Features8 Legends of the Fall:The Real and Imagined Sources of Our Bubble Economy

by Richard W. Fulmer

13 The End of Medicine: Not With a Bang, But a Whimper by Theodore Levy

17 A Health Insurance Criminal Pleads His Case by James L. Payne

19 The Wisdom of Nien Cheng by James A. Dorn

24 Botswana: A Diamond in the Rough by Scott Beaulier

27 The Improbable Prose of Nassim Nicholas Taleb by Robert P. Murphy

31 Government Moonshine by Michael Heberling

34 How Shall We Live? by Paul Cleveland and Art Carden

Columns4 Ideas and Consequences ~ Anti-Force is the Common Denominator by Lawrence W. Reed

15 Thoughts on Freedom ~ On the Rule of Law by Donald J. Boudreaux

22 Our Economic Past ~ Private Capital Consumption: Another Downside of the Wartime

“Miracle of Production” by Robert Higgs

29 Peripatetics ~ Opaque by Design by Sheldon Richman

37 Give Me a Break! ~ Let’s Take the “Crony” Out of “Crony Capitalism”

by John Stossel

47 The Pursuit of Happiness ~ ObamaCare and Unions

by Charles W. Baird

Departments2 Perspective ~ Murray Rothbard by Sheldon Richman

6 Government Must Stimulate to Avoid a 1937-Style Recession? It Just Ain’t So!

by Ivan Pongracic, Jr.

39 Capital Letters

Book Reviews

41 The Beautiful Tree

by James Tooley Reviewed by Max Borders

42 Capitalism at Work: Business, Government, and Energy

by Robert L. Bradley, Jr. Reviewed by Michael Beitler

43 Herbert Hoover

by William E. Leuchtenburg Reviewed by Jim Powell

44 End the Fed

by Ron Paul Reviewed by George Leef

Page 44

Page 17

Page 6

VOLUME 60, NO 3 APRIL 2010

In 1946 the fledgling Foundation for Economic Educa-tion published a pamphlet titled “Roofs or Ceilings: The Current Housing Problem”

(www.tinyurl.com/cpluwy), a brief against rent controlwritten by two unknown young economists:Milton Fried-man and George Stigler. They would go on to win theNobel Prize in economics in 1976 and 1982, respectively.

That’s a remarkable story. But just as remarkable iswhat that pamphlet led to. When it was issued, Stigler,then teaching at Columbia University (his University ofChicago days still lay ahead), told a young student aboutit, perhaps changing American intellectual history.

The student was Murray Rothbard.“Rothbard,” writes Brian Doherty in Radicals for

Capitalism: A Freewheeling History of the Modern AmericanLibertarian Movement, “was delighted to learn of anorganization promoting his political and economic values. . . . By 1948, Leonard Read had already notedyoung Rothbard’s deep knowledge of market econom-ics and libertarian principles (and their history) andbegan to lean on him to vet articles for FEE.”

On visits to FEE Rothbard met Frank Chodorov, theprolific libertarian author who edited The Freeman thefirst year after Read acquired it. “Chodorov helpedintroduce Rothbard to the works of [Albert Jay] Nock,Herbert Spencer, Garet Garrett, and Isabel Paterson,among others,” Doherty reports. It wasn’t long beforehe encountered Ludwig von Mises, an adviser to Read.

Thus Rothbard, who went on to become one of thegreat natural-law libertarian figures in history and anindefatigable advocate/elaborator of Misesian (Austrian)economics in method and substance, can be said to havereceived vital intellectual nourishment at FEE’s Irving-ton-on-Hudson estate.

Rothbard, who died 15 years ago, was at once abeloved and controversial figure. He was one of the veryfew individuals who shaped the modern freedom move-ment at its start. Even advocates of the freedom philos-ophy who never read a word he wrote have beeninfluenced by him.With a passion nonpareil, Rothbardset out to create a self-conscious libertarian movement,which he accomplished through his activism andcharisma, as well as through his writings—from the

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Murray RothbardPerspective

Published byThe Foundation for Economic Education

Irvington-on-Hudson, NY 10533Phone: (914) 591-7230; E-mail: freeman@fee.org

www.fee.org

President Lawrence W. ReedEditor Sheldon Richman

Managing Editor Michael NolanBook Review Editor George C. Leef

ColumnistsCharles Baird David R. Henderson

Donald J. Boudreaux Robert HiggsStephen Davies John Stossel

Burton W. Folsom, Jr. Thomas SzaszWalter E.Williams

Contributing EditorsPeter J. Boettke Dwight R. Lee

James Bovard Wendy McElroyThomas J. DiLorenzo Tibor Machan

Joseph S. Fulda Andrew P. MorrissBettina Bien Greaves James L. Payne

Steven Horwitz William H. PetersonJohn Hospers Jane S. Shaw

Raymond J. Keating Richard H.TimberlakeDaniel B. Klein Lawrence H.White

Foundation for Economic Education

Board of Trustees, 2009–2010Wayne Olson, Chairman

Harry Langenberg Walter LeCroyWilliam Dunn Frayda Levy

Jeff Giesea Kris MaurenEthelmae Humphreys Roger Ream

Edward M. Kopko Donald Smith

The Foundation for Economic Education (FEE) is anonpolitical, nonprofit educational champion ofindividual liberty, private property, the free market,

and constitutionally limited government.The Freeman is published monthly, except for combined

January-February and July-August issues. Views expressed by the authors do not necessarily reflect those of FEE’s officers and trustees. To receive a sample copy, or to have The Freemancome regularly to your door, call 800-960-4333, or e-mail mnolan@fee.org.

The Freeman is available electronically through products and serv-ices provided by ProQuest LLC, 789 East Eisenhower Parkway, POBox 1346, Ann Arbor, Michigan 48106-1346. More informationcan be found at www.proquest.com by calling 1-800-521-0600.

Copyright © 2010 Foundation for Economic Education,except for graphics material licensed under Creative CommonsAgreement. Permission granted to reprint any article from this issue, with appropriate credit, except “Let’s Take the ‘Crony’Out of ‘Crony Capitalism’.”

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P E R S P E C T I V E : M u r r a y R o t h b a r d

scholarly to the popular—in economics, history, politi-cal philosophy, and social criticism. For one man tohave turned out Man, Economy, and State/Power andMarket; America’s Great Depression; The Ethics of Liberty;Conceived in Liberty (four volumes on American historythrough the Revolutionary War); For a New Liberty—and so much more—is something astounding.We prob-ably won’t see his likes again. (See David Gordon’sFreeman article, “Murray Rothbard’s Philosophy ofFreedom,” www.tinyurl.com/ycfbybb.)

I feel lucky to have known Murray. He was always adelight to be around, whether talking about someobscure historical figure, traditional jazz (before theelectric guitar intruded), classic movies, or the future ofliberty. He was unfailingly optimistic and ever ready fora laugh. He was what he called H. L. Mencken (whomhe treasured):“the joyous libertarian.”

To say that he was controversial even within the free-dom movement is an obvious understatement. His appli-cation of libertarian and market principles to even the“traditional functions” of limited government—that is,his belief that the free market can and should provide all legitimate services competitively—stirs heated debatetoday. While his originality in the matter he called “anarcho-capitalism” is clear, he himself might say he wassimply picking up the baton carried by the pioneeringnineteenth-century free-market economist Gustave deMolinari, whose seminal essay,“The Production of Secu-rity,” Rothbard first brought to American libertarians.

Whatever one thinks of Rothbard’s answer to thequestion raised therein, there can be no doubting thevalue of the question itself; it forces one to examine thecontours of liberty, the nature of the State, and there-fore the very possibility of limiting its powers.

Those who cherish liberty cannot calculate theirdebt to Murray Rothbard.

* * *We lead off with the winning essay in the second

annual Eugene S.Thorpe writing competition: RichardFulmer’s “Legends of the Fall:The Real and ImaginedSources of Our Bubble Economy.” Of the 182 entriesaddressing the causes of the current housing and finan-cial debacle, Richard Fulmer’s was judged the best.Congratulations, Richard!

As the practice of medicine becomes more bureau-cratized by government intervention, the profession

will change subtly and gradually, but patients will even-tually notice the degradation in service. Such is where“reform” will lead, says Theodore Levy.

All during the debate over the reinvention of med-ical insurance, it was taken for granted that individualsshould be forced to buy coverage. James Payne, whorefuses, is ready to accept his status as a criminal.

Nien Cheng suffered unimaginable oppression atthe hand of the Chinese communist regime but wenton to be a passionate spokeswoman for freedom. Onthe occasion of her death, James Dorn offers a tributeto this heroic woman.

When people think of Africa, sadly, they think ofpoverty and oppression. But that has not been true forBotswana. Scott Beaulier explains this little-known suc-cess story.

Nassim Nicholas Taleb is a provocative writer whoscoffs at the idea that human affairs can be predictedscientifically. Robert Murphy introduces us to the manwho popularized the term “black swan.”

Ethanol is still in our gasoline, and besides all the badthings you’ve heard about it, it also harms engines.Michael Heberling has the details.

Broadly speaking, there are only so many ways forsociety to be organized, and only one is in harmonywith freedom and human nature. Paul Cleveland andArt Carden elaborate.

Here’s what our columnists have whipped up:Lawrence Reed says he doesn’t care what you callyourself as long as you oppose aggressive force. DonaldBoudreaux defines the rule of law. Robert Higgs dis-cusses capital consumption during World War II. JohnStossel dissects crony capitalism. Charles Baird antici-pates how health care “reform” will help labor unions.And Ivan Pongracic, Jr., reading Paul Krugman’s claimthat more government spending will fend off a 1937-style recession, responds,“It Just Ain’t So!”

Books on private schools for the poor, political cap-italism, Herbert Hoover, and the Federal Reserveoccupy our reviewers.

In Capital Letters, Thomas Szasz answers a reader’sconcerns about religious identification and GeorgeSchwappach explains how carrying less health insur-ance saved him money.

—Sheldon Richmansrichman@fee.org

B Y L AW R E N C E W. R E E D

Anti-Force is the Common Denominator

Ideas and Consequences

Allow me to alter something the great humoristWill Rogers said: “I’m not a member of anyorganized group. I’m a libertarian.” I wince a bit

as I say that, though. Let me explain.Labels such as “libertarian” aren’t always illuminat-

ing. Sometimes they serve as expedient substitutes forthought—as in, “Oh, he’s one of those!” When pressedto cough up a label to describe myself, I sometimesemploy “libertarian” but not without adding a caveat ortwo so no one assumes I’m referring to a political partyor that my position on certain hot-button issues mustbe this or that. On other occasions I call myself a “classical liberal,” but unless I havetime to explain it, confused listenerswonder how that differs from the“liberals” of today. “Voluntaryist” (ofthe British philosopher AuberonHerbert variety) describes my polit-ical, ethical, and economic lean-ings most accurately—unfortunately,though, few people have ever heardthe term.

I am also other things as well. I’man “Austrian” economist (whileappreciating numerous positive con-tributions from other schools of thought). I’m a Chris-tian who is also a rationalist because I believe reason inan ordered universe is a divine gift. Though I don’tembrace Ayn Rand’s atheism, like her I am a ferventadvocate of capitalism who endorses man’s inalienablerights, the roles of the producer and entrepreneur, andthe magnificence of the creative mind. I’m a conserva-tive in the sense that I value many time-tested tradi-tions, even if I oppose mandating them by legislativefiat. I’m a moralist because I think moral principles likehonesty, independence, courage, and self-discipline areboth good and indispensable ingredients for a free soci-ety. Readers might recall that in the January issue I

happily labeled myself a latter-day “Locofoco”(www.tinyurl.com/ycvq6b3).

Each person’s order of values, focus of attention, andexpertise are unique to him—so one can be a libertar-ian, broadly speaking, and still call himself an Objec-tivist or an Austrian or a voluntaryist or a classicalliberal or a Christian or an atheist or a moralist or aconservative or even two or more of those things.

Blessed with many friends in all these camps, Iendeavor to make enemies in none. I lament thoseoccasions when disagreement leads to hostility betweenpeople who are otherwise allies on most issues. If you

aim to make progress for the largercause, then tolerance, bridge-building,and finding common ground (none of which necessitates compromise on fundamental principles) seem more appropriate than picking fights.What’s the point of self-righteousbreast-beating?

While I don’t label myself anObjectivist, I love this quote (andmany others) from Ayn Rand: “Whenyou see that trading is done, not byconsent, but by compulsion—when

you see that in order to produce, you need to obtainpermission from men who produce nothing—whenyou see money flowing to those who deal, not ingoods, but in favors—when you see that men get richerby graft and pull than by work, and your laws don’tprotect you against them, but protect them againstyou—when you see corruption being rewarded andhonesty becoming a self-sacrifice—you may know thatyour society is doomed.”

A friend posted this on Facebook recently: “If FEEand other libertarian-leaning orgs would drop all their

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Lawrence Reed (lreed@fee.org) is the president of FEE.

Labels such as“libertarian” aren’talways illuminating.Sometimes they serve as expedientsubstitutes forthought.

religious baggage, I could support them wholeheart-edly.” I felt compelled to reply, “No one at FEE claimsthat you must be ‘religious’ to value and support liberty.We respect all people of faith, or no faith, so long asthey do not initiate force against their fellow citizens.And because we judge people for the individuals theyare, not for the ‘group’ someone says they’re in or bythe label somebody attaches to them, we don’t con-demn all people of faith for the wrongs of a few anymore than we would condemn allatheists for the wrongs of a Stalin or aMao.A person’s faith or lack thereof isjust that—personal—and not a require-ment to support property rights.”

I wasn’t trying to convert that per-son to my faith, nor did I seek to esca-late the exchange into a parting of theways. I attempted to defuse it byemphasizing what I thought wasfriendly territory: Both of us wouldlike to see much less initiation of forcein society. We live in a world wherelots of misguided people are not satis-fied that there’s enough of it yet.Theyadvocate more initiation of force, as evidenced by theirdesires to deal with every problem under the sun bycreating another tax-supported government program.I saw this Facebook acquaintance as an ally not anenemy. And that’s the way it ought to be, it seems tome, if those of us who believe in liberty really want towin.

Allow me to share with you a few paragraphs frommy May 2007 Freeman column (www.tinyurl.com/dltnal).They might form a basis for more amicable relationsbetween factions that now see themselves as opponents:

A mature, responsible adult neither seeks unduepower over other adults nor wishes to see otherssubjected to anyone’s controlling schemes and fan-tasies: This is the traditional meaning of liberty. It’sthe rationale for limiting the force of government inour lives. In a free society the power of love, not thelove of power, governs our behavior.

Consider what we do in our political lives thesedays—and an unfortunate erosion of freedom

becomes painfully evident. It’s acommentary on the ascendancy ofthe love of power over the power oflove. We have granted command ofover 40 percent of our incomes tofederal, state, and local governments,compared to 6 or 7 percent a cen-tury ago. And more than a fewAmericans seem to think that 40percent still isn’t enough.

We claim to love our fellow citi-zens while we hand governmentever more power over their lives,hopes, and pocketbooks. We’veerected what Margaret Thatcher

derisively termed the “nanny state,” in which we asadults are pushed around, dictated to, hemmed in,and smothered with good intentions as if we’re stillchildren.

It boils down to this: I don’t much care what youcall yourself, but if you want to see a hefty reduction inthe initiation of force in society, then you’re an ally Iwant to collaborate with. Let’s focus not on our differ-ences but on changing the ideas of those who areworking in the other direction.

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A n t i - F o r c e i s t h e C o m m o n D e n o m i n a t o r

I don’t much carewhat you callyourself, but if youwant to see a heftyreduction in theinitiation of force in society, then you’rean ally.

It is rather unfortunate that the Royal SwedishAcademy of Sciences’ Economics Prize Committeechose to award the 2008 Nobel Prize in economics

to Paul Krugman. It is not that Krugman did notdeserve the prize—his contributions to internationaltrade theory were indeed substantive and valuable.Theproblem is that by 2008 Krugman had long ceased tobe a serious economist, becominginstead a common pundit. Thus theNobel Prize gave his ideological andhighly partisan New York Times col-umn an imprimatur of economiccredibility that it certainly does notdeserve. Over the past ten years theeconomic analysis found in his col-umn has regressed to Keynesian cari-cature, bereft of the depth or subtletythat one would expect from a Nobellaureate. Instead, the purpose of hiscolumn is quite clear: to justifyexpansion of government control ofthe economy under all circumstances,facts and good economics be damned.

A Broken Recordhat 1937 Feeling” (January 14; www.tinyurl.com/y9etge7) is an excellent example. Krugman

argues that the recent signs of economic recovery arevery likely deceptive and therefore the governmentshould not even think about easing up on the fiscal andmonetary gas pedals anytime soon. He points to the1937 recession as an example of the awful conse-quences of premature tightening. For the past yearKrugman has insisted that the government’s economic

stimuli have been too small and more stimulus isurgently need. This is just another round of the same-old same-old.

Krugman’s article exhibits the most simple-headedand mechanistic view of Keynesian economics: If theeconomy is in the doldrums, it must be because aggre-gate demand is too low, and therefore it is up to gov-

ernment fiscal and monetary policy toraise it to its proper level. The onlymistake that the government couldpossibly make is to not do enough fastenough.

