government’s exerciseof power.

Moreover, to the fear that nullificationwould lead to intolerable disorder, JamesKilpatrick reminds us of the disorder thatcharacterizes the present system: “If power-hungry federal judges may impose oneunconstitutional mandate, they may imposea thousand, each more oppressive than theone before.” Is this not its own kind of dis-order? “But if the Constitution is over the[Supreme] Court, who or what finally is overthe Constitution? It can only be the States,who under Article V alone have the power toamend or rewrite it.” The theory that theSupreme Court’s interpretation of the Con-stitution must necessarily be the final wordeffectively concedes to that body the rightsubstantively to amend the Constitution tomean what the Court says it means. But theright to amend clearly rests with the states.“How, then,” Kilpatrick wonders, “may itbe urged that the States ‘unequivocally sur-rendered’ the control of their most funda-mental rights, in the last resort, to a Courtthey themselves created?”14

It is hard to find fault with Kilpatrick’sreasoning. In my experience, however, thesqueamish always seem to fall back on somehard case that allegedly renders nullificationimpracticable, even dangerous. Thus, one

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might argue, even if the doctrine of nullifica-tion did not degenerate into general confu-sion in peacetime, what should happen if astate or group of states should invoke it dur-ing war, potentially threatening the nation’ssecurity? Most proponents of nullificationhave correctly noted that it is precisely insuch situations that we would logicallyexpect the interests of the states to be mostconsonant and their allegiance to the federalgovernment most secure. More to the point,one might well wonder what a group ofstates was doing in the same union in thefirst place if a portion of them actuallydesired to sabotage the prosecution of a justwar.

The main point that nullification aims toaddress is that a government allowed todetermine the scope of its own powers can-not remain limited for long. This is a lessonwe should have learned by now. Moreover,since piecemeal solutions to reducing federalpower have accomplished nothing, we canhardly afford to dismiss out of hand the ideaof nullification, a remedy that is at once cre-ative and intelligent, and recommended bysome of the greatest political thinkers inAmerican history. �

1. Thus see Hans-Hermann Hoppe, “On the Impossibility ofLimited Government and the Prospects for a Second AmericanRevolution,” in Reassessing the Presidency, ed. John V. Denson(Auburn, Ala.: Ludwig von Mises Institute, 2001), pp. 667–96.

2. Thomas Jefferson to William B. Giles, December 26, 1825;http://etext.lib.virginia.edu/jefferson/quotations/jeff1060.htm.

3. Cited in William J. Watkins, Jr., “The Kentucky and Vir-ginia Resolutions: Guideposts of Limited Government,” Inde-pendent Review, Winter 1999, p. 391.

4. Paul Johnson, A History of the American People (NewYork: HarperCollins, 1997), pp. 240–41.

5. Leonard W. Levy, Constitutional Opinions: Aspects of the Bill of Rights (New York: Oxford University Press, 1986),pp. 165ff.

6. Although one can make a fairly substantial constitutionalcase for secession, and thus in a sense secession is a constitu-tional remedy, what Jefferson was seeking was a solution inwhich a state could remain in the Union while at the same timeresisting an act of federal oppression.

7. James J. Kilpatrick, The Sovereign States: Notes of a Cit-izen of Virginia (Chicago: Henry Regnery, 1957), p. 190.

8. Virginia Commission on Constitutional Government, Wethe States: An Anthology of Historic Documents and Commen-taries thereon, Expounding the State and Federal Relationship(Richmond, Va.: William Byrd Press, 1964), pp. 143–44.

9. James Madison to Edward Everett, August 28, 1830;reprinted in North American Review, October 1830, p. 537.

10. Professor Constantine Gutzman of Western ConnecticutState University, who has written extensively on Madison andhis role in (and later recollections and interpretation of) theevents of 1798, is particularly scathing on this point: “[Madi-son] could have listened to the wisdom of the leading men of hisstate, but he chose first to denigrate them, then to ignore them,and, once his own cohort had died off, to distort their and hisown record.” K.R. Constantine Gutzman, “‘Oh, What a Tan-gled Web We Weave. . .’: James Madison and the CompoundRepublic,” Continuity, Spring 1998, p. 28. Gutzman arguesthat despite his later protestations, Madison certainly appearedto be calling for nullification in 1798; see Kevin Raeder Gutz-man, “From Interposition to Nullification: Peripheries and Cen-ter in the Thought of James Madison,” Essays in History 36(1994), pp. 89–113.

11. Albert Taylor Bledsoe, Is Davis a Traitor? or Was Seces-sion a Constitutional Right Previous to the War of 1861? (Rich-mond, Va.: Hermitage Press, 1907), p. 174.

12. Kilpatrick, pp. 214–15.13. Thus see Thomas J. DiLorenzo, “Yankee Confederates:

New England Secession Movements Prior to the War Betweenthe States,” in Secession, State and Liberty, ed. David Gordon(New Brunswick, N.J.: Transaction, 1998).

14. Kilpatrick, p. 194.

Nullification: The Jeffersonian Brake on Government

23

Register online forthe FEE National Convention!

www.feenationalconvention.org

America is a great country. What betterevidence is there than the opportuni-ty for people to say the stupidest,most witless things?

Many people probably think that Wash-ington, D.C., has a monopoly on idiocy. Not true. While the nation’s capital is often, indeed usually, void of common senseand good judgment, dumb comments some-times rise outside the capital. Consider theesteemed bookstore chain of Barnes &Noble. It regularly hosts author book sign-ings. Among its recent guests was Bill Ayers,university professor and author of FugitiveDays: A Memoir. It turns out that as a 1960sradical Ayers expressed himself by plantingbombs. As he told the New York Times, “Idon’t regret setting bombs. I feel we didn’tdo enough.”

Hosting an avowed terrorist seems partic-ularly odd after September 11, but Barnes &Noble Vice President Mary Ellen Keatingdecried “censorship” in refusing to cancelhis appearance after customer complaints.Canceling would have been good judgment,not censorship.

Ayers sought to help by writing a letter inwhich he termed the events of September 11“an appalling crime” and avowed that he“never intended to injure or kill otherhuman beings.” Perhaps he was usingkinder, gentler bombs. But Ms. Keating wentfurther, claiming that to cancel his planned

appearance “would be to give in to ourfears, and ultimately to validate the positionof our enemies.”

Would Al Qaeda terrorists really celebrateif Barnes & Noble decided not to let anadmitted domestic terrorist promote hisbook? As James Taranto mordantly observesin his “Best of the Web” compilation for theWall Street Journal’s OpinionJournal.com,“Terrorists win if we don’t let terrorists cashin on their past crimes? This has got to bethe most twisted use of the ‘we can’t let themwin’ cliché yet.”

Criticism of the refusal to support speechwith which one disagrees has made it intothe Los Angeles Times. Freelance writerNora Vincent is tired of all the complaintsabout the stupid things academics andcelebrities have said about terrorism, war,and more. She’s appalled at the argumentthat exercising free speech means being will-ing to accept the consequences of doing so—as in, if people don’t like what you say, theycan call you a jerk and treat you like one.Criticism is okay she says, but not “puttinga gun to the speaker’s head,” which wouldmake the First Amendment “meaningless.”Actually, doing so would violate the criminallaw and, appropriately, land you in jail.

Firing someone would also violate theFirst Amendment, argues Vincent: “After all,how free can your speech be if your job is inperil if you say the wrong thing?” Unfortu-nately, she obviously knows nothing aboutthe First Amendment, which only applies togovernments. And appropriately so. Say herhometown newspaper, the New York Times,

Potomac Principles by Doug Bandow

Free to Be Stupid

Doug Bandow, a nationally syndicated columnist,is a senior fellow at the Cato Institute and theauthor and editor of several books.

MARCH 2002

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hired a columnist to write about worldaffairs and that person turned out to be aNazi. Would it really violate the FirstAmendment to fire him?

By the same token, she writes, “yankingadvertisements from network televisionshows should also be unconstitutional.” To“remain true to the spirit of the FirstAmendment,” Vincent argues, we shouldpass a law preventing “advertisers fromrevoking their support for shows.” In fact,any show unwilling to risk having its fund-ing pulled can ask for a contractual guaran-tee, and any advertiser is free to say no.

The Library and the FlagIn Boulder, Colorado, an employee asked

the library to hang a flag in the glassentrance. Art Director Marcellee Gralappsaid no, it “could compromise our objectivi-ty” and she wanted “people of every faithand culture” to “feel welcome.”

I’m not much of a flag waver, but howwould this compromise the library’s “objec-tivity” and make people feel unwelcome?Boulder is in the United States, is it not? Per-haps the problem was space—at the sametime that the library was refusing to allowthe flag to hang, it displayed 21 ceramic, uh,penises in its gallery in an exhibit titled“Hung Out to Dry.” A sign alerted visitorsthat “this exhibit contains mature materialthat may be objectionable to some.” Somuch for making everyone feel welcome. (Adisgruntled patron soon absconded with theexhibit, later returning it to police. Localauthorities, apparently upset with his variantof “performance art,” brought criminalcharges against him.)

Anne Muller of Wildlife Watch doesn’tlike hunting. But not because of animals. Shefears terrorism. Hunting, she explained, “isjust a wonderful opportunity for someonewho would want to do a terrorist act.”

Thus she urged New York state to sus-pend the hunting season: “Armed and cam-ouflaged individuals can get close to chemi-cal, agricultural, business facilities, gaspipelines, electrical power lines, substations,transformers, and airports. Local police andenvironmental conservation officers willmerely slough off concerns saying that theindividuals are ‘just hunting.’”

Because that’s what they would be doing.As for terrorism, that is more likely to comefrom radical environmentalists. Groups likethe Animal Liberation Front and Earth Lib-eration Front have been busy, even afterSeptember 11, damaging oil-explorationequipment, attacking research facilities,burning a primate research center, and fire-bombing a corral for wild horses. A fewmore private people roaming around withguns would probably help stop this sort ofterrorism.

There are also stupid people in othercountries. Very stupid people.

The British boy band Blue cut a video inNew York City on September 11 and wit-nessed the destruction of the World TradeCenter. The band members were later inter-viewed by the Sun newspaper. When theWTC attack came up, three of the membersseemed appropriately horrified. But not 18-year-old Lee Ryan. He asked, “Who gives a[expletive deleted] about New York whenelephants are being killed?” Why, he added,“Animals need saving and that’s moreimportant. This New York thing is beingblown out of proportion.”

His mates tried to shut him up. His musiclabel took him to the woodshed, and he laterapologized for expressing himself “in a veryfoolish and offensive way.” Yes, it was that.We all do dumb things in life. But some peo-ple do extraordinarily dumb things. Whatvalue would freedom have if it did notinclude the opportunity to say the most stu-pid, witless things? �

25

On Guests and Customersby Stephen G. Barone

Nowadays, whenever I go shopping Iseem to be a “guest” at every storewhere I used to be a “customer.” Butwhat occurs between a proprietor and

his patron is the opposite of what occursbetween a host and his guest. In fact, treat-ing a patron as a guest would actually be adegradation of the relationship that properlyexists between patron and proprietor.

A guest is invited into our home where hereceives gratis our food, potables, inciden-tals, and hospitality. He has no avenue ofrecourse if any of it does not meet his expectations. His right to complain is tem-pered by our right to throw him out on hisear.

A proprietor, on the other hand, is held tohigher standards. When people enter hisstore, he and they anticipate mutual bene-fits—neither is doing a favor for the other.His failure to provide goods commensuratewith the expectations of his clientele is notonly injurious to the enterprise, but alsopotentially litigable. In consideration of suchstark contrasts, any shopkeeper would dowell not to confuse his customers withguests.

There is lately a similar blurring betweenthe words “customer” and “taxpayer.” Thisshouldn’t be a surprise. Public-sectorbureaucrats are notorious for hopping on a

bandwagon roughly about the time whenprivate-sector managers are jumping off.Therefore, government agencies have takento calling their forced constituencies “cus-tomers” just as the shopkeepers and bankersare abandoning the term and moving on to“guests.”

Consider the IRS, whose personnel latelyrefer to us as “customers” rather than “tax-payers.” It’s annoying enough to be called a“guest” when my ostensible “host” ispatently expecting money for his “hospitali-ty.” But it’s downright maddening to becalled a “customer” when I’m having moneyextracted from me ultimately at the point ofa gun.

The essence of the relationship betweencustomers and proprietors is the voluntaryexchange of money for goods. But there isnothing voluntary about the taxes that arelevied on us to redistribute the wealth. Atrue customer can refuse to do business withan entity. But refuse to pay taxes and yourproperty is seized. Resist such appropriationof your resources and the police will demon-strate forthwith the state’s “customer servicepolicy” for its recalcitrant patrons.

Customers are not guests and taxpayersare not customers. Obfuscating such palpa-ble differences does not engender warm andfuzzy feelings. Quite the contrary, it breedscynicism and abets distrust, thereby hinder-ing good will, which is precisely the oppo-site of what both ruses are supposed toachieve. �

Stephen Barone (stephengb@tds.net) is a consul-tant with Barodine Marketing Communications &Research, LLC, located in Madison, Wisconsin.

MARCH 2002

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The Virtues of Sweatshopsby Stefan Spath

An acquaintance said to me the otherday how appalling it is to see somany Americans revel in the giftsreceived during the holidays. “We

should be ashamed of ourselves,” he lament-ed. “Most of this stuff was manufactured insweatshops.” Such a misinformed notion shouldn’t go unanswered because it rein-forces this fallacy in the minds of those whodon’t know better.

It is not difficult to understand why hecould so easily make this connectionbetween manufactured goods from abroadand so-called “sweatshops.” Over the pastfew years the issue of sweatshop labor hasbeen thrust on the public’s radar screen byhigh-profile cases involving such names asKathie Lee Gifford and Nike Corporation.

However, the public at large seems to beon the fence with this issue owing to a lackof good information. What complicates thesituation is the misinformation peddled bysome who have ulterior motives that stretchfar beyond ending so-called sweatshoplabor, such as those who oppose capitalismitself.

The term “sweatshop,” when used in thiscontext, is meant to intimidate people intoforming an opinion without considering theevidence. Who, after all, could be in favor of“sweatshops”?

What are “sweatshops” anyway? Ifthey’re low-wage (by advanced standards),labor-intensive manufacturing facilities, theyhave existed throughout the world in differ-ent places and at different times, althoughnow they tend to be concentrated in devel-oping nations with large populations of low-skilled workers. This pattern of how andwhere labor-intensive manufacturing is con-ducted has an economic explanation evi-denced by historical examples throughoutthe centuries. For similar reasons, the Per-sians bought textiles from the Phoenicians inthe sixth century B.C.E.; the Venetiansbought spices from Arab traders during theRenaissance; and the Portuguese boughtwool from the English in the eighteenth cen-tury. It is why 90 percent of the VCRs soldin the United States today are manufacturedin Korea. Specialization and the division oflabor are guided by each particular country’scomparative advantage. (Comparativeadvantage, as opposed to absolute advan-tage, refers to a group’s relative superiorityin producing a particular good vis-à-visother groups compared to other goods.)

