自由选择－弗里德曼

《自由选择－弗里德曼》由会员上传分享，免费在线阅读，更多相关内容在学术论文-天天文库。

Copyright©1980,1979byMiltonFriedmanandRoseD.FriedmanAllrightsreserved.Nopartofthispublicationmaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,includingphotocopy,recording,oranyinformationstorageandretrievalsystem,withoutpermissioninwritingfromthepublisher.Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:Permissions,HarcourtBraceJovanovich,Inc.757ThirdAvenue,NewYork,N.Y.10017Theauthorwishestothankthefollowingpublishersforper-missiontoquotefromthesourceslisted:HarvardEducationalReview.Excerptsfrom"AlternativePub-licSchoolSystems"byKennethB.ClarkintheHarvardEdu-cationalReview,Winter1968.Reprintedbypermissionofthepublisher.NewsweekMagazine.Excerptfrom"BarkingCats"byMiltonFriedmaninNewsweekMagazine,February19,1973.Copy-right©1973byNewsweek,Inc.Allrightsreserved.Reprintedbypermission.TheWallStreetJournal.Excerptsfrom"TheSwedishTaxRevolt"byMelvynB.KraussinTheWallStreetJournal,February1,1979.ReprintedbypermissionofTheWallStreetJournal,©DowJones&Co.,Inc.,1979.Allrightsreserved.SetinLinotypeTimesRomanPrintedintheUnitedStatesofAmericaLibraryofCongressCataloginginPublicationDataFriedman,Milton,1912Freetochoose.Includesbibliographicalreferencesandindex.1.Capitalism.2.Welfarestate.3.Industryandstate.I.Friedman,RoseD.,jointauthor.II.Title.HB501.F72330.12'279-1821ISBN0-15-133481-1LM OtherBooksbyMiltonFriedmanPRICETHEORYTHEREISNOSUCHTHINGASAFREELUNCHANECONOMIST'SPROTESTTHEOPTIMUMQUANTITYOFMONEYANDOTHERESSAYSDOLLARSANDDEFICITSAMONETARYHISTORYOFTHEUNITEDSTATES(withAnnaJ.Schwartz)INFLATION:CAUSESANDCONSEQUENCESWithRoseFriedmanCAPITALISMANDFREEDOM ToRickyandPatri CONTENTSPREFACEixINTRODUCTION1CHAPTERIThePoweroftheMarket9CHAPTER2TheTyrannyofControls38CHAPTER3TheAnatomyofCrisis70CHAPTER4CradletoGrave91CHAPTER5CreatedEqual128CHAPTER6What'sWrongwithOurSchools?150CHAPTER7WhoProtectstheConsumer?189CHAPTER8WhoProtectstheWorker?228CHAPTER9TheCureforInflation248CHAPTERIOTheTideIsTurning283APPENDICES311NOTES315INDEX327vii PREFACEThisbookhastwoparents:CapitalismandFreedom,ourearlierbook,publishedin1962(UniversityofChicagoPress);andaTVseries,titled,likethebook,"FreetoChoose."TheserieswillbeshownonthePublicBroadcastingServicefortensuccessiveweeksin1980.CapitalismandFreedomexamines"theroleofcompetitivecapitalismtheorganizationofthebulkofeconomicactivitythroughprivateenterpriseoperatinginafreemarketasasys-temofeconomicfreedomandanecessaryconditionforpoliticalfreedom."Intheprocess,itdefinestherolethatgovernmentshouldplayinafreesociety."Ourprinciplesoffer,"CapitalismandFreedomsays,"nohardandfastlinehowfaritisappropriatetousegovernmenttoaccom-plishjointlywhatitisdifficultorimpossibleforustoaccomplishseparatelythroughstrictlyvoluntaryexchange.Inanyparticularcaseofproposedintervention,wemustmakeupabalancesheet,listingseparatelytheadvantagesanddisadvantages.Ourprinciplestelluswhatitemstoputontheonesideandwhatitemsontheotherandtheygiveussomebasisforattachingimportancetothedifferentitems."Togivesubstancetothoseprinciplesandillustratetheirap-plication,CapitalismandFreedomexaminesspecificissuesamongothers,monetaryandfiscalpolicy,theroleofgovernmentineducation,capitalismanddiscrimination,andthealleviationofpoverty.FreetoChooseisalessabstractandmoreconcretebook.ReadersofCapitalismandFreedomwillfindhereafullerde-velopmentofthephilosophythatpermeatesbothbookshere,therearemorenutsandbolts,lesstheoreticalframework.More-over,thisbookisinfluencedbyafreshapproachtopoliticalsci-encethathascomemainlyfromeconomistsAnthonyDowns,ix