What Krugman fails to tell hisreaders is that it is widely acceptedamong modern economists that the1937 recession was primarily causedby another kind of government mis-take. The Fed did indeed start tight-ening in 1936, but the problem was how it did it. Instead of using open-market operations to graduallyincrease interest rates in order to con-tain any inflationary pressures, it choseinstead to use its new power (grantedby Congress the previous year) to set

the banks’ reserve requirements—the percentage ofdeposits that banks must hold either in their vaults or atthe Fed. We now know that changing the reserverequirements is highly disruptive to bank operationsand is simply too blunt of a monetary tool—even smallchanges can have a great impact on money supply.

T“

Government Must Stimulate to Avoid a 1937-Style Recession?

It Just Ain’t So!

6T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

B Y I VA N P O N G R A C I C , J R .

Ivan Pongracic, Jr. (ipongracic@hillsdale.edu), is an associate professor ofeconomics at Hillsdale College, and the author of Employees andEntrepreneurship.

Paul KrugmanProlineserver (commons.wikimedia.org)

7 A P R I L 2 0 1 0

Rushing like fools where wise men fear to tread andclearly oblivious to the destructive potential of this newtool, the Fed engaged in three back-to-back increases inreserve requirements between August 1936 and May1937, causing a severe tightening of the money supplyin a very short time. It is no surprise that the Americaneconomy, just as it appeared poised for a modest recov-ery, was plunged into a serious recession—within thedepression!

A Terrible Record

The moral is not that the Fed shouldn’t be tighten-ing now. Rather, it is that when the Fed makes

a mistake in monetary policy, the consequences areoften dire. And the Fed’s record over the past nearlyhundred years is disastrously bad, with even its defend-ers admitting that it has often been a major destabiliz-ing force in the economy.

Krugman also fails to note that theU.S. government is repeating othermistakes committed in 1935-36:attempting to radically reorganize keyeconomic sectors, pursuing new soak-the-rich taxes, and vilifying business-men and financiers in the process.Theeconomy may be forced to fundamen-tally change how the health care sector operates, creat-ing another enormous unfunded liability for the federaland state governments and possibly a major burden onindividuals and businesses. The Obama administrationhas also vigorously pursued carbon cap-and-trade legis-lation, which would drive up energy costs, potentiallyby large amounts. On top of this, there has been muchtalk of completely revamping and tightening bankingand financial regulation.

In short, we are in the middle of the most ambitiousgovernment-enlargement agenda since probably theNew Deal. Does it come as much of a surprise that weare getting similar results?

After pouring massive amounts of money into theeconomy in the past two years—two fiscal stimuli total-ing $952 billion, the $700 billion TARP program, the$102 billion increase in discretionary domestic spend-ing by the federal government in the 2009 fiscal year,and the $1.2 trillion increase in the monetary base by

the Fed, all together adding up to nearly $3 trillion, ormore than 20 percent of GDP—the economy is still farfrom healthy. Unemployment is stuck at 10 percent, andnobody is expecting a quick recovery. But we did getthe record federal budget deficit of $1.4 trillion (10percent of GDP) in fiscal 2009, bringing the grossnational debt to a record $12 trillion-plus, on track tohit 100 percent of GDP in 2011 and calling into ques-tion the future fiscal viability of the U.S. government.Add to the mix the unfunded liability time-bombs of Medicare and Social Security, and it becomes obvi-ous that sky-high tax—or inflation—rates areinescapable. In addition, every one of the proposedgovernment interventions—and many others beingbandied about today—is likely to increase taxes onindividuals and businesses, as well as significantly esca-late regulatory oversight, making it more difficult and

riskier to run a business. How manyof these acts will pass into law andwhat forms will those laws take? Noone can know. It is easy to see whyentrepreneurs, who in the end are theones creating economic growth andjobs, would be worried enoughabout the future to simply stopinvesting.

The dynamic at work here has been labeled “regimeuncertainty” by economist and Freeman columnistRobert Higgs in his article “Regime Uncertainty:Whythe Great Depression Lasted So Long and Why Pros-perity Resumed after the War” (The Independent Review,Spring 1997). Higgs defines regime uncertainty as astate of “pervasive uncertainty among investors aboutthe security of their property rights in their capital andits prospective returns . . . [due to] government actions.”Higgs shows how the “Second New Deal from 1935 to1940” scrambled the rules of the game to such anextent that many entrepreneurs simply withdrew fromthe economy rather than continue to attempt to createwealth.

Krugman needs to read Higgs’s brilliant and detailedhistorical and theoretical analysis to understand the realreason we should worry about repeating the 1937 reces-sion: government’s doing too much rather than notenough.

G o v e r n m e n t M u s t S t i m u l a t e t o Av o i d a 1 9 3 7 - S t y l e R e c e s s i o n ? I T J U S T A I N ’ T S O !

The Fed’s record over the past nearlyhundred years isdisastrously bad.

Preface

The Foundation for Economic Education ispleased to announce that Richard W. Fulmer ofHumble, Texas, is the winner of the second

annual Eugene S.Thorpe writing competition. Mr. Ful-mer holds a bachelor’s degree in mechanical engineer-ing from New Mexico State University and for over 20years has worked as a systems analyst in the energyindustry.With Robert L. Bradley, Jr., he is the author ofEnergy: The Master Resource. His article,“Legends of the Fall: The Real and Imagined Sourcesof our Bubble Economy,” is published below.

We have for the better part of a century now livedin a world of fiat money, and fiat monetary systems aresophisticated versions of central planning. The beliefsystem that supports them carries an inherent hubristhat the planner’s vision of the future is sufficiently pre-cise to chart the path of the chaotic interaction of vari-ables that made up an economy. It is a recurring myth,with consistent historical outcomes. Mr. Fulmer’s papergoes directly to first causes and discusses the real estatebubble as a predictable consequence of our central-banking system.

One hundred eighty-two authors responded toFEE’s call for papers in competition for the 2009Eugene S. Thorpe Award, and many wrote eloquentlyof multiple secondary causes. The unintended conse-quences of the Community Reinvestment Act? Fannie,Freddie, Ginnie, and assorted ill-conceived cousins?Zigging instead of zagging by our central bankers?Political opportunism and legalized graft? All surelytrue. Greed and other venal motives? Of course. But itmisses the point to blame either human motivation orhuman error. The problem is systemic and founda-

tional. It’s not what people do with or to the system—it’s the system itself.

The selection committee thanks all the contestantsfor their contributions. The rules allow for only onewinner, but special recognition and honorable men-tions are in order for several of the runner-up contrib-utors. Erin Mundahl of Independence, Minnesota,wrote of government policies that disrupted the naturalbrakes on risk taking: “Free-market policies naturallylimit risk exposure. Regulations which encouraged oreven mandated an expansion of risk counteracted thisnatural limitation.”The risks were ultimately socializedto the taxpayers. The returns accrued to the congres-sional and bureaucratic elites that benefited both finan-cially and politically. Government operates outside theconfines of the natural constraints imposed by profitand loss, and grants political rewards based on the socialchoices valued by bureaucratic actors.

Charles N. Steele of Hillsdale, Michigan, observedthat government not only did what it shouldn’t; gov-ernment also failed to do what it should. A free mar-ket cannot function without the supportiveinfrastructure of the rule of law, and one of the legiti-mate functions of government is to prosecute criminalactivity. Mr. Steele observes that “Deception, false rep-resentation of products, and failure to live up to con-tractual terms are not legitimate methods ofcompetition in the free market. They are criminalactivity, and the free market requires that such activi-ties be policed.” Just so.

B Y R I C H A R D W. F U L M E R

Legends of the Fall:The Real and ImaginedSources of Our Bubble Economy

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Richard Fulmer (richard_w_fulmer@hotmail.com) is a senior fellow withthe Institute for Energy Research and coauthor (with Robert L. Bradley, Jr.)of Energy:The Master Resource.

From Nero to FDR, emperors and their kin havelistened to the sirens of monetary manipulation. Thevoices are enchanting and sing of wealth without work.But the ships of many states have foundered on therocky shores to which such fantasies inevitably drawthem. Real wealth creation cannot be manipulated; itresults from increased efficiencies of resource allocationand production. A drunken Saturday night party maybe fun while it lasts, but the Sunday morning hangoverthat follows is a predictable consequence of the short-sighted behavior that created it. Unless and until oursystem of monetary creation and control is redesignedto benefit from the power of market pricing mecha-nisms, we can expect the recurring cycle of boom andbust to continue.

Congratulations to Richard W. Fulmer on his win-ning article.

Karl BordenProfessor of financial economics, University of Nebraska-KearneyChairman, Eugene S.Thorpe Writing Competition Committee

* * *

Businesses, competing for consumer dollars in afree market, must deal with the world as it is inorder to survive. Politicians, competing for con-

stituent votes, spin facts to recreate the world as theywant it to be in order to gain support for their policies,hide mistakes, and shift blame. In this world of spunreality, the failure of government intervention providesthe rationale for still more intervention. So spins theendless cycle in which legislatures create unintendedconsequences, condemn “market failure,” and demandfurther legislation. Government grows in crisis, even ifit created the crisis.

Our current financial problems provide an illustrationof this all-too-familiar pattern. In response to the hous-ing bust, politicians hid behind long-discredited myths,moving swiftly to lay blame variously on Wall Streetgreed, oil speculation, investors’ animal spirits, deregula-tion, unrestrained capitalism, predatory lending practices,and, of course, the business cycle.Yet even a brief look at the facts reveals government intervention throughout.

The Monetary Cycle

Supply and demand regulate prices in a free-marketeconomy. Increased borrowing (demand for loanable

funds) or decreased saving (supply) leads to rising interestrates (prices). Conversely, lower interest rates stem fromless borrowing, more savings, or both. More saving meansthat consumers favor future consumption over currentspending. Banks, with rising deposits on hand, drop theirinterest rates to compete for borrowers. Capital invest-ments deemed infeasible when interest rates were highernow appear attractive. Companies borrow to expand pro-ductive capacity, anticipating future rising demand madepossible by rising present consumer saving.

Suppose, however, that the government intervenesto artificially lower the price of money. Reduced inter-est rates make saving less attractive and consumptionmore so. At the same time businesses, taking advantageof lower rates, borrow to fund expansion. Prices rise as consumers and producers compete for scarceresources—a sack of seed corn cannot be both eatenand planted. Sales increase and markets boom. Eventu-ally, however, the central bank must raise interest ratesto prevent inflation, and the boom goes bust. Businessesfind that they have overinvested or invested in thewrong things.

Such malinvestment is an unsustainable allocation ofscarce resources to create goods and services for whichthere is insufficient demand. A correction occurs whenresources are reallocated to produce what people actu-ally want. Corrections can be very painful as industriesthat overexpanded during the boom now downsize,shedding employees and suppliers. Avoiding the adjust-ments, however, simply postpones the pain. Resourcesoften continue to be poorly invested, compounding thedamage and making the inevitable correction thatmuch more agonizing when it comes.

Boom and bust cycles nearly always result from mon-etary expansions that disrupt the price signals regulatingan economy. Such expansions preceded Holland’s TulipMania in 1636–1637, the nineteenth-century bankingpanics in the United States, the Great Depression, thedot-com bubble, and the current housing debacle.

Ironically, these monetary cycles are called “businesscycles,” as if they were an inherent part of the free mar-ket. Proponents of some business-cycle theories believe

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L e g e n d s o f t h e F a l l

that, left unregulated, businesses will overproduce, cre-ating a glut of unwanted goods. Factories must thenreduce production or even shut down until the glut iseliminated.

Yet what mechanism would drive businesses in dif-ferent industries across an entire nation to produceunwanted goods? How could, to cite the most recentexample, home builders in California, Nevada,Arizona,Florida, and markets in between have simultaneouslymisread local demand to such an extent? A nationwidespike in greed? Irrational exuberance? Bankers’bonuses? A simpler, more rational explanation is thatthey were misled by government policies that artifi-cially inflated housing prices, giving the appearance ofgreater demand than was actually there. Overproduc-tion is a symptom, not a primary cause.

The Housing Bubble

Early in the new millennium, theFederal Reserve slashed interest

rates in response to the dot-com col-lapse and the 9/11 attacks. Othernations’ central banks soon followedsuit. Now awash in liquidity, investorsfrom around the world needed invest-ments that would yield returns higherthan the rate of inflation. Coinciden-tally, American local and federal poli-cies—including land-use restrictions,preferential tax treatment, buyer subsi-dies, and regulations favoring low-income buyers—hadmade investing in residential housing more attractivethan other options. Housing prices rose as homeownersupgraded and renters became owners.

Home loans were sold in the secondary mortgagemarket, which is dominated by the government-spon-sored enterprises: the Federal Home Loan MortgageCorporation (Freddie Mac) and the Federal NationalMortgage Association (Fannie Mae). Mortgages werethen bundled into “packages” in order to diversify risk.Individuals and institutions worldwide purchased thesepackages as investments. “Derivatives” such as credit-default swaps (essentially insurance against bond or, inthis case, loan failure) and other such securities createda “multiplier effect,” as these investment vehicles were

based on other vehicles that were, in turn, based onmortgages.

The complex system that resulted was inherentlyunstable and was made more so by regulations thatcoerced lending institutions into making home loans toborrowers who could not afford to repay them. In addi-tion, Congress encouraged Freddie Mac and FannieMae to buy trillions of dollars worth of these “sub-prime” loans, enabling lending institutions to engage ineven more such dangerous lending with little (orreduced) incentive to vet borrowers.

Credit-rating agencies, members of a cartel createdby the Securities and Exchange Commission, gaveunrealistically high ratings to packaged debt containingsubprime loans. Basel II, an international banking

accord, similarly understated theassociated risks and encouragedbanks to hold mortgage-backedsecurities by requiring them to keepsmaller cash reserves to back suchinstruments than it required for tra-ditional loans. Implicit governmentsupport for Freddie Mac and FannieMae and the “Greenspan put” (anunstated Federal Reserve policy ofinjecting liquidity into the economyin response to any serious difficulty)encouraged investors to take risks inthe belief that the governmentwould cover any losses.

Speculators exploited zero-down loans and“adjustable-rate mortgages,” intended for disadvantagedhome buyers, and began “flipping” homes (buying housesonly to quickly resell them at a profit). In some cases,houses were built strictly as investments—built to be soldand sold again, not to be occupied. Such overbuildingcould not be sustained and, when the Federal Reserveraised short-term interest rates—contracting the moneysupply—the bubble burst.The value of investments basedon bundled home mortgages quickly plummeted.

Mark-to-market accounting rules enforced by theSecurities and Exchange Commission (SEC) com-pounded the problem. SEC rules required financialinstruments to be valued at current market prices,amplifying the effects of both boom and bust. Mort-

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R i c h a r d W. F u l m e r

Government policiesartificially inflatedhousing prices,leading buildersacross the country tobelieve that consumerdemand was greaterthan it actually was.

gage-based securities, overvalued when housing pricessoared, became undervalued as the panic grew andfinancial institutions saw their assets become virtuallyworthless almost overnight.

The key intervention and primary cause of theentire cycle of events, however, was the Fed’s initialmonetary expansion. Government policies all but dic-tated that the resulting boom would be concentrated inresidential housing and that the eventual bust would befar worse than it would otherwise have been. Evenwithout these policies, though, a boom would still haveoccurred. Perhaps it would have been concentrated inanother sector of the economy; or perhaps there wouldhave been a general rise in capital investment. Eitherway, once the Federal Reserve triggered the expansion,a boom was inevitable. And, becausethe boom was artificial (that is, thecredit expansion was not based onreal savings), a bust had to follow.

Government control of a nation’smoney supply guarantees boom andbust cycles. To illustrate this, imaginea car with some very special features.Its windshield is frosted so that thedriver cannot see where he is going,and its side windows are just clearenough to allow him only a vagueidea of where he is.The rear windowalone affords an unobstructed view.Finally, the steering linkage is on a30-second delay. The car will not change course untilhalf a minute after the driver turns the steering wheel.

Now imagine trying to drive such a car.You steer astraight course as long as you see the highway stretchedout behind you in the rear view mirror.When the roadcurves, you realize it only after the fact.You turn thewheel to get back on the highway, but nothing happens. So you turn the wheel some more. Again,nothing happens, so you turn the wheel still farther.Suddenly, the steering kicks in, and the car veerswildly. Desperately, you swing the wheel in the otherdirection, but the car continues turning the other way.What follows is a series of violent overcorrections end-ing in a crash.

Trying to regulate a nation’s money supply works

about the same way. Central bankers cannot see intothe future.They see only dimly where they are, and it isonly in hindsight that their vision is clear. The impactof adjustments they make to the money supply may notbe fully felt for a year or more. Such a system, like ourcar, is inherently unstable.

In response to the bust the Federal Reserve hasmoved quickly to re-inflate the economy, just as it haddone after the dot-com collapse. The result is beingtermed a “recovery,” but more likely it is another over-correction, the beginning of yet another boom and bustcycle, and a further misallocation of scarce resources.We cannot spend our way into prosperity. Production,not consumption, creates wealth.

The Road Back

We face two basic issues: Howdo we recover from the cur-

rent recession, and how do we stopmonetary boom and bust cycles? Theanswer to both is to increase eco-nomic freedom.