In nineteenth-century America, anti-sweatshop activism was focused on domesticmanufacturing facilities that employed poorimmigrant men, women, and children.Although conditions were horrendous, theyprovided a means for many of the country’sleast-skilled people to earn livings. Typically,those who worked there did so because itwas their best opportunity, given the choices

Stefan Spath (sspath@fee.org) is executive directorof FEE.

MARCH 2002

27

Current Issues

available. More often than not, throughschooling and aculturation the children ofthose workers developed better skills thantheir parents and graduated into higher-paidoccupations.

Today, of course, there are few primitivefactories in the United States. That isbecause our economy has developed so thatmost Americans have educations and skillsthat command higher wages than workers in foreign countries with less-developedeconomies. As a result, the law of compara-tive advantage has guided the production ofcertain goods to countries with abundantlow-skilled labor. This maximizes productiv-ity both in developed and less-developedeconomies.

Working ConditionsHow do working conditions, a legitimate

concern, fit into the equation?Last year a well-publicized but poorly

organized sit-in at Harvard University put aspotlight on the working conditions of theschool’s janitorial staff. The students whotook part in the operation used the plight ofthe campus workers to highlight what theydescribed as the unfair working conditionsof the world’s poor. The word “sweatshop”was used repeatedly. The Harvard studentswanted to force multinational corporations(MNCs) of the West to pay a “living wage”to foreign workers in the developing world,just as they were demanding of the universi-ty with respect to its custodians.

Do these self-proclaimed champions of theworld’s poor and their cries for “livingwages” help those whom they purport to rep-resent? Unfortunately, so many endeavorsthat start with good intentions do more harmthen good. This too can be understoodthrough an understanding of sound econom-ics.

The vilified MNCs that have set up facto-ries in developing nations have done so outof good business sense. By shifting produc-tion to an area where labor costs are leastexpensive, the cost savings can be passed onto consumers. However, MNCs compete forthis labor, creating an incentive for those

companies to make its employment opportu-nities the best choice among competing alter-natives. Companies that establish factorieswith appalling work environments don’tstand a chance competing for workers in afree market. This is why arguments aboutpoor working conditions don’t stand up toscrutiny.

It is true that the wages earned by workersin developing nations are outrageously lowcompared to American wages, and theirworking conditions go counter to sensibili-ties in the rich, industrialized West. Howev-er, I have seen how the foreign-based oppor-tunities are normally better than the localalternatives in case after case, from CentralAmerica to Southeast Asia. There are myriadexamples of large MNCs from the West con-tributing to programs that uplift entire com-munities, such as the maquiladora industrialtowns of northern Mexico that have benefit-ed from improved roads, water-purificationplants, and the construction of entire schoolsystems around new factories.

One must also consider how the machina-tions of special-interest groups in this coun-try affect the public’s image of so-calledsweatshops and the “living wage” issue.Labor unions in the West do not exist todefend the rights of workers throughout theworld. They exist to protect the job securityof their dues-paying members. Union work-ers in the United States whose obsolescingskills put them at risk of losing their jobs tocheaper foreign labor use veiled commentsand outright threats to intimidate lawmak-ers and hide their true intentions of self-preservation. When unions succeed at this,the cost of the inefficiency is spread outamong millions of unsuspecting consumerswho subsidize the unionists’ job securitythrough higher prices.

In other words, anti-trade activists, fromlabor unions to misguided students, try toprevent workers in developing countriesfrom finding better opportunities to raisetheir living standards. Moreover, the pro-testers undermine the sovereignty of con-sumers. Consumers in the rich West, wherethe cost of low-skilled labor is prohibitivelyexpensive, would benefit from the increased

Ideas on Liberty • March 2002

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purchasing power and lower prices madepossible by the shift of certain jobs to thedeveloping world. The individual benefitmay be small when spread out over tens ofmillions of consumers, but in the aggregate iteclipses the cost in lost jobs for a relative fewin the industrialized economies. If anti-tradeactivists have their way, consumers lose.

New Jobs CreatedLabor unions also obfuscate the issue by

claiming that companies which establishoperations in developing nations createunemployment in America. Such a claim isonly half the story. Production in many ofthe most labor-intensive industries has been shifting over the past 25 years from the developed to the lesser-developedeconomies. However, unemployment in thiscountry hit record lows over the same peri-od. The capital freed from inefficient domes-tic lines has been redirected to growth indus-tries where Americans have a comparativeadvantage.

Over the past generation, for every job in the textile or auto industry that was lostin the United States, two or more have been created in high-technology or otheradvanced industries. Rest assured, we prob-ably won’t see large American software firmsopening manufacturing plants in China orlarge pharmaceutical companies relocatingtheir R&D laboratories to Guatemala any-time soon—because high-skilled jobs requirea level of worker education and skills thatpoorer countries cannot provide.

The harm to the parties on the other side

of the equation is barely understood becausethey are thousands of miles away and lackthe cohesiveness to counter the arguments of their developed-world self-proclaimed“advocates.” Suffice it to say, they are notthe ones clamoring for trade barriers to keepout Western corporations or protect ineffi-cient American union workers. They wantjobs and are willing to work for a wage com-mensurate with their productivity in theireconomies.

Sound economics teaches us that pricesinfluence behavior. Wages are nothing morethan the price of labor. If MNCs are com-pelled to pay wages comparable to those inthe United States, even in countries wherelocal labor-market conditions can’t justifythem, there would be no production-costsavings and hence no purpose in relocatingto those countries in the first place. The poorof these less-developed countries would havefewer opportunities for work and would loseall the other benefits of foreign direct invest-ment, which range from technology transfersto international trade integration. Soactivists like the Harvard students whobelieve their protests help the world’s poor-est workers actually harm them by pricingthem out of the market and denying themthe opportunity to develop their skills andeconomies.

Adam Smith’s classic argument that tradeincreases the productivity and prosperity ofall involved still applies today. The wealth ofempirical evidence compiled over the pasttwo centuries bolsters Smith’s argument andshould be used to counter the protests.

It turns out sweatshops aren’t so bad. �

The Virtues of Sweatshops

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America’s Worst Enemyby George F. Smith

Iknow a woman in her mid-80s who’sdoing quite well for herself. She maintainsa house and large yard, cooks for hergrandkids, and enjoys her bridge club.

Yet, given the way our culture works, it’snot unthinkable that Big Brother mightsomeday send her a .38 for her birthday andinvite her to check out.

As shocking as it sounds, this is the kindof outrage to expect when people surrenderresponsibility for their lives to others. Self-styled experts, such as the duty-to-die group,which includes former Colorado governorRichard Lamm, promote their views as goodfor “society.” In their case, they believe ifpeople have reached a certain age they’velived long enough, whether they’re healthyor not.1 Since many of these experts drawgovernment paychecks, should it be surpris-ing when some of their pronouncements getenacted into law?

Let’s say the devil with them and take ourlives back. It starts with an understanding ofthat weighty word, responsibility.

As psychologist Nathaniel Branden putsit, responsibility “requires that you con-sciously become the cause of the results thatyou want. [It is refusing] to behave like a vic-tim or to wait for someone to save you fromlife’s problems.”2

If one result we want is political freedom,how do we consciously create it? By under-

standing what it is and promoting it in ourpersonal and professional lives.

Our founders made exacting efforts toinstitute a government limited to our com-mon defense, one that lacked the power tobe nanny, bully, or thief. Unfortunately, theyalso said the state should promote the gener-al welfare, which has sanctioned a meddlersfree-for-all. But as The Federalist Papersattempted to make clear, this was not theirintention. If we look at history we can seewhy: this country was created by spectacularacts of individual initiative. An obviousexample is the signing of the Declaration ofIndependence. But it spread beyond a hand-ful of elites in Independence Hall.

On July 9, 1776, the Declaration was readpublicly in New York City, the first suchreading outside Philadelphia. It was a docu-ment of outrageous treason to the rulingBritish government. Responsible citizens, nomatter how just their grievances, did nottake up arms against the king.

Some of the audience thought differently.After the public reading, they marched tonearby Bowling Green Park, where stood alead statue of the king surrounded by a largeiron fence. In a frenzy, they ripped down thefence, lassoed the statue, and tore it off itsmarble pedestal. Adding appropriate punctu-ation, they smashed the icon to bits and melt-ed the lead into 42,000 musket balls theylater used to fire upon the king’s soldiers.3

By engaging in political treason againstthe most feared nation on earth, the colonists

George Smith (gfs543@bellsouth.net) is a free-lance writer.

MARCH 2002

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were signing their own death warrants, liter-ally, for the right to take full responsibilityfor their lives.

As Representative Ron Paul, economistWalter Williams, and others have pointedout, the colonists put up with a lot less froma despotic king than we do from our electedofficials.

It’s tempting to believe we no longer fightfor our freedom because the notion of“we’re all in this together” has snuffed outpersonal responsibility. It hasn’t, but itsdecline is being fostered by widespreadsemantic corruption, in which “freedom”has taken on the Orwellian features of slav-ery. The new freedom is “inclusive,” we’retold—as if the original freedom were not—and this requires strong state rule and unlim-ited funding to ensure everyone is equallyfree.

Fortunately, specious reasoning like thishasn’t infected everyone. Two monthsbefore the Event That Changed Everything,citizens in Nashville, Tennessee, becameincensed when they found out politicianswere trying to institute a state income tax inan 11th-hour session of the legislature.Known reverently as the Tennessee TeaParty, over 1,000 people stormed the capi-tol, pounding on doors and hurling rocks atwindows, one of which landed in GovernorDon Sundquist’s office. The protesters ral-lied outside for several hours until the senatebacked down and passed a budget with nonew taxes.4

Tragically, the sounds we heard after the9-11 attacks were more pleading thanprotesting. “Save us,” Americans cried to thegovernment that failed to protect them.

Tightening Government’s GripPoliticians listened once again, but this

time they passed “security” measures that infact do little more than tighten government’sgrip on our lives. For instance, we’re sup-posed to be relieved to know our intelligenceservices can now read terrorist e-mails legal-ly—leaving “terrorist” to be defined as theysee fit—when they already know that majorterrorist organizations rely on steganogra-

phy (hiding files within a file) to communi-cate messages. According to computer foren-sic experts, it’s virtually impossible to evendetect steganographic files, let alone discerntheir contents. So whose e-mail will BigBrother be reading?5

Thankfully, in the post-cataclysmic rushto subdue freedom there have been signifi-cant acts of grassroots rebellion. One of themost brilliant came on September 15, 2001,the first day the government allowed airlinesto resume service. As United Flight 564pulled away from its gate in Denver en routeto Washington, D.C., the pilot told his pas-sengers their lives were in their own handsnow—the government could not protectthem.

“If someone or several people stand upand say they are hijacking this plane,” hetold them, “I want you all to stand uptogether. Then take whatever you haveavailable to you and throw it at them.Throw it at their faces and heads so they willhave to raise their hands to protect them-selves.

“We will not allow them to take over thisplane. I find it interesting that the U.S. Con-stitution begins with the words ‘We, the peo-ple.’ That’s who we are, the people, and wewill not be defeated.”6

31

King George III’s statue being torn down in New York City after a reading of the

Declaration of Independence, July 9, 1776

DO

VER

PU

BLIC

ATI

ON

S

Can you imagine the outcry to such anannouncement before 9-11? The pilot wouldhave likely been furloughed for stress, if notfired, and many of the passengers wouldhave filed complaints.

On this day they broke into sustainedapplause, as did travelers on other flightswho heard similar announcements. The pas-sengers became instant patriots—in the senseof sharing with our founders their willing-ness to take responsibility for their fate.

People will eventually learn that in allow-ing the government to run their lives, it’sruining them instead. It won’t happenovernight, but they will start demanding tohave control back. They will insist that gov-ernment rid itself of anything that interfereswith its proper function of securing our rightto live free.

They will see that their abnegation hasbecome America’s worst enemy by makinggovernment an unaccountable brute thatthreatens their very existence. On that day,self-responsibility, which has manifest sur-vival value, will no longer be an obsoleteideal to be legislated into extinction. �

1. See Stuart Anderson, “The World According to DickLamm,” August 22, 1996; www.cato.org/dailys/7-28-96.html.

2. Nathaniel Branden, “It’s Your Life So Make the Most ofIt,” www.nathanielbranden.net/ess/ess09.html.

3. See http://tlc.discovery.com/tlcpages/newyork/1776.html.4. Leon Alligood, Rob Johnson, and Duren Cheek, “Crowd

Hurls Rocks, Rhetoric to Protest Tax, The Tennessean, July 13,2001; http://tennessean.com/local/archives/01/04/06531563.shtml.

5. Robert Vamosi, “How the NSA Is Monitoring You—AndWhy It’s Wasting Its Time,” ZDNet, June 27, 2001;www.zdnet.com/anchordesk/stories/story/0,10738,2780166,00.html.

6. David Remnick, “Many Voices,” The New Yorker, Octo-ber 15, 2001; www.newyorker.com/THE_TALK_OF_THE_TOWN/CONTENT/?011015ta_talk_comment.

Ideas on Liberty • March 2002

32

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By definition, diseases are afflictions ofthe body. Hence, afflictions of themind, called “mental illnesses,” are notreal diseases. Organized psychiatry

deals with that embarrassing fact byreasserting its age-old claim that “mental illnesses” are brain diseases and enlisting the power of the state to turn fiction intofact.

In October 2001 the Senate approved abill, spearheaded by Senators Pete V.Domenici and Paul Wellstone, outlawingdisparities between insurance coverage formental and physical illnesses. Domenici, thepapers reported, “has a daughter with schiz-ophrenia, and Senator Paul Wellstone,Democrat of Minnesota, whose brother hassevere mental illness, pleaded with Housemembers to outlaw the widespread limits ontreatment for psychiatric disorders.” Virtu-ally without dissent, the media endorsed thecry for “parity.” Nevertheless, on December18, House members of the conference com-mittee rejected the Senate proposal by aparty-line vote of 10 to 7, Republicans vot-ing no, Democrats voting yes.

For all practical purposes, there was nopublic debate about the pros and cons ofusing the power of the state to compel insur-ance companies to sell, and the public to buyand pay for, insurance for psychiatric treat-ment. The Washington Times, however,published my critique of the then-pending

legislation as an op-ed article (December 9,2001). In part I said:

“All too often,” complained Sen.Pete V. Domenici, New MexicoRepublican, “insurance discriminatesagainst illnesses of the brain.” Thatstatement—and the argument for so-called parity for mental illness it sup-ports—is simply not true. Neurologistsand neurosurgeons do not lobby forparity insurance for their patientsbecause insurance companies have nospecial exclusions for patients withneurological diseases. Only psychia-trists lobby for such “parity.”

