volume 61, no 9 november 2011

Features8 The Battle to Save American Street Vending by Bob Ewing

12 The Infrastructure Delusion: Getting Nowhere Faster by Richard W. Fulmer

17 Unemployment:What Is It? by Warren C. Gibson

21 Taxation Is the Lifeblood of the State by Arthur Foulkes

25 “Find Out What the People Want”:The Russell Conwell Story by Harold B. Jones, Jr.

29 Quantitative Easing Forever? by Christopher Lingle

33 The Importance of Failure by Jack Knych and Steven Horwitz

36 The Individual and the Community by Aeon J. Skoble

Columns2 Perspective ~ Progressive Intolerance by Sheldon Richman

4 Ideas and Consequences ~ Missing Samuel Tilden by Lawrence W. Reed

6 More Government Action Needed for Job Recovery? It Just Ain’t So! by Tyler Watts

15 Thoughts on Freedom ~ Dangerous Political Naifs by Donald J. Boudreaux

23 Our Economic Past ~ The Other Test: Debts and Taxes by Stephen Davies

31 Peripatetics ~ Social Cooperation by Sheldon Richman

39 Give Me a Break! ~ What We Don’t Know about History Can Hurt Us by John Stossel

47 The Pursuit of Happiness ~ Henderson’s Iron Law of Government Intervention:

The 1967 Detroit Riot by David R. Henderson

Book Reviews42 Alchemists of Loss: How Modern Finance and Government Intervention Crashed

the Financial System

by Kevin Dowd and Martin Hutchinson Reviewed by Roger W. Garrison

43 The Relentless Revolution: A History of Capitalism

by Joyce Appleby Reviewed by Leonard Liggio

44 Libertarianism Today

by Jacob Huebert Reviewed by George Leef

45 A Maverick’s Defense of Freedom

by Benjamin A. Rogge, edited by Dwight R. Lee Reviewed by Joshua HallPage 44

Page 33

Page 23

VOLUME 61, NO 9 NOVEMBER 2011

Television pundits increasingly express an atti-tude that is at once arrogant and ignorant:Thepeople who oppose Keynesian economics—

specifically an increase in government deficit spendingto create jobs and jumpstart the economy—are thesame kind of people who also believe that the earth isonly several thousand years old (rather than 4.5 billion),that evolution is bunk, and that science is something tobe feared. MSNBC’s Chris Matthews takes the strongestversion of this position.

TV hosts of course are not authorities on economics,so when they judge Keynesianism as the only truly sci-entific economics, they mean two things:That is what aKeynesian taught them in school and that is what alltheir Keynesian friend-guests assure them is the case.Since they never invite a non-Keynesian economist ontheir shows, they insulate themselves against informeddissent from their faith.Who’s antiscience?

I know many people who (like me) reject Keynesianeconomics and embrace science (while realizing thatscientists are prone like the rest of us to confirmationbias and career ambitions.) But Matthews & Co. saythere are no such people.

This explains their intolerance to those who refuseto agree that in a recession government spending isindispensable to raising aggregate demand and restoringeconomic growth.

If you point out that every dollar governmentspends, whether taxed or borrowed, is a dollar removedfrom the private sector, the Keynesian pundit mightagree but point out that business is not investing (true)and consumers are not spending (false)—so what’s lost?

The pundits’ blinders keep them from a broader per-spective. Since all they know is the most vulgar rendi-tion of Keynesian economics, they have no idea thattwo distinct factors now prevent economic growth.First, the boom (without which there’s no bust) wascreated by monetary, housing, and financial policies thatto a great extent still exist. Government officials are try-ing to resurrect the housing industry, indicating that theruling elite still does not realize that the industry’s pre-bust condition was the artificial result of misguidedinterventions.Widespread malinvestments—investmentsunjustified by real underlying conditions—have to be

2T 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

Progressive IntolerancePerspective

Published byThe Foundation for Economic Education

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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 Wendy McElroy

James Bovard Tibor MachanThomas J. DiLorenzo Andrew P. MorrissBettina Bien Greaves James L. Payne

Steven Horwitz William H. PetersonRaymond J. Keating Jane S. Shaw

Daniel B. Klein Richard H.TimberlakeDwight R. Lee Lawrence H.White

Foundation for Economic Education

Board of Trustees, 2011–2012

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Ethelmae Humphreys Donald SmithEdward M. Kopko Harold J. Bowen, III

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The Foundation for Economic Education (FEE) is anonpolitical, nonprofit educational champion of indi-vidual liberty, private property, the free market, andconstitutionally limited government.

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3 N O V E M B E R 2 0 1 1

P E R S P E C T I V E : P r o g r e s s i v e I n t o l e r a n c e

liquidated before economic growth can resume. Liqui-dation requires the costly but necessary adaptation andtransfer of resources and labor to purposes for whichthere is genuine demand. This correction cannot takeplace if political responses to the recession get in theway by, say, discouraging saving.

Second, the government has created significant newregulatory uncertainties that chill the investment cli-mate. With so many yet-to-be-written rules comingdown the pike, why would anyone risk money now? Agovernment regulatory regime is bad enough; one thatcan change at any moment is far worse.

Finally, the pundits are blind to the fact that governmentcan’t create real jobs by design. It’s not that government can’tpay people to do things. But in economic terms, a job isnot merely exertion in return for a paycheck. It’s activitythat transforms resources from a less valued form to amore valued form in the eyes of consumers.

Keynesian pundits insist that a stimulus program topay workers billions of dollars to repair schools, roads,and bridges would qualify as productive because peoplevalue those things. What’s missed is that we live in aworld of scarcity and tradeoffs, and that we always makechoices at the margin. Repairing a school may soundgood in a vacuum (Which school? How elaborate arepair?), but not so good when something more valu-able must be given up in exchange.

We all make similar tradeoffs in the marketplace, andwe can do so intelligently because goods and serviceshave prices. But government-produced goods and serv-ices are not priced and sold in the market. Instead, gov-ernment collects its revenues by threat of force, andpoliticians and bureaucrats dispose of them ostensiblyin the interest of the people but more likely in thecareer interest of those same politicians and bureaucrats.Without prices and free exchange—without entrepre-neurship—we cannot know if what government pro-duces is worth the alternative goods and servicesforgone. Putting the infrastructure into the freed mar-ket would correct this defect.

The Keynesian pundits, then, are wrong. The gov-ernment need not be the spender of last resort because1) producers and consumers would spend just fine if itwould get out of their way, and 2) the government can’tbe relied on to create, rather than destroy, value in itsuse of scarce resources.

* * *In a move reminiscent of medieval times, the gov-

ernment of Atlanta has told independent street vendorsthey now owe tribute to a new monopoly contractor.Bob Ewing describes this outrage against economicfreedom.

“Infrastructure” is the magic word for those whowant the government to spend ever-more amounts ofthe taxpayers’ money. Richard Fulmer reminds themthat this is no substitute for a free economy.

The American people continue to be plagued byunemployment. What is it exactly, and where does itcome from? Warren Gibson starts a two-part series this month.

People favoring a tax-hike strategy for reducing thefederal deficit point to the booming Clinton years forsupport.Arthur Foulkes takes a closer look at those years.

Russell Conwell was well known in the late nine-teenth century for his inspirational speeches aboutentrepreneurship and self-help.Today he’s forgotten, butHarold Jones, Jr., is trying to change that.

Fed Chairman Ben Bernanke promises to con-tinue his near-zero-interest-rate policy for another two years. But Christopher Lingle says that would be adisaster.

Failure can be painful, but not as painful as whatresults from a public policy aimed at preventing failure.Jack Knych and Steven Horwitz explain.

Communitarian sociologist Amatai Etzioni has beenrailing against libertarianism for at least 30 years butrefuses to respond to rebuttals. Aeon Skoble gives himone more chance.

Our columnists have had fun coming up with topicsfor their sharp observations. Lawrence Reed remem-bers Samuel Tilden. Donald Boudreaux finds fault witheconomists. Stephen Davies uses debt and taxes togauge political failure. John Stossel looks at some his-torical myths. David Henderson traces the causes of the1967 Detroit riot. And Tyler Watts, reading Paul Krug-man’s appeal for more government spending because itwill create jobs, responds,“It Just Ain’t So!”

Our book reviewers have been absorbed in worksabout the financial crisis, a champion of the freedomphilosophy, libertarianism, and capitalism.

—Sheldon [email protected]

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

Missing Samuel Tilden

Ideas and Consequences

If you’re under 50 you probably don’t rememberwhen telephone “numbers” weren’t all numbers.From the 1920s until the mid-1960s most phone

“numbers” began with two letters corresponding tocertain digits on a common telephone dial. KL7-1234,for example, was read as “Klondike 7-1234.”

My family’s number was TI3-8597.The letters weremeant to honor a man I never knew of or appreciateduntil long after the switch to all digits—Samuel J.Tilden. He deserves to be much better remembered assomething other than part of a defunct phone number.A strong case can be made that he was, as the subtitle ofa recent book by screenwriter Nikki Oldaker suggests,“The Real 19th President.”

Tilden was born nearly two cen-turies ago on February 9, 1814, inNew Lebanon, New York.After stud-ies at Yale and New York University,he became a successful lawyer, ashrewd investor, a wealthy man, and apromising politician in the Democ-ratic Party. A crusader against thecorruption of the infamous Tammany Hall politicalmachine in New York City, Tilden was catapultedfrom the New York state assembly to the governorshipin 1874. From that perch he quickly earned a nationalfollowing and gained the Democratic Party’s nomina-tion for president in 1876.

No Democrat had occupied the White House sinceJames Buchanan passed the office to Abraham Lincolnin 1861. Fifteen years later the country was ready for achange. Tilden comfortably beat Ohio RepublicanRutherford B. Hayes in the popular vote, 51 to 47.9percent, but a nasty political battle resulted in a dubiousdeal. Behind closed doors Hayes was awarded enoughdisputed votes in the Electoral College to edge Tildenthere by one vote. In exchange the Republicans agreedto withdraw federal troops from the South and end

Reconstruction.Tilden remains one of only four presi-dential candidates in U.S. history to win the popularvote but lose the Electoral tally—the others beingAndrew Jackson (1824), Grover Cleveland (1888), andAl Gore (2000).

Tilden was known for assessing policy optionsaccording to right and wrong versus the typical politi-cal (and Machiavellian) rule of what can get youelected and reelected. “Successful wrong never appearsso triumphant as on the very eve of its fall,”he once said. “We must believe in the right and in the future. A great and noble nation will not sever itspolitical from its moral life.”

Hayes turned out to be a clean anddecent one-term president, but Tildenjust might have shined as one of ourbest. I’ve come to admire him becausehe was rigorously committed to allthe right things: limited government,sound money, free trade, and lowtaxes—which is to say that he’d have ahard time getting to first base today,

particularly within his own party. Most 21st-centurylibertarians would be very comfortable with the 1876Democratic Party platform on which Tilden ran.

Money. The big money questions of the 1870s were1) what to do with the hundreds of millions of paperdollars (“greenbacks”) issued during the Civil War; and2) whether to subsidize and re-monetize silver as ameans of inflating the currency.Tilden and the Democ-rats were the country’s leading advocates of fulfillingthe original promise to redeem greenbacks in gold andin opposing subsidies for silver. As advocates of soundmoney they had no interest in monetary expansion togoose the economy and help debtors because theybelieved it was fundamentally dishonest.


Lawrence Reed ([email protected]) is president of FEE.

Tilden just mighthave shined as one of our best presidents.

“Reform is necessary,” asserted the Tilden platform,“to establish a sound currency, restore the public credit, and maintain the national honor. We denouncethe failure for all these eleven years of peace to make good the promise of the legal tender notes (the green-backs), which are a changing standard of value in the hands of the people, and the non-payment of which is a disregard of the plighted faith of the nation.” Taking direct aim at the Republicans, it went on to declare: “We denounce the financial imbe-cility and immorality of that party which . . . has madeno advance towards resumption—no preparation forresumption—but instead has obstructed resumption bywasting our resources and exhausting all our surplusincome.”

Tariffs: Taxes on imported goods were the primarysource of federal revenue for most ofthe nineteenth century. Since Lincoln,the Republican Party stood for hightariffs not just for the revenue but alsofor the “protection” of domesticindustries. The free-trade Democratssaw protectionism for what it really is:an attack on consumers for the benefitof producers with political connec-tions.The Tilden platform’s critique ofit is as relevant today as it was in 1876:

We denounce the present tariff, levied uponnearly four thousand articles, as a masterpiece ofinjustice, inequality, and false pretence. It yields adwindling, not a yearly rising, revenue. It has impov-erished many industries to subsidize a few. It pro-hibits imports that might purchase the products ofAmerican labor. It has degraded American com-merce from the first to an inferior rank on the high seas. It has cut down the sales of Americanmanufactures at home and abroad, and depleted thereturns of American agriculture—an industry fol-lowed by half our people. It costs the people fivetimes more than it produces to the treasury,obstructs the processes of production, and wastes thefruits of labor. It promotes fraud, fosters smuggling,

enriches dishonest officials, and bankrupts honestmerchants. We demand that all custom-house taxa-tion shall be only for revenue.

Government spending:Virtual one-party (Republican)dominance since 1865 had produced huge increases infederal expenditures, largely for pork-barrel projects.Tilden denounced the spending explosion, and his peo-ple inserted strong language against it in the 1876 plat-form: “Since the peace, the people have paid to theirtax-gatherers more than thrice the sum of the nationaldebt, and more than twice that sum for the federal gov-ernment alone.We demand a rigorous frugality in everydepartment, and from every officer of the government.”The Tilden Democrats were squarely in the tradition oftheir Jefferson-Jackson forebears and light-years apart

from their Democratic descendantsof today. It was a tradition that wouldcontinue through the last greatDemocratic president, Grover Cleve-land, only to be thoroughly forsakenby the next (and arguably the worst)Democratic president,Woodrow Wil-son.

On many other vital issues of theday Tilden and the Democrats stakedout the moral high ground. Theyopposed an imperialistic foreign pol-

icy and favored Civil Service reform to minimize polit-ical patronage and corruption. Because they respectedthe rights and sovereignty of free individuals, theyfought against sumptuary laws to regulate personalbehavior. They denounced the use of governmentpower to advantage one group over another. And theypushed to treat the southern states once again as equalpartners in the Union.

Today dozens of streets, townships, libraries, andschools from Wichita Falls,Texas, to Washington, D.C.,bear the Tilden name. A statue of him and his home,both in New York City, still stand. But otherwise, sadly,the memory of this man who stood for liberty andshould have been president is fading as surely as my oldphone number.

5 N O V E M B E R 2 0 1 1

M i s s i n g S a m u e l T i l d e n

On many vital issuesof the day Tilden and the Democratsstaked out the moralhigh ground.

Would it come as a shock to hear one of the best-known apologists for governmentintervention in the economy admitting

that it hasn’t worked (so far)? This is exactly whatNobel Prize-winning economist and uber-KeynesianPaul Krugman does in a New York Times column, stat-ing, “[W]e are not now and have never been on theroad to recovery” (“The Wrong Worries,” August 4,tinyurl.com/3jnruye).

That’s right: Despite record federal spending andunprecedented Federal Reserve intervention, the econ-omy remains depressed. Beyond stating the obviousabout the nonrecovery Krugman frets about the long-term implications of the stubbornly sour labor market.He also notes that consumers are “still burdened by thedebt that they ran up during the housing bubble,”which, to my Hayek-schooled mind, sounds an awfullot like the drawn-out bust phase of a credit-fueledbusiness cycle.

Rather than concluding that deficit spending andprinting money are the wrong cures for what ails us,Krugman complains that government is not doingenough. Citing the tea-party Republicans’ “deficitobsession,” Krugman complains that government hasbeen “pulling back [rather than] supporting the econ-omy in its time of need.” He also cites lassitude at theFed, claiming it’s been “intimidated by the Ron Paultypes” into overreacting against potential inflation.Krugman argues the federal government should bedoing much more, and its top priority should be creat-ing jobs, not reducing the deficit.

While Krugman avoids the specifics of what suchgrandiose federal jobs programs would entail, he’s onthe record supporting massive New Deal-style public-

works spending, which would employ “armies of gov-ernment workers.” Krugman also favors more monetarystimulus by the Fed to boost spending throughout theeconomy. In brief Krugman is saying we have not yetbegun to fight the Keynesian battle of stimulus oneither the monetary or fiscal fronts.

Let’s review the figures. Since September 2008 theFed has more than tripled its balance sheet, printingroughly $2 trillion in new bank reserves, monetizingaround $900 billion of U.S. government debt, and lend-ing over $3 trillion to U.S. and foreign banks. As forfederal spending—the real growth engine, in Krug-man’s mind—it increased by 40 percent (29 percent inreal terms) from 2007 to 2011 to a record $3.8 trillion,with half that increase coming in the recession year2009 alone.“Stimulus” spending by itself has amountedto $666 billion so far, and federal bailouts have rackedup at least $150 billion in taxpayer costs. Since 2007gross public debt has increased from 64 to 103 percentof GDP.

And Krugman’s argument again? Government is notprinting and spending enough.This fetish for unlimitedspending juxtaposes strangely against a backdrop ofperhaps the most fiscally profligate decade of Americanhistory, but I’ll give Krugman credit for boldness. How-ever, the figures themselves, shocking as they are, maskthe real question: Can more government spendingactually encourage productive employment that pro-motes overall economic welfare?