Our immediate problem stemsfrom an imbalance between moneyand goods and from resource misallo-cation resulting from governmentinterference with the market. Themoney-goods balance can be restoredby shutting off the federal moneyspigot. This requires reining in gov-

ernment spending (which competes with the privatesector for scarce resources), cutting taxes, and freeingmarkets. Correcting the misallocation of resourcesrequires eliminating the policies that favor residentialhousing over other consumer needs.

The longer-term problem of taming boom and bustcycles can be addressed only by eliminating the FederalReserve’s money monopoly. Repealing legal tenderlaws (which grant a monopoly on the creation of mediaof exchange to the Federal Reserve) would free Amer-icans to choose forms of money that both meet theirneeds and maintain their value.

Before any of this can happen, though, the myth ofthe “business cycle” must be dispelled. Legends are lux-uries we cannot afford. Reality is not optional.

11 A P R I L 2 0 1 0

L e g e n d s o f t h e F a l l

In response to the bustthe Federal Reservehas moved quickly tore-inflate theeconomy.The resultis more likely anotherovercorrection than a“recovery.”

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Social change can be revolutionary, sudden, andswift, but more commonly it moves at a glacialpace. Yet glaciers work great change, and great

damage, given enough time.There has been much talk of people leaving the

medical profession if government further bureaucratizeshealth care. But the odds are great that there won’t beany dramatic job stoppage. No medical “Galt’s Gulch”will form where masses of physicians on strike will livein peace and solitude, some building cars and othersmining copper, all vowing never to returnto medicine until their demands are met.Such is the stuff of fiction. But the reality ismuch worse.

What will happen is more insidious,though over time no less damaging. Therewill be an increase in early retirement, asmore physicians tire of their jobs. Morephysicians will take time off and let theirpractices suffer at the margin. Patients willhave slightly more difficulty making appointments . . .each year . . . year after year, though never so quickly asto lead to mass complaints or a recognition that thingsare obviously worse.

Coverage will be shunted to physicians’ assistants,nurse practitioners, emergency department physicians,hospitalists, and partners. Fewer patients will feel theyhave their own doctors. This will not necessarily beworse—I don’t feel I have my own McDonald’s, yet thefood remains as I expect—but it may be worse, to theextent quality of care depends on background knowl-edge of individuals.

The filter of who gets into medical school willchange. Fewer will enter the field due to intellectual

curiosity. More and more people who cannot toleratebureaucracy will be weeded out. Questioning author-ity will become as dangerous in medicine as it is inpolicing or the military. The 40-hour physician workweek, on the other hand, will become commonplace,and the type of person attracted to medicine will notbe the type who is willing to work any longer, or anyharder.

Health care will be less a service than a commodity.All your complaints will have answers, if not always the

right answers. Workups will be standardizedby “expert panels” allegedly educating physi-cians as to “best practices.” And if the “bestpractice” is to not treat you because it is notcost-effective to society, the fact that you wantand are willing to pay for the treatment willbe seen as a problem rather than a solution.

These panels are designed to save moneyby making workups more efficient and uni-form, but the reality is different. More expen-

sive imaging tests routinely substitute for less expensivephysical exams because the quality of physical examsvaries and doctors have little incentive to improve theirown abilities at examination. Not only is it becomingsomething of a lost art (“Why use a stethoscope to listenfor a heart murmur when we can just see it on a cardiacultrasound exam?”), but it takes time.And since doctorsare paid by third parties more concerned about effi-ciency than quality, taking time with patients—improv-ing one’s diagnostic exam skills—is a luxury fewer andfewer physicians can afford.

B Y T H E O D O R E L E V Y

The End of Medicine:Not With a Bang, But a Whimper

13 A P R I L 2 0 1 0

Theodore Levy (ted_levy@me.com) is a physician practicing in theSouthwest.

Does this sound unbelievable? It is happeningalready. In the 1990s the Office of Inspector Generalinvestigated major teaching hospitals in America. Tax-payers are billed by such institutions for training newgenerations of physicians. PATH (Physicians at Teach-ing Hospitals) audits found patients in these hospitalswere commonly evaluated by medical students orinterns only. Attending senior physicians were fraudu-lently simply “signing off,” saying, “I agree,” withoutever seeing the patient.The University of PennsylvaniaHospital settled a PATH dispute for $30 million, andThomas Jefferson University Hospital did so for $12million. Anecdotes describing such problems abound,including hospital charts saying, “Physical exam showsboth pupils equally reactive to light,” when the patienthad actually been blind in one eye for decades, a mis-take much more easily attributable to the exam’s neverhaving been done than to error.

Slowly and gradually communityhospitals will come to resemble VAhospitals. Centers of excellence willbe advocated in theory—evidence-based medicine will be the byword to“bend the cost curve downward” byeliminating “inefficiencies.” But willthey really be excellent, or will theymerely be better than whatever else isavailable? Will they be free to innovate? Will they befree to profit if their innovations are successful? Willthey simply be the medical equivalents of the best carson the road in Cuba?

Pharmaceutical innovation, produced by those evilfor-profit companies that even doctors love todenounce, will drop off. Not precipitously, but eventu-ally. And people will die, as they have died since timeimmemorial, without anyone ever knowing what drugsmight have improved or extended their lives, if onlythere had been greater incentives to produce them.

As noted, imaging studies will become more impor-tant but will also become more difficult to schedule.And the quality spectrum between optimally inter-preted exams and standardly interpreted exams willcontinue to widen. The Current Procedural Termi-nology (government billing) codes are the same, inde-pendent of the quality of the interpretation.

There is already a spectrum of quality available inmedicine, and those with means can obtain better med-ical care than those without, just as O.J. Simpson wasable to obtain better legal services than your averagedefendant—the first time. But that spectrum risksbecoming more rigid, more settled. What has been, inAmerica, health care for the poor will become healthcare for all but the very rich. But the cost curve willbend downward.

Or will it? Medical salaries will bend downward,certainly, but administrative costs associated with gov-ernment programs are always huge, and always underes-timated. Medicare spending now is an order ofmagnitude higher than the projections in 1965 of whatit would be now. But we do know this: Bending thecost curve of medical care in either direction comeswith costs.

If it’s bent downward people will wait longer forhealth care that is not as good as itcould have been.We often buy things“not as good as they could havebeen,” Chryslers rather than Cadillacs,Range Rovers rather than RollsRoyces, but those choices are made atthe individual level, not forced on usby “society.” And those choices are,well, choices—not a byproduct of a

system we cannot control.Or the cost curve can bend upward, perhaps due to

hidden governmental administrative costs, perhapsbecause AARP is a strong lobby. And we’ll feel thepinch in other areas, as our debt grows, as our prosper-ity lags and falters and becomes a quaint piece of his-tory we teach our children (or perhaps, in our guilt,hide from them).

We’ll pride ourselves, as we do now, on “the besthealth care system in the world,” even while we also bragthat we have universal care, just like the great nations ofEurope. And we’ll suffer with double-digit unemploy-ment, just like the great nations of Europe.And we’ll havelower growth in productivity, just like the great nations ofEurope. And we’ll have smaller houses and cars, just likethe great nations of Europe. But it will be all right,because we’ll be able to wait . . . and wait . . . and wait . . . for our turn at the health care that is our right.

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T h e o d o r e L e v y

Slowly and graduallycommunity hospitalswill come to resembleVA hospitals.

B Y D O N A L D J . B O U D R E A U X

On the Rule of Law

Thoughts on Freedom

Everyone agrees that the rule of law is good, bothmorally and economically. Almost no one—regardless of political ideology—dares to ques-

tion the great goodness and importance of the rule of law.

I certainly don’t question it.But what exactly is the rule of law? In answering this

question we uncover reasons why persons with vastlydifferent views on the appropriate role of governmentall sincerely proclaim allegiance to the rule of law.

Here is what is not of the essence of the rule of law. The rule of law does not exist simply because thegovernment that issues commands and enforces the lawis legitimately and democraticallyelected. The rule of law does not existsimply because commands and laws areenforced according to their letter, with-out bias or exception or corruption.The rule of law does not exist simplybecause everyone in society, includingthose with political power, is subject tothe government’s commands.

Each of those traits of a decent polit-ical and legal system is desirable, butneither separately nor collectively arethey the essence of the rule of law.

Rules and Laws

The rule of law exists when, and only to the extentthat, the rules enforced by government are in fact

law.My definition might sound like a tautology.After all,

don’t rules become laws precisely by being enforced bygovernment?

No. But confusion over the meaning of “rule oflaw” springs from the widespread but mistaken beliefthat it is by virtue of being enforced by governmentthat rules become law.

Law in fact emerges from the everyday actions ofmen and women in their ongoing efforts to thrive andto keep from bumping disruptively into each other.Law becomes embedded in the predominant expecta-tions of persons in a community.

To pick an extreme example, the unprovokedkilling of a peaceful person is not unlawful becausegovernment has declared the act illegal. Such anaction is unlawful because it violates deeply heldcommunity norms and expectations. Striking fromgovernment’s statute books all proscriptions againstmurder would not in the least make murder lawful.

In principle, in a classically liberal world, a govern-ment formalizes laws against mur-der, and uses some of its resources to police against murder, becausegovernment is the organization insociety that has the comparativeadvantage at performing such polic-ing. For much the same reason thatStarbucks specializes in retailingcoffee, government specializes inenforcing law. And just as Starbucksresponds to prevailing consumerdemands—just as Starbucks is notin business to tell consumers what

they want and don’t want, but instead is in business toserve consumers according to their specific tastes forcoffee and pastries—a genuinely classical-liberal gov-ernment is not in business to foist its demands and dic-tates on citizens, but instead to serve citizens byenforcing laws that exist independently of government.

Only by understanding law in this way can we makesense of the familiar stricture that “ignorance of the law

15 A P R I L 2 0 1 0

Donald Boudreaux (dboudrea@gmu.edu) is a professor of economics atGeorge Mason University, a former FEE president, and the author ofGlobalization.

Almost no one—regardless of politicalideology—dares toquestion the greatgoodness andimportance of therule of law.

is no excuse.” Because true law is always embedded inprevailing community expectations, society is happierand more peaceful the more people act lawfully—thatis, the more people act consistently with these expecta-tions. So the rare person who in fact does not knowwhat these expectations are is not permitted to violatethe law simply by pleading—or even by proving—thathe really didn’t know that, say, it’s unlawful to takeanother person’s purse without permission.

There’s no sense of injustice in punishing such apurse-snatcher.The laws that are violated in such casesare not in any way arbitrary; they grew organicallywithin the community and are important to its contin-ued peaceful existence. Also, becausethe expectations that are “law” are infact so widespread, the probability ofany given law-breaker really beingignorant of the law is so slim that it’snot worthwhile to let his allegedignorance stand as a potential defenseagainst his prosecution.

Contrast this expectations-basedunderstanding of law with the mod-ern myth that laws are only thosecommands issued by the State.Wouldmost of us be sanguine punishing, inthe latter case, a law-breaker whoreally and truly was ignorant of the State’s dictate? Ithink not.

While it’s highly unlikely that, say, a purse-snatcheris unaware that purse-snatching is unlawful, it’s not atall unlikely that, say, a property owner is unaware thatthe legislature or a bureaucracy has declared it a crimi-nal offense to fill in a small water hole in his backyard.Also, the fact that community norms do not proscribeproperty owners from filling in their water holes isstrong evidence that filling in such holes does little ornothing to disrupt the smooth functioning of society.

So while ignorance of the law, as it is embedded innorms and expectations, truly is no excuse for violatingthe law, ignorance of legislative diktats is—or ought to

be—a defense against failure to behave as the legislaturecommands.

Undeserved Respect

Unfortunately, because legislative and bureaucraticdiktats are mistakenly called “laws,” they too often

receive a degree of respect and esteem that they do notdeserve.

One genuine feature of the rule of law, therefore,that common parlance does get right is that the rule oflaw is indeed contrasted with the “rule of men”—thatis, with the rule of specific persons. The rule of law isthe rule of norms that have evolved into widely held

expectations. No person, no commit-tee, no Congress or Parliament oreven court created these norms—these laws. Like market prices and pat-terns of production, true laws (to useone of Hayek’s favorite phrases) “arethe result of human action but not ofhuman design.”

The rule of law means general def-erence to those norms and expecta-tions that emerge out of decentralizedhuman action. The opposite—rule bydiktat—always means rule by individ-uals exercising coercive power to

override these norms and expectations. The fact thatthese individuals who exercise this power might beelected in no way transforms the diktats they imposeinto true law.

Law as it is defined here is never perfect. It can be,and historically has been, infected with any number ofimperfections. But it has the great virtue of seldombeing a tool of power-seeking, or power-wielding,human beings. The diktats that power-hungry rulerscreate—and which these rulers call “law” in order todrape their diktats with faux legitimacy—are almostalways tools to further the specific ends of the rulerswithout much regard for the long-run welfare of ordi-nary men and women.

16T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

D o n a l d J . B o u d r e a u x

Because legislativeand bureaucraticdiktats are mistakenlycalled “laws,” they too often receive adegree of respect thatthey do not deserve.

If mandatory health insurance goes through, it willturn me into a criminal. I don’t have health insur-ance. I don’t want it. And I will refuse to buy it

even though I can afford it. Before they lead me to thecell, perhaps the prisoner may be allowed to say a fewwords in his defense.

It’s understandable that politicians are eager to elim-inate the medicallyuninsured. For yearsthey’ve been told thatwe are the flies in theointment of healthcare policy. It is saidwe are either a)wrecking the systemby using services wedon’t pay for, or b)deprived of neededmedical care andtherefore objects ofpity and subsidy.

These points mayapply to some unin-sured but not to all.Some of us belong inwhat might be calledthe “successfully uninsured” category. We are not free-loaders.We believe we have an obligation to pay for themedical care we receive, and we always pay for it. I putno financial burden on doctors, hospitals, or taxpayers,and politicians are wrong to assume I am part of thecountry’s health care problem.

Politicians are also wrong to assume that I am anobject of pity. Like many Americans, I have significant

savings and can afford medical expenses out of pocket.(Census Bureau figures for 2000 show that over 18 mil-lion households had assets in excess of $250,000). Oursavings make it possible for my wife and me to declineboth private insurance and Medicare (we are 70).Thosewithout savings are in a different situation:They proba-bly need insurance, or a subsidy, or charitable help. My

point is that if youcan handle your ownmedical bills throughsavings and personalresponsibility, this is a sound approach.Politicians shouldencourage this stateof self-reliance, notcriminalize it.

There are manyadvantages to beinginsurance-free. Thefirst is flexibility.Several years ago, mywife had a seriousbout with cancer.The successful treat-ment involved sur-

gery and local radiation therapy. After much study sherefused the more massive radiation treatment recom-mended by the doctor and pursued alternative thera-

B Y J A M E S L . PAY N E

A Health Insurance Criminal Pleads His Case

17 A P R I L 2 0 1 0

Contributing editor James Payne ( jimpayne@nctv.com) has taught politicalscience at Yale,Wesleyan, Johns Hopkins, and Texas A&M. His latest bookis A History of Force: Exploring the Worldwide Trend AgainstHabits of Coercion, Bloodshed, and Mayhem. This article firstappeared at TheFreemanOnline.org.

©iStockphoto.com/Andrejs Zemdega

pies, including acupuncture, nutritional therapy, mas-sage, and naturopathic medicine. Every decision wasmade in terms of what seemed best to treat this illness.We were not drawn into using inappropriate therapiesbecause they were “free,” nor did we pass up desirabletherapies because they were “not covered.”

The second advantage of being insurance-free is weavoid bureaucracy.We don’t fill out insurance forms; wedon’t make phone calls trying to find out what’s covered;and we don’t play games (with the collusion of doctors)trying to get things we need paid for by someone else. Ifan aching back suggests the need for a different mattress,we go out and buy one and don’t waste time and moneytrying to prove to some clerk that it’s covered.When thegovernment offered a new piñata ofbenefits in the form of prescriptiondrug coverage, we entirely escapedthe frustration of figuring out how todeal with its staggering confusion.While other seniors were closetedwith lawyers trying to decide what tosign up for, we went hiking.

Refusing health insurance mayhave advantages, but what will hap-pen if I face a medical problem thatrequires more than my savings? Tounderstand my answer, consider aparallel question about some other commodity—say,housing. I announce that I believe in paying for hous-ing from my own financial resources. Someone pointsout there might be a house I want that costs more thanI can afford. That’s just too bad: I don’t get to buy it.I limit my housing consumption according to myresources.

I look at medical care the same way: If somethingcosts too much, I do without.This position, so obviousand sensible in other areas, is considered untenablewhen it comes to medical care. In this realm the pre-vailing assumption is that everyone is entitled to all thehealth services he needs or wants.

It’s one thing to announce this entitlement as anideal, but quite another to make it work. In the realworld medical resources are limited, and therefore allapproaches to health care funding employ rationing.

In tax-based systems administrators establish waiting

lists so that some patients die before their opportunityfor treatment comes up.They ban the use of expensivetreatments and alternative therapies. And, withoutexactly saying so, they underfund medical facilities, sothat patients wait in the halls of emergency wards, forexample. In commercial insurance plans rationing isimplemented by restricting coverage to specific proce-dures and specific doctors—and by setting upper limitsto coverage.

Paying your own medical bills is simply another wayof limiting consumption: If a treatment costs too much,you don’t buy it. The advantage of self-rationing is it is frank and open, and thus avoids the whining andblaming that characterize bureaucratic systems.