Advocating “parity for mental ill-ness” is a hoax. The supporters of“mental health parity” do not wantparity for mental patients: They do notseek equal “legal treatment” by legisla-tors and courts for mental patients andmedical patients. What they want isparity for psychiatrists: They seekequal “monetary treatment” by healthinsurance companies for psychiatristsand other physicians.

The phenomena we label as mentalillnesses are not brain diseases, andeveryone knows it. That is why psychi-atrists protest that mental illnesses arebodily diseases, and why politiciansproclaim the disease status of mentalillness. Politicians say that mental dis-eases are brain diseases, but don’tmean it. Lawmakers regard mental dis-eases as quasi-crimes: They pass laws

The Therapeutic State by Thomas Szasz

Parity for Mental Illness,Disparity for Mental Patients

Thomas Szasz (tszasz@aol.com) is professor ofpsychiatry emeritus at SUNY Upstate Medical Uni-versity in Syracuse.

MARCH 2002

33

that authorize psychiatrists and judgesto deprive innocent persons of libertyby confining them in mental hospitals.There are commitment laws for per-sons diagnosed with mental diseases;there are no such laws for personsdiagnosed with brain, lung, or liverdiseases. Mental patients are oftentreated against their will and they canplead mental illness (insanity) as anexcuse for murder; medical patientscannot be treated against their will andcannot plead bodily illness (brain dis-ease) as an excuse for murder. So muchfor parity for patients.

Sooner or later, we shall have toconfront the nature of “mental illness”and the differences between the legalstatuses of mental patients and medicalpatients. The longer we postpone thisconfrontation, the greater will be theinjury inflicted on our health care sys-tem and on the moral fabric of oursociety.

In a letter to the editor of the Times, datedDecember 16, Richard K. Harding, presidentof the American Psychiatric Association(APA), responded:

A Dec. 9 Commentary column inThe Washington Times focused on theparity of mental illness and questionedthe reality of mental illness, ostensiblyarguing against parity with the premisethat mental illness does not exist as amedically treatable disorder. . . . Iencourage anyone who doubts the real-ity of mental illness to talk with a par-ent of a child with schizophrenia ormanic depression. Mental illnesses arereal, treatable brain diseases thatrequire diagnosis and treatment bytrained physicians. The editorial is aslap in the face at those among us whohave mental illnesses. It essentially saysthat people with mental illness do notdeserve appropriate medical treatment.

. . . It is astonishing that people stillrevert to the Dark Ages to perpetuatethe stigma associated with mental ill-ness. It is time to recognize that mentalillnesses are real and that they respondto appropriate medical treatment.

Assertion is not evidence. By urging “any-one who doubts the reality of mental illnessto talk with a parent of a child with schizo-phrenia or manic depression,” Dr. Hardingimplies that parents of mentally ill childrenare experts on diagnosing brain diseasescalled “mental diseases.” If this is so, thenthose parents do not need doctors to deter-mine if a child has a disease. They need doc-tors only to prescribe drugs to treat the illness.

Dr. Harding considers my piece “a slap inthe face at those among us who have mentalillnesses.” But where is the insult? SupposeJones believes he has diabetes and is told hedoes not have the disease. He would feelrelieved, not insulted. Similarly, there arecountless persons, throughout the world,who are grateful for, not insulted by, my“denial of mental illness”: they do not wantto be defaced by psychiatrists. The only people who feel slapped in the face by my views are individuals who want to profit—economically, existentially, or both—fromusing the concept of mental illness andclaiming it is a disease like diabetes: psychi-atrists, politicians, and “professional mentalpatients.”

Since Dr. Harding’s comments were,oddly, focused on children afflicted withmental diseases, it must be emphasized thatchildren with medical diseases, such as dia-betes or Hodgkin’s disease or lupus, are usu-ally better behaved and more responsiblethan their healthy counterparts. The oppo-site is the case for children with “mental dis-eases.” No doubt inadvertently, Dr. Hard-ing’s letter supports the view that a personwith a psychiatric diagnosis is an individualwhose behavior displeases or upsets personswho have power over him. �

Ideas on Liberty • March 2002

34

Prescription Drugs and Advertisingby William L. Anderson

In the continuing debate over the prices ofprescription drugs, Ellen Goodman, aPulitzer Prize-winning columnist, believesshe has found the real answer to why

many drugs are so expensive. The culprit,she says, is advertising, and lots of it. Shewrites: “Pharmaceutical companies tell usthat the cost [of drugs] is connected toresearch and development. No cost, no cure.But major drug companies, as a FamiliesUSA report shows, spend more on market-ing, advertising, and administering than onR&D. Indeed, some of what they callresearch—Let’s color that pill purple!—iswhat we call marketing.”1

Goodman is hardly alone in her views.Indeed, people on all sides of the debateoften say the same thing. Drug companies docite R&D costs as a major contributor toprescription drug prices, just as oil compa-nies cite the high cost of crude oil for highgasoline prices. In other words, according tomost who participate in such debates, costsdrive prices. To be more specific, these folkshold that the costs of the factors of produc-tion (or what economists call inputs) direct-ly determine the prices of the final productsthat individuals consume.

Government regulators usually base pric-ing policies on this “cost-plus” notion of

prices. For example, when the U.S. govern-ment regulated gasoline prices during the1970s, regulators tied increases in pumpprices to price increases in crude oil. Ofcourse, those regulators also forbade gaso-line retailers to raise pump prices immedi-ately after crude prices increased, since itwould take four to six weeks before thehigher priced crude actually became usablegasoline. Therefore, retailers had to waitbefore being permitted to raise prices.

(It does not take an economic expert toknow what chaos this system created. Con-sumers, correctly anticipating future priceincreases, quickly increased their demand forgasoline purchases in the present. Becauseretailers were not able to raise prices in thepresence of demand increases, it did not takelong for anxious buyers to strip current sup-plies, leading to the infamous “Sorry! Out ofGas” signs that began to appear at gas sta-tions across the country.)

The notion of cost-plus pricing is hardlynew. Many ancient scholars, in search of the“just price,” assumed that such a price hadto be based on production costs. However,as Murray Rothbard noted, by the MiddleAges many of the Scholastic writers had jet-tisoned that view for a utility-based interpre-tation of value.2 In fact, it wasn’t until therise of the English classical economists of theeighteenth and nineteenth centuries, includ-ing Adam Smith and David Ricardo, thatcost of production once again took centerstage.3

William Anderson (banderson@mail.frostburg.edu) is an assistant professor of business manage-ment at Frostburg State University, Frostburg,Maryland.

MARCH 2002

35

Economics

Had the classical view been correct, folkslike Ellen Goodman and the government reg-ulators would have been justified in believingthe cost of production ought to determineprices. However, the cost-of-production the-ory of value has a number of inherent prob-lems, the chief one being that it explainsnothing.

If one were to employ the cost-of-production theory to explain the price of mycomputer, the causality might go as follows:the price comes from the cost of the factorsof production that went into making thecomputer, including labor, raw materials,components, and the machinery (capitalgoods) that assembled them.

Fine enough, one might say, but fromwhere did those costs come? A classicaleconomist might answer that those costscame from the costs of the factors that pro-duced the capital goods and raw materials.The costs of raw materials would come fromthe land and labor. Karl Marx reduced allproduction to labor in his variation of thelabor theory of value. (Marx developed histheory of value from the “cost of produc-tion” theories of Adam Smith and DavidRicardo. He took those theories to their log-ical conclusion in developing his own inter-pretation of value.)

The problem is that we are stuck in anendless regression. Costs begat costs, but noone seems to be able to tell from where theoriginal costs of land and labor emanated. Inother words, one concentrates on effect, butcannot locate the original cause. (Marx doesnot provide a solution either, because he

does not provide a causal mechanism forlabor’s value. Should a worker be paid $3 or$300 an hour? Marxism cannot answer thatquestion.)

Utility Theories of ValueA general utility theory of value seems to

offer an alternative to the cost theory, but italso has severe limitations. For example, thefamous diamond-water paradox came fromthe confusion caused by general utility valu-ation. Water is more important to life thandiamonds. Therefore, given a general utilityview, water is more valuable than diamonds,yet in most cases the cost of potable water(at least in this country) is nearly nothing,while your friendly jeweler demands bigbucks for diamond jewelry. As a Marxistwho teaches economics once told me, thediamond-water paradox is “proof” that cap-italism has distorted the values of society.

Yet no distortion exists. As I wrote inthese pages previously, “Value . . . is deter-mined by the usefulness of the marginalavailable unit of the item in question, ormarginal utility. An individual imputes valueto a particular unit of water, not to the over-all characteristics of water itself.”4

Furthermore, as Carl Menger, the founderof the Austrian school of economics, pointedout in his 1871 classic, Principles of Eco-nomics, the value of factors of productionultimately depends on the value that con-sumers place on the final (consumption)good made from those factors. For example,before people discovered they could distill

Ideas on Liberty • March 2002

36

One could say that a marketing campaign for a certain newdrug does not drive up the price of drugs. Instead, a companywill engage in a potentially costly but wide-ranging marketingplan for the drug because people at the firm believe the newdrug will be profitable. The value of the marketing plan isderived from the value that consumers place on the drug, not the other way around.

kerosene from crude oil, crude was mainlyseen as a nuisance. Before the developmentof kerosene, people in western Pennsylvaniadrilling for water who instead hit oil did notthink of themselves as fortunate. Instead,they cursed their bad luck.

In other words, oil-derived products likegasoline and heating fuels do not gain theirvalue from crude oil or from any of theprocesses involved in the creation, trans-portation, or sale of fuels. Instead, crude oil,refining, and transportation of oil productsall receive their value from the value of thefuels, nylon, and other oil-derived productsthat consumers use.

Menger asked what would happen to thevalue of factors of production used for mak-ing tobacco products if everyone were tostop consuming tobacco. He noted “finishedtobacco products” would lose their value.But that’s not all: “A further consequencewould be that the raw tobacco leaves, themachines, tools, and implants applicableexclusively to the processing of tobacco, thespecialized labor services employed in theproduction of tobacco products, the avail-able stocks of tobacco seeds, etc., would losetheir goods-character.”5 Obviously, amongthe labor services losing value would be themarketing of tobacco products.

To place Menger’s analysis in the contextof marketing drugs, one could say that amarketing campaign for a certain new drugdoes not drive up the price of drugs. Instead,a company will engage in a potentially cost-ly but wide-ranging marketing plan for thedrug because people at the firm believe thenew drug will be profitable. The value of themarketing plan is derived from the valuethat consumers place on the drug, not theother way around.

Another way to look at this issue is to dowhat Goodman implies should be done:

eliminate most of the marketing. In her viewthe “cost” of drugs would be lower, whichwould mean they could be sold to the publicfor less. This is a rather naïve view of things.A firm does not employ marketing to raiseits costs. Instead, it engages in marketing toinform the buying public (and especiallydoctors who will write prescriptions) of thedrug’s effectiveness. Without marketing, itwould be unable to get out the necessaryinformation to make its drug salable in thefirst place.

In short, commentators like Goodman—aswell as those who publicly represent the drugindustry—have the scenario backwards. Thevalue of a drug is decided in the marketplace,with consumers driving the whole process.Granted, there are factors that keep drugprices high, like patents and third-party pay-ments through insurance and government.The patents restrict the amount that will bemade available, while third-party paymentshelp keep demand at high levels.

But those facts cannot change the principlethat consumer demand ultimately determinesnot only the value of an end product, but alsothe value of all of the factors of production(including marketing) that go into making itavailable to people. Marketing doesn’t driveup the price of a drug; rather, the prospect ofa drug’s benefits (hence, its profitability)makes its marketing valuable. �

1. Ellen Goodman, “Prescription Drug Ads Drive Up Costs,”Greenville (S.C.) News, July 15, 2001, p. G3.

2. Murray N. Rothbard, “New Light on the Prehistory ofthe Austrian School” in Edwin G. Dolan, ed., The Foundationsof Modern Austrian Economics (Kansas City, Mo.: Sheed &Ward, Inc., 1976), p. 54.

3. While the English Classical economists gave us manyimportant ideas regarding creation of wealth and the impor-tance of laissez faire, their value theory was less than desirableand, according to Joseph Schumpeter, actually pushed econom-ic analysis down the wrong path (Rothbard, p. 53).

4. William L. Anderson, “In Praise of Athletes’ HighSalaries,” Ideas on Liberty, August 2000, p. 9.

5. Carl Menger, Principles of Economics (New York: NewYork University Press, 1976), p. 65.

Prescription Drugs and Advertising

37

Protecting Precious Resourcesby Scott McPherson

Ever since President George W. Bushproposed opening up parts of the feder-ally owned Arctic National WildlifeRefuge (ANWR) for drilling, the debate

has raged over America’s energy policies andthe best way to guarantee independencefrom foreign energy, particularly oil,sources. In battles typical of American poli-tics, these arguments have never focused onthe proper role of government and how bestto insure a free society in an increasinglyinterdependent world. Instead the argumenthas revolved around the popular collectivistnotion of community ownership.

A common refrain these days is that gov-ernment, especially the federal government,has a duty to act as a “steward” over “our”natural resources. This is often stated in veryexplicit terms—that woodlands, oil-richlands, and natural-gas deposits, among otherthings, are “national” property, requiringstate ownership and, of course, bureaucraticcontrol. Whenever the issue of naturalresources is raised, it is accepted as giventhat elected officials know better than entre-preneurs how to provide for the needs of the

American people. Such thinking is danger-ous not only because it is wrong, but alsobecause it feeds the growing trend in main-stream thinking that the products of themarketplace are Americans’ by right.

The most common mistake in this discus-sion is the assumption that because a specif-ic commodity happens to lie within the polit-ical borders of a country, it is a “national”good. For example, because ANWR is in thestate of Alaska, anything of value therebelongs collectively to the American peo-ple—which means, in effect, that it belongsto the federal government. The question toask is, should government own resources?Do we want it dictating the terms by whichcertain commodities will be released into theeconomy, and is this the best way of secur-ing their long-term use?

To many people, the answer is categori-cally yes. Who, they ask, is going to assurethe continued provision of oil, gasoline, orwood, if private interests are allowed toexploit them for profit. If left to the free mar-ket, they believe, there simply wouldn’t beany of these stocks left, as more and moregreedy businessmen pulled them from theground to offer up to a consumption-madpopulace.

Scott McPherson (mcpherson0627@juno.com) is afreelance writer in Tulsa, Oklahoma.

MARCH 2002

38

“If our progress is to continue, it is important that we do notforget the things which have brought us thus far.”