Stimulus enthusiasts like Krugman are sure it can.And their first big task for the new labor armies is to go

More Government Action Needed for Job Recovery?It Just Ain’t So!


B Y T Y L E R W AT T S

Tyler Watts ([email protected]) is an assistant professor of economics at BallState University.

7 N O V E M B E R 2 0 1 1

forth and fix America’s broken infrastructure. Haven’tyou heard? America’s roads, bridges, sewers, airports,and more are in total disrepair—so says the infrastruc-ture lobby. But these folks—an assortment of large con-struction, manufacturing, and transport companies, andtheir unions—have been carping about infrastructurebeing underfunded for the last 30 years. No surprisehere: like any special-interest group, they want a con-tinued and enlarged flow of federal funding. Hence myPublic Choice nerves twitch at every mention of“crumbling infrastructure.”

But let’s concede that they’re right: that our infra-structure is in a sad state and more federal spendingwould be a wise investment. Using the infrastructurelobby’s figure of 18,000 new jobs for every $1 billion ingovernment spending, doubling federal infrastructurespending would reduce the unemployment rate to 8.3percent.And this ignores the matter of timing, as infra-structure projects require years ofplanning and regulatory hurdle-jump-ing before they’re “shovel-ready.”Nonetheless, even the most unrealisti-cally generous assumptions aboutinfrastructure spending indicate that ifyou want to get the economy back tofull employment, it’s going to take alot more than just public works.

But stepping back from labor army fantasies, there’ssomething absurd about using infrastructure “invest-ment” as a jobs program. To the extent that federalfunding of infrastructure is economically advisable,“good government” would require minimum expendi-ture (read: minimum employment), lest said publicworks turn into a black hole of rent-seeking—publicspending to enrich private interests.

Infrastructure spending is not immune to the insti-tutional inefficiencies that beset all government pro-grams. But questioning the value and efficiency ofpublic works is only half the matter. Call me a conser-vative stick in the mud, but the little question of howthe government is going to pay for all this largess strikesme as relevant these days.

Krugman of course sees no problem here. He is onrecord favoring larger deficits, seeing historically lowinterest rates as a go-ahead for even more federal bor-

rowing. Oddly enough, others in the economy, such asStandard & Poor’s, see a quite large problem with con-tinuing government debt growth. It’s called insolvency:If you have too much debt and you can never pay it off,bad consequences ensue. (I wonder if Krugman wouldadvise a family with $325,000 in credit card debt on anincome of $50,000 a year to go ahead and open up anew credit card account simply because it came with a0 percent teaser rate?) While Krugman, with his stalebrand of vulgar Keynesianism, appears increasinglyoblivious to it, other recent events have revealed instark fashion what our real economic problem is—excessive government debt, a direct consequence ofexcessive government spending.

The fixation on ever-bigger government stimulusprograms to “fix the economy” reveals the basic fallacywith Krugman and the Keynesians. They view “theeconomy” and “the government” as distinct entities—as

if poor little Johnny Economy wouldbe just fine if only rich, stingy oldUncle Sam would open up his walletand give Johnny a job! The reality isthat the economy is us—the govern-ment exists within the U.S. economy,not apart from it. To “support” theeconomy the government must takeresources from the very same econ-

omy. This can only confer a net increase in productiveactivity if government bureaucrats and politicians a) aretruly benevolent, suppressing their representation of pri-vate interests in favor of “the general welfare” and b)know better than individual entrepreneurs throughoutthe country how to wisely invest scarce resources.

Since the days of Hume and Smith, economists haverightfully heaped skepticism on such assumptions.Politicians and bureaucrats are neither angelic noromniscient; simply increasing their ability to print andspend is not a formula for prosperity.The fact that theUnited States is currently suffering the lingering effectsof a complex recession and government debt crisis doesnot change these lessons, but confirms them.To adapt aphrase from a president who understood this (even if hecouldn’t quite enact it): In our present crisis govern-ment spending is not the solution to the problem; gov-ernment spending is the problem.

M o r e G o v e r n m e n t A c t i o n N e e d e d f o r J o b R e c o v e r y ? I T J U S T A I N ’ T S O !

The government exists within the U.S. economy, notapart from it.

Larry Miller and Stanley Hambrick are classicAmerican entrepreneurs. Both men started theirbusinesses from scratch, and for more than 20

years they’ve been living their American Dreams.They each own and operate popular vending stands

outside Turner Field in Atlanta, serving baseball fanswith tasty snacks, fully licensed Braves merchandise,parody shirts, andother goodies atsteep discounts.They pay all therequired and var-ied taxes on salesand business tocity and stateofficials.

Little did theyknow that in July2011 they wouldfind themselvesat the center of a major effort to vindicate therights of streetvendors nation-wide (tinyurl.com/3spvmyl).

Street vending has long allowed entrepreneurs toprovide for themselves and their families while satisfy-ing customer demands and creating jobs. TogetherMiller and Hambrick employ about a dozen people.They see vending not merely as work but as a way oflife. As Miller puts it: “I’ve been able to develop alifestyle around vending. I’ve been able to purchase mea home and raise children and grandchildren.”

Hambrick takes pride that his business provides jobs,supports his entire family, and pays for his children’seducation: “I employ six people, and they are depend-ing on me, and I’m depending on them now. I’ve beenable to put my kids through college working here andbeing successful.”

But a new law on the books in Atlanta is about to destroy both ofthese businesses,along with untoldothers throughoutthe city.

UnprecedentedMonopoly

Vending isthousands of

years old and hasthrived in Americasince the 1600s.By 2007 street-vending businessesthroughout thecountry generatedrevenues in excessof $40 billion.

Vendors in Atlanta alone brought nearly $250 millionto their local economy.

The recession in 2008 tightened consumer walletsand forced many out of work, which led to a street-vending boom. And, sure enough, new regulations followed.

B Y B O B E W I N G

The Battle to Save American Street Vending


Bob Ewing ([email protected]) is director of communications at the Institutefor Justice (ij.org).

In 2009 Atlanta officials decided to create a citywidevending monopoly. The city signed off on a deal thathands over all vending on public property to a singlemultibillion-dollar corporation.

Atlanta Mayor Shirley Franklin signed an exclusive20-year contract with a Chicago-based shopping-mallmanagement company, General Growth Properties(GGP). While governments have long meddled withstreet vendors, this was the first time in American his-tory that a city gave one company the “exclusive rightto occupy and use all public property vending sites . . .including without limitation those vending sites cur-rently occupied by public property vendors.”

The GGP contract calls for the construction ofvending kiosks around Atlanta. As thekiosks are built the existing vendorsare forced to move out or else startpaying up to $20,000 annually in rentand fees to work out of a crampedGGP kiosk. Vendors used to paying$250 a year for their vending sitemust now hand over $500 to $1,600every month for the privilege of work-ing for the monopoly. This makes itall but impossible for most Atlantavendors to stay in business.

This is not the first time Atlantalegislation has had the effect ofdestroying vending businesses. WhenAtlanta hosted the Olympics in 1996then-mayor Bill Campbell gave a personal associate theright to sublease out vending spots throughout the city.Thousands of vendors were pushed away, and many losttheir businesses and life savings.

The GGP kiosks now popping up in Atlanta aredesigned for advertising rather than selling merchan-dise.They are covered with ads on three sides, limitingvisibility and function while making it difficult toattract and interact with customers.

Further, the new Atlanta law absurdly requires GGPto prohibit their vendors from competing with nearbybricks-and-mortar businesses. The contract stipulatesthat GGP lessees may only sell products that “comple-ment and not compete with existing ‘bricks-and-mor-tar’ retailers in the areas of the vending units.”

The transition to kiosks is occurring in severalphases. As soon as the first phase went up numerousvendors were forced into unemployment. The secondphase includes the area around Turner Field, with construction scheduled to begin toward the end of this baseball season. Once phase two is implemented,Miller’s and Hambrick’s businesses will almost assuredlybe destroyed.

On July 15 Miller came to work to find a spray-painted outline of a kiosk on the ground next to hisvending location.At a press conference two weeks laterhe pointed to the outline and lamented, “That might as well be my coffin.”

Trouble in Texas

Unfortunately,Atlanta vendors arenot alone. Consider Yvonne

Castenada.Castenada is a proud Texan. Born

and raised in El Paso, she created asuccessful vending business that pro-vides for her daughter and injuredhusband. Castenada is a food vendor.By 5 o’clock in the morning she isalready up and getting her foodready for the day. She cooks herpopular burritos in a nearby com-mercial kitchen, loads them intowarming trays in her food truck, andsets out into the El Paso streets to

serve her customers.Her business was thriving until city officials passed a

law that turned El Paso into a no-vending zone—forthe sole purpose of protecting bricks-and-mortarrestaurants from competition.

The protectionist regulations made it illegal formobile food vendors like Castenada to operate within athousand feet of any restaurant, convenience store, orgrocer.The city even prohibited vendors from parkingto await customers, forcing vendors instead to con-stantly drive around the city until a customer flaggedthem down. Once the customer was served, the ven-dors had to leave immediately.

Vendors caught violating the new law faced thou-sands of dollars in fines.

9 N O V E M B E R 2 0 1 1

T h e B a t t l e t o S a v e A m e r i c a n S t r e e t Ve n d i n g

This was the firsttime in Americanhistory that a citygave one companythe “exclusive rightto occupy and use all public propertyvending sites.”

City officials harassed and cited Castenada on multi-ple occasions. She said, “It has gotten to the pointwhere I’m concerned about being able to pay my bills.I find myself constantly looking over my shoulder justbecause I might be too close to a restaurant.”

A spokesperson for the El Paso Restaurant Associa-tion admitted in an interview by the local ABC affiliatethat the law is purely protectionist: “We wanted thisordinance in place to help established restaurants keeptheir business.”

Even the city’s health inspector admitted before theEl Paso city council that the lawwas put in place “to address con-cerns of the fixed food establish-ment. . . . [T]here’s not a healthreason or a Texas food rule that I can find that justifies that.”

A National Problem, ANationwide Initiative

In November 2010 The Econo-mist wrote that “thanks to

Twitter and the tough econ-omy, some of the best foodAmericans eat may come from a food truck.” Predicting thatthe recessionary street-vendingboom would lead to “thebiggest shift in America’s culi-nary landscape in 2011,” themagazine noted that new regu-lations were popping up in sev-eral cities, and in others therewas pressure to ease restrictionsso vending could flourish.

A new national report released by the Institute forJustice (IJ), Streets of Dreams (tinyurl.com/3otbycj), eval-uated the vending regulations in the 50 biggest cities inthe United States. The results were disturbing. Forinstance:

• 33 cities have established no-vending zones,which often include potentially lucrative areas such asdowntown or areas near sporting venues.

• 20 cities ban vendors from setting up near bricks-and-mortar businesses that sell the same or similar goods.

• 19 cities prohibit mobile vendors from staying inone spot, forcing them to spend much of their daymoving instead of selling.

• 5 cities prevent mobile vendors from stopping andparking unless flagged by a customer.

In January IJ launched its National Street VendingInitiative, creating a nationwide litigation and activismeffort aimed at vindicating the right of street vendors toearn an honest living.The first targets were El Paso andAtlanta.

“I’m fighting for myAmerican Dream.”

Thankfully, Castenada refusedto let her competitors and

their friends in government runher out of El Paso. Instead, inJanuary she teamed up withother vendors and the Institutefor Justice in a major federal lawsuit against the city. Theyargued that the vending regula-tions were anticompetitive andunconstitutional on the groundsthat they violated the economicliberty of El Paso vendors.

And just weeks after the suitwas filed, the city backed downand repealed its protectionistregulations.

Miller and Hambrick joinedthe vending initiative in July.Together with IJ they announceda lawsuit challenging Atlanta’svending monopoly. The Wall

Street Journal editorialized that “the Atlanta case is onemore example of the way that governments tend tocollude with private interests to benefit the powerful.We hope Atlanta’s new law is tossed out in court, sovendors like Messrs. Miller and Hambrick can get backto business.”

Hambrick clarified why he brought the lawsuit:“I’m fighting for my American Dream. And I’m fight-ing for the rights of other vendors and small busi-nesses.”


B o b E w i n g

Atlanta decided to give Larry Miller’s 20-year-old vendingbusiness to a multibillion-dollar corporation.Photo courtesy Institute for Justice

Indeed, a victory by Miller and Hambrick couldhave national implications. A ruling in their favorwould set a precedent for future challenges to restric-tive vending laws in cities across the country.

Momentum is building. On August 17 vendors inChicago joined forces with area law students and the IJClinic on Entrepreneurship in a grass-roots street-vending campaign. Thecity has recently taken to ticketing andeven arresting vendors simply for serv-ing their customers. Regulations cur-rently prohibit vendors from workingwithin 200 feet of bricks-and-mortarrestaurants. It’s also illegal for vendorsto put toppings on a hot dog fromtheir cart or serve any food before 10a.m. The grassroots campaign seeks tooverturn these needlessly restrictiveregulations.

Judicial Engagement

Importantly, such vending laws existthroughout the country today because the courts

fail to protect economic liberty. In the name of “judicial deference” judges have largely abdicated theirresponsibility to protect this right and enforce limits ongovernment power.Without meaningful judicial super-

vision, laws favoring special interests have proliferated to an almost unimaginable extent.

For instance, IJ challenged a blatantly protectionistlaw in Louisiana that made it illegal to arrange and sellflowers without first obtaining permission from thegovernment—the only law of its kind in the country.

Aspiring florists were forced to pass asubjective licensing exam . . . that wasgraded by existing florists! Remark-ably, a court upheld the law on thegrounds that it was theoretically pos-sible that without a flower cartel thepublic could be harmed by “infecteddirt.”

Unless judges are engaged—takingour rights and the facts before themseriously—such abuses are inevitable.For vendors and other Americans tofully enjoy their right to earn a living,the courts must decide that protec-tionism is not a constitutional exer-cise of government power. Currently

the federal circuit courts are split on this issue.For their part, Miller and Hambrick are ready to

fight all the way to the Supreme Court if that’s what ittakes to vindicate the right to earn a living for entre-preneurs nationwide.

11 N O V E M B E R 2 0 1 1

T h e B a t t l e t o S a v e A m e r i c a n S t r e e t Ve n d i n g

For vendors andother Americans tofully enjoy their rightto earn a living, thecourts must decidethat protectionism isnot a constitutionalexercise ofgovernment power.

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Infrastructure does not an economy make. Highwaysand railroads, airports and seaports, communica-tions towers and fiber-optic cables are essential for

the flow of commerce, but it is the people, goods, andinformation moving over and through this infrastruc-ture that are the heart of an economy. Overinvestmentin roads, bridges, and airports means underinvestmentin the productive base that is an economy’s life blood.Government spending means more than just an outlayof dollars; it means consuming scarceresources that cannot then be used forother things. Such spending does notincrease production; it simply shiftsresources into areas where they wouldnot otherwise have gone.

As described in William J. Bern-stein’s book The Birth of Plenty: Howthe Prosperity of the Modern World WasCreated, France’s minister of financesunder Louis XIV from 1665 to 1683,Jean-Baptiste Colbert, worked tire-lessly to expand commerce byimproving his country’s roads andcanals. Unfortunately, trade was hindered by more thanpotholes—a complex system of internal tariffs wasthrottling commerce. Colbert tried to dismantle thetariffs but was only partially successful. After his death,“all fiscal restraint was lost. By the end of Louis XIV’sreign three decades later, the State had doubled the tollson the roads and rivers it controlled, and the nation that had once been Europe’s breadbasket . . . was bledwhite. . . .” Bad regulations trumped good roads.

During the Great Depression Franklin Rooseveltinitiated massive public-works programs to improve the

nation’s infrastructure in hopes of putting people backto work and jump-starting the economy.The construc-tion efforts were staggering. According to ConradBlack:

The government hired about 60 percent of theunemployed in public-works and conservation proj-ects that planted a billion trees, saved the whoopingcrane, modernized rural America, and built such

diverse projects as the Cathedral ofLearning in Pittsburgh, the Montanastate capitol, much of the Chicagolakefront, New York City’s LincolnTunnel and Triborough Bridge, theTennessee Valley Authority, and theheroic aircraft carriers Enterprise andYorktown. They also built or reno-vated 2,500 hospitals, 45,000 schools,13,000 parks and playgrounds, 7,800bridges, 700,000 miles of roads, and athousand airfields.

Yet these extraordinary accom-plishments were not enough to pull the nation out ofthe Depression. Neither were the millions of jobs gen-erated by this monumental work.

At the same time as he was directing resources awayfrom the private sector, Roosevelt also unleashed uponit a regulatory blizzard that significantly increased therisk of doing business. Higher personal, corporate,excise, and estate taxes; wage and price controls; pro-

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

The Infrastructure Delusion:Getting Nowhere Faster


Richard Fulmer ([email protected]) is a freelance writer inHumble,Texas.

Infrastructurespending does notincrease production;it simply shiftsresources into areaswhere they wouldnot otherwise have gone.

duction restrictions; antitrust lawsuits; and constantexperimentation provided few incentives for companiesto expand.As in Louis XIV’s France, an improved infra-structure could not revive commerce in the face of sti-fling government regulations.