No Blame Game

Paying your own medical bills alsolets you see that there are more

socially constructive ways to use fundsthan spending on health care. Supposethat to fix your limping gait requirescomplicated care costing hundreds ofthousands of dollars. If others pay forthis care, you might accept it. But sup-pose you are paying for it with yourown savings. Now you might thinktwice about spending the money on

yourself.You might know of a school for autistic chil-dren that could put the money to good use. Or youmight have a grandchild who needs the money to starta business.

Such decisions are indeed difficult, but we need toface them if we are to make sensible choices abouthealth care.Today we are not facing them.We are hid-ing behind the confusion of a tangled government/cor-porate system that pretends we can have all the medicalcare we want.

Spending my own money on health care helps meset a rational limit to medical spending, even on spend-ing to preserve my life. Not buying health insuranceand not allowing politicians to force others to fund myneeds helps me keep my consumption of medicalresources within fitting bounds.

This way of looking at health insurance may be old-fashioned, but should it be a crime?

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J a m e s L . P a y n e

Spending my ownmoney on health carehelps me set arational limit tomedical spending,even on spending topreserve my life.

Nien Cheng, author of Life and Death in Shanghai (1986), died in Washington lastNovember at the age of 94. She was an

incredibly courageous woman and the embodiment ofgrace and wisdom.

She loved traditional Chinese culture, but her worldwas shattered on August 30, 1966, when the RedGuards ransacked her home and, on September 27,arrested her. She spent the next six and a half years inShanghai’s No. 1 Detention House, insolitary confinement.

Communist Party interrogatorsaccused Cheng of being a spy, but herreal “crime” was that she was viewed as a“capitalist roader.” She had attended theLondon School of Economics (LSE) inthe 1930s, where she met her husband,Kang-chi Cheng, who later became gen-eral manager for Shell Oil in Shanghai.

When he died in 1957, Nien Chengbecame a special adviser to the new gen-eral manager. She was the highest-rankedbusinesswoman in China at the time. Herskills in dealing with party officials wereinvaluable and helped Shell stay in Chinauntil the start of the Cultural Revolution in 1966.

During her imprisonment Cheng refused to admitany wrongdoing. She was tortured and nearly died, buther determination to survive and her deep faith gaveher the strength to persevere. She was released fromprison on March 27, 1973, only to find that the RedGuards had murdered her only child, Meiping, for fail-ing to “confess” and denounce her mother as a “classenemy.” Cheng’s one hope in life was gone; she left

China forever in 1980 and settled in Washington, D.C.,in 1983.

Anyone who knew Nien Cheng could immediatelysee that she was special—even the doctor at the No. 1Detention House said he never met a more “truculentand argumentative” prisoner. When she learned of herimminent release, she refused to leave the prison unlessthe authorities declared, in writing, that she was “inno-cent of any crime or political mistake.” She insisted that

they offer “an apology for wrongfularrest” and called the official statement “asham and a fraud.”

In that statement she was accused ofconspiring with the British governmentbecause in a letter she signed in 1957,shortly after she joined Shell, “shedivulged the grain supply situation inShanghai.”That accusation was ludicrous.Her secretary was merely conveyingcommon knowledge to the incominggeneral manager, who was still in Lon-don—namely, that “the Shanghai govern-ment allows everyone twenty catties ofgrain per month.”

After nearly seven years in prison shedeclared,“I shall remain here until a proper conclusionis reached about my case.”The authorities refused, andtwo female guards had to drag her out of prison. It wasnot until later that Cheng learned that her interrogatorswere trying to get her to confess to being a spy so that

B Y J A M E S A . D O R N

The Wisdom of Nien Cheng

19 A P R I L 2 0 1 0

James Dorn (jdorn@cato.org) is a China analyst at the Cato Institute andprofessor of economics at Towson University in Maryland.A shorter versionof this article first appeared in the South China Morning Post, November15, 2009.

Nien Cheng outlasted Maoist torture,theft, and the murder of her onlydaughter.

Jiang Qing (Mao Zedong’s wife) and other radicalscould oust Premier Zhou Enlai, a moderate whofavored allowing foreign firms like Shell to operate inChina.

It was only after Mao’s death in 1976 and DengXiaoping’s decision to open China to the outside worldthat Cheng was officially declared innocent of anycrimes against the State and “rehabilitated” in Novem-ber 1978.

The Realities of Communist Rule

It is ironic that Cheng became enticed by socialismduring her studies at LSE. In her essay “The Roots of

China’s Crisis” (in Economic Reform in China, which Iedited along with Wang Xi), shewrote, “When I read a book on theSoviet Union by Sidney and BeatriceWebb, I thought,‘How wonderful andidealistic socialism sounds.’”

Later, after her husband had servedin Australia as a diplomat for theNationalist government, the Chengsmade the fateful decision to return toChina in late 1948.They and many oftheir Western-educated friends wereseduced by Mao’s call for democracyand wanted to help build a newChina.

In her essay Cheng notes thatwhile she had learned about socialistideals at LSE—including the apparent success of Sovietegalitarianism, central planning, and state ownership—her professors never mentioned “class struggle” or “therealities of communist rule.”What she painfully discov-ered was that in a society where individuals have noeconomic freedom and no genuine rule of law, no oneis safe from the power of the State. Economic life is politicized, corruption is endemic, and inequality of power reigns, in stark contrast to promises of egali-tarianism.

As Cheng wrote in her book, “The fact is that theCommunist government controls goods, services, andopportunities and dispenses them to the people inunequal proportions.” During the Maoist regime one’srank in the party determined one’s economic status.

“Though the salary of a member of the Politburo wasno more than eight or ten times that of an industrialworker, the perks available to him without charge werecomparable to those enjoyed by kings.”

The Chinese Communist Party under Mao’s ironfist destroyed civil society and traditional culture.A newChina was created after the Communist victory in1949, but it was not the socialist ideal Cheng had envi-sioned. Rather, the party created “mindless robots,unburdened by the capacity for independent thinkingor a human conscience.”

Success depended on power, and justice vanished.“The result was a fundamental change in the basic val-ues of Chinese society,” she wrote.

Mao’s mantra was, “Strike hardagainst the slightest sign of privateproperty.” Nien Cheng’s property,including her priceless porcelain col-lection, was confiscated. Her daughterwas murdered and her freedomdestroyed by the State.

Crony Capitalism

While in jail, in 1971, theinmates were assembled and an

official announced, “Many of you are here precisely because youworshiped the capitalist world of the imperialists and belittled socialistChina. You placed your hope in the

capitalist world and believed that one day capitalismwould again prevail in China.”

Today, mainland China is perhaps more capitalistthan any other country, but it is “crony capitalism.”The nation lacks full-fledged private property rights, especially in land; there is no independent judiciary to protect persons and property against the party’s monopoly on power; and freedom of religion and expression are sharply curtailed. The battle for justice that Cheng fought has not yet beenwon.

In her book Cheng recognized the significance ofPresident Nixon’s visit to China in 1972 and theimportance of engaging China. She witnessed theprogress the mainland has made since Deng Xiaoping

20T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

J a m e s A . D o r n

What Chengpainfully discoveredwas when individualshave no economicfreedom and nogenuine rule of law, no one is safefrom the power ofthe State.

began to liberalize markets in 1978. She understoodthe critical role of trade and investment in linkingChina to the West. But she also understood that“Unless and until a political system rooted in law,rather than personal power, is firmly established inChina, the road to the future will always be full oftwists and turns.”

Seeking Truth and Justice

Nien Cheng’s journey from an idealistic Marxistliberal at LSE in the 1930s to a realistic

market liberal—after living through Mao’s upheavalsand seeing the end of private property and the uncertainty and injustice caused by arbitrary andunlimited State power—gave her a great appreciationof America.

Near the end of her life, in a personal letter, shewrote,

I can hardly believe I have lived so long. I think itis mainly because I am never angry nor am I everworried. I believe in “constant change,” so I alwaysthink a bad situation will change into a good situa-tion or not so bad after all. In any case, there isalways a solution. As for being angry, after what hadhappened to me in China, I think I have used up allthe anger inside me. There is simply nothing to beangry about in America.

All Americans should be proud Nien Cheng choseto make America her home. She believed that here shewould be free to choose and that her person and prop-erty would be protected by the law of the land.

Today, as the U.S. government grows in size andpower, it would be well to remember the wisdom ofNien Cheng—and the danger to personal freedomwhen the State erodes economic freedom.

21 A P R I L 2 0 1 0

T h e W i s d o m o f N i e n C h e n g

B Y R O B E R T H I G G S

Private Capital Consumption:Another Downsideof the Wartime “Miracle of Production”

Our Economic Past

Although the so-called miracle of production inthe United States during World War II per-suaded many economists and others to accept

the validity of the basic Keynesian model, this interpre-tation rests on important errors of commission andomission to which I have called attention over theyears. (See especially the studies brought together in my2006 book, Depression,War, and Cold War.) Among theseerrors, one that has yet to receive adequate attention isthe wartime consumption of private capital—as it were,a drawdown of the economy’s privatestock of seed corn to feed the soldiers.

Although official macroeconomicdata for the war years have manyproblematic aspects, we may consultthem as a point of departure. Thesedata show that net private domesticinvestment plunged from $9.1 billionin 1941 to $0.3 billion in 1942, andfor each of the following three yearsthe amount (in billions of currentdollars) was negative: –4.1, –2.9, and–0.2, for 1943, 1944, and 1945,respectively. Thus for the four waryears combined, the private capitalstock fell by $6.9 billion, or by anamount half-again greater than the amount added dur-ing best year of the 1930s (namely, 1937).This showingseems bad enough, but the actual decline was greaterthan the official data indicate.

While privately owned capital declined during thewar, privately operated capital increased because the gov-ernment spent more than $17 billion for manufactur-ing plants, equipment, and reconversions between July1940 and June 1945—an amount equal to almost twoyears of net private investment at the 1941 rate. Theseplants were operated for the most part by private cor-porations under management contracts, and after the

war some of the facilities were sold to their wartimeoperators or other private parties. Much of the govern-ment-financed capital would prove to be ill-suited tothe profitable production of civilian goods in the post-war economic environment, however, and hence itspostwar value was much less than the amount the gov-ernment had spent to build it during the war.

In any event, the official figures overstate theincrease in the privately owned or operated capitalstock during the first half of the 1940s because the

standard formulas for computingdepreciation fail to take into accountcertain extraordinary conditions,especially “the accelerated deprecia-tion resulting from intensive plant useand scarcity of replacement parts” towhich economist Glenn McLaughlincalled attention in the American Eco-nomic Review for March 1943.

According to a 1945 War Produc-tion Board report,

Plant utilization in the munitionsindustries increased sharply after PearlHarbor . . . . [T]he average utilizationof facilities in the metal products

industries late in 1944 was about two-thirds abovethe prewar level, after having reached nearly twicethe prewar level in the spring of 1943; the increasein the remaining industries, though smaller, was stillsubstantial. . . . [T]he increased utilization of existingfacilities contributed nearly as much to the increase of totalindustrial output during the war as did the construction ofnew facilities; though the contribution made by more

22T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

Robert Higgs (rhiggs@independent.org) is senior fellow at the IndependentInstitute (www.independent.org), editor of The Independent Review,and author of Neither Liberty nor Safety: Fear, Ideology, and theGrowth of Government (Independent Institute).

For the four waryears combined, theprivate capital stockfell by $6.9 billion,or by an amounthalf-again greater thanthe amount addedduring best year ofthe 1930s.

intensive utilization was much more important inthe earlier part of the period, particularly in 1940and 1941, than it was in 1943 and 1944. [Emphasisadded.]

Double-shift and even treble-shift operation of plantsbecame much more common during the war.

Writing in the Survey of Current Business in 1963,Murray Foss reported that in a comparison of condi-tions in 1940–44 with those in 1934–39, hours of usageper year increased by 53 percent for railroad freightcars, by 54 percent for freight locomotives, and by 34percent for passenger locomotives. Hours of usage peryear per spindle in the cotton textile industry increasedby about two-thirds during the waryears.

Repairs Forgone

While the capital stock was beingused far more intensively, the

lack of replacement parts and repairmaterials kept producers from doingeven normal upkeep on their prop-erty. In the housing sector, rent con-trols induced landlords to forgoordinary repairs. For apartment housesand small structures, index numbers ofrepair and maintenance expendituresfell some 20 percent during the war.According to a 1945 report of thedirector of war mobilization andreconversion, the motor-carrier industry during thethree peak war years obtained “only 195,000 newtrucks and buses,” which amounted to “less than 10percent of the number it would normally require forreplacements and expansions,” while increasing its loadseach year and hastening wear and tear on its fleet ofvehicles. For the overall economy, this report con-cluded, “wear and tear on plants has been far abovenormal, while repairs and replacements have beenbelow normal.”

In addition, official depreciation estimates fall shortof the truth during the war years because they fail to

correct for inaccuracies in the price indexes. In a situa-tion of pervasive price controls, even if a firm tried tomake adjustments for the declining purchasing powerof money, the dollar amounts it allowed for deprecia-tion understated the actual amounts it needed to setaside in order to replace its worn-out plant and equip-ment later, in the postwar environment, when priceswould no longer be suppressed and actual market (thatis, higher) prices would prevail. The statisticians at theCommerce Department apparently took the officialprice indexes at face value even for the years whenprice controls were in effect.

According to official estimates published in the Sur-vey of Current Business in April 1970, the private stock

of fixed business capital lost morethan 7 percent of its real valuebetween 1941 and 1945.After inclu-sion of the government-financedadditions to the industrial capitalstock, the privately operated totalincreased in value by an estimated 15percent.

However, by taking into accountthe measurement errors in thewartime depreciation estimatesincorporated into the official fig-ures—errors caused by inaccurateprice indexes and by the inappropri-ate application of uniform, standarddepreciation schedules during aperiod of accelerated actual depreci-

ation—we may conclude that the true drop in the pri-vately owned stock of capital was even greater than theofficial figures show during the war years and that theincrease in the stock during the second half of the1940s was greater than shown. Moreover, depreciationfigures applied to the industrial capital stock the gov-ernment financed during the war are too low for thesame reasons. Thus for the capital stock, as for theeconomy’s real output, the official data have misled usby making the wartime expansion appear bigger than itreally was and the postwar expansion smaller than itreally was.

23 A P R I L 2 0 1 0

P r i v a t e C a p i t a l C o n s u m p t i o n

While the capitalstock was being usedfar more intensively,the lack ofreplacement parts andrepair materials keptproducers from doingeven normal upkeepon their property.

Over the past 40 years Botswana has been sub-Saharan Africa’s fastest-growing country andone of the fastest-growing countries in the

world.Though it started off as one of the poorest coun-tries in the world, its per capita income now comparesfavorably with many Mediterranean counterparts. Likemost countries, the financial crisis has slowedBotswana’s recent economic growth, and large “stimu-lus” packages have ostensibly been introduced toreverse that direction, but, evenwith Botswana’s poor economicperformance in 2008 and 2009, itscontrast with the rest of sub-Saha-ran Africa is stark.As the graph onthe next page shows, sub-SaharanAfrica (SSA) as a whole (withBotswana included) has seen dis-mal growth since 1965, whileBotswana has enjoyed more than a15-fold increase in real grossdomestic product.

While many attribute thecountry’s success to diamond rev-enue and a homogenous popula-tion, Botswana’s success actually has resulted, first andforemost, from economic freedom. Until last yearBotswana was the most economically free sub-SaharanAfrican nation in the Fraser Institute’s Index of Eco-nomic Freedom; Mauritius has nudged ahead ofBotswana in the most recent report.The country’s mar-ginal tax rates are some of the lowest in the world; itsborders are more open than those of many otherAfrican countries; and the government has a long tradi-tion of respecting private property and upholding the

rule of law. As historian Robert Guest sums upBotswana’s postcolonial policies, “Since independence,Botswana has been governed sensibly, cautiously, andmore or less honestly.”

The honesty in policy described by Guest hashelped Botswana escape the so-called “African tragedy”of poverty. By conventional standards the country is anupper-middle-income country, and throughout mytime in Botswana a few years ago I was struck by how

normal the country seemed. It issafe to walk around after dark, andviolent crime rates are quite low.The drinking water is generallyfine. Its capital city, Gaborone, isbuzzing with commerce, and anumber of shopping malls therehave high-end merchandise andquality restaurants similar to thosefound in any Western country.According to government officials,no Batswana (the appropriate termfor people of Botswana) has everdied from the country’s frequentdroughts, and basic education lev-

els and public road networks are far superior to those in neighboring countries. As one tourist put it, “Thisplace is really quite boring.” (To which I replied,“Yeah,maybe that’s an idea for a paper: “Botswana: The Beauty of Being Boring.”)

B Y S C O T T B E A U L I E R

Botswana:A Diamond in the Rough

24T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

Scott Beaulier (beaulier_sa@mercer.edu) is the BB&T DistinguishedProfessor of Capitalism and department chair of economics in MercerUniversity’s Stetson School of Business and Economics in Macon, Georgia.He has written a number of academic and policy articles on Botswana’sgrowth miracle.