—HENRY GRADY WEAVER, The Mainspring of Human Progress

Critics of the free market want things bothways in this respect. On the one hand, it ispresumed that if private companies wereallowed to own “vital” resources, theywould rush to flood the market in the hopesof quick gains and deplete the supply. How-ever, it is by increasing supply that prices arecaused to decline, not rise. Conversely, oth-ers fear that these resources would be hoard-ed and kept off the market for the oppositereason—to raise the price. That hardly jibeswith fears of quick exhaustion.

It is precisely because of the profit motivethat precious resources would be the mostsecure in private hands. If someone ownssomething of value, the last thing he wantsto do is anything that would depreciate hisinvestment. Woodland is only valuablebecause of the large number of trees on it,which is why timber companies not behold-en to government replant their forests andavoid clear cutting. Natural-gas deposits,too, are no good once they are gone. Afterlast year’s huge increase in the cost of natur-al gas, providers didn’t sit on their laurelsand allow the price to continue to skyrocket.They invested heavily in finding more.

Government, by contrast, has no realunderstanding of the usefulness and impor-tance of what it owns, exactly because itnever has to face any economic conse-quences for its bad business decisions.

What Is Precious?More important, those who call for gov-

ernment control of certain commodities liveby an arbitrary definition of what is consid-ered “precious.” If only government can betrusted with property deemed of vital impor-tance to our “national well-being,” then awhole host of things should be added to thelist of “national resources”—not the least ofwhich are our automobiles, farms, supermar-kets, and large manufacturers. No one but

the most hardcore Marxist would suggestthat these life-affirming goods and services benationalized, yet a piece of frozen real estatein the Arctic Circle is “too important” to beleft to the “instability” of the free market.

The longer this debate goes on, the more itsounds like Americans view their conve-niences as a God-given right. The Declara-tion of Independence mentioned life, liberty,and the pursuit of happiness—not cheapgasoline, bountiful harvests, and inexpensiveheat.

Electricity, food, homes, computers, med-icine, cars, and the fuel needed to powerthem are the products of the labor of indus-trious people who sought to satisfy unful-filled desires. The resources they had to useto create those goods are only valuablebecause someone invested the time and ener-gy required to extract them from the earth.We are suffering under a dangerous illusionwhen we allow a disconnect between theindividual initiative and motivation thatmade all these marvels available and individ-ual ownership of the basic means of produc-tion—the land itself. Claims that govern-ment should manage the resources that pro-vide the living standards we enjoy ignore thefact that government had nothing to do withcreating that standard of living in the firstplace.

Government should have no role in theenergy business, or any business for thatmatter, because it is inconsistent with itsstated goal of preserving the rights of its cit-izens. It is government’s job to protect theproperty rights of the entrepreneur seekingto exploit natural resources—not competewith him. With bureaucrats and politiciansout of the way, profit-driven individuals willdo all that needs to be done to assure thatwants and needs are fulfilled in a timely andefficient manner for as little as possible. Let’snot pretend that government can do thatjob. �

39

Last month I discussed the prisoners’dilemma, in which everyone is motivat-ed to behave in a way that leaves every-one worse off. One can appreciate mar-

ket exchange by understanding how privateproperty and voluntary exchange eliminate adestructive prisoners’ dilemma—one inwhich the best choice for everyone is to tryto live at everyone else’s expense. The resultis general poverty, coupled with the loss offreedom to a repressive state justified in thename of overcoming the prisoners’ dilemma.

But even when a country has a well-functioning market system, some govern-ment action is commonly justified as neces-sary to overcome serious prisoners’ dilem-mas. For example, making sure that peopleobey the rules of the market (respecting theproperty rights of others and abiding by con-tractual agreements) can be thought of asovercoming a prisoners’ dilemma. If every-one else obeys the rules of the market, theeconomy will be extremely productive, butan individual can do better by stealing anddefrauding others (without sanctions againstthis behavior) than by being productive. Asa few violate the rules of the market, obey-ing the rule becomes less beneficial to others,and a few more will begin to violate therules, which can lead to an unraveling asincreasing numbers steal and defraud.

Engaging in productive effort becomes fool-ish. The only way out of this prisoners’dilemma is by imposing sufficiently severepenalties on theft and fraud so that they payless than productive effort. Most peoplebelieve that only government can effectivelyimpose such sanctions.1

Government is also widely believed neces-sary for overcoming the prisoners’ dilemmain providing what economists call publicgoods—goods that, once provided to oneperson in a community, are available to all.Flood prevention is the standard example.The benefit you receive from preventing aflood does nothing to reduce the benefit yourneighbors receive. With most goods, thesame unit cannot be consumed by more thanone person—the apple you eat is one that Icannot eat; the clothes you wear are clothesthat I cannot wear, at least not at the sametime. These goods are called private goods.

One might think that public goods aregreat—just provide enough for one personand you have provided enough for all. Butpublic goods present a serious problemwhen, as is sometimes true, it is difficult toexclude people from benefiting from thegood once it is provided. Again, flood pre-vention comes to mind. If my neighbor isprotected against a flood, so am I. The prob-lem is that it is difficult to get people to vol-untarily pay for a non-excludable publicgood because each person can hope to free-ride from the payments of others. In otherwords, a non-excludable public good putspeople in a prisoners’ dilemma.

To pick a simple example, assume that

Economic Notions by Dwight R. Lee

The Cure Can Be Worse than the Disease

Dwight Lee (dlee@terry.uga.edu) is Ramsey Pro-fessor at the Terry College of Business, Universityof Georgia, and an adjunct fellow at the Weiden-baum Center on the Economy, Government, andPublic Policy at Washington University in St. Louis.

40

Economics

100 people live in a flood plain and eachwould realize $500 worth of benefit frombuilding a levee along the nearby river at acost of $250 for each person. Clearly every-one would be better off contributing the$250 to build the levee. But no matter whateach person believes others will do, he is bet-ter off not contributing. If enough otherscontribute, the levee will be built and hereceives the benefits for nothing, but itwould be useless for him to contribute if fewothers do. With everyone responding to thesame incentives, no one contributes andeveryone is worse off than they could be.

Supposedly, by being able to force peopleto pay taxes, government makes everyonebetter off by eliminating the prisoners’dilemma we would otherwise face. Byrequiring that everyone either pay $250 intaxes or go to jail, the prisoners’ dilemmahas been eliminated—and assuming the gov-ernment uses the revenue to build the levee,everyone comes out ahead—the value theyreceive is greater than the taxes they pay.

Few Public GoodsHowever, there are far fewer public goods

than claimed that really justify taxation andwealth transfers. There is hardly an orga-nized interest group in existence that hasn’targued that its activities are vital to nationaldefense and therefore the government shouldtake wealth from others for its benefits: woolsubsidies (soldiers wear clothes), agriculturalsubsidies (soldiers eat), import restrictionson shoes (soldiers wear shoes), special taxbreaks for mining (provides raw material forweapon production), programs for storingfeathers (to insure the availability of downfor jackets if we are involved in an arcticwar), and the list can be continued. None ofthese things are public goods, and even ifimportant to national defense, they are bestprovided in markets undistorted by govern-ment subsidies and transfers.

Also, even when a good is a public good,it is often possible to exclude nonpayers and

provide it more efficiently through privatemarkets than through government. For yearseconomists have used the lighthouse to illus-trate a public good—the benefit that oneship received from the beacon did not reducethe benefits other ships could receive. But in1974 the Nobel prize-winning economistRonald Coase pointed out that many light-houses were privately provided in eighteenth-century England, with owners collectingpayment from ships as they docked at near-by ports.2 A television program, once it hasbeen broadcast, is a public good, but it canbe (and generally is) privately provided bygetting viewers to pay either indirectly bywatching commercials or directly throughpay-TV arrangements.

Arguments are often made for governmentexpansion to solve problems that aren’tproblems at all. Of course, some interest isalways served by government “solutions” tononproblems, and not surprisingly govern-ment often steps in when it is not neededwith actions that create real problems,which—surprise—are used to justify yetmore government action. Even when a pris-oners’ dilemma prevents the private marketfrom working with textbook perfection andit is theoretically possible for governmentaction to improve things, it is seldom justi-fied. Government action is invariably poorlyinformed, guided by motivations that havelittle to do with solving genuine problems,and almost always makes the problems it issupposed to solve worse.

One explanation for government’s poorperformance is that although it can some-times solve some prisoners’ dilemmas, itdoes so only by creating other, and com-monly worse, prisoners’ dilemmas. This willbe the subject of next month’s column. �

1. Strong arguments have been made that private arrange-ments would arise without government coercion to establishand enforce the laws necessary for the proper functioning ofmarkets. See Bruce Benson, The Enterprise of Law: JusticeWithout the State (San Francisco, Calif.: Pacific Research Insti-tute for Public Policy, 1990), and David Friedman, The Machin-ery of Freedom: Guide to a Radical Capitalism (LaSalle, Ill.:Open Court, 1989), chapters 28–31.

2. Ronald Coase, “The Lighthouse in Economics,” Journalof Law and Economics, October 1974, pp. 357–76.

41

Do Big Corporations Control America?by James Rolph Edwards

Since the mid-eighteenth century thedevelopment of market-based societiesin America and elsewhere, with consti-tutional protections of property and

freedom, has had startling effects. Well over90 percent of the improvement in the mater-ial living standards of ordinary persons thathas occurred in the 6,000 years of recordedhuman history has occurred in that last 250years and in those nations. Mean lifeexpectancy in the United States rose from 35years in 1800 to 50 in 1900, and around 76in 2000. Famine in such nations disappearedand many diseases were conquered. All thisresulted from replacing the caste and statusrelationships of medieval society with con-tract relationships between mutually con-senting adults, while restricting the power ofgovernment to enforcing contracts, provid-ing national defense, preventing crime, and afew other basic functions.

Despite the enormous gains this form ofsocial organization generated for ordinarypeople, particularly in America, a politicaland ideological reaction began after the CivilWar, when industrialization was proceedingrapidly, and lasted more than a century. Akey claim of the partisans of this view—whooriginally called themselves Progressives—isthat large corporations not only dominatecapitalist society economically, essentially

abolishing market competition, but alsodominate the political system. So most, if notall legislation, serves the wealthy corporateinterests. Karl Marx may have originated thisargument, but to this day, shorn of its Marx-ist metaphysics, it is the majority perspectiveamong the intellectual and political classes inAmerica. Even many conservatives, and afew libertarians, adhere to this perspective.

Most staunch free-market advocates andpolitical libertarians argue, to the contrary,that the dominant political and ideologicalimpulse of the twentieth century in Americaand the West has been statist and anti-capitalist. In this view the “corporate domi-nation” argument is simply a key element inthat statist ideology, used to justify legisla-tion enhancing governmental power andreducing human freedom. In an essay pub-lished several decades back, Ayn Rand madethe connection clear when she wrote: “Everymovement that seeks to enslave a country,every dictatorship or potential dictatorship,needs some minority group as a scapegoatwhich it can blame for the nation’s troublesand use as a justification of its own demandsfor dictatorial powers. In Soviet Russia, thescapegoat was the bourgeoisie; in Nazi Ger-many, it was the Jewish people; in America,it is the businessmen.”1 Rand went on toclaim, with some justification, that business-men, big businessmen in particular, wereAmerica’s most persecuted minority, usingthe inequities of the antitrust laws to illus-trate her argument.

James Rolph Edwards (edwardsj@msun.edu) is anassociate professor of economics at MontanaState University-Northern in Havre, Montana.

MARCH 2002

42

Certainly, things are somewhat morecomplicated than Rand claimed in thatessay. One need not believe that an all pow-erful conspiracy of international bankersand wealthy capitalists lies behind the statistmovements of our day to recognize thatbusinessmen have often supported exten-sions of state power. This was particularlyso in the decades after World War I.Woodrow Wilson had centralized power inWashington during the war and exercisedregulatory command and control over theeconomy. He drew many corporate execu-tives into the government to operate thebureaus he created, and many of themfound they preferred issuing and enforcingorders over attempting to motivate andmanage voluntary, contractual employees,who could quit at will.

Thus some big-business executives came tothe same elitist, technocratic view held bymost intellectuals and academics: that ordi-nary people are too ignorant to run their ownlives, much less largely determine, throughtheir consumption and employment choices,the allocation of resources in society. It fol-lows, in this view, that experts should runthings by fiat, maintaining only a thin veneerof democracy and free markets. FranklinRoosevelt drew heavily on this pool of statistbusiness executives to staff his administra-tions during the Great Depression.

Economists have also found reason to rec-ognize that businessmen often act to extendgovernment power and attenuate marketcompetition. George Stigler developed theeconomic theory of regulation in the late1960s, arguing that, instead of regulationbeing imposed on industries in genuinedemocratic response to the desires ofoppressed and abused consumers, firmsoften actually seek government regulation inan effort to gain monopoly or cartel powersthey cannot obtain by market methods. Thehistorian Gabriel Kolko, in a detailed studyof the Progressive era, made a similar argu-ment a few years before Stigler. Rand her-self, in many of her works, recognized theexistence of such corrupt businessmen. Thusstatist and corporate interests and ideologymay converge at least to some degree, leav-

ing a limited-government, free-market per-spective as the only logical opposition.

Temporary AlliesStill, businessmen and statists can at best

be temporary and uneasy allies. The majori-ty of businessmen are honest, and unlike theintellectual, academic, and bureaucraticclasses in America, where a statist view dom-inates, business interests are too diverse togenerate a consistently statist legislativeimpulse. Some import-competing businesses,for example, will lobby for government topass a tariff to raise the price of a productthey sell domestically. Other businesses thatuse that product as an input, however, willoppose the tariff. Also, attitudes of firmstoward regulation sometimes reverse. Theairline industry sought the creation of theCivil Aeronautics Board and the airline car-tel in the 1930s. But when their profits wereabsorbed by airline unions in the 1970s andmany airlines were frustrated by the CAB intheir efforts to compete on particular routes,much of the industry supported deregula-tion. Business groups donate to all influ-ential parties and political groups, unlikelabor unions, which donate exclusively tostatist groups. Much business lobbying isessentially defensive, aimed at staving offoppressive and costly regulation, oftenunsuccessfully.

Most of the basic legislative structure inAmerica conflicts with the view that legisla-tion is dominated by wealthy corporateinterests. Consider the tax structure. If suchinterests dominated, would the SixteenthAmendment ever have been adopted? Wouldthe personal income tax it allowed Congressto establish have become progressive, with atop rate that at times has been as high as 90percent? Would over 70 percent of all rev-enue collected through the personal incometax come from the top 20 percent of income-earning families, as it has since the mid-1990s?