Enough Roads; Too Many Roadblocks

Today President Barack Obama is touting high-speed rail and other infrastructure improvements

as keys to economic renewal. But if massive infrastruc-ture investments were not enough to turn the economyaround in the 1930s, they are far less likely to do sotoday. Because Roosevelt was starting from a lower basehis improvements would have had a far greater impacton the economy of his day than would similar workdone now.Also, the lighter regulatoryburden in the 1930s meant therewere projects then that truly were“shovel-ready.” Today environmentalimpact studies, possible archeologicalfinds, and nuisance lawsuits may stall construction for years or halt itcompletely.

The real roadblock to economicgrowth is the burgeoning regula-tory burden that President Obama,like Roosevelt before him, hasplaced on business. According to a study by JamesGattuso and Diane Katz, “[T]he Obama Administra-tion imposed 75 new major regulations from January2009 to mid-FY 2011, with annual costs of $38 bil-lion.” Hundreds of additional regulations will pourforth from Obamacare, Dodd-Frank, and proposedEPA greenhouse gas restrictions. All this on top of analready monumental regulatory burden imposed bygovernment. A Small Business Administration reportestimates the cost of regulatory compliance at over$1.75 trillion in 2008 alone.

Briefly, our current economic woes were triggeredby the collapse of a housing bubble, produced by loosemonetary policy together with federal pressure onmortgage companies to lend to bad credit risks.Whenthe bubble burst, housing prices fell, causing manyhomeowners to default on their mortgages. Investmentvehicles based on those mortgages lost much of their

value, leading to huge investor losses and the failure ofsome major financial institutions.

Lost in Transition

Absent government interference industry wouldretool, shifting capital and labor out of home

construction and into other areas. Because neithercapital nor labor is homogeneous, this shift takes time.Equipment that can be put to other uses may have tobe sold or physically moved. Other equipment mayhave to be modified or scrapped altogether. Workersmay need to increase their market value by relocatingor by gaining new knowledge and skills. In a recessionconsumers typically reduce spending and increase sav-ings, thus freeing up the resources needed to complete

the shift.Keynesian economists, however,

see both labor and capital as homoge-neous, aggregated lumps. Where Austrians see capital in transitionKeynesians see “idle capital.” Keyne-sian programs to put that capital backto work only hinder or halt theneeded transition, either leaving capi-tal in its malinvested state or forcing itinto the very idleness they seek toremedy. For example, expanding

credit may re-inflate the collapsed bubble for a time,leading industry to continue producing unneededgoods. Stimulus spending—whether for infrastructureor other things on the government’s wish list—trans-fers scarce resources from industry to government, fur-ther impeding the transition. New laws, enacted toprevent future recessions, make businesses reluctant toinvest until the associated regulatory structures aredefined—a process that can take years. Once in placethe regulations may inhibit capital flow, locking ineffi-ciencies and malinvestment in place and propping upcompanies that should be allowed to fail. Unemploy-ment insurance and other such programs eliminate orat least reduce workers’ incentives to move or reedu-cate themselves.

The country’s problems are not the fault of inade-quate highways. They are the result of governmentintervention: loose monetary policies, programs that

13 N O V E M B E R 2 0 1 1

T h e I n f r a s t r u c t u r e D e l u s i o n : G e t t i n g N o w h e r e F a s t e r

Keynesian programsto put malinvestedcapital back to workonly hinder theneeded transition.

encourage unsustainable debt, explicit and implicitguarantees to financial institutions, massive spendingthat crowds out private investment, oppressive regula-tions, higher taxes with constant threats of more tocome, and political payoffs to “friendly” companies andunions. Building high-speed railroads will not stop themalign effects of these policies; the solution is to stopthe policies.

Goods, people, and information will not flow freelyacross a nation, regardless of the quality and extent ofits infrastructure, if taxes and regulations block their

flow. Trade perished in France as Colbert’s improvedroads and canals were made all but useless by highinternal tariffs. Hundreds of thousands of miles of newand rebuilt roads were not enough to move commercepast the regulatory roadblocks that Roosevelt erected.President Obama’s proposed high-speed trains—indeed, his latest nearly half-trillion-dollar jobs pro-gram—will not pull the country over the mountain ofregulations that has been created in the decades sincethe Great Depression and that Obama has raised tonew heights.


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

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

Dangerous Political Naifs

Thoughts on Freedom

Being well past the age of 50 and having spentnearly all my adult life as an academic econo-mist, I seize the privilege of doing what so

many other economists of my age and rank do—namely, offer unsolicited speculations about what isright and what is wrong with modern economics.

First, something that is right.With one major exception (discussed below), the

typical economist, when doing economics (and regard-less of political bent), doggedly avoids ad hominemexplanations. That is, economists don’t explainobserved reality as resulting from specific human personalities or personality traits.Instead, economists (try to) identifythe constraints and opportunities thatconfront decision-makers and thenexplain patterns of human activitiesas being predictable outcomes of theways that individuals—any individu-als—respond to identified constraintsand opportunities.

This avoidance of ad hominemexplanations is the source of one ofthe most important lessons that economists teach: greedexplains nothing. Because greed—or, more accurately,“self-interestedness”—is largely unchanging acrosstime, no observed changes in the economy can beexplained by it.

Greed can’t explain rising fuel prices, for example,given that fuel sellers (and also fuel buyers) are just asgreedy when prices are lower as they are when prices arehigher. Likewise with booms and busts. Because people’sgreed remains constant something else must explainbooms and busts. And so too for any other economicphenomena you care to name—everything from the factthat Americans are richer than Armenians to the factthat, say, big-box retailers’ market shares are growingwhile those of mom-’n’-pop retailers are shrinking.

Of course the particular constraints and opportuni-ties identified by economist Doe as being most relevantfor explaining some phenomenon often differ fromthose identified by economist Jones for explaining thesame phenomenon. Doe, for example, might identify anincrease in the rate of growth of the money supply asthe most crucial factor for explaining an observedboom and bust, while Jones identifies an easing in gov-ernment regulation of banks as the crucial factor. Butneither Doe nor Jones explains the boom and bust ascaused by the likes of greed or ignorance.

Economists’ refusal to use always-popular (and oftenhalf-baked) romantic notions abouthuman behavior to explain economicphenomena goes a long way towardmaking economics a genuine science,and it accounts for much of whatevergood economists have managed tobestow on society.

What’s Wrong

Turning now to something that iswrong with economics, much of

the harm that economists inflict on society is a directresult of the one area in which economists too oftenembrace such ad hominem explanations: analyzing gov-ernment involvement in the economy.

Despite a long-established tradition in economics ofstudying the “public” sector using the same analyticaltools that we use to study the private sector—anddespite two founders of this Public Choice traditionbeing awarded Nobel Prizes (George Stigler in 1982and James Buchanan in 1986)—far too many econo-mists persist in sloppy, unanalytical ad hominem thinkingabout government.

15 N O V E M B E R 2 0 1 1

Donald Boudreaux ([email protected]) is a professor of economics atGeorge Mason University, a former FEE president, and the author ofGlobalization.

Far too manyeconomists persist insloppy, unanalytical adhominem thinkingabout government.

For too many economists government is assumed tobe able to escape many of the constraints that unavoid-ably bind and trip up people in the private sector.Asymmetric information, moral hazard, and adverseselection, as well as confirmation bias and the legions ofother alleged “irrationalities” identified by behavioraleconomists, are just some of the “imperfections” econ-omists find in markets and then too frequently simplyassume can be dealt with effectively by government.

Overlook here the fact that many of the problemsalleged to be unavoidable in the private sector are infact handled quite well by human beings acting with-out government who exhibit far more ingenuity thanthe typical economist believes is pos-sible in private-sector settings. (It’snotable that Elinor Ostrom, the firstwoman to win the Nobel Prize ineconomics, isn’t a professor of eco-nomics but instead of political sci-ence. She won the prize in 2009 forher work showing how creative peo-ple in private settings often overcomeobstacles—such as free-rider prob-lems—that most economists naivelyassume can be overcome only by gov-ernment.)

Unanalytical Assumptions

Focus instead on economists’bizarre stumble into an unanalyti-

cal assessment of government. That stumble goes likethis:“Omigosh! There’s an imperfection in this private-sector market! My textbooks and the many refereedjournal articles I’ve read and written make quiteclear—with lots of difficult mathematics—that thismarket will therefore fail. My textbooks and journalarticles also imply, and in many cases explicitly state, theconclusion that the government—and only the govern-ment—can solve the problem. Models prove this con-clusion.”

Such stumbling is common. From today’s insistencethat America needs more stimulus spending, throughthe support that many economists express for the new

Consumer Financial Protection Bureau, to economists’overwhelming belief that countries need central banks,too many economists unscientifically reach their con-clusions about the alleged efficacy of government inter-vention without first asking how the informationavailable to government officials, and how the incen-tives these officials face, will affect government deci-sion-making.

In short, economists mysteriously conclude thatdesirable public-sector outcomes follow from thepraiseworthy intentions that economists assume moti-vate most public officials.

Nowhere does this mystery run more deeply thanin fiscal policy. Even if it were truethat increased government spendingcan hasten an economy’s escape froma recession, the large number ofeconomists who today endorse suchspending is discouraging. Seldom dothese economists inquire into theincentives facing government officialsin charge of spending. The assump-tion is that these officials will spendthe money in ways sure to promotethe public interest. Also, seldom dothese economists inquire into theinformation asymmetries and otherconstraints that might hamper evenwell-meaning officials’ efforts to carryout fiscal policy effectively.

Save for the relatively few economists steeped inPublic Choice economics, the typical economist todayremains a political naif—and a dangerous one at that.He is bloated with unjustified confidence in modelswhich show that if government officials behave in thepublic interest and if these officials are immune to thesame decision-making quirks and knowledge limita-tions that afflict decision-makers in private markets,then government can perform all manner of marvels.This economist then uses his authority to supportinterventions that are utterly unjustified by genuine sci-entific standards.

It’s shameful.


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

Economists myste-riously conclude thatdesirable public-sector outcomesfollow from thepraiseworthy inten-tions that economistsassume motivate mostpublic officials.

Unemployment has regained center stage nowthat the debt crisis has receded from that posi-tion, at least for a time. Unless things change

dramatically over the next year unemployment will bethe number one issue in the forthcoming presidentialelection. Hardly any proposal will escape being labeled“job-killing” or “job-creating” or both.

To begin with some basics,what is work and what is a job?For economists, work is anyactivity that we would not per-form without tangible compen-sation, usually money. In ourwork lives almost all of us arealso motivated by nonmonetaryconsiderations, and to theextent we diverge from themost remunerative activityavailable to us, we are blendingwork and leisure. A retired per-son who takes up college lec-turing may do the workprimarily for the satisfaction itbrings. If his salary were with-drawn and he continued to teach, he would be enjoy-ing leisure.

The goal of all economic activity is consumption,which to economists means not just mundane goodslike faster cars but also “noble” ends like cathedrals. Jobsare therefore not ends in themselves, as much as publicdiscussion would suggest otherwise.They are means toacquire income to be used for consumption and saving,in addition to personal satisfaction, learning opportuni-ties, or socializing.

A person who lacks a job is unemployed if he or shewants work, has suitable skills, and has realistic expecta-tions about compensation.These are vague terms; theymake unemployment a murky concept.That goes dou-ble for underemployment, though both remain veryreal phenomena.

What is it about unemployment that makes it soproblematic? Why can’t marketscure labor surpluses with lowerwages as coffee surpluses arecured by lower coffee prices? Isgovernment interference toblame, or is there somethingabout free markets that allowsunemployment to persist?

Both. Let’s look first at natu-ral unemployment, which isunemployment not caused bygovernment policies. Econo-mists Milton Friedman andEdmund Phelps brought thisconcept to the fore during the1960s even though, like mostmodern economic concepts, it

had been recognized in various guises long before theywrote of it.

Labor markets, even when unhampered by govern-ment interference, are different from other markets.Nonmonetary considerations do not arise in othermarkets as much as in labor markets. Not just salary,but working conditions, job satisfaction, and advance-

B Y W A R R E N C . G I B S O N

Unemployment:What Is It?

17 N O V E M B E R 2 0 1 1

Warren Gibson ([email protected]) teaches engineering at Santa ClaraUniversity and economics at San Jose State University.This is part one of atwo-part article.

Dorothea Lange

ment opportunities matter to most job seekers, oftengreatly.

A certain number of unemployed people are hold-outs, people who might find some sort of job fairlyquickly but are holding out for a higher salary, morejob satisfaction, convenient location, and so on.Lumping all holdouts together is problematic. Somemay harbor unrealistic expectations. Some feel con-strained by their spouses’ wishes. Some have amplesavings and can afford to hold out more stubbornlythan others.

Some holdouts are reluctant to relocate. Moving isusually expensive and often emotionally distressful,especially to children.The current lin-gering housing crisis makes movingespecially unattractive to some. Peoplewho are not only unemployed butalso “underwater” in their mort-gages—and particularly those whohave simply stopped making pay-ments, knowing that their lenders maynot get around to their case formonths or even years—are stronglyinclined to stay put rather than acceptdistant job offers.

Efficency Wages

Another form of natural unem-ployment is a bit subtle but very

real. It goes by the name “efficiencywages,” based on the fact that recruitment and trainingcosts are quite significant for most firms. Employerswant their new hires to stick around so that these costscan be amortized over a reasonably long and productiveterm of employment.To motivate valuable new and oldemployees to stay, firms tend to offer compensationsomewhat higher than the going rate for workers in anyparticular category. If the going rate is the wage thatbalances supply and demand for a particular labor cate-gory and if most offers are somewhat above this rate—efficiency wages—the result must necessarily be someunemployment. No one exemplified this theory betterthan Henry Ford and his outlandishly high $5-per-daywage beginning in 1914. According to one report, thepolicy eliminated complaints and reduced absenteeism

by 75 percent.Total labor costs actually fell.There was along waiting list for Ford jobs, but those men had otheropportunities in the growing Detroit economy.

Government-Caused Unemployment

Government policies contribute to unemploymentabove and beyond natural unemployment. The

most notorious of these policies are minimum wagelaws. These laws make it illegal, effectively, for low-skilled workers to accept employment. Anyone whocannot generate $8 worth of production per hour can-not expect to be paid more than $8. Such unfortunatepeople might be productive at $6 per hour but are for-

bidden to accept employment at thisrate and are instead condemned tojoblessness and all its attendant mis-eries. This burden falls most heavilyon black teenagers, whose employ-ment rate (based on those seekingwork and excluding those who are inschool) is well over 40 percent. Thebenefits accrue mainly to slightlyhigher-skilled workers, who haveclimbed onto the metaphorical ladderleading to better jobs and who areshielded from competition fromthose excluded by minimum-wagelaws.

Unemployment insurance softensthe impact of joblessness and reduces

the incentives to find a job. Recipients are supposedto show that they are actively seeking work, but thisrule is easily sidestepped.There is nothing wrong withunemployment insurance per se. The problem is thatthe government forces all workers to buy this insur-ance whether it suits them or not. (Though nominallypaid by employers, in fact the burden falls partly onworkers and partly on employers.) Some workersmight prefer to take that portion of their compensa-tion in cash, but that choice is forbidden. Private car-riers that might offer this insurance would, like allinsurance providers, take steps to minimize adverseselection (the tendency for riskier workers to buyinsurance) and moral hazard (the incentive for thosecovered to take risks that could get them fired).


Wa r r e n C . G i b s o n

There is nothingwrong with unem-ployment insuranceper se.The problem isthat the governmentforces all workers tobuy this insurancewhether it suits them or not.

Labor unions, as voluntary associations bargainingfreely with employers, are unobjectionable. They did alot of good in the past when working conditions inmany places were pretty bad. But now they are grantedspecial privileges by law—basically the privilege toengage in violent or coercive activities. The result isoften wage agreements that are above market-clearinglevels.Those left out are of course unemployed.

While labor unions can boost their members’ com-pensation at the expense of non-union workers, higherwages generally and higher living standards are duemainly to increased productivity, which in turn dependson high levels of capital investment. People are morewilling to save and invest when theyhave confidence in the future, and thatconfidence comes from respect forproperty rights.

The Pain of Unemployment

Because unemployment, natural orgovernment-caused, is such a

personal matter, its impact is highlysubjective, extending far behind lostwages.

A teenager looking for work maynot be his family’s main source ofincome, but finding a job could becrucial to his life path. In my dayteenagers could earn money deliver-ing papers, mowing lawns, rakingleaves, and shoveling snow. The work was unregulatedand the income untaxed. Were we exploited? Hardly.We learned to take pride in our work, save for thefuture, and in contrast to our allowances, savor the spe-cial significance of money that we had earned.

A family breadwinner who loses his job andremains unemployed for an extended period of timewill surely become discouraged, a term that onlybegins to describe the psychological devastation thatcan ensue. Men especially begin to see themselves asfailures not just as breadwinners, but as husbands andfathers and more generally. Marital problems oftenarise. Children pick up on the distress and at certainages wonder if they are to blame. Domestic violenceand suicides are not uncommon. But losing a job may

be no big deal for the senior citizen who works mainlyfor pleasure.