xFREETOCHOOSE:APersonalStatementJamesM.Buchanan,GordonTullock,GeorgeJ.Stigler,andGaryS.Becker,who,alongwithmanyothers,havebeendoingexcitingworkintheeconomicanalysisofpolitics.FreetoChoosetreatsthepoliticalsystemsymmetricallywiththeeconomicsys-tem.Bothareregardedasmarketsinwhichtheoutcomeisdeterminedbytheinteractionamongpersonspursuingtheirownself-interests(broadlyinterpreted)ratherthanbythesocialgoalstheparticipantsfinditadvantageoustoenunciate.Thatisimplicitthroughoutthebookandexplicitinthefinalchapter.TheTVseriescoversthesametopicsasthisbook:thetenchaptersofthebookcorrespondtothetenprogramsoftheTVseriesand(exceptforthefinalchapter)bearthesametitles.However,theTVseriesandthebookareverydifferenteachtruetoitsowncharacter.ThebookcoversmanyitemsthatthetimeconstraintsoftheTVprogramsmadeitnecessarytoomitoralludetoonlybriefly.Anditscoverageismoresystematicandthorough.WewereinducedtoundertaketheTVseriesinearly1977byRobertChitester,presidentofPBSstationWQLNofErie,Penn-sylvania.Hisimaginationandhardwork,andhiscommitmenttothevaluesofafreesociety,madetheseriespossible.Athissug-gestion,MiltonpresentedbetweenSeptemberof1977andMayof1978fifteenpubliclecturesbeforevariousaudiencesfollowedbyquestion-and-answersessions,allofwhichwerevideotaped.WilliamJovanovichcommittedHarcourtBraceJovanovichtothemarketingofthevideotapesandprovidedagenerousadvancetohelpfinancethevideotapingofthelectures,whicharecurrentlybeingdistributedbyHarcourtBraceJovanovich,Inc.Thetran-scriptsofthelecturesservedasrawmaterialfordesigningtheTVprogramsthemselves.Beforethelectureswerecompleted,BobChitesterhadsuc-ceededinobtainingsufficientfinancialsupporttopermitustoproceedwiththeTVseries.WeselectedVideo-ArtsofLondonasthebestgrouptoproduceit.Aftermonthsofpreliminaryplanning,actualfilmingbeganinMarchof1978andwasnotcompleteduntilSeptemberof1979.AnthonyJay,MichaelPeacock,andRobertReidofVideo-Artsplayedakeyroleintheinitialdesignoftheseriesandanimportantsupervisoryrolethereafter. PrefacexiFiveTVprofessionalswerewithusthroughoutmostofthefilmingandediting:MichaelLatham,asproduceroftheseries;GrahamMassey,asfilmdirector;EbenWilson,asanassociateproducerandprincipalresearcher;MargaretYoung,asassistantfilmdirectorandproductionsecretary;andJackieWarner,asproductionmanager.TheyinitiatedusgentlybutfirmlyintothearcaneartofmakingTVdocumentariesandsmoothedoverthedifficultspotswithinvariabletactandfriendship.Theymadeourventureintoastrangeandcomplexworldanexcitingandenjoy-ableexperienceratherthanthenightmarethatwenowrealizeitcouldeasilyhavebecome.Theirinsistenceoncombiningbrevitywithbothrigorandlucid-ityforcedustorethinkmanyofourownideasandtoparethemdowntoessentials.Thediscussionswiththem,aswellaswiththefilmcrewsfromdifferentcountriesoneofthemostenjoyablepartsoftheprojecthelpedustorecognizeweakpointsinourreasoningandinducedustosearchforfurtherevidence.ReleasedfromtherigidtimeconstraintsofTV,wehavebeenabletotakefulladvantageofthesediscussionsinthisbook.WeareindebttoEdwardC.BanfieldandDavidD.Friedman,whoreadthecompletefirstdraft,andtoGeorgeStigler,AaronDirector,ChiakiNishiyama,ColinCampbell,andAnnaSchwartz.RosemaryCampbellspentmanyhoursofpainstakingworkinthelibrarycheckingfactsandfigures.Wecannotblameheriferrorsdoappear,forwedidsomeofthecheckingourselves.WeowemuchtoGloriaValentine,Milton'ssecretary,whosegoodnatureismatchedbyhercompetence.Finally,weappreciatethehelpwehavereceivedfromHarcourtBraceJovanovich,someanony-mously,somefromWilliamJovanovich,CarolHill,andoureditor,PeggyBrooks.Televisionisdramatic.Itappealstotheemotions.Itcapturesyourattention.Yet,weremainoftheopinionthattheprintedpageisamoreeffectiveinstrumentforbotheducationandper-suasion.Theauthorsofabookcanexploreissuesdeeplywith-outbeinglimitedbythetickingclock.Thereadercanstopandthink,turnthepagesbackwithoutbeingdivertedbytheemo-tionalappealofthescenesmovingrelentlesslyacrosshistelevi-sionscreen.Anyonewhoispersuadedinoneevening(oreventenone-hour xiiPrefaceevenings)isnotreallypersuaded.Hecanbeconvertedbythenextpersonofoppositeviewswithwhomhespendsanevening.Theonlypersonwhocantrulypersuadeyouisyourself.Youmustturntheissuesoverinyourmindatleisure,considerthemanyarguments,letthemsimmer,andafteralongtimeturnyourpreferencesintoconvictions.MiltonFriedmanRoseD.FriedmanEly,VermontSeptember28,1979 "Experienceshouldteachustobemostonourguardtoprotectlibertywhenthegovernment'spurposesarebene-ficial.Menborntofreedomarenaturallyalerttorepelinvasionoftheirlibertybyevil-mindedrulers.Thegreaterdangerstolibertylurkininsidiousencroachmentbymenofzeal,well-meaningbutwithoutunder-standing."JusticeLouisBrandeis,Olmsteadv.UnitedStates,277U.S.479(1928) INTRODUCTIONEversincethefirstsettlementofEuropeansintheNewWorldAmericahasbeenamagnetforpeopleseekingadventure,fleeingfromtyranny,orsimplytryingtomakeabetterlifeforthemselvesandtheirchildren.AninitialtrickleswelledaftertheAmericanRevolutionandtheestablishmentoftheUnitedStatesofAmericaandbecameafloodinthenineteenthcentury,whenmillionsofpeoplestreamedacrosstheAtlantic,andasmallernumberacrossthePacific,drivenbymiseryandtyranny,andattractedbythepromiseoffreedomandaffluence.Whentheyarrived,theydidnotfindstreetspavedwithgold;theydidnotfindaneasylife.Theydidfindfreedomandanop-portunitytomakethemostoftheirtalents.Throughhardwork,ingenuity,thrift,andluck,mostofthemsucceededinrealizingenoughoftheirhopesanddreamstoencouragefriendsandrela-tivestojointhem.ThestoryoftheUnitedStatesisthestoryofaneconomicmiracleandapoliticalmiraclethatwasmadepossiblebythetranslationintopracticeoftwosetsofideasboth,byacuriouscoincidence,formulatedindocumentspublishedinthesameyear,1776.OnesetofideaswasembodiedinTheWealthofNations,themasterpiecethatestablishedtheScotsmanAdamSmithasthefatherofmoderneconomics.Itanalyzedthewayinwhichamarketsystemcouldcombinethefreedomofindividualstopur-suetheirownobjectiveswiththeextensivecooperationandcol-laborationneededintheeconomicfieldtoproduceourfood,ourclothing,ourhousing.AdamSmith'skeyinsightwasthatbothpartiestoanexchangecanbenefitandthat,solongascooperationisstrictlyvoluntary,noexchangewilltakeplaceunlessboth1 