Again, if the wealthy corporate interestsdominated government and legislation,would there ever have been a corporateincome tax? Such a tax, levied on the net

43

income of firms before distribution toinvestors, actually taxes the incomes ofstockholders twice. That is because all thenet income of the firm is generated by capi-tal supplied by those investors, whoseincomes are then taxed again, through thepersonal income tax, after distributionthrough stock dividends. As a result, theactual tax rate on investor income is enor-mously higher than the stated personalincome tax rate. Certainly, rational capital-ists would not have allowed such a grosslyunfair and costly law to pass had they thepower to stop it. The corporate income taxdisadvantages corporations relative to otherforms of business organization, such as part-nerships and proprietorships, which sufferno such double taxation. If wealthy corpo-rate interests dominated our political system,would they ever have allowed such a thing?

Similarly, would they have accepted a lawcompelling businesses to withhold the taxesof employees? Income-tax withholding forcesfirms to act as tax collectors for the govern-ment at their own expense. This is done with-out compensation of any kind, in violation ofthe Fifth Amendment takings clause of theConstitution, and against their wills, in viola-tion of the Thirteenth Amendment injunctionagainst involuntary servitude. Withholdingimposes an economic burden that corporateor other business interests would not havewillingly accepted had they the power to pre-vent it. Do not such policies in fact reflect ananti-capitalist animus?

Corporate Control?The notion that a corporate elite domi-

nates the nation politically presumes alsothat large corporations are able to controlprices, output, and entry in their industrieson an enduring basis, as John Kenneth Gal-braith has long claimed. Though in someindustries this has clearly occurred, preciselythrough corporate lobbying to secure fran-chises and monopoly or cartel protection(the electric utilities are a good example),there is precious little evidence of any suc-cessful system-wide abolition of competi-tion. Precisely the opposite seems to be the

case. The turnover of dominant firms in par-ticular industries is far too high, and themarket shares of firms in concentrated mar-kets far too unstable year to year, to supportany view that being top dog guarantees con-tinued dominance. Add to this the rapid andconstant innovation we observe, and suchturnover and market-share instability indi-cates that most firms gain large marketshares by satisfying customers with lowerpriced and/or higher quality products thantheir competitors, and lose share when theystop doing so.

The evidence regarding macro concentra-tion points to the same conclusions. Anysimple comparison of the Fortune 500 listsof the largest industrial corporations in1980, 1990, and 2000, for example willimpress an observer with the impermanenceof corporate domination. Likewise, GaryQuinlivan recently compared the Wall StreetJournal lists of the world’s top 100 firmsranked by market value for 1990 and 1999,and found that there were 66 new firms inthe 1999 list. He also reports that the Unit-ed Nations, comparing lists of the top 100nonfinancial multinational corporations for 1990 and 1997, found a 25 percentturnover. This is less impressive than theWall Street Journal comparison, but still anenormous turnover of top firms in just a fewyears.2

Using data available in the 1986–to–1996editions of the Statistical Abstract of theUnited States, I recently found some remark-able changes in U.S. macro concentrationbetween 1980 and 1993. The 500 largestindustrial corporations in the United Statesemploy a large fraction of American work-ers, embody a large part of our productiveassets, and produce a large share of ouraggregate output. Over those 13 years, how-ever, the assets of the top 500 industrialfirms, as a share of total corporate assets, fellby over 20 percent. Employment in the top500 firms, as a share of total employment inthe country, fell even more, by 29 percent.And most amazing of all, the share of grossdomestic product generated by those firmsfell by an astonishing 39 percent over thatshort period.3

Ideas on Liberty • March 2002

44

Clearly, the turnover in any list of thelargest corporations is inconsistent with thenaïve view that large firms are able to abol-ish competition and insure their continueddominance. So is the evidence on the output,employment, and assets of large firms in theaggregate. Assets, employment, and marketshare have clearly shifted significantly tosmall- and medium-sized firms in the lasttwo decades. Such firms have competed withincreasing success against larger corpora-tions in a computerized and internationallyintegrated economic environment. Wouldany economically and politically dominantclass of wealthy capitalists in big corpora-tions have allowed such an enormous declinein their relative wealth and power to occur ifthey could have stopped it?

In fairness, it should be noted that theseeconomic events are also not entirely con-sistent with the view that the statist andanti-capitalist ideology held by most mem-bers of the intellectual, academic, bureau-cratic, and media elites still dominates thelegislation process. Certainly that was truefor most of the twentieth century, as illus-trated in the graph showing both federalgovernment expenditures (FGE) as a frac-tion of gross national product and the sumof federal and state expenditures as a frac-tion of GNP from 1929 to 1990. The datacome from various volumes of The Eco-nomic Report of the President, which isissued annually by the President’s Councilof Economic Advisers. The growth in

FGE/GNP, from about .025 (or 2.5 per-cent) in 1929 to .233 in 1990, nearly tentimes as large, clearly, if imperfectly, docu-ments the size and growth of the leviathanstate.

Since about 1980, however, the ideologi-cal and political grip of statism has begun toloosen. Statist policies of regulation andincome redistribution have visibly failed.Slowly, some of the statist fetters have beenlifted from the economy, allowing entrepre-neurship and economic growth to continue.Federal outlays actually fell from 21 percentof gross domestic product in 1994 to only18.8 percent in 1999 (GDP replaced GNP inthe National Income and Product Accountsafter 1990). This nearly 10.5 percent declinein the relative size of government, and com-mensurate release of resources to the privatesector, more than any other thing, account-ed for the rapid economic growth of the late1990s. Many statist policies still advance, ofcourse. Things hang in the balance, but thetide seems to have incrementally turnedtoward restoration of a freer society.Whether that trend will continue or bedeflected in a statist direction again by theterrorist attack of September 11 remains tobe seen. �

1. Ayn Rand, “America’s Persecuted Minority: Big Busi-ness,” in Ayn Rand, ed., Capitalism: The Unknown Ideal (NewYork: Signet, 1967), p. 45.

2. Gary Quinlivan, “Multinational Corporations: Mythsand Facts,” Religion and Liberty, November and December2000, pp. 8–10.

3. James Rolph Edwards, “The Myth of Corporate Domina-tion,” Liberty, January 2001, pp. 41–42.

Do Big Corporations Control America?

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1989

Beijing Erodes Hong Kong’sLaissez Faireby Christopher Lingle

While the rest of the world is debat-ing the terms under which theymight engage China, authorities inBeijing are busy trampling on its

agreement with the British over HongKong’s return to Chinese sovereignty. In thehandover agreement, both parties agreed onHong Kong’s mini-constitution, the BasicLaw, as a document that provided assur-ances for Beijing’s “one country, two sys-tems” pledge.

Most visitors to the former CrownColony, now known as the Hong Kong Spe-cial Administrative Region (SAR), wouldthink that little had changed there. And theyare partly right. Little has changed on thesurface. Unfortunately, there has been a con-stant erosion and corrosion of the basicinstitutions Beijing promised to leave unsul-lied and intact.

It is clear that China’s authoritarian lead-ers hope that they can subvert these institu-tions to serve their own ends. On the onehand, they implemented a rigged electoralsystem that dilutes the democratic processand marginalizes reformists who promotedemocracy. At the same time, Beijingappointed a congenial but administrativelychallenged chief executive for the SAR toinsure compliance with their demands.

This would have been bad enough. How-ever, there has also been a weakening of thejudicial system. It bears pointing out that theopenness and transparency of Hong Kong’slegal system was perhaps the most importantunderpinning of the material success andfreedoms enjoyed there. Ironically, with theexception of Jimmy Lai, Hong Kong’stycoons are too busy cutting deals with Bei-jing to realize what is happening. Most ofthe super-rich do not understand that therule of law allowed them to become wealthy.

They are relying on their personal connec-tions, guanxi in Chinese, to arrange favor-able treatment from corrupt mainland offi-cials. The bad news is that as these practicesbecome perfected they will inevitably seepinto business dealings in Hong Kong. Thegood news is that the forces of globalizationassure that corrupt, authoritarian govern-ments will join the Suharto regime inIndonesia in the dustbin of history.

A recent interference with Hong Kong’saffairs was revealed in a warning issued byWang Fengchao, an official of the centralgovernment’s Liaison Office in the SAR. Heinsisted that the Hong Kong media not pub-lish views advocating independence for Tai-wan, declaring that journalists have aresponsibility and an obligation to supportreunification of China. In addition, themedia should not disseminate informationthat might be interpreted as advocating the“two states” theory articulated by formerTaiwan President Lee Teng-hui or any others

Christopher Lingle (clingle@ufm.edu.gt) is a pro-fessor of economics at Universidad Francisco Mar-roquín and author of The Rise and Decline of theAsian Century.

MARCH 2002

46

that might encourage independence. At the same time, Mr. Wang urged the SARgovernment to move quickly to enact ananti-subversion law based on Article 23 ofthe Basic Law, which authorizes national-security legislation.

A State MatterIn his warning, Mr. Wang asserted that

his proposed limitations had nothing to dowith press freedom because Taiwan is a statematter that should be dealt with differentlyfrom other news items. As if Beijing’s con-tinued human rights abuses were notenough, Mr. Wang’s comments provideample evidence that Communist Party offi-cials do not understand the nature or thevalue of individual rights and freedoms.

The media has now been instructed that itmust handle Taiwan-related news different-ly. Compliance with this demand would betantamount to self-censorship and under-mine editorial independence as the founda-tion of press freedom. In effect, the mediawould be reduced to being a tool to promotepolicies of the current ruling party.

At present, the Basic Law guarantees pressfreedom along with freedoms of speech andpublication. It would be a stretch to imaginethat restricting such freedoms is consistentwith the spirit of Article 23.

These misguided actions are further cor-rupting the Basic Law and serve to makemore implausible the terms offered to theTaiwanese people for unification under theconditions of autonomy promised to HongKong. At the same time, a crackdown in

Hong Kong would destroy investors’ confi-dence in its laissez-faire institutions.

In another instance, Beijing violated thespirit of noninterference in Hong Kong’sinternal affairs by indicating its displeasurewith a ruling that would grant an extendedright of abode to some mainland citizens. Inresponse, the SAR government reversed thedecision and issued a statement acknowledg-ing Beijing’s right to reinterpret the BasicLaw.

The insensitivity of China’s authoritarianleadership to Hong Kong citizens’ wish forgreater economic and political freedoms sul-lies its own image. At the very least, it castsa pall over expectations of Beijing’s willing-ness to uphold international agreements thatit considers inconvenient.

Although Marxism may have been side-lined for the moment, China remains in thegrip of a Leninist power structure that isrigidly authoritarian. In its present incarna-tion the leadership in Beijing is not onlygoing against the tide of human history; it also violates Lenin’s vision of anti-imperialism. In response to the colonialimperialism of his day, Lenin supported therights of self-determination for all people.This should presumably include people inHong Kong and Taiwan.

Meanwhile, Beijing insists on disregardingthe expressed preferences of Chinese peoplein both places. The current leadership shouldbuild on the successes of Deng Xiaoping,who oversaw the modernization of China’seconomy. It should yield to the inevitableforces of history that demand a moderniza-tion of China’s political system. �

47

Lead Balloonsby Larry Schweikart

T he scenario became clear about fiveyears ago: neither the federal govern-ment nor the states could hope to raisetaxes any further without a major

revolt at the ballot box. At the same time,politicians hesitated to take any unpopularsteps that might result in fiscal responsibili-ty, especially at the national level. Numer-ous budget “caps” and “resolutions” and“agreements” led to sustained deficits in the1980s. Then, because of the still-vibranteconomy, government revenues suddenlyeased past expenditures to produce severalyears of surpluses. But the important factremains that neither during times of deficitsnor during times of surpluses did the growthof government slow, let alone halt.

This produced some uncomfortable feel-ings in Washington, which as much as possi-ble had shifted the burden of programs relat-ed to the environment, law enforcement, andother policies to the states, which in turnfound themselves financially struggling. Theresult was an awareness that while votersstill wanted their programs, they also refusedfurther tax hikes to pay for them. What todo?

Into this dilemma jumped the Americantrial lawyers, first latching onto the tobaccolitigation by persuading the attorneys gener-al of a majority of states to tag along on aclass-action suit against the tobacco compa-

nies. What was the hook to reel in the greedystate governments? Use the tobacco-settlement money to offset state health outlays caused by cigarettes! As the tobaccolitigation wound its way through the courts—ultimately to be settled—a few states beganto have second thoughts about the likelihoodthat the funds would ever end up in theircoffers. Several of them pressured the triallawyers to reduce their percentage of thetake in this massive heist.

The details of the tobacco settlement are,for our purposes, irrelevant. What is impor-tant was the precedent set: state govern-ments, strapped for cash, refused to makecitizens face the reality of scarce resources.Instead, the states resorted to a type of alter-native funding via the lawsuit. However,even that temporary solution yielded anoth-er problem. With the tobacco companiesnow immunized, where could states getmore cash?

The answer, literally, was painted on thewalls. In 1999, Rhode Island State AttorneyGeneral Sheldon Whitehouse (a Democrat)opened talks with the litigation firm NessMotley, and soon Raymond Motley filed suitagainst the lead companies that have pro-duced lead-based paint since the 1930s. It didnot matter that the federal government onlybanned white lead paint for use in residentialareas in 1978 or that Motley’s firm, alongwith six other major litigation firms, con-tributed more than $8 million to the 2000election campaigns, virtually all of it to the

Larry Schweikart (schweikart@erinet.com) teacheshistory at the University of Dayton.

MARCH 2002

48

Democratic Party.1 All that mattered was thatcities (and, soon, states) saw a new goldengoose. San Francisco already had a four-attorney team called the “affirmative litigation”department charged with going to industrieswith threats of litigation to extort money.

Straight in the crosshairs of the new suitswere long-established American companiessuch as Sherman-Williams and Dutch Boyand British-owned Glidden. Having broughtthe asbestos companies to their knees, Mot-ley and Peter Angelos of Baltimore (andanother major Democratic National Com-mittee fundraiser) set out to prove a “con-spiracy” on the part of the paint companiesto foist deadly lead-based paint on unsus-pecting urban parents. Attempting to drumup victims, the lawyers scoured through thedata on children with learning disabilitiesand poor school performance. Although anyactual links to lead would be almost impos-sible to prove to reasonable citizens, courttrials often don’t involve reasonable people.Carefully screened emotional juries are setup to pit “the children” against “Big Lead.”We know who wins that one.

National Lead, the major producer of leadthat made Dutch Boy paint, was not a fatenough target for the litigators. They neededto tie in all the paint companies, and thatinvolved the conspiracy aspect; the litigatorssought to prove that the evil paint compa-nies knew decades ago that their productdamaged children, and covered it up. Argu-ing that the companies (like “Big Tobacco”)knew the dangers and continued to sell—even to advertise!—the paint, the lawyersclaim, proves the conspiracy.