Growth and development in every direction.Geof Wilson

Source: World Development Indicators, 2008

In 1965 the country, a former protectorate of GreatBritain, was a newly independent nation of desert landand cattle herders. Its future was deemed grim by theexperts, and many expected Botswana to remain poorand heavily dependent on South Africa.Yet much likethe Asian “tigers,” Botswana’s success stands out as oneof the truly exceptional sustained growth runs in thetwentieth century. It has averaged 7 percent annualgrowth in per capita income since independence.

Racial Harmony

Attempts to explain Botswana’s development as theresult of a relatively homogeneous culture are

flawed. If cultural and ethnic homogeneity played such acrucial role in promoting development, why then wasBotswana so poor at the time of independence? It prob-ably did not hurt reformers to be dealing with a homo-geneous population during the postcolonial period, butculture in and of itself was not enough to guaranteeBotswana’s growth explosion. Becoming free from GreatBritain and subsequently promoting sound economicpolicies were the additional and far more importantingredients of Botswana’s success.

Botswana’s pursuit of racial harmony,however, did helpit avoid the turmoil that other sub-Saharan countries saw.

In the early years of Botswana’s postcolonial devel-opment the leadership behaved much differently frommany other African leaders. Botswana’s first president,Seretse Khama, was a charismatic leader who sought

racial harmony and welcomed the advice of Britishexpatriates. Rather than follow the lead of most otherAfrican leaders and embrace Marxism, Khama and hismajority coalition in the Botswana Democratic Party(BDP) chose to sit down with British expatriates andminority stakeholders when formulating policy. Thesmall, informal meetings held by the BDP made poli-cies more legitimate and served as an implicit compactbetween the BDP and other important interest groups.

The tolerance and cosmopolitanism of Khama andthe BDP were more than lip service.When it came toborder issues, for example, the government welcomedthousands of refugees being persecuted by racistregimes in Rhodesia and elsewhere. The official posi-tion of the government was to recognize the basic dig-nity of all individuals and maintain open borders.

Tolerance also shaped domestic policy, as the newgovernment was careful to incorporate traditionalindigenous institutions throughout the reformprocess. For example, its kgotla system, which predatedcolonialism and encouraged dissent in the publicrealm and unanimity in decisions, remains part ofmodern-day Botswana. Its precolonial tribal system oflaw and dispute resolution was brought into modern-day institutions to some extent through the House ofChiefs, which serves as an advisory body to the legislature. While the postcolonial reforms did notcompletely embrace the traditional institutions of the precolonial and colonial periods, steps were takento preserve valuable parts of Botswana’s history andculture. By contrast, in many other sub-SaharanAfrican nations so-called “modernization” meant thecomplete dismantling and elimination of all thingstraditional.

Tight Spending Control

As the new government was being formed in themid-1960s, few resources were available for signif-

icant “public” spending. Rather than tax people exces-sively, the government kept tax rates low andpredictable. Low taxes encouraged entrepreneurialactivity and reduced tax evasion and corruption.Khama and the BDP could have borrowed substantially,but they had a fear of accumulating debt and insteadkept spending on traditional government programs like

25 A P R I L 2 0 1 0

B o t s w a n a : A D i a m o n d i n t h e R o u g h

defense and education to minimal levels. The govern-ment could not afford a national defense force early onin the reform process, so the country simply wentnearly ten years without it.

The government sought to constrain longer-termspending by introducing five-year National DevelopmentPlans (NDPs) to set government spending priorities.Once agreed on, they can only be amended with over-whelming support from parliament. In addition to estab-lishing NDPs, the government constrained spending byapplying strict cost-benefit standards to expenditures.

The generally free-market approach to economicdevelopment taken by Botswana’s leadership in the earlyyears had the effect many pro-market economists wouldpredict: rapid growth and serious quality-of-lifeimprovements for average Batswana. This developmentwas most rapid during the first tenyears as an independent nation—yearsthat predated most of the diamond discover-ies and extraction. Moreover, diamondsare not normally viewed as a boon todevelopment. In much of the “naturalresource curse” literature in econom-ics, things like diamonds are said tohamper development because they leadto weak institutions and rent-seeking.As Fareed Zakaria puts it in his popu-lar book, The Future of Freedom,

Why are unearned riches [like oil, diamonds, andgold] such a curse? Because they impede the develop-ment of modern political institutions, laws, andbureaucracies. Let us cynically assume that any gov-ernment’s chief goal is to give itself greater wealth andpower. In a country with no resources, for the state toget rich, society has to get rich so that the govern-ment can then tax this wealth. In this sense East Asiawas blessed in that it was dirt poor. Its regimes had towork hard to create effective government becausethat was the only way to enrich the country and thusthe state. Governments with treasure in their soil haveit easy; they are “trust-fund” states. They get fat onrevenues from mineral or oil sales and don’t have totackle the far more difficult task of creating a frame-work of laws and institutions that generate wealth.

Thus Botswana has not grown because of, but ratherdespite, its diamond wealth.

To be sure, Botswana faces some serious chal-lenges. First, government spending as a percentage ofGDP in Botswana is too high and it has been grow-ing rapidly.The “hands off ” approach of leadership inthe early years has largely been forgotten and givenway to big government. Botswana’s large, bloatedgovernment now funds a large national defense, cov-ers education through college, and has extendedhealth care coverage in the wake of a seriousHIV/AIDS crisis. The government’s steadily increas-ing scale and scope has made Botswana a less eco-nomically free country in recent years, and it couldbe stifling to future growth.

Second, Botswana’s courts and property rights havenot been free from interference. Therule of law, in particular, has some-times been relaxed in cases involvinggovernment officials. Indigenousgroups, such as the Kalahari Bush-men (also known as the Sans, amongother names) have consistently beenoppressed by the government andunfavorable legal rulings. And thegovernment’s attitude toward for-eigners, particularly Zimbabweans,has grown increasingly xenophobic.Continued shifts away from the cos-

mopolitanism of Khama in recent years makeBotswana’s future growth far from certain.

The chief lesson to take from Botswana’s postcolo-nial success is the following:When given a chance, eco-nomic freedom can produce beneficial long-rungrowth results in poor African countries. Many leadersin sub-Saharan Africa dismiss good policy stories likethe one being told here as “Western ideas and models”unsuitable for Africa. From where they sit, Africa’s his-tory is unique and different.The differences are signifi-cant enough to make “standard approaches,” such aseconomic freedom, futile endeavors. While there ismuch to be said for not imposing external institutionson people, Botswana is a case of Africans finding eco-nomic freedom on their own.As a result, Batswana haveenjoyed higher living standards.

26T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

S c o t t B e a u l i e r

When given achance, economicfreedom can producebeneficial long-rungrowth results inpoor Africancountries.

As I get older and more cynical, I tend to lookdown on the latest “hot” idea or person. Sure,teenage pop stars and the novelist Dan Brown

are talented, but they’re not nearly as extraordinary astheir popular status would suggest. Every once in awhile, though, something impresses me despite suchcynicism. Nassim Nicholas Taleb, for example, lives upto the hype surrounding him. Libertarians—especiallythose versed in Austrian economics—will find Talebwell worth reading.

Taleb is the author of the international bestsellerFooled By Randomness and the blockbusterThe Black Swan: The Impact of the HighlyImprobable. The books largely overlap, butthe second (the focus of the present arti-cle) is less liable to misunderstanding,probably because of confusion amongreaders of the first.

The black swan is a metaphor for thelimits of our knowledge and, perhaps moreimportant, our unfounded confidence inour knowledge. The metaphor draws onthe familiar notion that before discoveringcounterexamples in Australia, people in the Old World would have been certainthat all swans were white. To be more precise, Taleb lists three attributes of the black swan event his bookaddresses:

First, it is an outlier, as it lies outside the realm ofregular expectations, because nothing in the past canconvincingly point to its possibility. Second, it car-ries an extreme impact.Third, in spite of its outlierstatus, human nature makes us concoct explanations

for its occurrence after the fact, making it explain-able and predictable.

Both of Taleb’s books are filled with “fun facts,” justas Malcolm Gladwell fills his own (bestselling) work.Yetthe difference is that Gladwell—in such romps as TheTipping Point and Outliers—never has much of a coher-ent theory for which his amazing anecdotes are rele-vant.

Taleb, on the contrary, tells us his thesis up front,then draws on his vast knowledge to illustrate his

points. One of his central claims is thatpeople place too much confidence in their esti-mates. Taleb stresses that the issue is nothow smart or how dumb people are. “Wecertainly know a lot, but we have a built-in tendency to think that we know a littlebit more than we actually do, enough ofthat little bit to occasionally get into serioustrouble.”

Taleb strings together sentences of sur-prising profundity while packing his prosewith interesting statistics and stories.Whenreading The Black Swan, I had to stop not-ing every “interesting” paragraph in the

margins, lest I fill them up.The book’s prologue alone is an interesting essay,

containing such standalone gems as the following:

B Y R O B E R T P. M U R P H Y

The Improbable Prose of Nassim Nicholas Taleb

27 A P R I L 2 0 1 0

Robert Murphy (rpm@consultingbyrpm.com), an adjunct scholar of theMises Institute and a faculty member of the Mises University, runs the blogFree Advice (www.consultingbyrpm.com/blog) and is the author of The Politically Incorrect Guide to the Great Depression and theNew Deal, the Study Guide to Man, Economy, and State withPower and Market, and the Human Action Study Guide.

Nassim Nicholas Taleb.Sarah Josephine Taleb

What is surprising is not the magnitude of ourforecast errors, but our absence of awareness ofit”;“We do not spontaneously learn that we don’tlearn that we don’t learn. . . . Metarules (such as therule that we have a tendency to not learn rules)we don’t seem to be good at getting”;“Who getsrewarded, the central banker who avoids a reces-sion or the one who comes to ‘correct’ his pred-ecessors’ faults and happens to be there duringsome economic recovery?

Taleb openly despises those in “suits”—very oftenmainstream economists or students of finance—whomake predictions without bothering to study therecord of their previous forecasts.Taleb declares, “Any-one who causes harm by forecasting should be treatedas either a fool or a liar. Some forecasters cause moredamage to society than criminals. Please, don’t drive aschool bus blindfolded.”

Of perhaps most interest to the Austrian reader,Taleb champions Friedrich Hayek and mocks PaulSamuelson (who died in December). In a section titled,“They Still Ignore Hayek,” Taleb lauds the Austrianfocus on the pretense of knowledge.Yet of Samuelson,the epitome of the neoclassical mainstream,Taleb issuesharsh judgment indeed:

In orthodox economics, rationality became astraitjacket. Platonified economists ignored the factthat people might prefer to do something other thanmaximize their economic interests. This led tomathematical techniques such as “maximization,” or“optimization,” on which Paul Samuelson builtmuch of his work. . . . I would not be the first to saythat this optimization set back social science byreducing it from the intellectual and reflective disci-pline that it was becoming to an attempt at an “exactscience.” By “exact science,” I mean a second-rateengineering problem for those who want to pretendthat they are in the physics department—so-calledphysics envy. In other words, an intellectual fraud.

Coming from a philosopher (or an academic Austrianeconomist, for that matter), such criticism would not meanmuch to the so-called experts in various fields.Yet Taleb’scriticisms come with a harsh sting, for he is a respected

contributor to the field of quantitative finance;Taleb (and acoauthor), for example, offered a more intuitive derivationof the Black-Scholes formula for option pricing.

Far more important to some readers,Taleb (allegedly)made a boatload of money as a trader.True to his philo-sophical views, one of his strategies involved usingoptions that went up in value when the underlying assetfell in price. If people really do systematically underesti-mate the likelihood of improbable (but significant)events, as Taleb claims, then it should be possible to makelong-run profits by losing small amounts of money onmost wagers but earning large payoffs on a few outliers.

Other Austrian-oriented writers such as GeneCallahan have criticized Taleb for throwing out thebaby with the bathwater.Taleb seems to think that thefabric of reality itself is governed by randomness; thatmuch is true.Yet as his discussions of Poincaré’s “threebody problem” and modern chaos theory make clear,the central lessons of the book don’t depend onwhether the world is “really” determinist or “really”uncertain. It is enough that from a human actor’s lim-ited knowledge, he can never truly predict what iscoming down the pike.

Finally,Taleb does not simply throw up his hands indespair. “We cannot truly plan, because we do notunderstand the future—but that is not necessarily badnews. We could plan while bearing in mind such limita-tions. It just takes guts.”

By focusing on the extremely improbable outlier,Taleb isn’t warding off theoretical explanations—he ismerely rejecting the regrettable tendency of overgeneral-ization in our theories, where we overfit based on alimited sample size.As Taleb says:“If you want to get anidea of a friend’s temperament, ethics, and personal ele-gance, you need to look at him under the tests of severecircumstances, not under the regular rosy glow of dailylife. Can you assess the danger a criminal poses byexamining only what he does on an ordinary day?”

There are many areas where the typical libertarianreader might take issue with Taleb, but this doesn’tdetract from the value of his work. For what it’s worth,in response to our correspondence on Benoit Mandel-brot’s work in economics,Taleb sent me a signed copyof his book.The inscription read: “Hope freedom pre-vails—Nassim.”

28T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

R o b e r t P. M u r p h y

B Y S H E L D O N R I C H M A N

Opaque by Design

Peripatetics

he House and Senate plan to put together thefinal health care reform bill behind closeddoors, according to an agreement by top

Democrats.”That less-than-startling piece of news was delivered

by House Speaker Nancy Pelosi back in January. Shewas at the White House when she said it, so it looks likeit’s okay with President Obama.

Thus, as the CBS News headline had it, “ObamaReneges on Health Care Transparency.”

Anyone who is really shocked (shocked!) that this ishappening should avoid talking tostrangers on the street.You’ll wind upbelieving you own a bridge.

In other words, no one reallythought Obama and his cronies weregoing to make government trans-parent by conducting business on C-SPAN. As the head of the Councilon Foreign Relations said admir-ingly about Obama in another con-text, “He’s learned the differencebetween campaigning and govern-ing.” Indeed. Even if he wanted to,there was no way Obama was goingto get our misrepresentatives in Con-gress to do it.

The phrase “transparent govern-ment” is just this side of a logical contradiction.A reallytransparent government would barely qualify as a gov-ernment at all. Imagine if you could witness all thebackroom dealing, logrolling, outright bribery, and therest of the shenanigans that go on under the laughablerubric of “governing.” It wouldn’t last a week.

Once in a while we get a glimpse of what goes on.When Sen. Ben Nelson’s vote on the health-insurancetakeover was cynically bought with the promise thateveryone but Nebraskans would pay Nebraska’s new

Medicaid bill, there was genuine disgust—even inNebraska.The payoff to Louisiana Sen. Mary Landrieugot a similar reception. But that was just the tip of theiceberg. Did you hear that under the Senate bill (nowdead) companies with fewer than 50 employees wouldhave been exempt from the health-insurance man-date—except for construction companies? There thethreshold would have been five. It was a little favor tothe construction trade unions. According to the NewYork Times:

Labor unions that have negotiatedhealth benefits for construction work-ers lobbied for the provision.Withoutit, they said, small nonunion employ-ers would have an unfair competitiveadvantage over companies that theysay do ‘the right thing’ by providinghealth benefits to plumbers, electri-cians, carpenters, roofers and otherworkers in the building trades.

This sort of thing happens everyday.As Michael Kinsley once said, thereal scandal in Washington is the legalstuff, not the illegal stuff, that goes on.

We can’t say we weren’t warned.Afew years ago a great scholar named

Charlotte Twight explained it all in her book Dependenton D.C.:The Rise of Federal Control over Ordinary Ameri-cans. I’m a huge fan of this book, and everyone con-cerned with liberty should read it closely. What I saidabout it in 2003 still holds:

T“

29 A P R I L 2 0 1 0

Sheldon Richman (srichman@fee.org) is the editor of The Freeman andTheFreemanOnline.org.

The phrase“transparentgovernment” is justthis side of a logicalcontradiction.A reallytransparentgovernment wouldbarely qualify as agovernment at all.

If I may be blunt, this is a subversive book—inthe sense that if average Americans were to read andgrasp it, they would turn into libertarian revolution-aries.Why? Because Twight documents the ways thatofficials systematically mislead us about what gov-ernment does. In many cases, she uses their ownwords to convict them of massdeception aforethought.

The key to her thesis is the con-cept of political transaction costs. Ineconomics, transactions costs are theexpenses one accepts to engage inexchanges. To use Twight’s example,if you hire someone to plant a treein your yard, the transactions costsinclude any expenses you would nothave incurred had you planted thetree yourself.

There are transactions costs asso-ciated with politics too. These,Twight says, are “the costs to indi-viduals of reaching and enforcingpolitical agreements regarding therole and scope of government . . .[t]he costs to each of us of perceiv-ing, and acting upon our assessment of, the net costs ofparticular governmental actions and authority . . . oflearning the likely consequences of proposed govern-ment programs and taking political action in responseto such programs. . . .”

We could sum up the idea with the phrase “eternalvigilance,” which takes time, effort, and money. Or asothers have put it,“freedom isn’t free.”

Of course the higher the political transactions costs,other things equal, the less monitoring people will

engage in. Keep in mind that any one person’s clout issmall, so the payoff from absorbing the costs and engag-ing in the monitoring is also small. That results in agovernment watched closely by those who stand togain a lot (the special interests) and not so closely bythose who stand to pay, in the aggregate, a lot (the mass

of taxpayers).