If anguish could be measured we would probably saythat one year’s unemployment is more than twice aspainful as six months’. As time goes by the jobless notonly lose hope, but also suffer erosion of their workskills and attitude. Their former colleagues and clientstend to forget about them. Some without work turn toalcohol or worse in their despair.

Overqualification is a problem for many job-seekers.Employers are reluctant to hire people who are quali-fied to do better-paying work simply because thoseworkers are likely to leave once they get a more lucra-

tive offer. So some people simply“forget” to list that master’s degree ontheir résumé.

Unemployment andMacroeconomic Policy

Returning to Friedman andPhelps, the phrase they actually

used was the natural rate of unem-ployment, the rate that would prevailwhen the economy is operating atfull potential. Economies can operatebelow potential, as ours is presently,and they can sometimes operateabove potential. Correspondingly wecan have unemployment above thenatural rate or, rarely, below. In the

latter situation, we might see seniors lured out of retire-ment or young people lured into jobs before they fin-ish school. But this situation is not our focus here.

Friedman was known for his opposition to Keynes-ian policies and his championship of free-market ideas.But that one word rate hints at the fact that Friedmanfits squarely into the Keynesian macroeconomic proj-ect. Friedman viewed economics as an empirical sci-ence, not fundamentally different from physics, in directopposition to the Austrian approach. He and Phelpsspawned a cottage industry of searchers for the naturalrate. Without that one word his work might not havereceived the broad attention that it did.

Some economists define the natural rate as an aver-age rate (technically, a moving ten-year average). By this

19 N O V E M B E R 2 0 1 1

U n e m p l o y m e n t : W h a t I s I t ?

Because unem-ployment, natural orgovernment-caused,is such a personalmatter, its impact ishighly subjective,extending far behind lost wages.

definition the actual rate must always lie above the nat-ural rate at some times and below at other times. Butthis is simplistic. There is nothing “natural” about amoving average. Natural unemployment lies in theintentions and expectations of the people involved andis not so easily measured.

While the natural rate may be difficult to quantifyand the highly subjective effects of unemployment can-not be measured, what about the amount of unemploy-ment? Can it be measured? The Bureau of LaborStatistics (BLS) has that responsibility, and the numbersit announces get more attention nowadays than anyothers, with the possible exception ofGDP growth figures. How does theBLS arrive at its numbers?

BLS Categories

To begin with, it must decidewho is in the labor force and

who is not. Among those who don’thold jobs, infants, jail inmates, andpeople in nursing homes aren’texpected to work and shouldn’t becalled unemployed. They are simplyexcluded from the labor force.Beyond that it starts to get fuzzy. Should that seniorperson who works mainly for nonmonetary reasonsreally be counted in the labor force? What about dis-couraged workers? A discouraged worker is one whowants work and has looked during the past 12 months,but not during the past four weeks. Do the statisticiansreally know who has looked and who hasn’t, andwhether the reason was discouragement or somethingelse?

Because of these and other ambiguities the BLS esti-mates unemployment in six different ways. U-3 gets themost attention. It is the number of unemployed dividedby the size of the labor force.That number was 9.1 per-

cent at press time.The next most widely followed ver-sion is U-6, which adds “marginally attached” work-ers—those who are out of the labor force but wantwork and have looked within the previous 12 months.It also adds those with part-time jobs who would likefull-time work (again, how do they know?).This figurewas a whopping 16.2 percent.

So which is the real unemployment figure, U-3 orU-6? There is no right figure, and the emphasis on U-3 is not some sort of conspiracy to hide the “real” situ-ation.The figures are what they are, and it’s a mistake toread too much into them.

The biggest problem with unem-ployment statistics is not their fuzzi-ness but, like GDP, the implicationsthey carry: the idea that the govern-ment can and should proactivelyattempt to manage the unemploy-ment rate. Such has been the pre-sumption for at least 65 years.

Since 1948 the Federal ReserveSystem has operated under a dualmandate: maximize employment andstabilize prices.This is a direct reflec-tion of the dominant macroeconomic

theory of the time, which assumes the authorities couldreduce unemployment by adding a little inflation, orvice versa. The theory seemed to work for awhile butfell apart in the 1970s, when the term “stagflation”appeared.We had the worst of both worlds for a time,and Friedman was ready with an explanation: Inflationcould only temporarily boost unemployment—untilsuch time as expectations caught up to reality.The Fed,as we all know, has injected massive amounts of reservesinto the banking system with no discernible effect ongrowth or unemployment. So much for the dual man-date. More about this and other current conditions inpart two, which will appear next month.


Wa r r e n C . G i b s o n

The biggest problemwith unemploymentstatistics is not theirfuzziness but, likeGDP, the implicationsthey carry.

The cliffhanger debate over whether or not toraise the federal government’s debt ceilingthrew U.S. fiscal policy into brighter relief than

it has been in recent memory.Suddenly people were calling for significant cuts in

government spending in the face of a rapidly growingnational debt.

As often happens, calls for cuts in governmentspending were met by competing calls for higher taxes,especially on higher-income earners and businesses.They can afford to pay the extra taxes,we were told.And what’s more, highertaxes could actually help the economy.

In making this case, proponents ofraising taxes pointed to the taxincreases that came out of Washingtonunder President Clinton in 1993.TheU.S. economy, as measured by GDPgrowth, was strong in the years afterthose tax hikes while unemploymentand inflation were relatively low. Theargument now is that the 1993 taxincreases did not inhibit the economicboom the country enjoyed in the last six or seven yearsof the twentieth century.

In April New York Times columnist Nicholas Kristofmade this very argument. He wrote that while it’s truehigher taxes in general “tend to reduce incentives,” thisapparently “weak effect” is often overwhelmed by otherfactors. “Were Americans really lazier in the 1950s,when marginal tax rates peaked at more than 90 per-cent?” Kristof asked.“Are people in high-tax states likeMassachusetts more lackadaisical than folks in a statelike Florida that has no personal income tax at all?”

Like other observers, Kristof also contrasted the“golden period of high growth” after the Clinton taxhike with the “anemic economy” that followed GeorgeW. Bush’s tax cuts.

But do higher taxes really spur (or at least notinhibit) prosperity? Looking at the data from the 1990s,one might believe so. After all, the 1993 tax hikes werefollowed by years of strong economic performance. Posthoc ergo propter hoc (after this, therefore because of this),many might believe.

But not everyone agrees the dataare quite so clear. The HeritageFoundation’s J. D. Foster, for example,believes the data show that the U.S.economy was already expandingwhen the Clinton tax increases tookeffect. If anything, he believes, thosetax hikes slowed overall growth forseveral years until 1997, when theRepublican-led Congress passed aseries of tax cuts, including a reduc-tion in the capital gains tax rate from28 to 20 percent.

The “real acceleration in the economy began in1997, when economic growth should have cooled,”Foster wrote. “This acceleration in growth coincidedwith a powerful pro-growth tax cut.”

Foster also authored a 2008 Heritage Foundationsummary of several scholarly studies showing tax hikescorresponding with slower or negative economicgrowth. In theory higher taxes could encourage greater

B Y A R T H U R F O U L K E S

Taxation Is the Lifeblood of the State

21 N O V E M B E R 2 0 1 1

Arthur Foulkes ([email protected]) is a journalist living inIndiana.

Do higher taxes really spur (or at least not inhibit)prosperity? Lookingat the data from the1990s, one mightbelieve so.

levels of private investment through lower borrowingcosts—if government used the money to retire debtand reduced its competition for lendable funds. But thispotential “silver lining” is overshadowed by the negativeeffects of higher taxes, he stated. However plausible the-oretically, in practice the argument runs into trouble,not least from the fact that governments seldom saveany of their revenue, Foster notes.

Still, the idea that the 1993 tax increases spurredeconomic growth will not die easily. For instance, somepeople argue that those tax hikes provided muchneeded confidence in the U.S. economy.As Kristof putit: “Tax increases can also send a message of prudencethat stimulates economic growth.”

With this much disagreement it’s hard to know whatis really the truth. And this is always the case whenlooking at the effects of any singleeconomic policy in a vast and com-plex system. Indeed, so much is hap-pening at any given time in a moderneconomy—central-bank policy, tradepolicy, military spending, technologi-cal innovation, war or peace, andmore—it’s impossible to draw hardand fast conclusions from macroeco-nomic data alone.

The Austrian economist Ludwigvon Mises made this point in his clas-sic treatise, Human Action, in 1949. Indiscussing the role of historical data in economics, hewrote:“The champions of logically incompatible theo-ries claim the same events as the proof that their pointof view has been tested by experience.The truth is thatthe experience of a complex phenomenon—and thereis no other experience in the realm of human action—can always be interpreted on the ground of variousantithetic theories. . . . History cannot teach us any gen-eral rule, principle, or law.”

Stepping back, therefore, it may be worthwhile toconsider fairly uncontroversial economic propositions,such as the law of demand or the law of marginal utility, when trying to determine the likely effects of atax increase.

Basically, taxes alter relative prices.A tax on gasolinemakes gasoline more expensive. A tax on whiskey

makes whiskey more expensive. By the same token, atax on income affects the “price” of leisure; that is, anincome tax reduces the reward or “price” one receivesfor forgoing leisure in order to work. If you are willingto work for $10 an hour, you’re essentially “selling”your leisure time for that price.You might not be will-ing to sell that leisure time for a lower price. Thus anincome tax can be expected, on the margin, to reducethe willingness of some people to work.

While all this is important, it’s probably moreimportant to consider what happens to taxes after thegovernment collects them. How government officialsspend tax revenue can damage the economy as much asthe tax itself can. That’s because taxes are used for anynumber of things that distort markets and wasteresources, such as providing subsidies to favored indus-

tries or strengthening bureaucracies.As a newspaper reporter I have

frequent opportunities to witnessgovernment decisions to spend tax-payer dollars. Often an argument infavor of a particular spending pro-gram is that it will only add a fewdollars to any single individual’s taxburden. Once a government programis in place, however, it’s extremely dif-ficult to reverse it because govern-ment spending benefits particularindividuals and they are quite moti-

vated to maintain it. When budget cuts are proposed,government officials have effective ways of fightingback. For example, a proposed cut in education spend-ing is nearly always said to be taking teachers out ofclassrooms, and a proposed cut in police spending isnearly always said to be taking neighborhood cops offthe streets.The “fat” in education and law-enforcementspending may be elsewhere. But those are the itemsplaced on the public chopping block by clever bureau-crats and politicians.

So the real problem with taxes and tax increases maybe that they simply feed the beast—the political andless-efficient government sector—while shrinking thevoluntary, more-efficient private sector. For anyoneconcerned about liberty this is reason enough tooppose higher taxes.


A r t h u r F o u l k e s

How governmentofficials spend taxrevenue can damagethe economy asmuch as the tax itself can.

B Y S T E P H E N D AV I E S

The Other Test: Debts and Taxes

Our Economic Past

States and polities—or rather the ruling classes thatcontrol them—face two great tests in the courseof history. Failure to meet them typically leads to

disaster and even the dissolution of the State. The firstand most familiar is war, armed conflict with otherStates (or more accurately, other ruling groups). Byanalogy wars can be compared to examinations ortimed tests; the test of war is relatively short, intense,and often sudden in onset, with the probable resultobvious from the start and often dramatic.

The second kind of existential test can be likenedrather to that of researching and writing a disserta-tion—longer, more drawn out,with less immediate drama butpresenting in many ways a morethorough and searching examina-tion. The consequences of failure,however, can often be just assevere, even if they take longer toarrive. This second test is that ofmanaging taxation and publicfinance. As writers through theages have recognized, failure at thiscan ruin a polity as surely as defeatin war.

What, though, is the nature ofthe test, and in what sense do rul-ing groups fail it? Historically, rul-ing groups draw incomes (“rents” in the economists’language) from the groups they control. They do thisthrough various means, including taxes, fines, fees, tar-iffs, tolls, the selling of privileges and exemptions, andeven outright expropriation. In return they typicallyprovide services, most notably defense against irregularpredators, a means of settling disputes, and a range ofwhat are commonly described as “public goods,” whichcan cover anything from public works and infrastruc-ture to education. Ultimately all these services have to

be funded out of the revenues the rulers can gain. It istrue that a shortfall can be met by borrowing, but themoney lent is secured against future income and sodoing this is simply a way of spending income now inanticipation of its arrival in the future.

The failure of rulers to handle this can take twoforms. The simplest is when the level of taxation andother exactions is simply too high and discourages pro-ductive labor to such a degree that wealth is destroyedrather than created. If taken too far, this can actuallydestroy the basis for the rulers’ position. Just as a para-site that kills its host is a biological failure, so ruling

classes that destroy their own pro-ductive base are clearly politicalfailures.The more insidious failure,however, arrives when rulinggroups spend more money thanthey take in and fund it throughdebt. This can go on for a longtime, even indefinitely, provided theunderlying economy is productiveand dynamic enough and thespending is not too high. The evi-dence of history is that it cannot goon forever. Sooner or later a crunchwill come, and the way the rulinggroup responds determines whetherit passes or fails the test.

In 1783 the Treaty to Paris brought an end to aworldwide conflict. For Americans this was the Ameri-can Revolution, when the colonies gained their inde-pendence from the British Empire. From a worldperspective, however, this was only the latest round in astruggle for global leadership between Britain andFrance that could be traced back to the 1690s. Just as in

23 N O V E M B E R 2 0 1 1

Stephen Davies ([email protected]) is academic director at the Institute ofEconomic Affairs in London.

Failure to manage public finances had direconsequences for France’s rulers.Wikipedia

previous episodes, the war had been financed mainlythrough the issuing of debt, which was added to theaccumulated obligations of earlier conflicts. By 1783the public finances of both France and Britain were ina desperate state. In many ways the British financeswere in worse shape than those of the French: In 1784total British debt amounted to 156 percent of GDP,comparable to French levels but with an economy notas large as that of France and so less able to supportsuch a burden. However, the next six years saw theBritish elite address this problem. Their French coun-terparts did not and failed the test.

Diverging Paths

In Britain the new prime minister, William Pitt theYounger, brought the public finances under control

through what was known as “economical reform.”Thiswas a combination of extensive tax increases and majorcuts in government spending, mostsignificantly through the abolition ofa large number of useless governmentjobs or sinecures.This had significantpolitical implications because accessto these posts was a major form ofpatronage and central to the politicalsystem of the time. Even so, the cutswere made.

In France the new minister of finance, CharlesAlexandre de Calonne, did not address the state of theFrench public finances in the same way, at least not ini-tially. Instead he floated a series of loans to bridge thegap between income and expenditure. Despite itsgreater wealth, the French crown had to pay twice theinterest rate of the British State, because its creditors(the so-called “financiers”) had less confidence in itscapacity to repay the debt and its willingness and abil-ity to do what was necessary. Eventually Calonne pro-posed a series of reforms including tax increases (inparticular taxes on the aristocracy and clergy), majorcuts in government spending, and a move to internalfree trade in France. To overcome opposition, in 1787he persuaded the king to summon an Assembly of

Notables. However, the elites opposed both the taxincreases and spending cuts, and he was dismissed.Thepublicizing of the desperate state of the finances andthe accelerating loss of confidence in France’s rulers bytheir creditors meant the difficulties of the crownbecame even more acute until, in 1789, the king in des-peration called a meeting of the Estates General for thefirst time in over 150 years to try to break the deadlock.What followed is, as they say, history.

Contemporary America

Contemporary Americans should look back at theseevents with increasing nervousness. As in Britain

and France in 1783, the public finances are in a parlousstate. The gap between revenue and expenditure hasnever been wider and is even worse than the headlinefigures suggest when the unfunded liabilities ofMedicare and Social Security are taken into account.

For a long time now the Americanpolitical class has been fundingexpenditure through borrowing,depending ultimately on the confi-dence of their creditors and theunderlying productivity of the Amer-ican people. If this confidence shouldwaver (and there are many signs ofthis) the cost of this borrowing is

bound to rise. If the spending and liabilities exceed thecapacity of even the most heroic future productivelabor by American citizens (as they clearly do) thensomething has to give.

Ultimately it is clear that either spending must becut or taxes and imposts increased or some combina-tion of the two. Just as in France, however, this dependson the willingness of both elites and ordinary people todo what is necessary.That in turn depends on a broadagreement as to the proper role and size of govern-ment. In the absence of such an agreement, just as inFrance in 1787, tough decisions will be ducked andmatters will go from bad to worse. Arguments abouttaxes and the deficit are thus proxies for a deeperdebate.


S t e p h e n D a v i e s

The gap betweenrevenue andexpenditure has neverbeen wider.

“There is not a poor person in the United Stateswho was not made poor by his own short-comings. . . .”

Those words come, interestingly enough, from whatis almost certainly the most successful charitablefundraising speech ever delivered. It was given over6,000 times, provided almost 1,700 young people withthe opportunity to go to college, andplayed a significant role in assisting91,000 more to reach their educa-tional goals. If the man who gave thisspeech had kept and invested the pro-ceeds, an editor of the time observed,he would have had around $8 million(and this was back in 1917, when $8million was still a lot of money).Vir-tually all the money was in fact usedto provide a first-class education forpeople who would not otherwise havebeen able to afford it.