2FREETOCHOOSE:APersonalStatementpartiesdobenefit.Noexternalforce,nocoercion,noviolationoffreedomisnecessarytoproducecooperationamongindi-vidualsallofwhomcanbenefit.Thatiswhy,asAdamSmithputit,anindividualwho"intendsonlyhisowngain"is"ledbyaninvisiblehandtopromoteanendwhichwasnopartofhisinten-tion.Norisitalwaystheworseforthesocietythatitwasnopartofit.Bypursuinghisowninteresthefrequentlypromotesthatofthesocietymoreeffectuallythanwhenhereallyintendstopromoteit.Ihaveneverknownmuchgooddonebythosewho1affectedtotradeforthepublicgood."ThesecondsetofideaswasembodiedintheDeclarationofIndependence,draftedbyThomasJeffersontoexpressthegeneralsenseofhisfellowcountrymen.Itproclaimedanewnation,thefirstinhistoryestablishedontheprinciplethateverypersonisentitledtopursuehisownvalues:"Weholdthesetruthstobeself-evident,thatallmenarecreatedequal,thattheyareendowedbytheirCreatorwithcertainunalienableRights;thatamongtheseareLife,Liberty,andthepursuitofHappiness."Or,asstatedinmoreextremeandunqualifiedformnearlyacenturylaterbyJohnStuartMill,Thesoleendforwhichmankindarewarranted,individuallyorcol-lectively,ininterferingwiththelibertyofactionofanyoftheirnumber,isselfprotection....[T]heonlypurposeforwhichpowercanberightfullyexercisedoveranymemberofacivilizedcommu-nity,againsthiswill,istopreventharmtoothers.Hisowngood,eitherphysicalormoral,isnotasufficientwarrant....Theonlypartoftheconductofanyone,forwhichheisamenabletosociety,isthatwhichconcernsothers.Inthepartwhichmerelyconcernshimself,hisindependenceis,ofright,absolute.Overhimself,overhisownbodyandmind,theindividualis2sovereign.MuchofthehistoryoftheUnitedStatesrevolvesabouttheattempttotranslatetheprinciplesoftheDeclarationofInde-pendenceintopracticefromthestruggleoverslavery,finallysettledbyabloodycivilwar,tothesubsequentattempttopromoteequalityofopportunity,tothemorerecentattempttoachieveequalityofresults.Economicfreedomisanessentialrequisiteforpoliticalfree-dom.Byenablingpeopletocooperatewithoneanotherwithout lntroduction3coercionorcentraldirection,itreducestheareaoverwhichpoliti-calpowerisexercised.Inaddition,bydispersingpower,thefreemarketprovidesanoffsettowhateverconcentrationofpoliticalpowermayarise.Thecombinationofeconomicandpoliticalpowerinthesamehandsisasurerecipefortyranny.ThecombinationofeconomicandpoliticalfreedomproducedagoldenageinbothGreatBritainandtheUnitedStatesinthenineteenthcentury.TheUnitedStatesprosperedevenmorethanBritain.Itstartedwithacleanslate:fewervestigesofclassandstatus;fewergovernmentrestraints;amorefertilefieldforenergy,drive,andinnovation;andanemptycontinenttoconquer.Thefecundityoffreedomisdemonstratedmostdramaticallyandclearlyinagriculture.WhentheDeclarationofIndependencewasenacted,fewerthan3millionpersonsofEuropeanandAfri-canorigin(i.e.,omittingthenativeIndians)occupiedanarrowfringealongtheeasterncoast.Agriculturewasthemaineconomicactivity.Ittooknineteenoutoftwentyworkerstofeedthecountry'sinhabitantsandprovideasurplusforexportinexchangeforforeigngoods.Todayittakesfewerthanoneoutoftwentyworkerstofeedthe220millioninhabitantsandprovideasurplusthatmakestheUnitedStatesthelargestsingleexporteroffoodintheworld.Whatproducedthismiracle?ClearlynotcentraldirectionbygovernmentnationslikeRussiaanditssatellites,mainlandChina,Yugoslavia,andIndiathattodayrelyoncentraldirectionemployfromone-quartertoone-halfoftheirworkersinagri-culture,yetfrequentlyrelyonU.S.agriculturetoavoidmassstarvation.Duringmostoftheperiodofrapidagriculturalex-pansionintheUnitedStatesthegovernmentplayedanegligiblerole.Landwasmadeavailablebutitwaslandthathadbeenunproductivebefore.Afterthemiddleofthenineteenthcenturyland-grantcollegeswereestablished,andtheydisseminatedin-formationandtechnologythroughgovernmentallyfinancedex-tensionservices.Unquestionably,however,themainsourceoftheagriculturalrevolutionwasprivateinitiativeoperatinginafreemarketopentoalltheshameofslaveryonlyexcepted.Andthemostrapidgrowthcameafterslaverywasabolished.Themillionsofimmigrantsfromallovertheworldwerefreetowork 