Contrived Costs

Twight points out that there are“natural” transactions costs, as

with any economic activity, but also“contrived” transactions costs—theones “deliberately created by governmentofficials to increase our costs of assess-ing and responding to governmentpolicies” (emphasis added).

You’re not apt to read about these intextbooks or the establishment apolo-gies on most newspaper editorial andop-ed pages. For some unfathomablereason, most pundits don’t want us toworry our little heads knowing thatpoliticians may intentionally make itmore difficult for us to see what’s reallygoing on or to do anything about it.

But it’s hard to conclude the politicians would wantit any other way. How else to explain 2,000-page billsladen with impenetrable legislatese—which no mem-ber of Congress will read in their entirety—and 800-page amendments? Have you tried reading the federalbudget? Such output mocks the ideal of an “informedcitizenry.”That’s the last thing the misleaders in Wash-ington would want.

As Oscar Wilde said, “Nowadays to be intelligible isto be found out.”

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S h e l d o n R i c h m a n

For someunfathomable reason,most pundits don’twant us to worry ourlittle heads knowingthat politicians mayintentionally make itmore difficult for usto see what’s reallygoing on or to doanything about it.

From its minor role as an oxygenate additive forgasoline, ethanol has become the darling ofWashington. Politicians embrace ethanol as a

miracle elixir.All the fashionable energy buzzwords canbe applied to it. It is “green power”; it’s “renewable” andwill provide “energy independence” for America. Leg-islation has been promoting ethanol nonstop. TheEnergy Policy Act of 2005 required that our fuel supplyhave four billion gallons of ethanol in 2006 and thenincrease to 7.5 billion by 2012. Next came the Renew-able Fuel Standard Act of 2006 callingfor even more ethanol in our fuel sup-ply. Building on the old adage that youcan never have too much of a goodthing, the Energy Independence andSecurity Act of 2007 increased theethanol requirement even more. Itmandates using 36 billion gallons ofbiofuels in our gasoline by 2022.

Given the euphoria over ethanol, itis hard to imagine that there could bea downside. Unfortunately, ethanol hasnumerous and significant problems.

For starters, ethanol is an inferior energy source.Ethanol has 35 percent less energy by volume than regular unleaded gasoline. One gallon of E-10 gasoline(which contains 10 percent ethanol) is 3.6 percent lessefficient than pure gasoline (ethanol-free, E-0). In otherwords, as the percentage of ethanol in a gallon of gasgoes up, the realized miles per gallon go down. As aresult, E-15 is 5 percent less efficient than E-0 gasolineand E-20 is 7.7 percent less efficient. E-85 gas isbetween 25 and 30 percent less efficient than pure E-0gasoline.

On average, E-10 gas is 10 cents per gallon cheaperat the pump than regular E-0 gas. E-85 is evencheaper—70 cents per gallon less.This cost-per-galloncomparison is, unfortunately, very deceptive. A moretelling measure would be to compare the cost per miledriven for each fuel type. Craig Clough notes that a“flex-fuel” 2007 Chevy Tahoe (capable of handlingany ethanol-blend fuel) averages 14 MPG on regularE-0 gas and 10 MPG on E-85 gas.What would it costto go on a thousand-mile trip using these two differ-

ent types of gas? The cost of the tripusing regular E-0 gasoline (at $3.70per gallon) would be $264.29. Usingthe cheaper E-85 gas (at $3 per gal-lon), the same thousand-mile tripwould cost $300—that’s $35.71, or13.5 percent, more. Translation:Because of the lower energy contentin ethanol, consumers actually paymore because they will need moregallons to go the same distance. So ifa gallon of ethanol burns cleaner

than a gallon of regular E-0 gasoline, but you need toburn more gallons of the ethanol-blended gasoline togo the same distance, how does this result in less pol-lution? Or does it? Ethanol has another pollutionproblem. It is more volatile than gasoline (meaning itevaporates far more rapidly), making it a major con-tributor to smog.

Ethanol also has some nasty properties that politi-cians and the Big Corn lobby would rather not talk

B Y M I C H A E L H E B E R L I N G

Government Moonshine

31 A P R I L 2 0 1 0

Michael Heberling (mheber01@baker.edu) is president of the BakerCollege Center for Graduate Studies in Flint, Michigan.

Ethanol is an inferiorenergy source.E-85 is 25 to 30percent less efficientthan regular,ethanol-free gas.

about. For starters, ethanol is corrosive to some metals,rubber, fiberglass, and plastic.This leads to higher main-tenance costs and the need to replace parts sooner thanwould otherwise be the case. Older car engines, boatengines, motorcycles, snowmobiles, and small gas-pow-ered tools (chain saws, snow blowers, lawn mowers, andweed whackers) are especially vulnerable to ethanolcorrosion. Fine particles of rubber, plastic, or metal flowthrough the fuel system.These particles eventually clogthe engine’s fuel lines, fuel filter, carburetor, and fuelinjector. Ethanol can also cause an engine to burn outbecause it runs hotter.

Later-model cars and trucks weresupposed to have been re-engineeredto mitigate the corrosive properties ofthe E-10 ethanol-laced fuel. Ed Wal-lace, writing in Business Week, findsthat this is not necessarily true. “Notonly is ethanol proving to be a dud asa fuel substitute, but there is increasingevidence that it is destroying enginesin large numbers.” He goes on: “Itnow appears that in just a few yearssince the government forced ethanoluse on the country, engine and fuelsystem failures caused by ethanol arecausing major damage to more andmore new and used vehicles.”Wallaceconcludes: “Sadly, when a truly badidea is exposed today, Washington’sanswer is to double-down on the bet,mandate more of the same, and makethe problem worse. Only this time around motoristswill be able to gauge the real cost of ethanol when itcomes time to fix their personal cars.”

Ethanol has two other properties that further com-plicate the process. Ethanol and gasoline do not bondchemically. They simply coexist in the fuel system in an “oil and vinegar” relationship. While ethanol mayhate gasoline, it loves water. The term to describe this is “hygroscopic,” or “water soluble.” Ethanol attracts and absorbs water. As long as the amount of water in the fuel system is small, this can be a good thing:In the winter it limits the possibility of a fuel linefreeze-up. However, as the water content gets higher,

the new ethanol/water compound sinks to the bot-tom of the fuel tank. This process is called “phase separation.”

If we continually drive our cars (or cut our grassevery week or so) these ethanol-unique characteristicswill not normally be an issue. But after about 90 days(the shelf life of E-10 gasoline), problems begin tomanifest.The result:“bad gas.”The engine won’t start orthere will be “missing” or “sputtering” problems.This isthe reason you don’t want to leave gas containingethanol in the lawn mower over the winter.

Because of the separation and corrosion problems,ethanol cannot be transportedthrough pipelines. It requires its ownseparate and costly distribution chan-nel dominated by rail and trucks tokeep it apart from the gasoline as longas possible before retail.

Unconscionable Burning of Food

Ethanol’s biggest problem islargely ignored. Burning food as

an energy source is unconscionablein these circumstances. Using corn tofeed humans and livestock, and tofuel cars, is having obvious negativeimplications. In 2007 we burned 15percent of our corn crop as ethanol.According to the Investor’s BusinessDaily (IBD), “Ethanol and its subsi-dies amount to a hidden and nefari-ous tax on food. The higher use of

ethanol accounted for up to 15 percent of the rise infood prices between April 2007 and April 2008.” Con-gressional mandates to increase the use of ethanol evenmore will only exacerbate this problem. To meet themassive artificial demand for corn created by this gov-ernment energy program, we can either: 1) switchcrops (soy to corn) and keep the cropland acreage thesame (which will cause all food prices to skyrocket) or2) increase the amount of acreage available throughlarge-scale pristine habitat destruction. Neither is satis-factory.

According to IBD,“[I]t takes about 1,700 gallons ofwater to produce one gallon of ethanol. Each acre of

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M i c h a e l H e b e r l i n g

Ethanol also has somenasty properties thatpoliticians and theBig Corn lobbywould rather not talkabout. For starters,ethanol is corrosiveto some metals,rubber, fiberglass,and plastic.

corn requires about 130 pounds of nitrogen and 55pounds of phosphorous. Increased acreage meansincreased agricultural runoff, which is creating aquatic‘dead zones’ in our rivers, bays, and coastal areas.”

Ironically, a case could be made that ethanol is notreally “renewable green power” at all but rather a “fossilfuel” in disguise.You don’t just squeeze corn to makeethanol.The distilling process to convert corn starch toethyl alcohol is energy intensive.According to MatthewWald in the January 2007 Scientific American, to create100 units of ethanol energy in the distillation process,you need 45 units of fossil-fuel (coalor natural gas) energy. Michael Wang,an environmental scientist at theArgonne Laboratory, calculated thatthe amount of fossil fuels is evengreater if you look at the wholeprocess (planting, fertilizing, harvest-ing, and distillation). According toWang, to produce 100 units of ethanolenergy, you need 74 units of fossilfuels.

Hide the True Cost

Given all these expenses—energy to make energyand a separate logistic system—how does the

ethanol industry make any money? It doesn’t.Were it not for the massive government tax prefer-

ences (a 51-cent-per-gallon tax break) and governmentprotection (a 54-cent tariff on imported ethanol), thisindustry could not survive.That’s in part because coun-tries like Brazil—the world’s largest ethanol producer—can produce it more efficiently using sugar cane. On ayield-per-acre basis, the amount of ethanol produced

from Brazilian sugar cane is nearly double that derivedfrom U.S. corn.

Even with all this help, the industry asks for stillmore. Last year the ethanol producers’ association,Growth Energy, petitioned the EPA to allow ethanolblends as high as 15 percent. For the majority of the carsand trucks in the United States, the highest ethanol levelallowed by the EPA is the 10 percent blend. Anythingabove that could void existing car warranties. Theexceptions are flex-fuel/dual-fuel vehicles, which canuse E-85 gas because they have special stainless-steel fuel

tanks and other upgraded fuel systemparts. Besides the overused environ-mental and energy independenceangle, Growth Energy claims that thischange will create thousands of newjobs.

Revealingly, there is always onereason missing from the case forethanol. We always hear that it isgood for the environment, or it’sgood for family farmers, or it createsjobs. But no one ever says thatethanol is good for the consumer.

That’s because it isn’t. At the pump the consumer paysmore to get fewer miles per gallon than with gasoline.Behind the scenes the consumers’ tax dollars are usedto shore up a failing industry that drives up the cost offood and of maintenance of all engines that ethanoltouches. It is time to admit that promoting ethanol as a fuel source has been a catastrophic mistake.We needto cut our losses and let the free market, not the gov-ernment, determine winners and losers in the energysector.

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G o v e r n m e n t M o o n s h i n e

Ironically, a casecould be made thatethanol is not really“renewable greenpower” at all butrather a “fossil fuel”in disguise.

What is civilization and how is it to beachieved? How can we live together inpeace and social harmony? What is wealth

and how do we acquire it? Why are so many peoplepoor and why do they remain poor? Finally, are thereobjective standards of behavior thatmust be respected if societies are tothrive?

These questions are fundamentalto human life. In this essay we discuss some ways societies haveorganized themselves and considerthe consequences of such efforts.This allows us to conclude that asociety based on secure privateproperty rights, trade, and the divi-sion of labor is not only economi-cally efficient, it is morally superiorto all other types of organization.

The Welfare State

Let us first consider the welfarestate. In theory it aims to use

government force to redistributeproperty in order to achieve a moreequal consumption of economicgoods. Advocates of this manner ofsocial organization argue that it isbased on the ideal of charity. However, this cannot beso since the logical implication of this form of organi-zation is not the promotion of charity but the promo-tion of theft. Genuine charity involves the voluntarysacrifice of the giver.When the force of government isemployed to redistribute property, there is no volun-

tarism in it. Rather, there is only forced sacrifice, whichis the essence of theft.

Fundamentally, the welfare state is a type of socialorganization in which some people subsist off the fruitsof other people’s labor by the use or threat of force.

There are three ways to enjoy thefruits of others’ labor. The first is toreceive legitimate charity. In thiscase, the producer has voluntarilyparted with his product for the benefit of someone else. The sec-ond means is through voluntaryexchange. In this case someone mustmake an attractive offer of some-thing desired by producer.The thirdmethod is to use violence or thethreat thereof to appropriate theproduct. This form of getting whatyou want is especially perniciouswhen it is perpetrated by govern-ment, for then the victim has littlerecourse. (Fraud is a subtle form oftheft—that is, of obtaining someoneelse’s product on terms other thanthose he would agree to.)

Theft and fraud cannot be logicalfoundations for economic behaviorbecause they suffer from the fallacy

of composition. It is possible for a single individual toprosper as a looter, and indeed it may be possible for

B Y PA U L C L E V E L A N D A N D A R T C A R D E N

How Shall We Live?

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Paul Cleveland (pclevela@panther.bsc.edu) is an associate professor ofeconomics at Birmingham-Southern College in Alabama.Art Cardenteaches in the department of economics and business at Rhodes College in Memphis.

Legitimate charity requires someone to partvoluntarily with his money.Donald Macleod

many people to prosper as a robber band. However, it isimpossible for everyone to prosper as thieves since allthieves must have someone to steal from.The problemwith thieves is that they do not produce anything, andif everyone is a thief then there is nothing to steal.

For this reason the welfare state rests on a very sandyfoundation. It assumes there will always be somethingthat can be looted from a productive class. Moreover, itassumes the productive class will continue to producevaluable goods and services even as they are being vic-timized. Pay-as-you-go entitlement programs likeSocial Security and Medicare are built on this shakyassumption. It relies on the notion that future genera-tions will rise to meet the claims of older generations.In other words, to use Ayn Rand’s metaphor, the wel-fare state assumes that the harder it presses down onAtlas’s shoulders, the harder Atlas willwork to hold the world aloft.

As an alternative, people can liveas the beneficiaries of charity, but thistoo is unsustainable. There are cer-tainly legitimate cases in which char-ity and gift-giving are appropriate,such as when someone suffers someunforeseeable calamity or whensomeone wishes to promote theinterests of his friends and familymembers. When people get marriedor begin their families, for example,gifts are often very helpful and muchappreciated.There are limits, however, to our charitableimpulses, limits to our ability to discern need, and lim-its to our ability to feed others before we feed our-selves. In addition, it should be noted that the purposeof true charity is to promote the independence of therecipient. In this regard, charity is a noble, benevolentinstitution that is quite appropriate to a society of free,responsible, flourishing people.

But even charity can be carried too far.When some-one expects to enjoy his bread by the sweat of another’sbrow, he becomes what Rand called a moocher. Such aperson claims the right to the fruits of others’ laborsolely on the basis of his alleged need. He seeks to makehimself dependent on someone else’s labor and is notinterested in his own independence.

Mooching too is unsustainable because it presup-poses that something has been produced.Therefore, wecannot all expect to live this way. Mooching as suchprovides no way for goods to be produced and in factencourages the wasteful use of resources. If someonewishes to depend entirely on the kindness of strangers,he or she must invest in ways to elicit that kindness. Inhis 2007 book, Discover Your Inner Economist, TylerCowen points out tragic examples of places in Indiawhere people fight over begging turf or actually pay tohave limbs amputated in order to increase their beggingincome.To borrow the terminology of William J. Bau-mol, these are exercises in destructive entrepreneurship.They create no new value; instead, they destroy value inan effort to appear more dependent and helpless so asto effectively attract the sympathies of others.

This has implications for how weunderstand what is known as paternal-ism. As we have already seen, propercharity treats people with dignity anddirects them toward independencerather than dependence. Examplesfrom fatherhood (or motherhood) areappropriate.The right goal for a fatheris not to give his children everythingthey want or to see that they are bliss-fully happy all the time. Rather hisgoal is to help his children flourish asindependent, responsible people in animperfect world. At every stage in

their development, he is trying to help them achievenew levels of independence. When a young adult iscapable of interacting socially through the process ofvoluntary exchange—thereby increasing his own rangeof opportunities by increasing opportunities for oth-ers—then the parenting has been a success. In otherwords, proper human life includes production andexchange. While there are cases when such autonomycannot be achieved due to severe disability, neverthe-less, the affirmation of human dignity and independ-ence remains the goal as far as it can be achieved.

Production, Autarky, and Trade

Another way to acquire wealth is to produce ityourself and ask your neighbors for nothing; how-

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H o w S h a l l W e L i v e ?

The welfare stateassumes that theharder it pressesdown on Atlas’sshoulders, the harderAtlas will work tohold the world aloft.

ever, total individual autarky is impossible in its logicallimit. There is no such thing as an autonomous, self-made person in a market economy, and people aresocial creatures not because of disposition only but outof necessity. It is not a psychological propensity to truckand barter that leads us to exchange, but a praxeologi-cal truth regarding the vast increase in productivity thatarises from specialization, division of labor, and divisionof knowledge.

Leonard E. Read’s classic example showed that nosingle individual knows how to make something as sim-ple as a pencil (www.tinyurl.com/98wl7b).This funda-mental insight applies to a vast range of goods.Any kindof existence greater than that of the lowest animalsrequires exchange, and as exchanges increase, so too dothe division of labor and division of knowledge.