The author of the speech had beena poor kid himself. He could remem-ber being embarrassed, during his yearat Yale, that he had to wear such cheap, shabby clothes.Looking back even further, he remembered that thediet of his youth had consisted almost entirely of Indian pudding and baked potatoes, supplementedoccasionally by salt pork and cider-apple sauce. It tookhis father 12 years to pay off the $1,200 mortgage ontheir farm and another year to come up with enoughfor an Estey melodeon (a small reed organ). Ratherthan money each of the three children had been givena hen to feed; a cackle from the chicken house meant atoy or a piece of candy. And yet there was always an

empty plate on the table, just in case anyone (even atramp) stopped by.

This is not the background or the record of a manwho would harbor a grudge against the unfortunate.Toread his words about the nature of poverty as an attackon the poor is to read them wrongly. His speech wasaddressed to struggling entrepreneurs and people who

were down on their luck, and hewanted them to know that it was wellwithin their power to vastly improveon their present circumstances. Moreimportant, and in sharp contrast withthe “leading intellectuals” of his time,he insisted that becoming wealthywas one of the most honorable thingsthey could do.

His name was Russell H. Conwell.He was born in 1843 and showed anearly penchant for public speaking.Toprovide the money needed for his lastterm at Wilbraham Academy he gotpermission to speak in nearby schoolsabout the recently executed John

Brown. The children went home to tell their parents,who were soon waiting in line to buy copies of thebiography that young Conwell (with amazing foresight)just happened to have in ample supply.When the CivilWar came he went around speaking about the causes,called on men to enlist, formed a company known as “The Mountain Boys,” and at the age of 19 foundhimself one of the youngest captains in the United

B Y H A R O L D B . J O N E S , J R .

“Find Out What the People Want”:The Russell Conwell Story

25 N O V E M B E R 2 0 1 1

Harold B. Jones, Jr. ([email protected]) is a professor atDalton State College in Georgia and the author of Personal Characterand National Destiny.

Russell ConwellWikipedia

States Army. After the war he worked as, among otherthings, a newspaper correspondent and an attorney.He then took over a small, struggling church, whichafter a few years under his leadership was neither smallnor struggling.

In 1882 he accepted a call to Grace Baptist Templein Philadelphia. He had not been there long when hewas approached by a young man who, with only 30cents to his name, wanted to get an education. Hisefforts to put the boy off with descriptions of the diffi-culties involved failed, and Conwell agreed to spendthree hours a week with him.The new student arrivedfor the first lesson with five of his friends. For the sec-ond lesson there were 40. By the end of the second year250 were enrolled in the night school being conductedin the church’s basement.The teachers were volunteers,attendance was mandatory, and exam-inations were notoriously difficult.

Students were required to paytuition, but as the school expanded,the need for funds grew. Assistancefrom the wealthy of the surroundingcommunity was not forthcoming.Employers were afraid that an educa-tion would turn their best workers toother pursuits, and the comfortablysituated were unhappy with the ideaof raising the poor above their properstation in life. There were no government assistanceprograms, but even if there had been, Conwell wouldnot have applied. He believed it would be unjust to taxall of the people for something that would benefit onlythose with the ambition to take advantage of it. State-sponsored charities, he said, serve mainly to create asense of entitlement and a great deal of petty fraud.

But there were now 590 enrolled at Temple, and itseemed to be faced with the necessity of a tuitionincrease that would close the door to some of its beststudents. Then Conwell had an idea. It had beenbumping around in his mind since 1861, when he gavea lecture entitled “Heroes at Home” to a crowd of afew hundred in a Methodist church. Years of experi-ence had ripened his thought on the subject andturned him into an excellent speaker. He decided totry his luck on the then-popular Chautauqua circuit,

where Ralph Waldo Emerson had already made aname for himself. Before Conwell was done he hadspoken to crowds as large as 15,000 and in places asfamous as Madison Square Garden (back when it wasstill near Madison Square).

“Acres of Diamonds”

He spoke without notes, and he never put his wordson paper, so the speech has come down to us in

various forms, four of which were consulted in thepreparation of this article. (The author would bedelighted to provide specific sources and page numbersfor any who are interested.)

Conwell’s introduction is the story of one al Hafed(given in some versions as Ali-Hafed), who was con-tentedly prosperous until a visiting Buddhist priest told

him about the concentrated wealth ofdiamonds. Al Hafed inquired aboutthe kind of place in which thesemight be found, sold his farm, andwent off to search for them. Unsuc-cessful after many years, he threwhimself into the ocean. The personwho bought his farm had in themeantime come across a curiousblack stone that seemed somehow tocatch the light. He set it on the man-tle, and the next time the priest came

by he recognized it as a diamond. “Had Al-Hafedremained at home and dug in his own cellar or his owngarden, instead of wretchedness, starvation, poverty anddeath in a strange land, he would have had acres of dia-monds,” Conwell said.The farm was in fact the scene ofwhat would later come to be known as the GolcondaDiamond Mines (in Conwell’s time, the word was oftenspelled Golkonda and was a synonym for incrediblewealth).

The motivational speaker Earl Nightingale built oneof his best presentations around this introduction; thepoint, he said, is that the grass on the other side of thefence may be greener because it is getting better care.While Conwell would have agreed with this observa-tion, he was interested primarily in wider themes. Hetold several other tales about people who had missedthe prosperity waiting on the doorstep, but his first


H a r o l d B . J o n e s , J r.

Before Conwell wasdone he had spokento crowds as large as15,000 and in placesas famous as MadisonSquare Garden.

major point was the development of a mindset for thediscovery of opportunities. He was a voracious readerwith a photographic memory and may have beenfamiliar with Adam Smith. Even if he was not, histhoughts suggest a more than passing familiarity withthe principles of economics.

To those who wanted to become wealthy he gavethis advice: Find out what people want and get it forthem. It seems obvious enough, but Conwell couldremember a time in his life when he had yet to grasp it.As a boy he had on several occasions been left in chargeof his father’s country store. Once a man came in andasked, “Do you have any jackknives?” (What was thencalled a jackknife is now referred to as a pocket knife.)No, he did not, Conwell replied. Another farmer camein with same question and receivedthe same reply. A third was met withthis somewhat more emphaticresponse: “No. Why is everyonearound here asking for jackknives?Do you suppose we are keeping thisstore to supply the whole neighbor-hood with jackknives?” Lookingback, Conwell realized that if theyhad kept the store for that purpose itmight have been more profitable.

He told about how John JacobAstor, having foreclosed on amillinery store, went into partnershipwith the man who had just failed.Astor did not put a nickel of newmoney into the deal. He just went out to sit on a parkbench and see what the ladies were wearing. Hewanted to learn which styles had the most positiveeffect on a woman’s feelings about herself. Conwell saidthat when Astor saw “a lady pass, with her shouldersback and her head up, as if she did not care if the wholeworld looked at her, he studied the bonnet” and wentback with instructions for the hat maker. Then herepeated the process.The store was soon flourishing.

Conwell did not say Astor liked all the hats thatseemed to have such an impact on the feelings of thosewearing them. The point was not Astor’s feelings butthose of the women in the park. Both parties felt betteroff as a result of the transaction.

“I say you ought to be rich,” he told the members ofhis audience. If they were not getting a little richer witheach passing year, he said, it was only because they werenot paying attention to what other people wanted. “Ifyou will just take only four blocks around you, and findout what the people want and what you ought to sup-ply and set them down with your pencil, and figure upthe profits you would make if you did supply them, youwould very soon see it.There is wealth right within thesound of your voice.” He told the story of a man whoprovided so well for people of his neighborhood thatwhen they learned of his plans to move and build awarehouse, they petitioned him to stay.

There is nothing even slightly cutthroat about eco-nomic success, Conwell said. It is a matter simply of

giving people what they want andletting them reward you for it. Thetrue businessperson is the one whohas found a way to serve and lethimself or herself be served inreturn.The dishonest are a minoritywho might retain employees andcustomers for long enough to dosome damage but not for longenough to build a business. Lastingsuccess, he insisted, is always theresult of serving others as you your-self would like to be served.

He had no patience with minis-ters who condemned the “filthylucre” of material prosperity. They

only talk like that, he said, until they pass the collectionplate. “Money printed your Bible, money builds yourchurches, money sends your missionaries, and moneypays your preachers, and you would not have many ofthem, either, if you did not pay them.” Significant mate-rial accomplishment is not only honorable in its ownright but the means to much else that we honor.

Defending Prosperity

Conwell understood that in thus exalting the natureand consequences of the economic process he was

swimming against the intellectual current of his time.“The age,” he said, “is prejudiced against advising aChristian man . . . from attaining unto wealth.”What he

27 N O V E M B E R 2 0 1 1

“ F i n d O u t W h a t t h e P e o p l e Wa n t ” : T h e R u s s e l l C o n w e l l S t o r y

There is nothing evenslightly cutthroat abouteconomic success,Conwell said. It is amatter simply ofgiving people whatthey want and lettingthem reward you for it.

had to say about the nature of this prejudice is some-thing early twenty-first century America badly needs to hear.

He pointed out that not everything in print agreeswith the facts: “How little we can tell what is truenowadays when newspapers try to sell their papersentirely on sensation.” Neil Postman observed that inthe case of television the effect of this sensationalism iscompounded by the need to break everything up into45-second bits. The program doesnot need to tell the whole story, butit does need to be entertaining.Tele-vision producers, like the yellowjournalists of Conwell’s time, aremore interested in getting our atten-tion than in giving us the truth.

That, however, is the smaller partof the problem. The greater part ismalicious jealousy. “If a man knowsmore than I know, don’t I incline tocriticize his learning? . . . We alwaysdo that to the man who gets ahead of us.”

Even as he spoke, Germany’sMax Scheler, borrowing a term fromNietzsche, was writing a book entitled Ressentiment. Nothing soexcites public indignation, heobserved, as remarkable success. There is a great dealthat is easily forgiven, but the thought of any impres-sive achievement that might just as well have been ourown seems to fester. The one who is merely enviouswants whatever the object of his envy has gained andmay even confess to such a desire.The person who isconsumed with ressentiment, on the other hand, is nolonger conscious of where the feelings come from and

is therefore incapable of admitting to them. He or sheno longer cares about the accomplishment itself butlongs to harm the person it belongs to.

There is much about Conwell’s world that haspassed into history. Lies about the crimes of the suc-cessful and the ressentiment that gives birth to themremain.They are a central fact of American politics andthe real issue in the debate over tax increases.Whateverelse Barack Obama may be, he is not stupid. He knows

perfectly well that even if all theloopholes could be closed and even ifthe marginal tax rate on incomesgreater than $250,000 were 100 per-cent, there still would not be enoughto put the government’s books in theblack. His driving motive is not adesire to balance the budget but hisunadmitted need to punish the suc-cessful.

It is by pointing to such motivesthat Russell H. Conwell makes hisgreatest contribution to modernAmerica. There is a seminary thatbears his name, and Grace TempleBaptist Church continues to carry onthe ministry he began there. TempleUniversity, no longer just for studentswho have to come in the evening, has

become a leading institution of higher learning, com-plete with a hospital and a law school. More importantthan these, however, is Conwell’s reminder about thenature of the attack on prosperity and individualachievement. We need to keep it in mind wheneverpoliticians represent themselves as our saviors and thereal sources of national prosperity. They are the onesfrom whom we need to be protected.


H a r o l d B . J o n e s , J r.

Lies about the crimesof the successful andthe ressentiment thatgives birth to themremain.They are acentral fact ofAmerican politics and the real issue in the debate over tax increases.

Despite assertions that it has ended its policy ofquantitative easing (QE), the Fed is unlikely tobe able to do so until it also ends its zero-

interest-rate policy (ZIRP).This deadly policy duo hashad terrible consequences for the American economyand every country using U.S. dollars.

It is as though the Fed were riding on the back of adouble-headed monster. It cannothang on forever, but it cannot dis-mount the beast without beingdevoured. As it is, the U.S. Treasurydepends on ZIRP to fund America’sballooning debt. When investors fleean enfeebled dollar the Fed is likely tobe the “buyer of first resort” so thatthe price of Treasurys does not fall,pushing up interest rates. (So far Trea-surys with low yields are still in highdemand.) So with the Fed insistingthat short-term interest rates willremain near zero “for an extendedperiod,” a phrase used for the pasttwo years, a new round of QE isalmost inevitable.

For its part, QE involves flooding financial institu-tions with excess liquidity to try to flatten out theyield curve and depress long-term interest rates inhopes of sparking a recovery. But QE has created amassive overhang of excess reserves in the banking system that constitute repressed price inflation. Andthe sums involved are truly staggering: The Fed hasinjected at least $2.3 trillion into the financial system since Lehman Brothers collapsed in September2008.

From late 2008 through March 2010 the Fedbought longer-term securities worth $1.7 trillion(QE1).This included purchases of $500 billion in mort-gage securities and $100 billion in agency debentureswith a target of $1.25 trillion for mortgage debt. Pur-chasing mortgage-backed securities and bailing outAIG and Bear Stearns, as well as buying other securi-

ties, led to a 140 percent increase inthe monetary base.

In November 2010 the Fed beganQE2 by buying an additional $600billion in longer-term Treasury securi-ties, a program that officially expired atthe end of June.Yet the Fed has indi-cated it will continue buying Treasurysusing proceeds from maturing debt italready owns.

Stealth Easing

With over $112 billion of theFed’s government bond hold-

ings maturing over the coming 12months, replacement alone wouldinvolve purchasing over $9 billion of

Treasurys each month. It also has more than $914 bil-lion of mortgage-backed debt and $118 billion ofdebentures issued by government-sponsored enter-prises (Fannie Mae and Freddie Mac). As such this is a“stealth” continuation of QE with only a limited, ifany, decrease in the money-creation process.

B Y C H R I S T O P H E R L I N G L E

Quantitative Easing Forever?

29 N O V E M B E R 2 0 1 1

Christopher Lingle ([email protected]) is visiting professor of economics atUniversidad Francisco Marroquín in Guatemala and research fellow at theCentre for Civil Society in New Delhi.This article first appeared atTheFreemanOnline.org.

It is as though theFed were riding onthe back of a double-headed monster.It cannot hang onforever, but it cannot dismount thebeast without being devoured.

For all the fanfare about QE, it must be said that itconstitutes a last-gasp step and admission of the failureof other monetary policy tools. Consider the case ofJapan. Its central bank, the Bank of Japan (BoJ), beganasset purchases under QE to offset deflation and stimu-late its ailing economy in early 2001. After nearly adecade of setting interest rates near zero the BoJ real-ized it had been unable to conjure up an economicrecovery.Then after five years of gradually expanding itsbond purchases, the BoJ exercised an exit strategy fromQE in 2006, only to begin again.

Last March the BoJ increased its QE program from¥5 trillion to ¥10 trillion (about $130 billion) sched-uled until the end of 2012. Recentlyit announced another expansion to¥15 trillion ($183 billion).

Incentives vs. Growth

Achild untutored in economicsmight think it makes no sense to

continue massive increases of liquidityinto the economy that have been inef-fective for so long. But most centralbankers and many economists arguethat previous amounts were too littleand more is needed.

The incentives that QE and ZIRP create for com-mercial banks make it easy to see why these policiescannot promote economic growth. On the one hand,low interest rates reduce the cost of borrowing, whichshould encourage more investment spending. But onthe other, commercial banks pay almost nothing toborrow yet receive interest payments from the Fed tohold excess reserves, making them unlikely to extendnew loans.

A sufficiently high interest rate paid on bankreserves will induce banks to choose a risk-free inter-

est-bearing asset rather than lending to private-sectorborrowers.And so it is that commercial banks are earn-ing record profits while making very few new loans.

Exit Strategy?

The question of whether the Fed or the BoJ has aneffective “exit strategy” from monetary expansion

using near-zero interest rates and quantitative easingremains open. One possibility for the Fed is to engagein repurchase agreements (repos) to remove some ofthe excess liquidity that it pumped into the financialsystem.

These repos involve selling securities to commercialbanks with the Fed agreeing to buythem back at a higher price at a laterdate. But once again commercialbanks will find holding risk-freeinterest-bearing assets a much betterbet than issuing new commercialloans.

In the end both QE and ZIRPhave been ineffective in restoringeconomic vitality while also creatinga massive overhang of repressed infla-tion. Most economists view business

startups, especially small and medium-sized enterprises,as the key to economic recovery and growth.Yet QEand associated central-bank policies are diverting creditaway from newly forming firms.

The Fed has now announced it will continue the“exceptionally” low short-term interest rates until themiddle of 2013.This indicates that U.S. central bankersare unconvinced of the errors of their ways in theirpolicy choices. That they are unwilling or unable tochange course means the U.S. and Japanese economiesare doomed to painfully slow economic growth for theforeseeable future.


C h r i s t o p h e r L i n g l e

Quantitative Easingand associatedcentral-bank policiesare diverting creditaway from newlyforming firms.

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

Social Cooperation

Peripatetics

At FEE’s Advanced Austrian Economics Seminarlast summer, more than one speaker mentionedthat Ludwig von Mises considered a different

title for the book we know as Human Action.The othertitle? Social Cooperation.