4FREETOCHOOSE:APersonalStatementforthemselves,asindependentfarmersorbusinessmen,ortoworkforothers,attermsmutuallyagreed.Theywerefreetoexperi-mentwithnewtechniquesattheirriskiftheexperimentfailed,andtotheirprofitifitsucceeded.Theygotlittleassistancefromgovernment.Evenmoreimportant,theyencounteredlittlein-terferencefromgovernment.GovernmentstartedplayingamajorroleinagricultureduringandaftertheGreatDepressionofthe1930s.Itactedprimarilytorestrictoutputinordertokeeppricesartificiallyhigh.Thegrowthofagriculturalproductivitydependedontheac-companyingindustrialrevolutionthatfreedomstimulated.Thencecamethenewmachinesthatrevolutionizedagriculture.Con-versely,theindustrialrevolutiondependedontheavailabilityofthemanpowerreleasedbytheagriculturalrevolution.Industryandagriculturemarchedhandinhand.SmithandJeffersonalikehadseenconcentratedgovernmentpowerasagreatdangertotheordinaryman;theysawthepro-tectionofthecitizenagainstthetyrannyofgovernmentastheper-petualneed.ThatwastheaimoftheVirginiaDeclarationofRights(1776)andtheUnitedStatesBillofRights(1791);thepurposeoftheseparationofpowersintheU.S.Constitution;themovingforcebehindthechangesintheBritishlegalstructurefromtheissuanceoftheMagnaCartainthethirteenthcenturytotheendofthenineteenthcentury.ToSmithandJefferson,gov-ernment'srolewasasanumpire,notaparticipant.Jefferson'sideal,asheexpresseditinhisfirstinauguraladdress(1801),was"[a]wiseandfrugalgovernment,whichshallrestrainmenfrominjuringoneanother,whichshallleavethemotherwisefreetoregulatetheirownpursuitsofindustryandimprovement."Ironically,theverysuccessofeconomicandpoliticalfreedomreduceditsappealtolaterthinkers.Thenarrowlylimitedgovern-mentofthelatenineteenthcenturypossessedlittleconcentratedpowerthatendangeredtheordinaryman.Theothersideofthatcoinwasthatitpossessedlittlepowerthatwouldenablegoodpeopletodogood.Andinanimperfectworldtherewerestillmanyevils.Indeed,theveryprogressofsocietymadetheresidualevilsseemallthemoreobjectionable.Asalways,peopletookthefavorabledevelopmentsforgranted.Theyforgotthedangerto Introduction5freedomfromastronggovernment.Instead,theywereattractedbythegoodthatastrongergovernmentcouldachieveifonlygovernmentpowerwereinthe"right"hands.TheseideasbegantoinfluencegovernmentpolicyinGreatBritainbythebeginningofthetwentiethcentury.TheygainedincreasingacceptanceamongintellectualsintheUnitedStatesbuthadlittleeffectongovernmentpolicyuntiltheGreatDe-pressionoftheearly1930s.AsweshowinChapter3,thedepres-sionwasproducedbyafailureofgovernmentinoneareamoneywhereithadexercisedauthorityeversincethebeginningoftheRepublic.However,government'sresponsibilityforthede-pressionwasnotrecognizedeitherthenornow.Instead,thedepressionwaswidelyinterpretedasafailureoffreemarketcapitalism.Thatmythledthepublictojointheintellectualsinachangedviewoftherelativeresponsibilitiesofindividualsandgovernment.Emphasisontheresponsibilityoftheindividualforhisownfatewasreplacedbyemphasisontheindividualasapawnbuffetedbyforcesbeyondhiscontrol.Theviewthatgov-ernment'sroleistoserveasanumpiretopreventindividualsfromcoercingoneanotherwasreplacedbytheviewthatgovernment'sroleistoserveasaparentchargedwiththedutyofcoercingsometoaidothers.TheseviewshavedominateddevelopmentsintheUnitedStatesduringthepasthalf-century.