Even before Adam Smith, economic thinkers hadbeen well aware that trade createswealth by making us more productive.We argue, however, that this is only partof the story. The criticism of homo eco-nomicus as an autistic and antisocialmaximizer of pecuniary profit to theexclusion of all else is simplistic andnaive.The economic person cannot takecare of himself without taking care ofothers; indeed, the person who wishesto maximize his own profit can only doso by thinking constantly and deeplyabout the needs and wants of others.Tobe sure, homo economicus does not have to care about thepeople with whom he interacts in a deep moral sense.But this does not stop him from caring about them in apractical sense.

The Bible enjoins us to feed the hungry and clothethe naked, among other charitable endeavors. We dothis most effectively through the market process.Indeed, the very act of buying low and selling highmoves resources to areas where they are more valuable.While the entrepreneur does not have to know aboutthe people he serves, he can only expand his own set ofopportunities by creating opportunities for them.

In a lecture at the 2009 Austrian Scholars Confer-ence at the Ludwig von Mises Institute, Rabbi Daniel

Lapin made this point explicitly by considering theeconomic and social function of peddlers, people whowould go through towns buying and selling.The goodpeddler was better off when he left town, but he onlyfound himself in this happy circumstance by makingthe townsfolk better off as well. To borrow Lapin’sexample, a peddler might show up at a house and ask ifthe residents had anything they were willing to sell.Suppose for a moment that they said yes and pointed toan old table with a wobbly leg that they were planningto throw away.The peddler might offer to buy it for $5,which they would gladly accept. They would now bebetter off by $5. At this point the peddler could repairthe table and find another family that was planning tobuy a similar table for $20. If the peddler offered to sellthem the repaired table for $15, they would find them-selves better off. And so it goes:With every transaction

the peddler makes people better offand enables them to feed and clothethemselves. In a word, the peddlermakes a direct contribution to theirability to flourish.

Of all the ways for societies toorganize themselves, the free marketis the only system that is simultane-ously sustainable, prosperous, andconducive to human flourishing.We cannot live together as a com-munity of thieves, nor could wesustain ourselves as a community of

beggars, moochers, or wards of charity. Further, any-thing that can be properly defined as a human existencemust necessarily rely on specialization, trade, and divi-sion of labor.This has the happy consequence of maxi-mizing our ability to do well and do good by ourneighbors.When we focus our attention on productionand trade, we necessarily feed the hungry and clothethe naked because self-interest properly understoodrequires a degree of focus on the wants and needs ofothers that is conspicuously absent from other forms ofsocial organization. To adapt a phrase from Harvardeconomist Claudia Goldin, life in the pre-market worldwas nasty, brutish, and short. In the world of free enter-prise, life is long, healthy, and rich.

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P a u l C l e v e l a n d a n d A r t C a r d e n

Even before AdamSmith, economicthinkers had beenwell aware that tradecreates wealth bymaking us moreproductive.

B Y J O H N S T O S S E L

Let’s Take the “Crony” Out of “Crony Capitalism”

Give Me a Break!

When Judge Richard Posner, the prolific conservative intellectual, released his bookA Failure of Capitalism: The Crisis of ’08

and the Descent Into Depression last year, you might have thought the final verdict was in: Capitalism caused the economic downturn and high unemploy-ment.

That this verdict was pronounced by someone likePosner, who is associated with the free-market law and economics movement, gave moral support to allthe politicians who were intent on exploiting the reces-sion (as they exploit all crises) to increase governmentcontrol of the economy.

But what exactly is this “capitalism” that is blamed?The word “capitalism” is used in

two contradictory ways. Sometimesit’s used to mean the free market, orlaissez faire. Other times it’s used tomean today’s government-guidedeconomy. Logically, “capitalism”can’t be both things. Either marketsare free or government controlsthem.We can’t have it both ways.

The truth is that we don’t have afree market—government regulation and managementare pervasive—so it’s misleading to say that “capitalism”caused today’s problems.The free market is innocent.

But it’s fair to say that crony capitalism created theeconomic mess.

What is crony capitalism? It’s the economic systemin which the marketplace is substantially shaped by acozy relationship among government, big business, andbig labor. Under crony capitalism, government bestowsa variety of privileges that are simply unattainable inthe free market, including import restrictions, bailouts,subsidies, and loan guarantees.

Crony capitalism is as old as the republic itself andwe don’t have to look far to see how crony-domi-nated American capitalism is today. The politicallyconnected tire and steel industries get governmentrelief from a “surge” of imports from China. (Whocares if American consumers want to pay less for Chi-nese steel and tires?) Crony capitalism, better knownas government bailouts, saved General Motors andChrysler from extinction, with Barack Obama croniesthe United Auto Workers getting preferential treat-ment over other creditors and generous stock holdings(especially outrageous, considering that the unionhelped bankrupt the companies in the first place withfat pensions and wasteful work rules). Banks and

insurance companies (like AIG) arebailed out because they are deemedtoo big to fail. Favored farmers getcrop subsidies.

If free-market capitalism is a privateprofit-and-loss system, crony capitalismis a private-profit and public-loss sys-tem. Companies keep their profitswhen they succeed but use govern-ment to stick the taxpayer with the

losses when they fail. Nice work if you can get it.It’s time we acknowledged the difference between

the free market, which is based on freedom and com-petition, and crony capitalism, which is based on privi-lege. Adam Smith knew the difference—and chose thefree market.

What’s taking us so long?

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John Stossel hosts Stossel on Fox Business Network and is the author ofMyths, Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know is Wrong. Copyright 2010 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

The word “capitalism”is used in twocontradictory ways.

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39 A P R I L 2 0 1 0

Who Is a Mormon?As a long-time reader and supporter of The Freeman,

I express my enjoyment in reading the articles by Dr.Thomas Szasz. I appreciate his critical thinking and hisskill in constructing the written word in a most effi-cient and powerful style.

However, I take issue with part of his December2009 article, “The Shame of Medicine: Conviction byPsychiatry.” He states that Brian David Mitchell is a“devout Mormon.” The word Mormon is a nicknamefor members of the Church of Jesus Christ of Latter-Day Saints. Given that Dr. Szasz claims to have obtainedhis facts “as reported in the press,” he apparently did notbother to read the reports of Mr. Mitchell having beenexcommunicated from the Church well before theElizabeth Smart saga. He therefore was not and is not a“Mormon” at all, let alone a devout one.Whatever Mr.Mitchell is devoted to, it is obviously not the practicesor teachings of The Church of Jesus Christ of Latter-Day Saints, which openly speaks out against child abusein any of its forms, whose tenets deny the validity ofself-appointments to the ministry, and which believes inobeying and sustaining the laws of the land withoutexception.

My statements are easily vertified athttp://tinyurl.com/byx5zv and http://tinyurl.com/yb2qyso.

So Mr. Mitchell was denied his day in court. If thatis a failure of the legal system and of psychiatry, Dr.Szasz’s attempt to vilify Elizabeth Smart is unfair.

The Freeman is great. Our country needs it nowmore than ever. Keep up the good work.

—LAVAR CLEGGScottsdale,AZ

Thomas Szasz replies:I thank Mr. Clegg for his kind words about my Free-

man columns. His letter highlights the inherently andpervasively rhetorical character of everyday language.

Understandably, Mr. Clegg is concerned that theSmart story casts Mormonism in a poor light, anunavoidable consequence of any reference to it. Mycomments had nothing to do with the Mormon or anyother religion.A Hungarian proverb wisely cautions,“Ifit’s not your shirt, don’t put it on.”

Every act of classifying a person—as Mormon orMuslim or atheist or whatever—enhances his or herimage in the minds of some and diminishes it in theminds of others. Accuracy and fairness require that thewriter inform the reader whether the classificatory cat-egory is an identity the subject assumes voluntarily or isone that the writer or others attribute to him. I shouldhave characterized Mitchell as a “self-styled devoutMormon.”

Mr. Clegg asserts that because the Church of Jesus Christ of Latter-Day Saints had excommuni-cated Mitchell, “He therefore was not and is not a‘Mormon.’ . . .” Was Baruch Spinoza, famous in part for having been “excommunicated” (an act for whichthere is no authority in Jewish law), not a Jew?

Characterizing Mitchell’s excommunication as hav-ing occurred “well before the Elizabeth Smart saga” isalso an overstatement. From the evidence available, it isnot clear when the excommunication occurred, notthat it matters for the subject of my column. (See theofficial website of the Church of Jesus Christ of Latter-Day Saints, www.tinyurl.com/y9pdfzd, as well as www.tinyurl.com/ycfhwsl and www.tinyurl.com/yb2beda).

Mr. Clegg’s conclusion requires close attention. Hestates: “So, Mr. Mitchell was denied his day in court. Ifthat is a failure it is a failure of the legal system and ofpsychiatry. Dr. Szasz’s attempt to vilify Elizabeth Smartis unfair.” I neither vilify nor glorify Ms. Smart. I amskeptical about her belated account of her life in “cap-tivity,” as I am skeptical about nearly everything elseabout this baroque tale.

Capital Letters

40T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

Mr. Clegg does not question my claim that“Mitchell was denied his day in court” and attributesthat outcome to “a failure of the legal system and ofpsychiatry.” Institutional systems are set in motion andare operated by individuals with their own agendas.These individuals are moral agents responsible for theiractions.

Calling the denial of Mitchell’s Sixth Amendmentrights an institutional “failure” misses the point I havelong tried to make: namely, that “therapeutic jurispru-dence”—the name given to the psychiatric subversionof the law by persons who approve of that arrange-ment—is inherently flagitious.

Kudos to StosselI would like to congratulate John Stossel [regarding

his] point on competition saving medicine (“Com-petition Would Save Medicine, Too,” September,www.tinyurl.com/lxtzgv). I am living proof that thisworks. In 1996 I moved my family to a high-deductiblecatastrophic policy that did not include baby delivery(rightfully so, the insurance doesn’t see this as a medicalaccident; we know where babies come from).

Already having four children, my wife and I didn’tsee any reason to stop. For child #5, I went to each ofthe hospitals in the area (there were two) and explainedthat we had no insurance for deliveries and would pre-pay for a reasonable amount.Well, the hospital closest toour home agreed to our use of the labor and deliveryfacility, the nursing staff, and a 24-hour stay for $350(which was probably more than they got paid by Med-

icaid or insurance). We negotiated a trade with theOB/GYN to do the delivery. The surprise was theprime rib dinners we each enjoyed after the baby wasborn—a special the hospital was promoting to attractmore deliveries.

For #6, we hired a midwife and had the baby athome. For me, that was the most fantastic of all sixdeliveries I’d attended; [my wife] delivered our son sit-ting on my knees while I sat on the edge of the bed.Atten minutes old, he was in bed with his mom and hisbrothers. (As a side note, the OB/GYN who cared forher had to dismiss her as a patient before the midwifedelivery as a requirement of his malpractice insurance).

Having this high-deductible, catastrophic policy hasproven a boon for me and the health care industry.Incidentally, I have changed jobs three times since I gotit, and each time, after I had negotiated my salary, I gotan additional $500 or $600 per month in compensationfor not taking the employer’s insurance.

—GEORGE SCHWAPPACHDade City, Fla.

C a p i t a l L e t t e r s

We will print the most interesting and provocative letters wereceive regarding articles in The Freeman and the issues theyraise. Brevity is encouraged; longer letters may be editedbecause of space limitations. Address your letters to: The Free-man, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533;e-mail: freeman@fee.org; fax: 914-591-8910.

Book Reviews

The Beautiful Treeby James TooleyCato Institute • 2009 • 302 pages • $19.95

Reviewed by Max Borders

In the poorest parts of the worldyou’ll find private education.

From Ghana to India to China, pri-vate schools are sprouting up every-where. There are new schoolsopening where none were before.There are also new schools wheregovernment “free” schools alreadyexist but languish.Why? Simple: Par-

ents want the best for their children. They realize thatone of the keys to escaping poverty is a good educa-tion.The best education, they understand, comes fromentrepreneurs who offer higher quality to stay in busi-ness and prosper.

But how can desperately poor people afford it? Howcan the education market work in countries rife withcorruption and institutional barriers to innovation?Why haven’t we heard about this phenomenon before?And if private education can rapidly spread in thedeveloping world, couldn’t it also in the rich West?

In The Beautiful Tree, James Tooley answers thosequestions. He offers readers a firsthand account ofschools all over the developing world. The book isn’tjust academic research; it is also a kind of travelogue.Wemeet the real teachers, students, and parents who con-stitute the delicate educational ecosystems under con-stant threat from bureaucrats, do-gooders, andnaysayers. Tooley, a former university professor whonow works full-time to help start free-market schools,tells their stories as if at our side, coloring straightfor-ward prose with rich stories and quotations from peo-ple he has met.

In the end he arrives at what many may think is ahighly counterintuitive conclusion:“Private schools forthe poor are burgeoning across the developing world.In many urban areas they are serving the majority of

schoolchildren.Their quality is higher than that of gov-ernment schools provided for the poor—perhaps notsurprisingly given that they are businesses dependenton fees to survive and hence are directly accountable toparental needs.”

Tooley’s work suggests that the deep yearning par-ents have to give their children the very best is nearlyuniversal. Unfortunately, it also reminds us just howmuch education can be fetishized by those who wouldlike it to be removed from the market utterly—whichalso means removed from the entrepreneurial environ-ment that yields both quality and innovation.Again andagain we encounter “experts” who say that educationmust be under government control and who get in theway of educational entrepreneurs who think otherwise.

A common obstacle faced by private-school entre-preneurs is government regulation used to protect spe-cial interests. “We find it possible to meet all of theirregulations,” says plaintive Nigerian educator BawoSabo Elieu, “but we can’t possibly afford them all.”Elieu is one of many among the world’s private educa-tors who are trying to do something for poor children,despite the encroachment of the regulatory (and inNigeria, predatory) state.

Rather than dwelling on the well-known reasonswhy government schools serve students so poorly,Too-ley concentrates on the innovations that are possiblewhen the passions and preferences of human hearts toeducate the young go unsatisfied. Parents work extraand scrimp to afford the modest fees at makeshiftschools. School founders and teachers continuallysearch for ways to do better. Tooley reports that in hisvisits to these schools, he was usually asked for adviceon ways to improve them—when he had come to learnfrom them! We should take inspiration from the storiesof parents, teachers, and kids unwilling to settle forineffective government schools despite the many obsta-cles to educational freedom.

Many of Tooley’s third-world stories echo the issueswe face here in the United States. Private schools forthe poor must compete with “public schools” thatcharge nothing.Teachers’ unions engage in favor-seek-ing and protectionism. Government officials andexperts argue that schools that charge fees cannot, bydefinition, be “for the poor.” Regulations make it hard

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for educational entrepreneurs to challenge the statusquo. The politics of guilt and envy are played to theadvantage of the educational elites and at the expenseof ordinary people who know that government schoolshandicap their children.

If caring parents and educators can build privateschools that work in Kenya, Nigeria, and other poornations, we can do the same here in the United States.Our circumstances are different, but the desire to havethe best for our children is universal. No governmentcan quell that desire.

The Beautiful Tree has a profound and universal mes-sage: Freedom works in education. It’s time for Ameri-cans to follow the example of the poor people Tooleywrites about and invest in private schools, growing thatsector enough to hasten a brain drain from “public” toprivate. The contrast between high-cost, ineffectivegovernment schools and low-cost, effective privateschools will be too great to ignore. Tooley’s bookdeserves a thunderous round of applause for showingthat the government education empire can be out-flanked by determined people.

Max Borders (maxborders@gmail.com) is executive editor at Free toChoose Network.

Capitalism at Work: Business, Government, and Energyby Robert L. Bradley, Jr.M & M Scrivener Press • 2009 • 502 pages • $39.95

Reviewed by Michael Beitler

Capitalism at Work by RobertL. Bradley, Jr., looks at the

destructive force of cronyism (orwhat Bradley calls “political capi-talism”) in America.Though peo-ple keep saying—especially in thewake of the bursting housingbubble and subsequent financialmeltdown—that “capitalism failed,”the book makes the exceedingly

important point that what prevails in the United Statesis not true capitalism (free enterprise, no governmentimpediments to success nor bailouts for failure), but

rather a badly deformed mutation.When critics blamecapitalism, they’re blaming an innocent bystander. It’spolitical capitalism they should indict.

Bradley, who worked for 16 years at Enron, becom-ing a confidant of CEO and Chairman Ken Lay,devotes many pages to the company, perhaps the mostspectacular business failure in American history. Manyreaders will be surprised to learn that Enron wasextraordinarily dependent on political favors, a perfectexample of crony capitalism. Bradley digs deep toexpose the real causes of Enron’s demise, but he goesmuch further, showing that Enron was but oneinstance of the ruinous relationship between govern-ment and business.

Bradley makes his case in three parts: Heroic Capi-talism, Political Opportunism, and Energy and Sustain-ability.

Each chapter in Part I is devoted to an individualwhom Bradley considers a heroic, as opposed to a polit-ical, capitalist—that is, an advocate of free markets.Readers of The Freeman will be familiar with AdamSmith and Ayn Rand, but most likely will be unfamiliarwith the Scottish moralist Samuel Smiles, whomBradley calls “the father of the self-improvement move-ment.” Bradley’s profiles help delineate the positivemoral ground of capitalism: self-reliance, respect for therights and property of others, cooperation, abiding byone’s contracts, and so on.