I’ve heard that story before, but this time it got methinking: Would the free-market movement have beenperceived differently by the outside world if Mises hadused the other title? With the question phrased so nar-rowly, the answer is probably no. So let’s broaden it:Would the free-market movement be perceived differ-ently if its dominant theme was socialcooperation rather than (rugged)individualism, self-reliance, independ-ence, and other synonyms we’re sofond of?

Maybe.There’s no mystery why that other

title occurred to Mises. I haven’t triedto make a count, but I would guessthat “social cooperation” (or “humancooperation”) is the second most-used phrase in the book. The first isprobably “division of labor,” which isanother way of saying “social cooper-ation.” Human Action is about socialcooperation or it isn’t about anything at all. The firstmatter Mises takes up after his opening disquisition onthe nature of action itself is . . . cooperation. He begins,“Society is concerted action, cooperation. . . . It substi-tutes collaboration for the—at least conceivable—iso-lated life of individuals. Society is division of labor andcombination of labor. In his capacity as an acting ani-mal man becomes a social animal.”

It is through cooperation and the division of laborthat we all can live better lives. Naturally, Mises laidgreat stress on the need for peace, since the absence ofpeace is the breakdown of that vital cooperation. This

put Mises squarely in the pacifistic classical-liberal tra-dition as exemplified by Richard Cobden, John Bright,Frédéric Bastiat, Herbert Spencer, and William GrahamSumner. Mises wrote in Liberalism:

The liberal critique of the argument in favor ofwar is fundamentally different from that of thehumanitarians. It starts from the premise that notwar, but peace, is the father of all things. . . .War onlydestroys; it cannot create. . . .The liberal abhors war,not, like the humanitarian, in spite of the fact that it

has beneficial consequences, butbecause it has only harmful ones.

Given Mises’s orientation it isunsurprising to see him attach somuch importance to what he calls theRicardian Law of Association. This isknown as the law of comparativeadvantage (or cost), which states thattwo parties can gain from trade evenif one is more efficient at makingevery product they both want.

The key is opportunity cost. A$500-an-hour lawyer who is also thefastest, most accurate typist in the

world will likely find it advantageous to hire a typist.Why? Because every hour the lawyer spends typinginstead of practicing law costs him $500 minus what hewould have paid a typist. The typist faces no suchopportunity cost. So lawyer and typist both benefit bycooperating.This is true of groups (countries) too. Peo-ple will discover the benefits of concentrating on what,comparatively, they make most efficiently (or least inef-ficiently) and trading with others.As a result more totalgoods will be produced.

31 N O V E M B E R 2 0 1 1

Sheldon Richman ([email protected]) is the editor of The Freeman andTheFreemanOnline.org.

Would the free-market movement beperceived differentlyif its dominant theme was socialcooperation ratherthan (rugged)individualism?

This law is an important part of the argument forfree international trade because it answers the objec-tion that a national group that can’t make anything as efficiently (absolutely) as others will be left out ofthe world economy. But Mises understood that the lawof comparative advantage was merely an application ofthe broader law of association. As he wrote in HumanAction:

The law of association makes us comprehend thetendencies which resulted in the progressive intensi-fication of human cooperation. We conceive whatincentive induced people not to consider themselvessimply as rivals in a struggle for the appropriation ofthe limited supply of means of subsistence madeavailable by nature.We realize whathas impelled them and perma-nently impels them to consortwith one another for the sake ofcooperation. Every step forwardon the way to a more developedmode of the division of laborserves the interests of all partici-pants. . . . The factor that broughtabout primitive society and dailyworks toward its progressive intensification is humanaction that is animated by the insight into the higherproductivity of labor achieved under the division oflabor.

This seemingly simple idea leads to counterintuitiveconclusions. As a result of expanding cooperation,human beings compete to produce, not to consume. Misesexpressed this with my favorite sentence in HumanAction: “The fact that my fellow man wants to acquireshoes as I do, does not make it harder for me to getshoes, but easier.” The expansion of cooperation alsomeans dealing with strangers at great distance—a fur-ther incentive for peace.

Unfortunately the emphasis on cooperation is notwhat nonlibertarians are likely to “know” about free-market economics and the normative freedom philoso-

phy.They are more apt to associate these with “ruggedindividualism” than “social cooperation.” I have nodoubt that a major reason for this is that our opponentswho know better want the public to have a distortedsense of the genuinely liberal worldview. When Presi-dent Bill Clinton declared (disingenuously) in his 1996state of the union address, “The era of big governmentis over,” he followed up that sentence with this:“But wecan’t go back to the era of fending for yourself.” Buthuman beings have always been social/political animals.There was no era when men and women fended forthemselves individually.The choice is between free andforced association.

Of course libertarians and free-market advocates doemphasize the importance of the division of labor.

Nevertheless we are partly responsiblefor the public misperception. Ourrhetoric too often implies atomism,however inadvertently. (The appro-priate individualism is molecular indi-vidualism.) I understand the value ofthe terms “individualism,” “self-reliance,” and “independence,” but weshould realize that they can easily leadto undesirable caricatures. Let’s not

encourage anyone to think that the libertarian ideal isTed Kaczynski minus the mail bombs.

We’re all grappling with an uncertain future. Socialcooperation unquestionably makes that task easier thanif we attempted to go it alone. That’s why individualsformed mutual-aid (fraternal) organizations. Besidescamaraderie, these groups provided what the welfarestate feebly and coercively supposes to provide today:islands of relative security in a sea of uncertainty.

If people support the welfare state, don’t be puzzled.It’s because they cannot see a better voluntarist alterna-tive.That’s where libertarians come in.

We libertarians might have an easier time persuadingothers if we emphasized that freedom produces ever-more innovative ways to cooperate for mutual benefitand that when government dominates life, social coop-eration is imperiled.


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

Let’s not encourageanyone to think thatthe libertarian ideal isTed Kaczynski minusthe mail bombs.

In today’s society failure has become something to fear, avoid, and therefore prevent at all costs.Whether it is unemployment compensation, farm

subsidies, or bailouts for failing companies, the worldseems to view failure as having no redeeming socialvalue. If success is all good and failure is all bad, then itseems as though we should do everything we can to rem-edy or prevent failure.

But is that so? Without deny-ing the value of perseverance, andrecognizing that the slogan“never give up” can be useful inovercoming certain obstacles, wemust keep in mind that failurecan act as a guide to more worth-while activities. For example, in1921 Walt Disney started a com-pany called the Laugh-O-GramCorporation, which went bank-rupt two years later. If a friend ofDisney or the government hadn’tlet him fail and move on, hemight never have become theWalt Disney we know today.

More important than thisindividual learning process is theirreplaceable role failure plays inthe social learning process of the competitive market.When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the per-son who failed but also all of society by denying our-selves a key way to learn how best to allocate resources.Without failure there’s no economic growth orimproved human well-being.

Economists, especially those of the Austrian school,often emphasize how entrepreneurs discover newknowledge and better ways of producing things. Butentrepreneurial endeavors frequently fail and the prof-its thought to be in hand often don’t materialize.According to the U.S. Small Business Administration,over half of small businesses fail within the first five

years. But failed entrepreneurialactivity is just as important as suc-cessful entrepreneurial activity.Markets are desirable not becausethey lead smoothly to improvedknowledge and better coordina-tion, but because they provide aprocess for learning from ourmistakes and the incentive to cor-rect them. It’s not that entrepre-neurs are just good at getting itright; it’s also that they (like all ofus) can know when they’ve got itwrong and can obtain the infor-mation necessary to get it rightnext time.

On this view failure driveschange. While success is theengine that accelerates us towardour goals, it is failure that steers us

toward the most valuable goals possible. Once failure isrecognized as being just as important as success in the

B Y J A C K K N Y C H A N D S T E V E N H O R W I T Z

The Importance of Failure

33 N O V E M B E R 2 0 1 1

Jack Knych ([email protected]) is an economics student at St.Lawrence University in Canton, N.Y., where contributing editor andTheFreemanOnline.org columnist Steven Horwitz ([email protected])is the Charles A. Dana Professor of Economics.

Failure plays a crucial role in discovering anddisseminating knowledge.Studio Lévy and Sons [Wikipedia]

market process, it should be clear that the goal of asociety should be to create an environment that notonly allows people to succeed freely but to fail freely aswell.

The Knowledge Problem

Understanding this point requires a broader visionof the market process. For Austrian economists

the fundamental economic problem is not the effi-cient allocation of given resources to our most valuedends at a given time, but rather how we overcome the“knowledge problem”—the division of knowledgethat characterizes the social world. It is more impor-tant to figure this out than to master the problem ofresource allocation because new knowledge driveseconomic growth and creates pros-perity. If the main task of the marketwere merely to allocate knownresources to their most efficient uses,economic growth would seemimpossible, since we would be stuckin a primitive world. Where is thereany room for the innovation orchange that drives progress andimproves our lives? If a plow isdeemed the most efficient use ofiron and all iron is constantly allo-cated to making plows, how couldiron ever be allocated for a newinvention such as a tractor? The answer is that entre-preneurs change the most efficient use of resources bydiscovering new uses. By understanding the economicproblem posed by limited, unique, and dispersedknowledge, we can better understand the role failureplays in coping with this problem.

Competition figures prominently in this system.Competition promotes entrepreneurial activity and thediscovery of knowledge by empowering a variety ofdecision-makers to try to find new and better ways ofusing resources as well as new ends to achieve. Thisdecentralization ensures that what F. A. Hayek called the local knowledge of time and place will be bestused. Centralized planning, like other forms of govern-ment allocation, necessarily relies on the knowledge offewer people, limiting discovery and restricting knowl-

edge-dissemination to fewer channels. Competition is abetter way to overcome the knowledge problem.

Failure and Opportunity

We can understand the role of failure if we recog-nize, as Ludwig von Mises did, that all human

action intends to “remove felt uneasiness.” We arealways striving to improve ourselves by achieving ourhighest valued ends as often as we can. On these terms,failure is all around us because no human ever achievesa complete lack of felt uneasiness. We always haveunsatisfied ends. Israel Kirzner uses the term “alert-ness” to describe how the entrepreneurial element ofhuman action identifies which ends to strive for andwhich means are available. Kirzner says that for market

action to occur, entrepreneurs mustfirst be alert to opportunities forprofit. The possibility of profit keepsentrepreneurs alert to the ways peo-ple strive for ends or make use ofmeans that fail to remove felt uneasi-ness. Once they’ve noticed this failurein human knowledge, the sameopportunity for profit spurs entrepre-neurial activity to find a new way toachieve those ends, or to find betterends themselves. So a failure in humanknowledge becomes the catalyst forproducing new knowledge via the

entrepreneurial process.When entrepreneurs attempt to correct a particular

failure in knowledge, they often fail themselves andincur losses because of competition. Although bank-ruptcy is painful in the short term, such failure is anintegral part of how entrepreneurial activity and themarket function. Failure in a competitive societyinforms market participants about which activities orjobs to strive for and which to avoid, lest they wastetime and money. Jobs that add value to society shouldbe pursued, while those that fail to add value should beeliminated. Markets help guide market participants farbetter than any bureaucracy can because bureaucracieslack the market’s key components of competition,profit, and loss, which reveal failures and allow for theircorrection.


J a c k K n y c h a n d S t e v e n H o r w i t z

Although bankruptcyis painful in the shortterm, such failure isan integral part ofhow entrepreneurialactivity and themarket function.

Because competition is a voyage into the unknown,we can only know after the fact what works and whatdoes not.Thus economic failure is not “waste.” Callingentrepreneurial failure a “waste” implicitly assumesthat one knew ahead of time what the best use ofresources was. Such knowledge is not available to any-one, which is why failure is necessary to provide theneeded signals.

The subsidies, bailouts, stimulus packages, and otherinterventions that now increasingly characterize theU.S. economy disrupt this process. Farm subsidies(including cheap water out west), for example, prevententrepreneurs from finding and capitalizing on failuresof knowledge in farming.While there may be new andbetter ways to grow food, it is difficult for entrepre-neurs to find this out if farmers are kept afloat by thegovernment. Perhaps decentralized,local farming would be discovered asmore profitable if larger monoculturefarms that are possibly damaging theenvironment were allowed to fail. Bypreventing inefficient methods ofproduction from suffering losses, sub-sidies reduce the degree of failure inagricultural markets and make itharder to know that misallocation hastaken place and to correct it.

Not letting Chrysler and GeneralMotors fail during the Great Reces-sion prevented an entrepreneurial response to this mis-use of resources. The bailouts created two types ofnegative incentives. First, the companies were encour-aged to keep making cars when their losses showed theresources and labor could better be used elsewhere. Sec-ond, the government deterred any new entrepreneurfrom entering the industry and doing things better.Many politicians defended the bailout because they didnot want the hundreds of thousands of autoworkers tobecome unemployed. But when hundreds of thousandsof workers become unemployed they do not disappear.They find different jobs that would contribute to soci-ety in a better way than working for a bankrupt autocompany.The physical assets of bankrupt companies alsoget reallocated to alert entrepreneurs looking for bar-gains. Failure is necessary for learning and for success.

The Keynesian argument for government jobs pro-grams is that any sort of work will restart spending in arecession, even hiring people to dig ditches and fillthem up. But do a higher GDP and a job by themselvesmake society better off? Would it be better to have a 2percent unemployment rate with 8 percent of theemployed population doing jobs that don’t add realvalue (so around 10 percent of the labor force is notadding real value) or more unemployment with every-one who is working really adding value?

Unemployment

Unemployment is a form of failure, and it involvesthe same considerations as when businesses fail.

If a job no longer contributes value this needs to bemade clear so that those workers can find jobs that

actually do. Imagine if the disem-ployment of farmers had been pre-vented during the transition to anindustrial economy. In 1941, 41 per-cent of the U.S. workforce was inagriculture. In 2011 the portion was3 percent. Where would industry betoday if we had prevented the major-ity of the 41 percent from losingtheir jobs and finding new ones? It isright that this sort of “failure” wasallowed to occur because the dis-placed farmers found new jobs in the

cities and elsewhere. Those new jobs helped societytransition from agriculture to industry to services, cre-ating even newer jobs all along the way.This is strongevidence that learning from failure takes place in labormarkets.

Autopoiesis (life’s continuous production of itself) isone of the principal characteristics of life, and constantchange is its essence. This applies to the economy aswell. For us to maintain or increase a high standard ofliving we must constantly change how we do things.This change won’t be fueled by lucky guesses or bybureaucratic decrees, but instead often by entrepre-neurial activity in the face of failure in the market.Since that activity drives the train of progress, it is insociety’s interest that the tracks be cleared of govern-mental obstacles.

35 N O V E M B E R 2 0 1 1

T h e I m p o r t a n c e o f F a i l u r e

If a job no longercontributes value thisneeds to be madeclear so that thoseworkers can find jobsthat actually do.

Last May sociologist Amitai Etzioni participated ina debate hosted by the Cato Institute in whichhe argued against the classical-liberal theory as

being too atomistic, excessively concerned with selfishindividualism, and neglectful of the importance ofcommunity. He’s been making this point for 20 years,which is strange for two reasons: First, it isn’t true, andsecond, I have been refuting it for 20 years.

Okay, perhaps I shouldn’t be surprised that Etzionidoes not read my work. He’s a “celebrity” academicwhose writings are discussed in TheNew York Review of Books and who isgenerally regarded as one of the leadersof the communitarian movement. Heneed not bother reading obscurephilosophers. On the other hand, hisarguments have also been rebutted byStephen Holmes in The New Republic,as well as The Economist. So if writers offar greater prominence than me alsoengaged his arguments and he remainsunwilling even to acknowledge this,one is led to believe he is deliberately caricaturing.

The communitarian movement was at its most pop-ular in the mid-to-late nineties, although it has notgone away; it continues to repackage itself and appearslike clockwork whenever classical liberalism comes up.Its flagship journal, The Responsive Community, went bythe slogan “Rights and Responsibilities” and now uses“For Individual Rights and Social Responsibility.”Withslogans like these, one might be forgiven for wonderingwhy communitarians don’t like liberalism. The answeris, while classical liberals argue for negative rights andlimited government, communitarians argue for positive

rights and an expansive government that can limitrights on behalf of the common good.

“Negative rights” is another name for liberties, thesort of rights-claims that impose on others a duty ofnoninterference. “Positive rights” is another name forthe sort of rights-claims that impose on others a dutyto provide or perform, sometimes called entitlements.A key concept of classical liberalism is that a system ofnegative rights is internally consistent and does notlead to conflicts of rights, whereas positive rights can

generate such conflict. If Smith hasa right to be provided with some-thing, then Jones must have a dutyto provide it. If this is not a consen-sual arrangement, then Jones’s rightto liberty is now in conflict withSmith’s right to be provided withthe thing in question. Since liberal-ism (by definition) takes libertyseriously, this sort of conflict is aproblem. For a nonliberal it is notnecessarily a problem: Simply

announce that other values trump liberty—equality,for example, or security, or salvation.

One interesting conundrum raised by the positive-rights model is, who exactly bears the correspondingduties? With negative rights this is easy: Everyone canabstain from interfering with a person’s pursuits. But ifthere is a right to be given food or a car, who has toprovide it? If the positive right is the result of a con-tract, the contract will specify who has what obliga-

B Y A E O N J . S K O B L E

The Individual and the Community


Aeon Skoble ([email protected]) is professor of philosophy andchairman of the philosophy department at Bridgewater State University inMassachusetts.