The Power to DefineIn fact, as historical research done by a

colleague of mine shows, the companies’

advertising at the time was constrained onlyby the laws that specifically dealt with toxic-ity. Since lead paint was not intended to beeaten, no one even considered putting warn-ing labels on paint cans, such as, “Warning!This is paint! Don’t eat it!” Moreover, evenafter the paint companies began to sponsor aseries of studies at respected universities suchas Johns Hopkins and Harvard in the 1950s,the measures used to determine either leadlevels in blood or the danger levels that anyparticular “threshold” posed were hotlydebated.2 As with voting, it ultimately camedown not to the data itself, but to who wasallowed to define what the data meant. Onceprogressive “reformers” began to define leadpoisoning as only a tiny fraction of what hadbefore been considered tolerable, the attor-neys had their “damages.”

Still, the results so far have not been favor-able to the litigators. A 2000 study of chil-dren in Illinois, which had higher propor-tions of children with elevated blood-leadlevels than the national average, found onlyone child in 1,000 had lead at 10 micro-grams or higher—the danger point. More-over, this study covered only the worst high-risk lead-paint neighborhoods.3 If the litiga-tors can’t squeeze blood out of a turnipthere, they will be hard pressed to showacross-the-board damages.

The defendants’ attorneys have not sat ontheir hands. One of their necessary but utter-ly absurd (in a reasonable world) practices isto keep an attorney on the road attendingcity council meetings to parry suggestionsfrom the ever-present lead lawyers who onlywant to be the city’s friend. These defenseattorneys literally have to pre-empt andcounteract efforts by the lead zealots to con-sider new class-action suits in cities fromMilwaukee to Marietta.

And the battle has been joined in the halls

49

Since lead paint was not intended to be eaten, no one evenconsidered putting warning labels on paint cans, such as,“Warning! This is paint! Don’t eat it!”

of academia. Noted business historian DavidSicilia and chemical historian John Heit-mann have plowed through some three mil-lion documents trying to establish the histor-ical time line for what the paint companiesknew and didn’t know; what the reliabilityof blood-lead levels in 1930, 1940, and 1950were; and how the companies advertisedtheir products, not only to the public, but tolead and paint trade associations. It is all-outwar, and if the trial lawyers succeed withpaint, they will be back a year from nowwith yet another “dangerous” product. Andif they don’t succeed with paint? Unfortu-

nately, they’ll be back a year from now any-way, with state attorneys general in tow,whispering in their ears the names of newsuckers to hit up for supplemental “contri-butions” to state budgets. �

1. Table accompanying Michael Freedman, “Turning Lead into Gold,” Forbes, May 14, 2001; www.forbes.com/lega-cy/forbes/2001/0514/122tab2_table.shtml.

2. John Heitmann, “Absolutely the Right Tool for the Job:Atomic Absorption Spectroscopy and Childhood Lead Poison-ing,” paper presented at the Chemical Heritage Foundation,2000, and “‘Getting the Lead Out?’ The International LaborOrganization and Its Efforts to Prohibit Lead in Paint,1919–1940,” a paper presented to the European Social ScienceHistory Conference, 2001, both in author’s possession.

3. Freedman, http://www.forbes.com/forbes/2001/0514/122.html?_requestid=2989.

Ideas on Liberty • March 2002

50

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51

To the Editor:Professor Donald J. Boudreaux’s views

against government-financed adjustmentassistance to workers harmed by free trade(“Compensate Workers Harmed by Trade?”November 2001) seem well-taken—exceptfor one thing. The influence of freer trade oncompetition between domestic and importedproducts isn’t a natural phenomenon like a climate change. Rather, it’s a market transformation to which government hascontributed by removing or substantiallyreducing longstanding import restrictions(for example, tariffs or quotas).

When such government decisions (in theinterest of advancing the overall nationalinterest) materially contribute to seriousinjury to U.S. workers, companies, and com-munities long dependent on production ofthe affected products, government should beprepared to help them make timely adjust-ments to this contingency. Such assistance,which should be of reasonable scope andlimited duration, is economically sound,morally warranted, and vital to the viabilityof free trade as public policy.

—DAVID J. STEINBERG

Alexandria, Virginia

Donald Boudreaux replies:I agree with Mr. Steinberg’s premise that

government’s discretionary use of its powerscan harm innocent people, but I differ fromhim on what I take as my benchmark forjudging the appropriateness of any change inpolicy. My benchmark is that set of condi-tions that would exist with governmentdoing nothing more than protecting peopleagainst violence and theft. Under these con-ditions, consumers would be free to buygoods and services from whomever and fromwherever they choose. Tariffs and otherrestraints on trade violate this freedom. Thisviolation creates special privileges for thosedomestic firms and workers who benefitfrom this artificial protection. From its start,this privilege is illegitimate. To lift it is mere-ly to put an end to a monopoly privilege thatnever should have been conferred in the firstplace.

If the police devote more resources tostopping mugging in Central Park, the gov-ernment surely owes nothing to displacedmuggers. It’s the same with trade restraints.When the government performs better thelegitimate function of protecting rights andfreedoms, those who benefited from govern-ment’s earlier failure to perform this func-tion—or, especially, those who benefitedfrom government’s active facilitation of rightsviolations—are owed no special assistance.

CAPITAL LETTERS

Are Displaced Workers Owed Anything?

We will print the most interesting and provocative letters we receive regarding Ideas onLiberty articles and the issues they raise. Brevity is encouraged; longer letters may be edit-ed because of space limitations. Address your letters to: Ideas on Liberty, FEE, 30 S.Broadway, Irvington-on-Hudson, NY 10533; e-mail: iol@fee.org, fax: 914-591-8910.

Writing in the December 2001Atlantic Monthly, Judge RichardPosner called for an end to the“war on drugs.” He is among a

small but growing number of eminent schol-ars and officials who openly advocate thatthe state get out of the drug-prohibitionbusiness. Milton Friedman and William F.Buckley Jr. have long pressed for an end todrug prohibition. They’ve been joined inrecent years by, among others, former Secre-tary of State George Schultz, former Balti-more mayor Kurt Schmoke, New Mexico’sgovernor Gary Johnson, and the editors ofThe Economist.

Judge Posner cites the new war on terror-ism as the looming practical reason for end-ing the drug war. He points out that so-called “drug crimes” are victimless. Anythreats posed by terrorists intent on slaugh-tering innocent people are immeasurablymore serious than are whatever threatsmight be posed by people voluntarily pur-chasing, selling, and ingesting narcotics. Andbecause expanded efforts to guard againstterrorism require resources that have untilnow been used for other purposes, a sensibleway to achieve the necessary reallocation ofresources is to stop trying to protect peoplefrom themselves so that we can better pro-tect people from violence initiated by others.

I cheered when I read Posner’s call to endthe drug war. While I oppose drug prohibi-

tion principally on ethical grounds—Ibelieve that each adult owns himself andought to be free to do with himself as hepleases—I agree that practical exigencies,rather than moral-based reasoning, providethe best hope of ending the drug war. Maybe. . . perhaps . . . just possibly the intensifiednecessity that Americans have for wiping outterrorism will cause us to understand thatcontinuing the drug war is too costly.

But I doubt it.Apart from its immorality, the war on

drugs has been too costly from its inception.This “war” has long consumed billions uponbillions of dollars’ worth of resources, allspent with no discernable positive impact.Indeed, the only clear impact of the drug warhas been a repulsive trampling of freedoms.Asset forfeitures, government espionage onits own citizens, and racial profiling are justthe most blatant attacks on our freedomsunleashed by the war on drugs.

If the need to make sensible tradeoffs real-ly drives voters and politicians, the drug warwould have ended ages ago.

Astute readers might reply “No! Alcoholprohibition ended after just 13 years whenAmericans realized that it was failing.”

That’s the popular belief. It’s wrong.*National alcohol prohibition in the United

States began on January 16, 1920, followingratification of the Eighteenth Amendmentand enactment of the Volstead Act.

Thoughts on Freedom by Donald J. Boudreaux

Politics and Prohibition

Donald Boudreaux (dboudrea@gmu.edu) is chair-man of the economics department of GeorgeMason University and former president of FEE.

MARCH 2002

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*Much of what follows is based on Donald J. Boudreaux andA.C. Pritchard, “The Price of Prohibition,” Arizona Law Review,Spring 1994, pp. 1–10.

Speakeasies and gangster violence becamefamiliar during the 1920s. And yet Ameri-cans kept drinking. But contrary to modernbelief, the 1920s witnessed little sympathyfor ending prohibition. Neither citizens ingeneral nor politicians concluded from theobvious failure of prohibition that it shouldend. As historian Norman Clark reports,

Before 1930 few people called for out-right repeal of the [Eighteenth] amend-ment. No amendment had ever beenrepealed, and it was clear that few Amer-icans were moved to political action yetby the partial successes or failures of theEighteenth. . . . The repeal movement,which since the early 1920s had been asullen and hopeless expression of minori-ty discontent, astounded even its mostdedicated supporters when it suddenlygained political momentum.

What happened in 1930 that suddenlygave the repeal movement political muscle?The answer is the Great Depression and theravages it inflicted on federal income-taxrevenues.

Prior to the creation in 1913 of the nation-al income tax, about a third of Uncle Sam’sannual revenue came from liquor taxes. Notso after 1913. Especially after the incometax surprised politicians during World War Iwith its incredible ability to rake in tax rev-enue, the importance of liquor taxation fellprecipitously.

By 1920, the income tax supplied two-thirds of Uncle Sam’s revenues, and ninetimes more revenue than was then suppliedby liquor taxes and customs duties com-bined. In research we conducted, AdamPritchard and I found that bulging income-tax revenues made it possible for Congressfinally to give in to the decades-old move-ment for alcohol prohibition. Before theincome tax, Congress effectively ignoredsuch calls because to prohibit alcohol salesthen would have hit Congress hard in theplace it guards most jealously: its purse. Butonce a new and much more intoxicatingsource of revenue was discovered, the cost topoliticians of pandering to the puritans and

other anti-liquor lobbies dramatically fell.Prohibition was launched.

Despite pleas throughout the 1920s byH.L. Mencken and a handful of other sensiblepeople to end the folly of prohibition, Con-gress gave no hint that it would reconsider itseffort to ban alcohol sales. Prohibitionappeared to be here to stay—until income-taxrevenues nose-dived in the early 1930s. From1930 to 1931, income-tax revenues fell by 15percent. In 1932 they fell another 37 percent,so that in 1932 income-tax revenues were 46percent lower than just two years earlier. Andby 1933 they were fully 60 percent lower thanin 1930. With no end of the Depression insight, Washington got anxious for a substitutesource of revenue.

That source was liquor sales. JouettShouse, president of the Association Againstthe Prohibition Amendment, was a powerfulfigure in the Democratic party that had justnominated Franklin Roosevelt as its candi-date for the White House. Shouse empha-sized that ending prohibition would boostgovernment revenue. And a House leader ofCongress’s successful attempt to propose theprohibition-ending 21st Amendment said in1934 that “if we [anti-prohibitionists] hadnot had the opportunity of using that argu-ment, that repeal meant needed revenue forour Government, we would not have hadrepeal for at least ten years.”

There’s no doubt that widespread under-standing of prohibition’s futility and of itsugly, unintended side-effects made it easierfor Congress to repeal the EighteenthAmendment. But these public sentimentswere insufficient, by themselves, to end thewar on alcohol. Ending it required a gargan-tuan revenue shock to the U.S. Treasury.

So while I applaud Judge Posner and allothers who advocate ending the drug war—and while I fervently hope that their callssucceed—if the history of alcohol prohibi-tion is a guide, drug prohibition will not endmerely because there are many good, sound,and sensible reasons to end it. Instead, it willend only if and when Congress gets desper-ate for another revenue source.

That’s part of the sorry logic of politicsand prohibition. �

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BOOKSWhile America Sleeps: Self-Delusion,Military Weakness, and the Threat toPeace Todayby Donald Kagan and Frederick W. Kagan St. Martin’s Press • 2000 • 483 pages • $32.50

Present Dangers: Crisis andOpportunity in American ForeignPolicy and Defense Policyedited by Robert Kagan and William KristolEncounter Books • 2000 • 401 pages • $22.95

Reviewed by Doug Bandow

Americans who read While AmericaSleeps and Present Dangers might notrecognize the world presented. The

United States is at risk and embattled, sleep-ing while potential enemies march. Conflict,war, and disaster threaten at every turn. It islike Britain before World War II and Ameri-ca on the eve of Pearl Harbor. Only a mas-sive military buildup can keep the nationsafe.

It is a curious vision for a time when U.S.domination is akin to that of the RomanEmpire. When it comes to conventionalthreats, there aren’t any. The real danger,illustrated so horribly last September, is ter-rorism, but terrorism is largely a conse-quence of the sort of promiscuous Americanintervention favored by the authors.

Still, Donald and Frederick Kagan, Yalehistorian and West Point instructor, respec-tively, compare America today with GreatBritain during the 1920s. In their view, justas the latter failed to win the peace afterWorld War I, America risks failing to winthe peace after the Cold War.

The bulk of While America Sleeps reviewsBritish interwar policy. The analysis is inter-esting, but fails to demonstrate that uphold-ing peace and stability everywhere would

have advanced British interests or was sus-tainable.

For instance, the Kagans complain thatBritish and/or allied weakness led to variouscolonial rebellions and European bullying.But Britain’s failure to concentrate on itsvital interests in Europe resulted in part fromits dispersal of resources to police its far-flung possessions.

Most important, Britain and France dis-agreed on how to treat defeated Germany,falling between the two stools of conciliato-ry revision and ruthless enforcement of Ver-sailles. Either course might have worked.The muddled approach was almost designedto fail.

The international environments then andnow also differ dramatically. The Europe ofthe 1920s hosted only two significant demo-cratic powers, Britain and France; authori-tarian neutrals and potential adversarieswere far more numerous. Military weaknessand political mistakes then led to disaster.

Compare the world confronting Americatoday. The Russian Humpty Dumpty hasfallen off the wall and lacks Germany’s recu-perative power. China could become a seri-ous threat, but is far behind. The greatestdanger is not being asleep, but being arro-gant: Washington’s hubris has done more topush China, India, Indonesia, and Russiatogether than have any common interests.

Moreover, America is spending more onthe military than any other nation. Inresponse, the Kagans wheel out one of thesilliest arguments extant. The United Statesis spending a lower percentage of GNP onthe military “than at any time since beforeWorld War II.” However, in real terms theeconomy is eight times as large, whichmeans that we are devoting far moreresources to the military. And no nation isspending more—in contrast to 1940, whenmany were.

The world is messy and the future isunpredictable, but nothing justifies thenightmares that apparently trouble theKagans. What they should fear are more ter-rorist attacks at home. More meddling over-seas will only increase that risk. Washingtonlong should have been focusing on defending

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the American homeland instead of, say,attempting to reorder the Balkans.

Of the same nature, though more present-oriented, is Present Dangers, edited byRobert Kagan of the Carnegie Endowmentand William Kristol of the Weekly Standard.Although they admit that there currently isno obvious dire traditional threat, theyworry that the United States “will shrink itsresponsibilities and—in a fit of absentmind-edness, or parsimony, or indifference—allowthe international order that it created andsustains to collapse.”