In Part II Bradley drives home the point that politi-cal capitalism is the “intersection of business opportu-nity and political opportunism.” Here he vividlycontrasts the positive features of free markets with thegrubby, furtive nature of political capitalism, whichhinges on “connections,” favoritism, and secret deals to make profits, injure competitors, and pin losses ontaxpayers.

Bradley throws a wider net than we usually see inthe pro-market literature. In chapter 4, for example, hediscusses the influence of business writers such as GaryHamel, Peter Drucker, and Jim Collins. He evenincludes a well-informed section on accounting princi-ples, where he warns against the “invited manipulation”of fair-value accounting. And chapter 6, “U.S. PoliticalCapitalism,” includes numerous examples of industryrepresentatives scheming with politicians to establish

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Book Reviews

government rules and regulations (and entire agencies)to limit competition for the benefit of the currentmembers of the industry at the expense of new com-petitors, consumers, and taxpayers. The alarming truthis that political capitalism is slowly strangling heroiccapitalism.

In Part III Bradley enlightens the reader on manyissues relating to the production of energy. “The DarkDecade,” for example, focuses on the foolish govern-mental meddling in energy from Nixon to Carter. It’san especially timely topic, given the Obama administra-tion’s infatuation with “green energy” schemes thatrequire government financial support.

At the end of the book Bradley turns to Enron. Hedescribes its founder, Ken Lay, as a “Ph.D. economist,interested in the big picture and the ways of politicalpower. His résumé was top-heavy with Washingtonexperience, acquired at three federal jobs, the last tworegulating the energy industry.”As Enron’s CEO he wasthe master of the government-favor game.

Bradley gives examples of how Enron played bothsides of the political aisle and how it “politicized” its taxand accounting systems to create the illusion of prof-itability. Bradley states that Enron “was a logical, albeitgrotesque, outcome of the mixed economy writ large.”Most Americans think that Enron’s collapse showssome inherent weakness in capitalism, but what Bradleyshows is that it rose only because Lay and others in thefirm knew how to game the political system. Equallyimportant, Enron’s collapse came about becauseinvestors in the world of real capitalism finally discov-ered that the company was a hollow shell and dumpedits stock.

Bradley’s Capitalism at Work is actually the first bookin a planned trilogy called Political Capitalism. Theforthcoming volumes are titled Edison to Enron andEnron and Ken Lay: An American Tragedy. I’m lookingforward to both of them.

Michael Beitler (mike@mikebeitler.com) is the host of “Free Markets WithDr. Mike Beitler,” a libertarian Internet radio show, and the author ofRational Individualism:A Moral Argument for LimitedGovernment and Capitalism.

Herbert Hooverby William E. Leuchtenburg Times Books • 2009 • 208 pages • $22.00

Reviewed by Jim Powell

William E. Leuchtenburg isamong the last surviving

literary lions who played a majorrole shaping the reputation ofFranklin Delano Roosevelt. Hisbook Franklin D. Roosevelt and theNew Deal (1963) stood out amidstthe postwar deluge of worshipfulworks about FDR, includingthose by James MacGregor Burns,

Arthur M. Schlesinger, Jr., Frank Freidel, and KennethS. Davis. Leuchtenburg, professor of history emeritus atthe University of North Carolina, is an engaging authorwho knows how to tell a good story.

This new biography of Herbert Hoover is a preludeto the morality tale that Leuchtenburg has already pre-sented—namely, the heroic New Deal narrative.According to Leuchtenburg, the 1920s were a failure,and the worst failure was Herbert Hoover. He was a“heartless” man, a “dogmatic reactionary,” “a rightwinger of deepest dye” who preached “minimalist”government. Hoover wouldn’t spend enough moneyon relief because of his unwarranted “faith in volun-tarism.”

Yet Leuchtenburg provides evidence aplenty thatHoover wasn’t quite the laissez-faire champion he hasbeen made out to be. While criticizing Hoover forwanting to balance the federal budget, Leuchtenburgacknowledges that Hoover “was running a historicdeficit—nearly a billion dollars.” Leuchtenburg men-tions how Hoover’s Grain Stabilization Corporationtried to help farmers by purchasing agricultural com-modities at above-market prices, only to find that farm-ers responded by producing more. Overwhelmed withunwanted surpluses, the Corporation dumped thesecommodities on the market, driving farm prices evenlower than they had been before. Furthermore,Hoover’s Reconstruction Finance Corporation bailedout banks, railroads, insurance companies, and buildingand loan associations, but still the depression deepened.

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Book Reviews

In 1932 Hoover signed the Norris-LaGuardia Act, giv-ing labor unions immunity from antitrust laws, privatelawsuits for damages, and injunctions from federalcourts, which enabled union bosses to push aggressivelyfor monopoly bargaining power and forced dues.

I would agree with Leuchtenburg that two ofHoover’s biggest blunders were signing the Smoot-Hawley tariff in 1930 and tax hikes in 1932.The prob-lem is that it’s impossible to square all of this federalactivism with the notion that Hoover believed in “min-imalist” government.

Nor does Leuchtenburg comment on the strikingsimilarity between the policies of his demon Hooverand his hero FDR. Hoover and FDR both raised taxes.Both spent money on public works that didn’t providemany jobs for unskilled people. Hoover signed thetrade-stifling tariff. FDR effectively embraced it; henever spent any of his formidable political capital tryingto repeal it, which he might have been able to do soonafter he was sworn in, when a desperate nation was athis feet waiting for leadership and inspiration. Powerfulprotectionist interest groups would have opposed FDR,but he had an appealing personality and formidablecommunications skills, and was a political genius. Ithink he could have exploited the deep resentmentagainst Hoover to eliminate his monstrous tariffs andtaxes, providing a much-needed stimulus for the econ-omy. Apparently, he was content with Hoover’s anti-trade policy.

FDR, like Hoover, spent much effort trying to propup wages and prices.This prevented markets from fullyadjusting to the severe contraction. Maintaining above-market prices discouraged consumers from buying, andabove-market wages discouraged employers from hir-ing. Also, like Hoover, FDR expanded the power oflabor bosses (especially with the 1935 National LaborRelations Act). Unemployment dragged on underHoover, and it dragged on even longer under FDR—until 1940, when the government began mobilizing forWorld War II and conscripting young men.

These striking similarities create more than a fewproblems for the heroic New Deal narrative. If Hooverwas bad and FDR was good, then why did FDR adoptHoover’s major policies? If Hoover’s policies were areason that high unemployment dragged on for three

years of his presidency, then why weren’t FDR’s poli-cies a reason that high unemployment dragged on forseven years of his presidency? If Hoover is viewed ashaving failed to get America out of the Great Depres-sion, why shouldn’t FDR similarly be viewed as havingfailed to get America out of it? The main differencebetween Hoover and FDR might be that FDR wenton to win World War II, and probably many peopleignore or forgive his depression-era bungling becauseof that.

The key to Hoover’s and FDR’s failures during theGreat Depression was their “progressive” ideas. Bothmen grew up on those ideas and took them to heartwhen they served in Woodrow Wilson’s wartimeadministration.The depressing thing about this book isthat instead of debunking the myth that Hoover andFDR were philosophical opponents, it attempts to keepit alive.

Jim Powell (powellj@optonline.net), a senior fellow at the Cato Institute,is the author of FDR’s Folly, Bully Boy,Wilson’s War, GreatestEmancipations,The Triumph of Liberty, and other books.

End the Fedby Ron PaulGrand Central Publishing • 2009 • 224 pages • $21.99

Reviewed by George Leef

Of all the blunders in Ameri-can history, perhaps the

greatest was the decision to putcontrol of money and banking inthe hands of a cabal of big bankersoperating under the highfalutintitle “Federal Reserve System.”Unfortunately, few among us knowanything about the Fed, much less

have any inkling of how badly it has damaged thenation.Without it we’d have a smaller government andeconomic stability.

And yet the Fed enjoys almost sacred-cow status.Most Americans have been led to believe that modernnations absolutely must have some government institu-tion to “manage” the economy, provide money andcredit, and control interest rates. Blinded by that

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Book Reviews

notion, they assume that if we didn’t have the Fed, we’dbe stuck in the horse-and-buggy age, plagued by terri-ble boom-and-bust cycles.

Over the near-century since Congress establishedthe Fed (in 1913), it has had many critics, but never onewith the moral and political stature of RepresentativeRon Paul.The congressman from Texas is not a politi-cal hack who takes positions just to please constituentsand get reelected. He has made a lengthy, serious studyof economics, especially our monetary institutions, andhis book End the Fed puts his knowledge on display. Butit’s more than just a display of knowledge. The bookshows Paul’s passionate commitment to the cause ofestablishing the honest, dependable monetary systemthe United States was supposed to have.

That’s why Paul wants to end the Fed. It gives us adishonest and easily manipulated monetary system thatwe can only depend on for constant inflation. Abolish-ing the Fed, he writes, “would be the single greateststep we could take to restore American prosperity andfreedom and guarantee that they have a future.”

The financial turmoil and prodigious deficits ofrecent years have people wondering about the future.For them, this book will be like finding an oasis whenyou’re desperate for water in the desert.

Paul begins by explaining how the Fed came to be.The United States survived without it for more than acentury, although the nation suffered from periodicrecessions and “panics.” Those episodes, Paul makesclear, weren’t due to any flaw in the free market, butwere caused by bad government monetary policy andbanking regulation. The Panic of 1907, however, wasseized on by banking interests to push for the cartelthey had long desired. Congress obligingly created theNational Monetary Commission in 1908. It was domi-nated by big bankers who said that the country neededan “elastic” currency and a “lender of last resort” tobackstop banks that got themselves into deep trouble.The legislation was drafted in 1910 at a secret meetingon Jekyll Island, Georgia, at a resort owned by thebiggest banker of all, J. Pierpont Morgan. Congresspassed it in 1913.

One thing most people have heard is that it is theFed’s job to give us price stability. Paul shatters the ideathat it does so by noting that goods costing one dollarin 1913 now cost $21. Nor does the Fed give us eco-nomic stability. Paul points to the numerous recessionswe’ve had since it was established.

Drawing on his study of Austrian economic the-ory, Paul demonstrates that the boom-and-bust cycleis generated by the Fed’s penchant for tamperingwith interest rates. When it drives them artificiallylow, it stimulates a temporary boom that must even-tually end in recession or depression, with highunemployment and many bankruptcies among over-stretched firms.

Furthermore, the Fed makes it easy for the federalgovernment to finance its extravagant (and usuallyunconstitutional) spending. It can purchase governmentbonds through “open market operations” and magicallyturn federal debt into new money.What a scam. Politi-cians get to spend without explicitly raising taxes andthen blame the resulting depreciation of money onothers.

So the Fed is a bad institution, but what alternativeis there? We can’t go back to some antiquated systemlike gold, can we? Paul shows that a monetary systembased on precious metal is both feasible and much to bedesired, precisely because, unlike paper, governmentcan’t manipulate gold.

The book ends with an excellent list of suggestedreadings. I predict that End the Fed will lead to quite afew knowledgeable and zealous opponents of govern-ment economic intervention, and not just regardingmoney.

Ron Paul’s book is a timely cry of the heart. Withour economy in tatters, opportunistic scoundrels inWashington are calling for vast, freedom-killing expan-sions of government power. Paul stands athwart theirplans.This brave book is a rallying point for Americanswho know that we’re on a path to ruin.

George Leef (georgeleef@aol.com) is book review editor of The Freeman.

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B Y C H A R L E S W. B A I R D

ObamaCare and Unions

The Pursuit of Happiness

Last November 7, the House of Representativespassed H.R. 3962, crafted by Speaker NancyPelosi and whimsically titled the Affordable

Health Care for America Act (AHCAA). It was theHouse’s version of ObamaCare.American labor unions,whether representing government- or private-sectorworkers, enthusiastically endorsed the measure.Yet mostunions have been effective at securing good health carebenefits for their members, and they frequently cite thisas a reason for workers to unionize. So why are they soeager for government to expand its role in Americanhealth care? The short answer, as illus-trated by several provisions of theAHCAA, is that government-runhealth care would enable union bossesto capture large numbers of hithertounion-free workers into forced-duessubservience.

Increased government interven-tion in health care increases the num-ber of health care workers who are, orwho could be classified as, govern-ment employees. In a single-payer sys-tem all health care workers aregovernment employees. When gov-ernment increases its subsidies andregulation of nominally private healthcare facilities, they become much lessprivate. Their employees derive more of their incomefrom government and are subjected to government-dictated workplace rules.They become more and morelike government employees. This gives government-employee unions grounds for trying to intrude wherethey do not belong. Politicians who receive organizedpecuniary and in-kind election support from theunions are all too happy to comply.

Similarly, as individual private health care practition-ers receive more of their income from taxpayers they

become quasigovernment employees. At the behest ofAndy Stern and his Service Employees InternationalUnion (SEIU), politicians in several states—includingCalifornia, Illinois,Washington, and Missouri—are try-ing to classify home health care workers who are paidwith taxpayer money as state government employeeswho may be unionized and forced to pay union dues.Home health care workers tend to disabled and chron-ically ill people, often senior citizens, in their homesrather than in health care facilities. Section 2589 of theAHCAA creates a “Personal Care Attendants Workforce

Advisory Panel” on which laborunions are guaranteed representation.“Personal care attendants” is anothername for home health care providers.Union representatives on this panelwill inevitably push for forced union-ization of such workers.

The conversion of private-sectorworkers into government workersbenefits unions because govern-ment workers are easier for unions tocapture than private-sector workers.The percent of government workerswho are unionized far exceeds thecorresponding percent in the privatesector.

In 2009 unionization in govern-ment was 37.6 percent while in the private sector it wasonly 7.3 percent. Moreover, government-employeeunions now have more members than private-sectorunions. In 2009 government-employee union memberscomprised 51 percent of all union members, althoughgovernment workers were only 16.9 percent of allworkers (www.unionstats.com).

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Charles Baird (charles.baird@csueastbay.edu) is a professor of economicsemeritus at California State University at East Bay.

Increased governmentintervention in healthcare increases thenumber of healthcare workers whoare, or who could be classified as,governmentemployees.

The principal reason unions are more successfulamong government workers than private-sectorworkers is that government-sector employers have noreason to resist unionization. They and the unionswith which they “bargain” sit on the same side of thebargaining table. They each seek more and moremoney from taxpayers. Bureaucrats seek larger budgetsfor their agencies, and the unions are helpful in organ-izing support for those larger budgets. Governmentemployees know their paychecks are determined bypolitical clout, and they recognize the value of unionsas effective lobbyists against the interests of taxpayers.For example, in Canada, which has a single-payermedical system, almost all registerednurses are government employees.Sixty-two percent of Canadian registered nurses are unionized(www.tinyurl.com/y8alsrf). Thecorresponding figure in America in 2008 was 19.8 percent(www.unionstats.com). In brief,ObamaCare would create moregovernment employees; and sincegovernment employees are recep-tive to the blandishments of unions,unions support ObamaCare.

AHCAA also helps private-sector unions because itimposes health care costs on union-free employers whootherwise may not offer medical benefits to theiremployees. It is elementary economics: If your com-petitor has a cost advantage over you, you can either cutyour costs or lobby government to increase your com-petitor’s costs. AHCAA does the latter throughemployer mandates and tax penalties imposed onemployers who do not comply. Compensation includeswages and nonwage benefits such as health insurance.Aunion-free employer can tailor compensation packagesto fit the preferences of individual employees. Hethereby obtains the services of his employees at thelowest cost. Unionized employers with union contractsthat require uniform health care benefits do not havethat ability.

One might think that federal oversight of the myr-iad details of American health care would make themedical provisions of collective bargaining contractsirrelevant. Not so. Union-owned politicians are loath todo anything to make any of the games unions playirrelevant. Section 254 of the AHCAA provides that“Nothing in this [legislation] shall be construed to alteror supersede any statutory or other obligation toengage in collective bargaining over the terms or conditions of employment related to health care.” Sec-tion 424 guarantees that any union-negotiated healthplan automatically meets “health care participationrequirements.”

There are other ways that theAHCAA benefits unions. Section 111creates a $10 billion trust fund to bailout unions and employers that nowhave unfunded health care liabilities toearly retirees between 55 and 64. TheUnited Auto Workers (UAW), GeneralMotors, and Chrysler are among thebig beneficiaries of this “reinsurance”scheme.The government and the UAWhave already taken over General Motorsand Chrysler, but AHCAA would

throw even more taxpayer money at them. Section 110prohibits any postretirement health care benefit reduc-tions in the private sector. Taken seriously, this wouldmake the accumulation of future unfunded health careliabilities illegal. Inasmuch as the federal governmentitself continues to accumulate trillions of dollars ofunfunded liabilities in Social Security and Medicaid, thisis shameful hypocrisy.

There are more goodies for unions sprin-kled throughout the 2,016 pages of the AHCAA, butthe subterfuge is clear. In a 2008 campaign speechbefore the SEIU, Barack Obama promised Andy Sternand his subjects that “Your agenda is my agenda”(www.tinyurl.com/ygllo6c; note: audio begins immedi-ately at high volume).Whatever else may be said aboutthe president’s attempt to take over American healthcare, it is obvious that he is keeping that promise.

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C h a r l e s W. B a i r d

Since governmentemployees arereceptive to theblandishments ofunions, unions support ObamaCare.