One interestingconundrum raised bythe positive-rightsmodel is, who exactly bears thecorresponding duties?

tions, but this won’t entail any conflict with negativerights since the arrangement is consensual. If the rightis simply stipulated as part of “the common good,” thenall members of the community must bear the duty ofprovision jointly (but nonconsensually).

The communitarian critique of liberalism gets itstraction from a combination of a true observation anda false one.The true observation—hardly novel,Aristo-tle noted it two millennia ago—is that we are socialcreatures. We require social living to flourish. In apurely economic sense, it is obvious we cannot doeverything ourselves if we’re to do much of anythingat all. The division of labor and our capacity for spe-cialization and trade allow us each to benefit from thetalents of others and prosper far above the mere subsis-tence of other creatures. Beyond that there is a psycho-logical dimension to our sociality as well. As Aristotlenoted, we require friends to attain the happiness we’recapable of attaining.We require families within whichto develop. As we mature we formdistinct personalities as a result of themany relationships we have. “Theself ” does not emerge fully formedex nihilo but rather is the result ofmany influences and relational asso-ciations and affiliations. When com-munitarians like Etzioni make this point, they’renoting something true.

The part of the equation that is false is the claim thatclassical liberals either disbelieve or are indifferent tothe preceding account. Communitarians claim that lib-eralism presupposes an atomistic individualism—that itneglects the value of community and fails to see thatthere is a social component to the formation of the selfand to human flourishing. None of this is true. Classicalliberalism does not ignore these claims; it depends onthem. It’s as if one tried to argue against pizza by claim-ing that cheese is good, but since pizza has no cheese,pizza must be bad.

Economically speaking, the straw man beingemployed here is virtually self-evident:The market is asocial phenomenon. So you can’t have a theory aboutthe ways in which the market benefits people and at thesame time regard sociality as unimportant.The classical-liberal position is that we all benefit from our participa-

tion in the social phenomenon of the market—notmerely financially, but in terms of the great diversity ofour kind. Cooperation in a market system promotes,and in a way presupposes, heterogeneity and pluralism.This expands people’s horizons and shows them newways to derive and create value.

Of course, for a particular sort of communitarian theheterogeneity and pluralism of the market are consid-ered bad things. Karl Marx claimed that our identitiesare constituted entirely by our socioeconomic class andthat autonomy was an illusion. The prevailing eco-nomic system determines how you think. The liberalproject is flawed, Marx said, because it caused people tohave false ideas about labor, capital, society, and evenour own selves. Mussolini also claimed that the liberalproject was flawed because it caused people to havefalse ideas about labor, capital, society, and our ownselves, but his claim was that our identity was consti-tuted and determined not by class but by our ethnicity.

Communitarians today distancethemselves from fascists and commu-nists, and make the more genericclaim that “the community” deter-mines our identity, while still comingto the same conclusion: that liberalismis a flawed project. This enables them

to defend some liberties while arguing for positiverights and for the right of the community to infringeon liberty.

Of course, we’re all members of many differentcommunities simultaneously: family, town, ethnicity,region, nation, religion. In addition to these, webecome members of communities through our interestsand affiliations—professions, hobbies, sports loyalties,and other manifestations of preference. To be sure, allthese different things play a role in helping shape whowe become, but it’s a stretch to say that any one of themtrumps the others, or that the process is deterministic.Communitarianism seems to elide the distinctionbetween influencing and determining. We still makechoices about our values and actions, despite the manyinfluences on our thinking.

In his 1996 book, The New Golden Rule: Communityand Morality in a Democratic Society, Etzioni makes thesame criticisms of a liberalism that “neglects the role of

37 N O V E M B E R 2 0 1 1

T h e I n d i v i d u a l a n d t h e C o m m u n i t y

The market is a socialphenomenon.

community” that he made at Cato in May. But he alsopraises autonomy and explains that his ideal societywouldn’t be coercive. But a noncoercive communitythat respects individual autonomy sounds like liberal-ism, so this may be a case of wanting to have it bothways.Worse, it suggests that the best way to have a goodlife is to live in a community (which is true, but uncon-troversial) and that individualism won’t allow for this(which is false).

In many cases, Etzioni’s prescriptions are vague andalmost contradictory: We shouldn’thave too much autonomy becausethat’s bad for community; but weshouldn’t enforce community plans intyrannical ways because that’s bad forautonomy. He explicitly calls forcompulsory national service, which ishard to reconcile with a noncoercivesociety. He even invokes the expres-sion “voluntary social order,” but isclearly not making a Hayekian argu-ment: He explicitly rejects the free-market approach to economics. Hespecifically praises “symbolic displays”that promote community solidarity—does that mean requiring religiousdissenters to recite the Pledge of Allegiance? It is true of course thatsome “community values” are incom-patible with liberal individualism.Self-appointed spokesmen for the community mighthave an interest in suppression of dissent (mustn’toffend community sensibilities) or the subjugation ofminority religious practices (mustn’t promote excessiveindividualism). But Etzioni stops short of taking hisargument to this conclusion.

Even a cursory overview of liberal authors showsrespect for human sociality and a recognition of theimportance of community.This is evident in Locke andSmith, Ricardo and Hayek, Nozick and Rothbard.

Etzioni’s reliance on such obvious straw-man concep-tions of liberalism suggests it is tactical rather thanintellectual: How can we maintain some recognizablyliberal framework, yet support positive rights and gov-ernment control? By suggesting that the liberal projectis based on a mistake. If the proponents of classical-liberal individualism and free markets are shown to bepeople who neglect the value of community, thencommunitarianism can gain traction. But there’s noeasy way around what J. S. Mill called the “tyranny

of the majority”: That a majority of the people want things a certainway is not enough to justify coercingthe minority. Classical liberalismembraces social cooperation—indeedpresupposes it—but distinguishesitself from its competitors by insistingthat the communal projects and social arrangements be consensual. InEtzioni’s characterization this meanswe do not care about the community.

But caring about the communityand respecting individuals as individu-als are not contradictory aims. Yes,we’re social creatures, but one reasonsociety has so much to offer is thatwe’re all a little different. The greatdiversity of human interests and pref-erences and talents is a testimony toour individualism, and “society” is just

the manifestation of these differences as they arebrought together. If everyone thought the same way andliked all the same things, society would be a much lessinteresting place. So the idea that, to protect community,we need to stop thinking of people as autonomous indi-viduals gets it backwards. If we really care about thewell-being of communities and preserving the way soci-ety contributes to human flourishing, we ought to keepin mind the unique and autonomous individuals thatmake it up, and respect them.


A e o n J . S k o b l e

Classical liberalismembraces socialcooperation—indeedpresupposes it—butdistinguishes itselffrom its competitorsby insisting that thecommunal projectsand socialarrangements beconsensual.

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

What We Don’t Know about History Can Hurt Us

Give Me a Break!

“It ain’t so much the things we don’t know that getus into trouble. It’s the things we know that justain’t so.”

That famous line, attributed to many authors butapparently said by humorist Henry Wheeler Shaw (akaJosh Billings), applies to history as much as anything.

What liberates oppressed people? I was taught it’soften American power. Just the threatof our military buildup defeated theSoviet Union, and our troops in theMiddle East will create islands offreedom.

Unlikely, says historian ThaddeusRussell, author of A Renegade Historyof the United States.

“As a matter of fact,” Russell toldme, “in general American militaryintervention has increased anti-Americanism and hardened repressiveregimes. On the other hand, Ameri-can popular culture—what was oftencalled the worst of our culture inmany cases—has actually done morefor liberation and our national secu-rity than anything that the 82nd Air-borne could do.”

I told him that I thought that theSoviet Union collapsed because the Soviets spent somuch trying to keep pace with Ronald Reagan’s mili-tary buildup.

Pop Culture Revolution

On the contrary, Russell said. “It collapsed fromwithin. . . . People simply walked away from the

ideology of communism.And that began especially whenAmerican popular culture—jazz and rock and roll—began infiltrating those countries after World War II.”

I demanded evidence.“American soldiers brought jazz during World War II

to the Eastern front. Soviet soldiers brought it back.Eastern European soldiers brought it and spread it acrossthose countries. . . . Stalin was hysterical about this.”

The authorities were particularly concerned aboutyoung people performing and enjoying sensual music.

“Any regime at all depends onsocial order to maintain its power.Social order and sensuality, pleasuresof the body, are often at odds. Stalinand his commissars understood that,”Russell said.

American authorities 30 yearsearlier also feared the sensuality ofblack music, said Russell, attackingjazz “as primitive jungle music thatwas bringing down American youth.Stalin and his commissars across East-ern Europe said exactly the samethings with the same words later.”

Then rock ‘n’ roll came.“That was even more threaten-

ing,” Russell said. “By the 1980s,disco and rock were enormouslypopular throughout the communistworld.”

The communists realized they had to relax the rulesor risk losing everything, but it was too late. One of themost amazing and significant spectacles was BruceSpringsteen’s concert in East Germany in 1988, when acrowd of 160,000 people who lived behind the IronCurtain sang “Born in the USA.”

39 N O V E M B E R 2 0 1 1

John Stossel hosts Stossel on Fox Business and is the author of Myths,Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know is Wrong. Copyright 2011 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

Bruce Springsteen, Cold War hero?German Federal Archive

Make Nikes, Not Guns

I’m skeptical. I don’t know how much effect Reagan’smilitary buildup had versus rock ‘n’ roll, but I bet

ordinary consumer goods had an even bigger effect.People trapped behind communistlines wanted the stuff we had.When Iwas in Red Square before the fall ofcommunism, I sold my Nikes andjeans to eager buyers.

People want choices, and you can’tindoctrinate that out of them.

Which leads me to the mostdestructive myth about history: theidea that if we are to prosper, gov-ernment must make smart plans forus. I was taught that in college, anddespite the failure of the Soviet Union, many govern-ment leaders still believe it.

It’s no coincidence that the countries with the leasteconomic freedom, according to the Heritage Founda-

tion—Cuba, Zimbabwe, North Korea—are the worstplaces to live.They not only lack freedom, they are alsopoor.

Who’s at the top of the economic freedom list?Hong Kong. (The United States isninth.) Hong Kong has low taxes, andas I demonstrated in an ABC specialyears ago, the government makes iteasy to become an entrepreneur. I gotpermission to open a business there inone day. In my hometown, New YorkCity, it takes months.

Hong Kong doesn’t even havedemocracy, but because its rulers pro-tected people’s personal safety andproperty and left them otherwise free,

Hong Kong thrived. In 50 years it went from horriblepoverty to income levels that are among the highest inworld. Prosperity, thanks to economic freedom.

We should try that here.


J o h n S t o s s e l

It’s no coincidencethat the countrieswith the leasteconomic freedomare the worst places to live.

41 N O V E M B E R 2 0 1 1

Book Reviews

Alchemists of Loss: How Modern Finance andGovernment Intervention Crashed the FinancialSystemby Kevin Dowd and Martin HutchinsonWiley • 2010 • 432 pages • $27.95

Reviewed by Roger W. Garrison

The subprime crisis and financialmeltdown have spawned dozens

of books, some aimed at re-enshrin-ing John Maynard Keynes, others at laying him to rest once more;some aimed at praising the FederalReserve for staving off anotherGreat Depression, others at blamingit for treating the economy to

another cyclical episode. In Kevin Dowd and MartinHutchinson’s reckoning the blame is assigned to gov-ernment intervention (especially housing policy), fiscalirresponsibility, and interest-rate manipulation, all ofwhich gave scope for short-run profit-taking based onmodern finance theory. The incisiveness of this well-integrated tale derives from a mutual leveraging of thecoauthors’ perspectives and experiences.

Dowd offers a classical-liberal perspective on macro-economic policy and specifically central-bank policy.Having written extensively on free banking, he con-cludes that a thorough decentralization of the bankingbusiness is essential to enduring macroeconomic stabil-ity. Hutchinson is a seasoned investment banker turnedfinancial journalist. His firsthand, nuts-and-boltsknowledge of modern financial markets undergirds hisbroader perspective. Together, they provide an enlight-ening account of the long-run trends and short-sightedpolicy actions that culminated in the worst financialcrisis since the Great Depression.

The “alchemists” in their story are the architects andpractitioners of modern finance. Given the perverseregulatory environment, buying and selling derivativescan yield short-run profits to hedge funds and othertraders while virtually guaranteeing that in the longer

run the owners of the underlying real assets will sufferlosses if not bankruptcy.The careful reader will under-stand that speculation, whether on a long-term orshort-term basis, is an essential and healthy feature of amarket economy. But, if anything, the authors’ likeningof speculation to alchemy when it is based on the tech-niques of modern finance and carried out in the context of aregulated economy understates the perversity. On reflec-tion we can see that turning future long-run losses (ofother people) into current short-run profits (for your-self) is triply more disruptive than trying to turn leadinto gold. We can note 1) that lead, unlike long-runlosses, has a positive, though modest, value; 2) that it isyour own lead; and 3) that given the laws of nature,you’re unable to turn the trick.

But if the laws of nature keep people from turninglead into gold, why don’t the laws of the marketplacepreclude the financial alchemy that characterized mostof this century’s first decade? The answer, our authorsmake clear, is government intervention. A toxic mix ofinterventions (regulatory, fiscal, and monetary) per-verted the coordinating market forces by removingconsiderations of long-run systemic risk.The result wasa systemic discoordination whose increasing severityeventually turned systemic risk into a crisis.The laws ofthe marketplace, if allowed to exert themselves, can pre-clude financial alchemy (or at least put strict limits onit). But government intervention, including loan guarantees and the too-big-to-fail doctrine, open awindow in which short-run profit-taking in financialmarkets is pitted against long-run viability of the finan-cial institutions.

While the Federal Reserve is recognized as anessential accommodating element in the most recentepisode of boom and bust, Dowd and Hutchinsonfocus on the inherent perversity of modern financetheory in the context of the long-running efforts of thegovernment to redistribute income and to encouragehomeownership. Since the 1930s the government hasused the tax code to redistribute incomes downward.Over the years the income tax—and over the genera-tions the inheritance tax—has reduced the number offamilies that oversee their long-run business interests.The old partnerships (Dowd and Hutchinson’s term),which kept the owners’ skins in the game, have been


Book Reviews

supplanted by limited-liability corporations, whicheffectively separate management and ownership. Thiscritical separation, which left-leaning authors take to becharacteristic of capitalism, is shown by the authors tobe a consequence of government systematically over-riding the market-governed distribution of income.Whereas we once had business families that were in itfor the long run, we now have financial managers andtraders in derivatives markets who are in it for the shortrun, ultimately to the detriment of the financial systemand the real economy.

Alchemists of Loss provides a multidimensionalaccount of the nature and magnitude of our long-brewing economic woes. But the book provides uswith little hope for the future.The authors’ suggestionsfor reform range from the radical (reinstating the goldstandard and eliminating the central bank) to the not-so-radical (redrafting the Fed’s mandate to excludeconcern about unemployment) to the superficial (mov-ing the Fed’s headquarters to St. Louis). Even the casualreader will see that this extends from the virtuallyimpossible to the not-worth-doing, with no promisingmidrange option. The implicit conclusion is that weshould brace ourselves for more booms and busts.

Roger Garrison ([email protected]) is professor of economics at AuburnUniversity.

The Relentless Revolution: A History of Capitalismby Joyce ApplebyW.W. Norton • 2010/2011 • 494 pages • $29.95hardcover; $17.95 paperback

Reviewed by Leonard Liggio

The eminent UCLA historianJoyce Appleby concludes The

Relentless Revolution: A History ofCapitalism by referring to the per-sistent nostalgia for socialism: “Asone sufferer from Yugonostalgiaexplained it, ‘in Yugoslavia peoplehad fun. It was a system for lazypeople; if you were good or bad,

you still got paid. Now, everything is about money andthis is not good for small people.’”

In my view that sentiment is badly mistaken, andwhile Appleby recognizes the advantages of capitalism,in sum she is ambivalent: “Worldwide life expectancywent from forty-eight years at mid-twentieth centuryto sixty-six years in 1999 and it’s still continuing to rise!Still, it would be nice to eat cake while keeping lazyways too.” Her often engaging and informative book isundermined by sympathy for the precapitalist lifestyle.

Appleby describes the book as being not a generalstudy of capitalism, but instead “a narrative that followsthe shaping of the economic system that we live intoday.” One of the greatest changes capitalism madepossible was to free men and women from the work ofproducing food. In traditional societies around 80 per-cent of the people labored just to produce enough foodto meagerly feed the population. It had always beenthat way, and the human outlook was mostly static.Appleby emphasizes that the vast increase in productiv-ity which capitalism made possible brought about areversal of people’s attitudes toward the future. “At avery personal level,” she writes, “men and womenbegan making plans for themselves that would oncehave appeared ludicrous in their ambitious reach.”

One of Appleby’s central themes is change andinnovation, which had been objects of hostility in ear-lier societies. She observes that Adam Smith’s Wealth of Nations frequently testifies to the new view that cap-italism brought about. “The principle which promptsus to save is the desire of bettering our condition,”she quotes Smith as writing,“a desire which tho gener-ally calm and dispassionate, comes with us from thewomb and never leaves us til we go into the grave.”Where, Appleby wonders, had Smith gotten that viewof humans as naturally inclined to rational self-improvement?