Not all of the book’s essays are alarmist intone. Still, all assume that America’s allies—to whom Kagan and Kristol demand “aneven greater U.S. commitment”—are help-less.

For instance, Nicholas Eberstadt of theAmerican Enterprise Institute warns thatNorth Korea “poses a continuing, and per-haps even an increasing, threat to the UnitedStates and her Asian allies.” But NorthKorea is bankrupt and starving; it does notthreaten America. Rather, it threatens theRepublic of Korea, which today, with 40times the GDP and twice the population, canreadily defend itself.

Donald Kagan also has an essay in PresentDangers. His short historical essay, whichcloses the volume, emphasizes the impor-tance “of maintaining a military force ade-quate to deter aggression long before anystate was capable of undertaking it.” ButAmerica obviously has that ability. Thequestion is whether Washington shoulddeter aggression everywhere, even if of noconsequence to America or deterrable by itsallies.

Leadership requires the exercise of discre-tion, the thoughtful use of power in a worldof limited resources to match policy withinterest. In deciding what matters, Americamust consider all its values and interests,including its commitment to preserve limit-ed, constitutional government, maximize itsown citizens’ freedom, and not treat its ser-vicemen as gambit pawns in a global chessgame.

Yes, America is sleeping. Americans aresleeping while political elites work to pre-

serve outdated policies, alliances, and forces,irrespective of cost and risk. If war comes toAmerica, it will most likely result frompromiscuous intervention to fulfill the limit-less commitments envisioned by the threeKagans and Kristol. �

Doug Bandow is a senior fellow at the Cato Insti-tute. A former special assistant to President Rea-gan, he is the author or editor of several books,including Tripwire: Korea and U.S. Foreign Poli-cy in a Changed World.

A Nation of Cowards: Essays on the Ethics of Gun Controlby Jeff Snyder Accurate Press • 2001 • 170 pages • $24.95

The Origin of the Second Amendment:A Documentary History of the Bill of RightsEdited by David Young Golden Oak Books • 2001 • 838 pages • $55.00

Reviewed by Dave Kopel

W hile there are many books on theempirical, sociological, historical,legal, or political aspects of gun pol-

icy, A Nation of Cowards is the first full-length book focused on philosophical ques-tions. The first, and best, essay bears thesame name as the book. Originally publishedin 1993, Snyder’s essay challenges the notionthat reliance on government employees forprotection is morally superior to protectingoneself. Indeed, Snyder suggested that a fail-ure to protect oneself is immoral.

The rest of the book consists of reprintsfrom Snyder’s column for American Hand-gunner magazine, plus some other writings.This means that there is considerable repeti-tion of themes from one chapter to the next.It also means that Snyder rarely gets muchmore sophisticated than in the first chapter.We see the same issues examined from vari-ous angles, but the perspectives never lead togreater depth.

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Even so, Snyder makes many excellentpoints, persuasively expressed. Looking atthe National Organization for Women’sopposition to female gun ownership, heobserves that “feminine helplessness isacceptable as part of feminist dogma” aslong as women rely on the state rather thanan individual male for protection.

Snyder also addresses the argument thatwomen should not use guns for defenseagainst predators because defensive gun useis not always successful: “such argumentsrest on the craven suggestion that you oughtnot to fight back unless you are first guaran-teed perfect, risk-free protection.” He likenseschewing guns because armed defense is notalways successful to not wearing seat beltsbecause they do not offer perfect protectionin auto accidents.

Much of the gun-control debate in Ameri-ca revolves around social science and argu-ments for utility. Snyder raises two objec-tions to such arguments: First, groups likeHandgun Control shouldn’t force others tolive according to HCI’s theory of utility andeffective protection. Second, utility is irrele-vant because it doesn’t matter how manypeople misuse guns compared to how manypeople use them properly; to deny even oneperson the right to carry a gun becauseeveryone else misuses guns is a violation ofhis natural rights.

Another of Snyder’s targets is “instrumen-talism”—ascribing moral qualities tofirearms, rather than to the intention of theperson with the firearm. This leads to hisbroader point that the gun issue is funda-mentally about character, and that refusingto assume the responsibility of owning a gunto defend one’s family is an abdication of theresponsibility necessary for the citizen of arepublic. This abdication, he argues,amounts to an admission that the individualis not fit to govern himself, but instead mustbe cared for and controlled by government.

Certainly there is often a correlationbetween unwillingness to defend oneself andsupport for the nanny state. But in this argu-ment, Snyder lacks nuance and respect forthe variety of the human condition. Based onthe people you know, is it really true that

everyone who doesn’t own a gun or haveexpertise in some other form of self-defenseis a sap who wants the government to takecare of him?

In his final chapter, “Revolution,” Snyderconsiders whether revolution could be justi-fied today. He answers in the negative. First,today’s American character is more like thatof the revolutionary French than like that ofAmerica’s founding generation. Americanstoday are dependent on government andafraid of responsibility, and therefore unfitto make a new government. Second, Snyderpoints to John Locke’s observation that arevolution cannot succeed unless much ofsociety agrees that radical change is neces-sary, and there is no such widespread beliefin modern America. Snyder urges that “Wemust study again” the founding documentsand “consider what principles and institu-tional structures might best secure liberty,”including questioning where the Founders—or we—may have failed.

Readers who want to study the foundingdocuments and the right to arms should pur-chase The Origin of the Second Amendment:A Documentary History of the Bill ofRights. The book has a new hardback edi-tion, but the 1995 paperback edition is near-ly as good.

Starting with the Constitutional Conven-tion in the summer of 1787, and continuingthrough 1792, the book reprints the text ofrelevant sections (broadly defined) of everylegislative proceeding, newspaper article,correspondence, and every other documentrelated to the Second Amendment and theright to arms.

Besides 750 pages of original documents,the book offers an appendix of the full textof state constitution bills of rights from thefounding era. Another appendix showswhich states recognized certain rights ordemanded their recognition in the federalconstitution; the right to arms was nearlyubiquitous, and much more often recognizedor demanded than the rights of assembly orpetition.

When the Fifth Circuit Court of Appealsrecently upheld the individual right to armsin the landmark Emerson case, the court

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cited Young’s book scores of times, demon-strating its status as a leading source of orig-inal constitutional documents. �

Dave Kopel is the director of research for theIndependence Institute in Colorado.

PC, M.D.: How Political Correctness Is Corrupting Medicineby Sally Satel, M.D.Basic Books • 2000 • 285 pages • $27.00

Reviewed by Sue A. Blevins

W hen one thinks about “political cor-rectness” (PC), the term conjures upthoughts about left-wing politics.

Sally Satel’s PC, M.D.: How Political Cor-rectness Is Corrupting Medicine focuses onU.S. schools of public health and their questfor “social justice,” the anti-psychiatrymovement among former psychiatricpatients, nurse feminists, alternative medi-cine, involuntary treatment for drug addicts,and racial issues in health care. The authorfinds that the PC mindset is doing consider-able damage in the field of medicine.

Satel, an M.D. who is also a lecturer atYale University School of Medicine, a fellowat the American Enterprise Institute, and aformer staff psychiatrist for the superiorcourt in Washington, D.C., writes knowing-ly on a variety of important issues regardingpublic health. She provides persuasive evi-dence that schools of public health, tradi-tionally focused on infection control andpopulation-based diseases, have lately shift-ed to social and political issues. This newpublic-health activism stems from “politicalcorrectness,” which is an outgrowth of post-modernist philosophy. Postmodernistsaccuse the dominant culture of imposing itsvalues on the “powerless and disenfran-chised” members of society. One of Satel’skey observations is that postmodernists inmedicine want to topple the dominant cul-ture in order to close the health gap betweenwhites and blacks. It’s a case of doctors play-ing social engineers.

Satel notes that at the 1998 annual meet-

ing of the American Public Health Associa-tion, a PC public-health academician offeredthese five recommendations for curbing theAIDS epidemic: “limit the power of corpora-tions, cap salaries of CEOs, eliminate corpo-rate subsidies, prohibit corporate contribu-tions to politicians and strengthen laborunions.” None of those mostly statist nos-trums would have any impact on the trans-mission or curing of AIDS; the statists aretrying to use that health issue as a TrojanHorse for their agenda.

Moreover, Satel points out that PC public-health activists aren’t the least bit objectivewhen it comes to examining the relation-ships between various social factors andhealth. “For example, noting that wealthand health correlate, some public healthexperts condemn capitalism. . . . However, ifthey must be social activists, these expertscould just as easily fight for school choice. . . . After all, we know that education islinked to both future earnings and health.And wouldn’t it make sense to encouragemarriage and religious activity, since bothare associated with better health?” theauthor asks.

Satel’s concerns about the anti-psychiatrymovement, however, aren’t convincing. Infact, the book presents a major contradic-tion: In chapter two, “Inmates Take Overthe Asylum,” Satel challenges the claimsmade by “consumer-survivors”—individualswho assert they were harmed by psychia-trists/psychotherapists and who vehementlyoppose involuntary treatment. Yet in chap-ter seven, “Therapy for Victims,” she pro-vides rational evidence that the “trauma ser-vices movement” is seriously damagingpatients. This type of therapy is based on thepremise that early trauma results in cata-strophic problems and therapists shouldwork on helping patients express theirrepressed memories of abuse. But could thistherapy actually help implant false memo-ries? Satel notes that “The American Psy-chological Association is so concerned aboutthe ethical and legal implications of‘implanting’ memories of abuse through suggestion that it published a primer fortherapists.”

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So could it be that the consumer-survivorsin chapter two were truly harmed by thememory implanters noted in chapter seven?It seems illogical to debunk the consumer-survivors’ claims of being harmed by psychi-atry in one place, while highlighting a dan-gerous type of therapy (the trauma servicesmovement) in another.

This book is a must-read for anyone inter-ested in the issues of involuntary treatmentfor drug addiction and psychiatric illnesses.Satel clearly supports compulsory treatmentfor drug addiction and “mental diseases”—not just to make sure those so diagnoseddon’t hurt others, but to help them improvetheir own lives. She writes, “The point ofimposing treatment is to help patients attainautonomy, to help them break out of the fig-urative straightjacket binding thought andwill. . . . Being required to take medication ishardly a violation of the civil rights of a per-son who is too ill to exercise free will in thefirst place. The freedom to be psychotic isnot freedom.” Anyone who fears the spreadof legalized coercion will find this part of thebook most troubling.

PC, M.D. will engender many differentreactions. In general, authoritarians willprobably love it. Libertarians, conservatives,and classical liberals will appreciate theinsights into the PC public-health movement,but will likely disagree with the author’s sup-port for state-mandated psychiatry and treat-ment for drug addicts. Finally, socialists,especially those espousing diversity and egal-itarianism, will abhor that Satel has blownthe whistle on their efforts to turn the med-ical profession into a tool for their increasingcontrol of society. �

Sue Blevins is president of the Institute for HealthFreedom in Washington, D.C.

Escape from Leviathan: Liberty,Welfare and Anarchy Reconciledby J. C. LesterSt. Martin’s Press • 2000 • 246 pages • $59.95

Reviewed by Andrew I. Cohen

Since the author focuses entirely on criti-cisms of libertarianism, a less felicitousbut more descriptive subtitle would be:

“Against Arguments that Liberty, Welfare,and Anarchy Are Incompatible.”

J. C. Lester, a scholar in social and politi-cal theory trained at the London School ofEconomics and Political Science, appliesKarl Popper’s theory of knowledge to socialtheory. On Popper’s view, we ought touphold theories that withstand efforts at dis-proof by critics. Lester thus argues that lead-ing criticisms of liberalism fail to falsify the“compatibility thesis” his subtitle expresses.Starting with accounts of rationality, liberty,and welfare presented in light of objections,Lester defends a completely unregulatedmarket.

Lester is certainly doing important work.There are powerful scholarly criticisms ofliberalism (in its original sense) worthy oflibertarian notice. Lester’s approach couldfurnish a weapon in the arsenal against anti-liberalism. Unfortunately, he moves withconsiderable, sometimes blinding, speedagainst critics of liberalism. He defends thebrisk pace both by urging the reader to con-sult the original sources and by saying thatany errors he made here would have persist-ed in lengthier discussions.

His cursory reviews of key arguments pre-suppose an intimate familiarity with scholar-ly criticisms of liberalism. This book mightthen be of little value for the layperson. Forthose familiar with the relevant contempo-rary scholarship, the monograph, thoughsometimes problematically quick, has somevalue as an anti-anti-liberal guidebook.

On Lester’s account, rational personsinvariably calculate how best to promotetheir perceived interests. He quickly surveyssome objections to this picture of homo eco-nomicus and counters that persons rational-

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ly care for others, adding that each of us actsby definition as a “purposeful maximizer.”Human welfare then consists in having one’s preferences fulfilled. On such founda-tions Lester hopes to provide a non-moraland value-neutral derivation of the marketsystem.

Lester’s non-moral approach is seductive:if we can dispense with the complexities ofmoral argument, the case for the marketmight be less controversial. But thisapproach does not succeed here, and I worrythat it can never succeed.

Liberty in his view is supposedly theabsence of imposed cost, where cost iscashed out in terms of frustrated preferencefulfillment. But Lester stacks the deck byexcluding certain considerations from count-ing as costs or benefits, so he can pretendthis whole enterprise is purely descriptivewhen, in fact, there is much robust evalua-tive work going on behind the scenes tomake plausible this regime of liberty. This isclear in his effort to derive non-morally asystem of ownership. But if property is takento entail, as it usually does, a host of moralconsiderations, then we cannot derive a sys-tem of property simply from descriptiveclaims. To do so is to commit what philoso-phers call the “naturalistic fallacy,” and I donot see how Lester avoids it. Either the sys-tem of property he derives is of no normativeconsequence, or it involves the norms typi-cally entailed by property and so is guilty ofthe naturalistic fallacy.

Perhaps instead we should offer moralarguments to justify the consequences mar-kets promote. This requires rolling up oursleeves and presenting some moral theory toundergird liberalism. I do not pretend toknow how to do this, but it seems Lester hasnot avoided the need to do so.

Ultimately, Lester defends a form of whatphilosophers call “preference consequential-ism.” Under this approach, the free marketbest maximizes the satisfaction of prefer-ences compared to rival systems. But what ifaggregate preferences could best be satisfiedby violating the rights of minorities? Whatprotection does anarcho-libertarianismoffer? Moving swiftly past such worries,

Lester admits that he cannot in principleexclude horrific injustices. Taking a pagefrom the nineteenth-century British utilitari-ans, however, he claims that people happento be constituted so that standard injusticesare not preference satisfying, all things con-sidered. Such a response hinges long-termmaterial prosperity, consonant with ordi-nary conceptions of justice, on a fragile pre-ponderance of decent sentiments among thediverse lot of us. Maybe this is the best lib-erals can do, but critics will be undaunted.They will challenge Lester’s empirical claimsabout human psychology, and they will chal-lenge the normative suppositions lurking inthe background of the whole project.