She explains that to find the answer, she became “apermanent fixture at the British Museum” reading “anew genre, the writings about commerce that beganappearing in pamphlets, economic tracts, broadsides,and advice books from the 1620s onwards.” From thatresearch she learned how uncapitalistic life had been forthe typical Englishman. She quotes a scholar whowrote that he lived “in a house built with monopolybricks . . . heated by monopoly coal. His clothes areheld up by monopoly belts, monopoly buttons,

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monopoly pins. . . . He ate monopoly butter, monopolyherrings, monopoly salmon. . . .” Opposition to all thosemonopolies, granted by kings starting with James I, ledto revolution—politically and philosophically. Applebynotes that pamphlet writers like Thomas Mun arguedthat the economy should not be under the control ofthe sovereign.“Breaching the wall of paternalism in the1620s,” she writes,“marked a significant moment in thehistory of capitalism.”

Meanwhile, the oceanic sailing and trade that beganwith the Portuguese and Spanish was expanded by theDutch and English.The availability of goods producedabroad led to great improvements in living standards forcommon people, underscoring the fact that capitalismmade economic progress possible. Similarly, the revolu-tion in agriculture at the same time, especially in Eng-land and the Netherlands, was another advance madepossible by capitalism. For the first time the prospect ofwidespread famine ceased to be a worry.

In her treatment of capitalism in the nineteenth andtwentieth centuries, Appleby is interested in theprocesses of innovation and change. She emphasizes thetide of innovations rather than the political reactions toeconomic development that occurred in those cen-turies. While she remains positive about capitalism’simpact, Appleby does not take on the ferocious criticsof capitalism and their claims that it fosters all mannerof social and economic evils. No doubt some readerswill be disappointed in the book for that reason. Afterall, if the author is going to bring up Marxian criticismsof capitalism, why not also bring up the rejoinders thatdefenders of the free market have made to them?

Appleby’s concluding chapter, “Of Crises and Crit-ics,” deals with our present economic troubles. Again,readers are apt to find her discussion disappointing inits ambivalence.

There is much to recommend in this book, espe-cially the author’s work on changing economic thoughtin the seventeenth and eighteenth centuries and theconsequent emergence of market concepts. WhenAppleby reaches further afield of her area of specializa-tion, however, the book is weakened by observationsthat I do not believe are justified.

Leonard Liggio ([email protected]) is executive vice president ofacademics at the Atlas Economic Research Foundation.

Libertarianism Todayby Jacob HuebertPraeger • 2010 • 254 pages • $44.95

Reviewed by George Leef

Libertarianism is attracting moreattention than ever.As the eco-

nomic and social damage done byLeviathan increases exponentiallyAmericans are coming to under-stand that government power is theroot of our many troubles.The ideathat a consistent philosophy basedon freedom and peaceful coopera-tion among all people is the only

path out of the wilderness is spreading.That has defenders of the mega-state worried. For

them it would be catastrophic if people began thinkingthat they’d be better off with a minimal state. In recentmonths they’ve written several vicious, intellectuallydishonest attacks on libertarianism.Those are desperaterearguard actions, however. The case for libertarianismhas always been overwhelming, and in LibertarianismToday, Jacob Huebert advances it in a remarkably effec-tive way.

Huebert, a lawyer and former FEE intern, under-stands that the libertarian philosophy will only spreadthrough persuasion, and every page of the book is writ-ten with that in mind. He wants readers who are uncer-tain about libertarianism (or hostile to it) to see that itis nothing more than the consistent application of rulesfor living that nearly all of us accept in our relationshipswith others. “In everyday life,” he writes, “peopleunderstand and follow this basic libertarian rule. If youwant something and it belongs to someone else, youhave to persuade him or her to give or sell it to you—you cannot steal it or threaten to hit the other personover the head if they refuse to part with it. If you donot like the books your neighbor is reading, or the reli-gion he is practicing, or most anything else he is doingin the privacy of his own home, too bad—you cannotgo force others to do what you want them to do.”

Exactly. FEE’s founder Leonard E. Read stated itclearly in the title of one of his books, Anything That’sPeaceful. Huebert gives much credit to Read for helping


Book Reviews

to keep the libertarian philosophy alive during theperiod of government idolatry after World War II.

Most of the book is devoted to specific issues inwhich people are (or at least ought to be) fed up withthe mega-state and receptive to libertarian alternatives.But before getting into those issues, Huebert clears upsome serious misunderstandings. Political writers oftenconvey the notion that libertarianism is “an extremeform of conservatism,” and Huebert takes pains to showthat libertarians are not conservatives of any sort. Norare they liberals, as that term is now used. Both conser-vatives and liberals eagerly turn to government coer-cion on a wide array of policies. As a matter ofprinciple, libertarians insist on keeping the Pandora’sBox of aggression locked.

Another source of confusion is the common ideathat libertarian thinking is unworkable. We often hearsomething like: “Capitalism sounds good in theory, butin practice it leads to all kinds of trouble.” Libertariansdo indeed favor free-market capitalism, but Huebertargues that our economy is far, far from that unknownideal. “The U.S. economy is hampered by countlessinterventions: trade barriers, corporate welfare, wagecontrols, regulation, occupational licensure, antitrustlaws, compulsory unionism, taxes, and much else.” Itmakes no sense to blame libertarianism for problemscreated by a host of government blunders that itopposes.

Now let’s look at some of those sore spots whereAmericans should be receptive—where they should bedemanding libertarianism today.

One of them is war. Americans are finally gettingsick of military escapades around the globe. Democratsand Republicans, liberals and conservatives—all areeager to send troops into foreign countries and involvethem in conflicts under euphemisms like “nation build-ing” or “humanitarian intervention.” The only consis-tent opposition to these bloody, costly, endless warscomes from libertarians, Huebert notes.

What about the ridiculous mania for security? TheRepublicrats have fastened the dictatorial TransportationSecurity Administration (TSA) on us. Almost everyoneloathes the bossy, harassing attitude of the TSA’s “publicservants” but, Huebert writes, “Despite all these intru-sions, there is little evidence that the TSA has made any-

one safer by scanning shoes or confiscating fingernailclippers, shampoo, and the like.” He then takes the liber-tarian analysis further than the unpleasantness of airportcheckpoints: “Libertarians find the TSA disturbing inpart because it accustoms Americans to obeying ordersfrom uniformed agents without question and submit-ting to gross violations of privacy and dignity.”

The book covers many other current sore spots with Americans and shows how the problems wouldeither disappear or be greatly diminished if we adoptedlibertarian thinking: the mess that statism has made ofthe economy, the terrible prospect of politicized healthcare, the woefully ineffective education system, andmore.

If you want to undermine statist beliefs, pass thisbook around.

George Leef ([email protected]) is book review editor of The Freeman.

A Maverick’s Defense of Freedomby Benjamin A. Rogge, edited by Dwight R. LeeLiberty Fund • 2010 • 440 pages • $25.00 hardcover;$15.00 paperback

Reviewed by Joshua Hall

The Liberty Fund catalog isfilled with excellent books

on American history, economics,and philosophy. As a Public Choice economist I have benefitedtremendously from its publicationof the collected works of JamesBuchanan. While I already ownedseveral of his books, the opportu-

nity to purchase all his books and articles at once savedme time hunting them down.

Benjamin Rogge’s A Maverick’s Defense of Freedom isvaluable for a different reason. Absent Dwight Lee’sdecision to edit the volume and Liberty Fund’s to pub-lish it, I probably would have had no way to read mostof this material. That is, assuming I even knew of itsexistence, which is unlikely because most of the 57articles, essays, and speeches in this book have neverbeen published before. Given the important role Rogge

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played in classical liberalism in America during his life-time (he served on the boards of both FEE and LibertyFund), the value of this volume to students of liberty istremendous.

First and foremost, Rogge was a teacher. He beganteaching at Wabash College in 1949 and taught thereuntil his untimely death in 1980. Rogge took seriouslythe notion that academics should try to educate beyondthe classroom. He wrote opinion pieces in the WallStreet Journal and Indianapolis Star, gave speeches athome and abroad, and even narrated the film TheIncredible Bread Machine.The wide variety of speeches—given to different audiences—contained in this volumeprovide the reader a great sense of Rogge’s abilities as acommunicator of economic ideas. I will frequentlylook to these speeches for inspiration and insight intohow to best reach an audience.

Lee has superbly organized these pieces into sixbroad areas: liberty and personal responsibility, the roleof economists in a free society, the connection betweeneducation and liberty, microeconomics, macroeconom-ics, and foreign policy.The final three sections are pri-marily useful as excellent illustrations of basiceconomic thinking applied to policy issues such asinflation, unemployment, and energy security.Althoughthe details today may be different, the solutions are stillthe same. Rogge’s clarity in making the case for soundeconomics and limited government is without peer andthus ripe for imitation.

The first three sections are indispensable reading foranyone interested in “the freedom philosophy.” In themRogge deals with core issues related to liberty, and acommon theme is the importance of personal responsi-bility in building and maintaining a free society. Forexample, in an undated speech titled “Voluntary Orga-nizations in a Free Society,” Rogge makes the case thatvoluntary organizations are an important bulwarkagainst the growth of the government. As he puts it,“Every function well handled by private, voluntary

action is an island of defense against further govern-ment encroachment in our lives.”

For me the best part of the book was the section onthe role of education in a free society. In addition toincluding the entirety of Rogge’s classic essay withPierre Goodrich on “Education in a Free Society,” thissection also includes Rogge’s views on the financingand administration of higher education and the role ofstudents, businessmen, and public intellectuals in theeducational process.Anyone interested in today’s highereducation reform debates would benefit from readingthis section, which highlights an important issue rarelydiscussed today: personal responsibility by consumers ofeducation.

At the center of Rogge’s view of education is a stu-dent who is developing and taking more and moreresponsibility for his or her actions. For example, in aconvocation speech at a private school in Indianapolis,Rogge pointed out the importance of student agency:“Each student controls the doors to his own mind, andif he keeps those doors closed, there is little the teachercan do to penetrate into the interior.” He then goes onto argue that the school’s success will be defined bywhether it can get students to take responsibility fortheir own education. I suspect that today’s “helicopterparents” and infantilized teenagers would recoil at thepractical implications of Rogge’s message. It is a mes-sage, however, that parents and students need to under-stand if colleges and universities are going to return tobeing places of learning and open inquiry, not just niceplaces to spend four (or six) years of your life.

I have only briefly touched on the large number oftopics and themes covered in this volume.All that I cansay is that Rogge’s articulation and application of eco-nomics toward our understanding of a free society is asclear and important as it was when he first wrote eachpiece. I cannot recommend this book enough.

Joshua Hall ([email protected]) is assistant professor of economics at BeloitCollege.


Book Reviews

B Y D AV I D R . H E N D E R S O N

Henderson’s Iron Law of GovernmentIntervention:The 1967 Detroit Riot

The Pursuit of Happiness

The more I have studied government policy overthe last 40 or so years, the more strongly I havecome to believe that whatever problem you

name, some government intervention—a tax, a subsidy,a spending program, or a government regulation—wasan important cause or, at a minimum, made the prob-lem worse.The evidence for this view is so strong thatI think it merits being called Henderson’s Iron Law ofGovernment Intervention.

One instance of this law is the famous, or infamous,Detroit riot of 1967. After the riot various pundits“informed” the public that it had happened because somany of Detroit’s black inner-city residents were poorand hopeless. That became theaccepted explanation and, to theextent that anyone remembers it,probably still is. But a close look at the record reveals a much moreinteresting story—of a govern-ment’s police force oppressingpeople who simply wanted to livetheir lives peacefully.This is not tosay that the people who riotedbore no responsibility—everyoneis responsible for his own actions. However, without thepolice force’s intrusion and without a previous federalprogram that had destroyed a community, the riotprobably would not have occurred. And the evidencefor this is hidden in plain sight.

During a five-day period in July 1967, 43 peoplewere killed during the riot in Detroit’s inner city.Shortly after that, President Lyndon B. Johnson createdthe National Advisory Commission on Civil Disor-ders—the so-called Kerner Commission, named afterits head, then-governor of Illinois Otto Kerner. (Kernerwas later convicted of having taken a bribe while gov-ernor and served time in prison.) The Commission wastasked with determining the causes of that and other

riots during the summer of 1967 and with making rec-ommendations to prevent such riots in the future.

Its 1968 Report of the National Advisory Commission onCivil Disorders made a big splash, selling about two mil-lion copies. The report stated that black poverty was abig cause of the Detroit riots, and its recommendationsfor more government jobs and housing programs forinner-city residents were explicitly based on thatassumption.These recommendations, plus the charge ofwhite racism, received much of the publicity at thetime and are what most people took away from thereport. Publishers make a distinction between bookbuyers and book readers:The latter tends to be a small

subset of the former. That distinc-tion seems to apply here. It’s toobad that more people didn’t actu-ally read the report. The Commis-sion’s own account of the details ofthe Detroit riot tells a story that isfundamentally inconsistent withthe Commission’s own conclusionsand recommendations. Here’s thereport’s first paragraph on Detroit:“On Saturday evening, July 22, the

Detroit Police Department raided five ‘blind pigs.’Theblind pigs had their origin in prohibition days, and sur-vived as private social clubs. Often, they were after-hours drinking and gambling spots.”

These “blind pigs” were places that inner-city blackpeople went to be with their friends, to drink, and togamble; in other words, they were places where peoplepeacefully enjoyed themselves and one another. Thepolice had a policy of raiding these places, presumably

47 N O V E M B E R 2 0 1 1

David Henderson ([email protected]) is a research fellowwith the Hoover Institution and an economics professor at the GraduateSchool of Business and Public Policy at the Naval Postgraduate School inMonterey, California. He is the editor of The Concise Encyclopedia ofEconomics (Liberty Fund, 2008) and blogs at econlog.econlib.org.

Police watch rioters at 12th & Claremont, Detroit.The Detroit News archives

because the gambling and the unlicensed alcohol wereillegal. The police expected only two dozen people tobe at the fifth blind pig, the United Community andCivic League on 12th Street, but instead found 82 peo-ple gathered to welcome home two Vietnam veterans.The police proceeded to arrest them. “Some,” says theCommission report, “voiced resentment at the policeintrusion.”Who’d have thunk it? The resentment spreadand the riot began.

In short the triggering cause of the Detroit riot, inwhich more people were killed than in any other riotthat summer, was the government crackdown on peo-ple who were going about their lives peacefully. For therioters the last straw was the government’s suppressionof peaceful, albeit illegal, black capi-talism. Interestingly, in its many pagesof recommendations for more gov-ernment programs, the Commissionnever suggested that the governmentshould end its policy of preventingblack people from peacefully drinkingand gambling.

This is par for the course.When agovernment intervention helps causea problem, even those people whorecognize that the intervention wassomewhat to blame rarely call for anend to, or even a scaling down of,such intervention.

The government’s fingerprints show up elsewherein the Commission’s report. Urban renewal “hadchanged 12th Street [where the riot began] from anintegrated community into an almost totally blackone,” says the report. It tells of another area of the innercity to which the rioting had not spread: “As the riot-ing waxed and waned, one area of the ghetto remainedinsulated.” The 21,000 residents of a 150-square-blockarea on the northeast side had previously bandedtogether in the Positive Neighborhood Action Com-mittee (PNAC) and had formed neighborhood blockclubs.These block clubs were quickly mobilized to pre-vent the riot from spreading to this area. “Youngsters,”wrote the Commission, “agreeing to stay in the neigh-borhood, participated in detouring traffic.” The result:

no riots, no deaths, no injuries, and only two small fires,one of which was set in an empty building.

What made this area different was obviously theclose-knit community the residents had formed. Butwhy had a community developed there and not else-where? The report’s authors unwittingly hint at theanswer:“Although opposed to urban renewal, they [thePNAC] had agreed to co-sponsor with the Archdioceseof Detroit a housing project to be controlled jointly bythe archdiocese and PNAC.” In other words, the areathat had avoided rioting had also successfully resistedurban renewal, the federal government’s program oftearing down urban housing in which poor peoplelived and replacing it with fewer housing units aimed at

a more-upscale market. EconomistMartin Anderson, in his 1964 book,The Federal Bulldozer, had shownmany of the problems with urbanrenewal. Even some of Anderson’sharshest critics at the time admittedthat urban renewal could be called“Negro clearance.” Indeed, at thetime, an even blunter term, alsobeginning with the letter “n,” wasused.

But the Kerner Commission, evenin the face of its own evidence,refused to admit that urban renewal

was a contributing factor to the riots. Indeed, the Com-mission recommended more urban renewal. The Com-mission’s phrasing is interesting, though, because itadmits so much about the sorry history of the program:

Urban renewal has been an extremely controver-sial program since its inception.We recognize that inmany cities it has demolished more housing than ithas erected, and that it has often caused dislocationamong disadvantaged groups.

Nevertheless, we believe that a greatly expandedbut reoriented urban renewal program is necessaryto the health of our cities.

In short the commission’s antidote to poison was toincrease the dose.


D a v i d R . H e n d e r s o n

The triggering causeof the Detroit riotwas the governmentcrackdown on people who weregoing about theirlives peacefully.

volume 61, no 9 november 2011

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