While Lester may not have succeeded inshowing that liberty can be an “uncontestedconcept,” libertarians cannot help but sym-pathize with his project of defending themarket against charges of theoretical incon-sistency. Provided we keep an eye on thespeedometer, giving critics of libertarian-ism a run for their money can be an impor-tant and powerful buttress to the regime ofliberty. �

Andrew Cohen is assistant professor of philoso-phy at the University of Oklahoma.

Competition or Compulsion? The New Market Economy versus the New Social Engineeringedited by Richard EbelingHillsdale College Press • 2001 • 241 pages • $14.95

Reviewed by George C. Leef

T here is a chameleon-like characteristic ofthe enemies of freedom—they keepchanging their appeals to get people to

surrender liberty and property. During theCold War, those who favored central controlover individual freedom importuned peoplewith the absurd claim that state control overthe economy would both be more fair andmake us more prosperous. Now that theyrealize that good old-fashioned socialism isalmost impossible to sell, they have switched

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to a new set of claims calculated to be moreappealing to Americans who are, for themost part, affluent and unlikely to beswayed by even a toned-down Marxism.Now the siren songs of the authoritariansare more apt to appeal to the fears of thoseaffluent people, saying that they might losetheir comfortable living unless the state isgiven further powers.

The subtitle of this book is a good descrip-tion of the current sales pitch: the new socialengineering. The challenge to the free marketnow comes not in the strident red of Lenin,but in the muted earth tones of environmen-talism, the “anti-sprawl” movement, the“precautionary principle,” and similarnotions, all designed to seduce comfortableAmericans into the embrace of collectivist,dirigiste policies pushed by politicians andorganizations dripping with concern andcompassion. The new social engineers havefigured out that the old adage is true—youdo catch more flies with honey than withvinegar. That makes them all the more dangerous.

In the most recent addition to Hillsdale’sLudwig von Mises Lecture Series, editorRichard Ebeling has collected 12 essaysexploring the threats to freedom posed bythe new social engineering. “The contrib-utors,” Ebeling writes, “all warn of the continuing danger from the idea and ideolo-gy of the social engineer, in all its moderntransformations.”

The first and by far the longest essay in thebook is by Professor Ebeling himself—“Planning for Freedom: Ludwig von Misesas Political Economist and Policy Analyst.”Most of Ebeling’s wide-ranging discussionconcerns Mises’s analysis of the untowardeffects of government intervention in the freeaffairs of men. One of the chief problems ofinterventionism, Mises observed, was that itinevitably creates ripples of disturbance inother human endeavors, which then seem torequire further intervention by the state.Ebeling writes, “Thus, in Mises’ construc-tion of the logic of interventionism, a‘dynamic’ is set in motion that generates thepotential for an ever-expanding circle ofinterventions due to the disruptions previous

interventions have created.” At the time,Mises was writing about economic planning,but his insight applies with equal force to the“new social engineering.” Those who wantto reshape society are no more able to stopwith just a few measures of control thanwere those who desired to reshape the economy.

My favorite essay in the book is by Vir-ginia Postrel, “The Future and Its Enemies:Dynamism vs. Stasis.” The essay, of course,has its roots in her book The Future and ItsEnemies, but is not simply a reprint of achapter. It’s a fresh look at what I regard asthe key battleground in the current warbetween freedom and authoritarianism,namely the fight over the desirability ofprogress. Postrel’s argument is that our abil-ity to make progress is menaced by theforces of stasis. That is, there are people whocontend that humans live well enough (oreven too well) already and ought not tojeopardize what we have by permitting oth-ers to experiment with new products, meth-ods, and ideas. She quotes British philoso-pher John Gray, who whines that freedomfosters “the malady of infinite aspirations.”Proponents of stasis would like to tell us justwhat our aspirations may be.

Another excellent contribution comesfrom Fred Smith of the Competitive Enter-prise Institute. He compares the current fightover globalization with the Progressive Erain the United States. Smith points out thatthen, as now, most intellectuals sided withthe forces of control rather than with liberty.In the Progressive Era, when change meantincreasing government control, they favoredchange, but in the modern era change meansways for people to escape control; so, Smithsays, intellectuals have become the reac-tionaries.

Competition or Compulsion? also includesessays by George Bittlingmayer, Allan Carl-son, W. Michael Cox, Peter Ferrera, VaclavKlaus, Nancie Marzulla, Patrick Minford,Sam Staley, and Walter Williams.

The book is a worthy continuation of thefine Hillsdale series. �

George Leef is the book review editor of Ideas onLiberty.

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Lenin: A Biographyby Robert Service Harvard University Press • 2000 • 592 pages • $37.50

Reviewed by Yuri Maltsev

R obert Service is University Lecturer inModern Russian History at St. Antho-ny’s College and a well-known specialist

in twentieth-century Russian history. Hismost recent book, Lenin: A Biography, pro-vides the reader with a comprehensive biog-raphy of a man who changed the course ofevents of the twentieth century. Lenin stillaffects our life today—his followers arenumerous and fanatical in their beliefs; hisshadow is behind terrorist attacks and thedestruction of Afghanistan, Chinese pretens-es to world hegemony, Castro’s atrocities inCuba, as well as the worldwide crusadeagainst capitalism in the form of a rejectionof globalization. While many books havetried to depict Lenin as a well-meaningreformer whose ideas were later perverted,Service gives us a more realistic portrait.

In the horror chambers of history VladimirIlyich Lenin (born as Ulyanov) has a specialplace. He initiated the spread of totalitarian-ism in the twentieth century and created themodel killer state that was used and perfect-ed by his successor Stalin, as well as by othersocialist mass murderers of the past centu-ry—Hitler, Mao, Tito, Kim Il Sung, Castro,Ho Chi Minh, and Pol Pot. “Both industrial,literate, Catholic Czechoslovakia and agrari-an, illiterate, Buddhist North Vietnam suc-cumbed,” Service writes. “The methods ofintroduction varied from invasion to localcommunist political agitation. But the resultin its essentials was the same.”

The book begins with a thorough exami-nation of Lenin’s family roots, childhood,education, and upbringing. In 1887, 17-year-old Vladimir entered one of the besteducational institutions in Russia at thetime—the University of Kazan. With anexcellent school record and impressive rec-ommendations, he was admitted to the lawschool despite the fact that he was a brotherof an executed state criminal and himself

highly critical of the government. (I spent myfreshman year at the same university in the1960s, but transferred to the Moscow StateUniversity because of the stale, semi-religious atmosphere of Lenin’s personalitycult that remains in his alma mater.)

Service gives the reader an excellentaccount of Lenin’s revolutionary career andrise to power. In a particularly telling pas-sage, the author reveals that Lenin’s vauntedeconomic program for the new Soviet nationwas not the result of deep thought and plan-ning but of improvisation: “One of the greatmalignancies of the twentieth century wascreated more by off-the-cuff measures thanby grandiose planning,” he writes.

Lenin’s successor, Stalin, the most mur-derous dictator the world has seen, was por-trayed by Khrushchev as an “aberration oftrue socialism,” “a tyrant who pervertedLenin’s democratic intentions.” Most West-ern academics followed their Soviet counter-parts in this belief—some naively becauseany evidence of Lenin’s cruelty was sup-pressed and kept in secret Party archives,others because they believed in socialism andwould embrace any notion of the “goodLenin” and the “bad Stalin” to explain theelimination of millions in the Gulag. “Theirargument was,” writes Service, “that Leninas he lay dying envisaged a permanent com-munist order that involved cultural plural-ism, ethnic diversity and perhaps even amixed economy,” and that “if Lenin’s healthhad held out, then communism with ahuman face could have been constructed.”

Service shows, however, that few of Stal-in’s policies were without roots in Leninism:“Politics had been monopolized and central-ized. The agencies of coercion were firmlyunder the party’s control. The economy waspenetrated by state ownership and state reg-ulation. Religion was systematically perse-cuted. National aspirations were handledwith grave suspicion. High artistic and intel-lectual culture was rigorously patrolled.Schooling was steadily communized. Lawwas introduced and suspended at the com-munist leadership’s whim, and the legisla-tive, executive and judicial functions of thestate were deliberately commingled. The

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rulers treated society as a resource to beindoctrinated and mobilized.”

Not many mass murderers are reveredlong after their crimes were exposed. Leninis luckier than others—his corpse is guardedin the pompous mausoleum at the Kremlinwall in the heart of Moscow. Tens of thou-sands of towns, villages, and streets still bearhis name. Internet Web sites, newspapers,and magazines, as well as books and “docu-mentaries” fabricated by Lenin’s followersstill praise the “genius of proletarian revolu-tion, organizer of the Communist Party ofthe Soviet Union and founder of the Sovietstate” without any moral qualms 75 yearsafter the death of the tyrant.

Even today, in the wake of terroristattacks in the United States, we feel Lenin’schilling legacy. Justification for the Sovietaggression in Afghanistan, which ultimatelyled to the destruction of that country andturned it into a breeding field for interna-tional terrorism, was based on Lenin’s con-cept of the “internationalist proletarianduty” to establish “progressive” govern-ments all around the world.

Readers who wish to understand the rootsof much of the world’s evil should pick upService’s excellent book. �

Yuri Maltsev is professor of economics atCarthage College in Kenosha, Wisconsin.

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Since World War II, manufacturingemployment as a fraction of totalemployment has declined steadily. Inthe middle of the war, it was over 40

percent of the work force. By 1966 it dippedbelow 30 percent for the first time. By 1985,it dropped below 20 percent for the firsttime.

In 2000 there were just over 18 millionjobs in the manufacturing sector—a mere 14percent of total nonfarm employment.

Should we be alarmed at the continuingdecline of the manufacturing sector as asource of employment? Those who arealarmed argue that manufacturing jobs arethe good-paying jobs. The alternative tomanufacturing jobs are service jobs, whichhave a less than stellar reputation. Ignoringfringe benefits, the average manufacturingwage is slightly higher than the average wagein the service sector.

I recently heard a new slogan arguing forthe importance of manufacturing jobs overservice jobs: “We can’t get rich doing eachother’s laundry.”

Isn’t that a great slogan? It conjures up afrightening future of an America withoutmanufacturing jobs and the great masses ofus stuck doing the most menial of tasks atsubsistence wages.

I can think of lots of variations on thistheme: We can’t get rich selling each othercosmetics. We can’t get rich flipping ham-burgers for each other. We can’t get richchopping firewood for each other. And soon.

So is there any economics in any of theseslogans? Are they legitimate warnings of thefate that awaits us as we slough off manu-facturing jobs en route to a pure serviceeconomy?

It’s worth noting that we probably can’tget rich doing each other’s laundry. That’swhat makes the slogan so clever—it’s proba-bly true.

What’s false about the statement is theimplicit assumption that if we’re not careful,we’re going to lose all our manufacturingjobs and have them replaced with servicejobs. There’s an additional implicit assump-tion that if we ever do lose or choose to shedour manufacturing jobs, then the service jobsthat remain will be menial and low-paying.

Finally, there’s an implicit assumption inall this that the decline in manufacturingjobs is a natural force, an unstoppable trendthat will inevitably lead to the end of themanufacturing sector. And in some versionsof the laundry story, the reason we’re losingthose manufacturing jobs is that foreignersare stealing them. While we sit idly by naive-ly trying to do the best we can, foreigners aresystematically stealing our high-paying man-ufacturing jobs. In this version of the story,America is being “hollowed out.” Soon itwill just be a dry husk supported by servicejobs and will collapse.

The Pursuit of Happiness by Russell Roberts

“We Can’t Get Rich DoingEach Other’s Laundry”

Russell Roberts (roberts@wc.wustl.edu) is the JohnM. Olin Senior Fellow at the Weidenbaum Centeron the Economy, Government, and Public Policy atWashington University in St. Louis. His new bookis The Invisible Heart: An Economic Romance (MITPress).

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What’s really going on? Why is manufac-turing employment declining as a proportionof total employment? Can a nation’s econo-my survive on just the service sector? And ifAmerica does end up as a pure service econ-omy, will we all be living in poverty?

The manufacturing sector as an employ-ment source is in decline for two reasons.The first is innovation: manufacturers havefound ways to get by with fewer workers.The second reason is international trade:some manufacturing jobs are cheaper to dooutside the United States than here.

What that means is that the shedding ofmanufacturing employment is what has keptmanufacturing wages above wages in theservice sector. If we had stopped either ofthese trends in the name of keeping the high-paying manufacturing jobs, then theywouldn’t be high-paying anymore.

But how can we stay rich doing eachother’s laundry? Isn’t the inevitable result ofthese trends an America that relies totally onthe service sector?

Doing the Mexicans’ WashImagine for a moment an America where

everyone knew one thing and one thingonly—how to wash clothes down by theriver. That would be a poor country indeed.Not only can we not get rich doing eachother’s laundry, we’d starve to death with-out food. If everyone can only do laundry,there is no opportunity for trade, at leastdomestically. If we were really fabulous atlaundry, it’s conceivable that some of usmight be able to do it for Canadians andMexicans and thereby have access to someother goods beyond clean clothes.

Those who worry about foreigners’ steal-ing all the “good” jobs—the manufacturingjobs—presume that when those jobs disap-

pear, all we’re going to be left with is thoselow-paying service jobs, and in the ultimateindignity, only the worst service jobs aregoing to be left.

But of course in the real world, in theAmerica you and I actually live in, our skillsgo beyond laundry. Our wages don’t dependon the name of the job we hold; they dependon our skills and the demand for those skills.Nothing will stop us from applying our daz-zling array of skills domestically to basket-ball, health care, movies, education and themyriad of other service sectors.

Could we survive on just services? Wewouldn’t have to. We could trade those services, just as we do now, for manufac-tured goods made by foreigners. But would-n’t we be a lot poorer than we are now? Ifwe were, some of us would find it highlylucrative to go into manufacturing. We’dturn our skills to making things again. If weever shed all our manufacturing jobs, it willbe because the cheapest way to get manufac-tured goods will be by swapping services forthem.

Just as we are phenomenally more wealthytoday than we were in 1943, when manufac-turing was at its century-high peak as a pro-portion of total employment, we will bewealthier still if we ever become an all-service economy. That would occur as thenatural result of our choices as to where toapply our skills.

So we can’t get rich doing each other’slaundry. But we can get rich choosing service-sector jobs over manufacturing jobsif that is where the highest applications ofour skills lie. We’ve been doing it successful-ly for over 50 years. And it’s likely that thenext 50 years will see the manufacturing sec-tor continue to shrink as a source of employ-ment. But barring wars or horrible publicpolicy, we’ll continue to get wealthier. �

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