Theyhaveledtoagrowthingovern-mentatalllevels,aswellastoatransferofpowerfromlocalgovernmentandlocalcontroltocentralgovernmentandcentralcontrol.Thegovernmenthasincreasinglyundertakenthetaskoftakingfromsometogivetoothersinthenameofsecurityandequality.Onegovernmentpolicyafteranotherhasbeensetupto"regulate"our"pursuitsofindustryandimprovement,"standingJefferson'sdictumonitshead(Chapter7).Thesedevelopmentshavebeenproducedbygoodintentionswithamajorassistfromself-interest.Eventhestrongestsupport-ersofthewelfareandpaternalstateagreethattheresultshavebeendisappointing.Inthegovernmentsphere,asinthemarket,thereseemstobeaninvisiblehand,butitoperatesinpreciselytheoppositedirectionfromAdamSmith's:anindividualwhoin-tendsonlytoservethepublicinterestbyfosteringgovernment 6FREETOCHOOSE:APersonalStatementinterventionis"ledbyaninvisiblehandtopromote"privatein-terests,"whichwasnopartofhisintention."Thatconclusionisdrivenhomeagainandagainasweexamine,inthechaptersthatfollow,theseveralareasinwhichgovernmentpowerhasbeenexercisedwhethertoachievesecurity(Chapter4)orequality(Chapter5),topromoteeducation(Chapter6),toprotecttheconsumer(Chapter7)ortheworker(Chapter8),ortoavoidinflationandpromoteemployment(Chapter9).Sofar,inAdamSmith'swords,"theuniform,constant,anduninterruptedeffortofeverymantobetterhiscondition,theprinciplefromwhichpublicandnational,aswellasprivateopulenceisoriginallyderived,"hasbeen"powerfulenoughtomaintainthenaturalprogressofthingstowardimprovement,inspitebothoftheextravaganceofgovernmentsandofthegreatesterrorsofadministration.Liketheunknownprincipleofanimallife,itfrequentlyrestoreshealthandvigourtotheconstitution,inspite,notonlyofthedisease,butoftheabsurdprescriptionsof8thedoctor."Sofar,thatis,AdamSmith'sinvisiblehandhasbeenpowerfulenoughtoovercomethedeadeningeffectsoftheinvisiblehandthatoperatesinthepoliticalsphere.Theexperienceofrecentyearsslowinggrowthanddecliningproductivityraisesadoubtwhetherprivateingenuitycancon-tinuetoovercomethedeadeningeffectsofgovernmentcontrolifwecontinuetograntevermorepowertogovernment,toauthor-izea"newclass"ofcivilservantstospendeverlargerfractionsofourincomesupposedlyonourbehalf.Soonerorlaterandperhapssoonerthanmanyofusexpectaneverbiggergovern-mentwoulddestroyboththeprosperitythatweowetothefreemarketandthehumanfreedomproclaimedsoeloquentlyintheDeclarationofIndependence.Wehavenotyetreachedthepointofnoreturn.Wearestillfreeasapeopletochoosewhetherweshallcontinuespeedingdownthe"roadtoserfdom,"asFriedrichHayekentitledhispro-foundandinfluentialbook,orwhetherweshallsettighterlimitsongovernmentandrelymoreheavilyonvoluntarycooperationamongfreeindividualstoachieveourseveralobjectives.Willourgoldenagecometoanendinarelapseintothetyrannyandmiserythathasalwaysbeen,andremainstoday,thestateofmost lntroduction7ofmankind?Orshallwehavethewisdom,theforesight,andthecouragetochangeourcourse,tolearnfromexperience,andtobenefitfroma"rebirthoffreedom"?Ifwearetomakethatchoicewisely,wemustunderstandthefundamentalprinciplesofoursystem,boththeeconomicprin-ciplesofAdamSmith,whichexplainhowitisthatacomplex,organized,smoothlyrunningsystemcandevelopandflourishwithoutcentraldirection,howcoordinationcanbeachievedwithoutcoercion(Chapter1);andthepoliticalprinciplesex-pressedbyThomasJefferson(Chapter5).Wemustunderstandwhyitisthatattemptstoreplacecooperationbycentraldirectionarecapableofdoingsomuchharm(Chapter2).Wemustunder-standalsotheintimateconnectionbetweenpoliticalfreedomandeconomicfreedom.Fortunately,thetideisturning.IntheUnitedStates,inGreatBritain,thecountriesofWesternEurope,andinmanyothercountriesaroundtheworld,thereisgrowingrecognitionofthedangersofbiggovernment,growingdissatisfactionwiththepol-iciesthathavebeenfollowed.Thisshiftisbeingreflectednotonlyinopinion,butalsointhepoliticalsphere.Itisbecomingpoliticallyprofitableforourrepresentativestosingadifferenttuneandperhapseventoactdifferently.Weareexperiencinganothermajorchangeinpublicopinion.Wehavetheopportunitytonudgethechangeinopiniontowardgreaterrelianceonindi-vidualinitiativeandvoluntarycooperation,ratherthantowardtheotherextremeoftotalcollectivism.Inourfinalchapter,weexplorewhyitisthatinasupposedlydemocraticpoliticalsystemspecialinterestsprevailoverthegen-eralinterest.Weexplorewhatwecandotocorrectthedefectinoursystemthataccountsforthatresult,howwecanlimitgovern-mentwhileenablingittoperformitsessentialfunctionsofde-fendingthenationfromforeignenemies,protectingeachofusfromcoercionbyourfellowcitizens,adjudicatingourdisputes,andenablingustoagreeontherulesthatweshallfollow. CHAPTER1ThePoweroftheMarketEverydayeachofususesinnumerablegoodsandservicestoeat,towear,toshelterusfromtheelements,orsimplytoenjoy.Wetakeitforgrantedthattheywillbeavailablewhenwewanttobuythem.Weneverstoptothinkhowmanypeoplehaveplayedapartinonewayoranotherinprovidingthosegoodsandservices.Weneveraskourselveshowitisthatthecornergrocerystoreornowadays,supermarkethastheitemsonitsshelvesthatwewanttobuy,howitisthatmostofusareabletoearnthemoneytobuythosegoods.Itisnaturaltoassumethatsomeonemustgiveorderstomakesurethatthe"right"productsareproducedinthe"right"amountsandavailableatthe"right"places.Thatisonemethodofcoordinatingtheactivitiesofalargenumberofpeoplethemethodofthearmy.Thegeneralgivesorderstothecolonel,thecoloneltothemajor,themajortothelieutenant,thelieutenanttothesergeant,andthesergeanttotheprivate.Butthatcommandmethodcanbetheexclusiveorevenprin-cipalmethodoforganizationonlyinaverysmallgroup.Noteventhemostautocraticheadofafamilycancontroleveryactofotherfamilymembersentirelybyorder.Nosizablearmycanreallyberunentirelybycommand.Thegeneralcannotconceivablyhavetheinformationnecessarytodirecteverymovementofthelow-liestprivate.Ateverystepinthechainofcommand,thesoldier,whetherofficerorprivate,musthavediscretiontotakeintoaccountinformationaboutspecificcircumstancesthathiscom-mandingofficercouldnothave.Commandsmustbesupplementedbyvoluntarycooperationalessobviousandmoresubtle,butfarmorefundamental,techniqueofcoordinatingtheactivitiesoflargenumbersofpeople.Russiaisthestandardexampleofalargeeconomythatissup-posedtobeorganizedbycommandacentrallyplannedecon-9 10FREETOCHOOSE:APersonalStatementomy.Butthatismorefictionthanfact.Ateveryleveloftheeconomy,voluntarycooperationenterstosupplementcentralplanningortooffsetitsrigiditiessometimeslegally,sometimesillegally.'Inagriculture,full-timeworkersongovernmentfarmsareper-mittedtogrowfoodandraiseanimalsonsmallprivateplotsintheirsparetimefortheirownuseortosellinrelativelyfreemarkets.Theseplotsaccountforlessthan1percentoftheagri-culturallandinthecountry,yettheyaresaidtoprovidenearlyathirdoftotalfarmoutputintheSovietUnion(are"saidto"be-causeitislikelythatsomeproductsofgovernmentfarmsareclandestinelymarketedasiffromprivateplots).Inthelabormarketindividualsareseldomorderedtoworkatspecificjobs;thereislittleactualdirectionoflaborinthissense.Rather,wagesareofferedforvariousjobs,andindividualsapplyforthemmuchasincapitalistcountries.Oncehired,theymaysubsequentlybefiredormayleaveforjobstheyprefer.Numerousrestrictionsaffectwhomayworkwhere,and,ofcourse,thelawsprohibitanyonefromsettingupasanemployeral-thoughnumerousclandestineworkshopsservetheextensiveblackmarket.Allocationofworkersonalargescaleprimarilybycom-pulsionisjustnotfeasible;andneither,apparently,iscompletesuppressionofprivateentrepreneurialactivity.TheattractivenessofdifferentjobsintheSovietUnionoftendependsontheopportunitiestheyofferforextralegalorillegalmoonlighting.AresidentofMoscowwhosehouseholdequipmentfailsmayhavetowaitmonthstohaveitrepairedifhecallsthestaterepairoffice.Instead,hemayhireamoonlighterverylikelysomeonewhoworksforthestaterepairoffice.Thehouseholdergetshisequipmentrepairedpromptly;themoonlightergetssomeextraincome.Botharehappy.Thesevoluntarymarketelementsflourishdespitetheirin-consistencywithofficialMarxistideologybecausethecostofeliminatingthemwouldbetoohigh.Privateplotscouldbefor-biddenbutthefaminesofthe1930sareastarkreminderofthecost.TheSovieteconomyishardlyamodelofefficiencynow.Withoutthevoluntaryelementsitwouldoperateatanevenlowerlevelofeffectiveness.RecentexperienceinCambodiatragicallyillustratesthecostoftryingtodowithoutthemarketentirely. ThePoweroftheMarket11Justasnosocietyoperatesentirelyonthecommandprinciple,sononeoperatesentirelythroughvoluntarycooperation.Everysocietyhassomecommandelements.Thesetakemanyforms.Theymaybeasstraightforwardasmilitaryconscriptionorforbid-dingthepurchaseandsaleofheroinorcyclamatesorcourtorderstonameddefendantstodesistfromorperformspecifiedactions.Or,attheotherextreme,theymaybeassubtleasimposingaheavytaxoncigarettestodiscouragesmokingahint,ifnotacommand,bysomeofustoothersofus.Itmakesavastdifferencewhatthemixiswhethervoluntaryexchangeisprimarilyaclandestineactivitythatflourishesbecauseoftherigiditiesofadominantcommandelement,orwhethervoluntaryexchangeisthedominantprincipleoforganization,supplementedtoasmallerorlargerextentbycommandelements.Clandestinevoluntaryexchangemaypreventacommandeconomyfromcollapsing,mayenableittocreakalongandevenachievesomeprogress.Itcandolittletounderminethetyrannyonwhichapredominantlycommandeconomyrests.Apredominantlyvol-untaryexchangeeconomy,ontheotherhand,haswithinitthepotentialtopromotebothprosperityandhumanfreedom.Itmaynotachieveitspotentialineitherrespect,butweknowofnosoci-etythathaseverachievedprosperityandfreedomunlessvolun-taryexchangehasbeenitsdominantprincipleoforganization.Wehastentoaddthatvoluntaryexchangeisnotasufficientcon-ditionforprosperityandfreedom.That,atleast,isthelessonofhistorytodate.Manysocietiesorganizedpredominantlybyvol-untaryexchangehavenotachievedeitherprosperityorfreedom,thoughtheyhaveachievedafargreatermeasureofboththanauthoritariansocieties.Butvoluntaryexchangeisanecessarycon-ditionforbothprosperityandfreedom.COOPERATIONTHROUGHVOLUNTARYEXCHANGEAdelightfulstorycalled"I,Pencil:MyFamilyTreeasToldto2LeonardE.Read"dramatizesvividlyhowvoluntaryexchangeenablesmillionsofpeopletocooperatewithoneanother.Mr.Read,inthevoiceofthe"LeadPenciltheordinarywoodenpencilfamiliartoallboysandgirlsandadultswhocanreadandwrite,"startshisstorywiththefantasticstatementthat"nota 12FREETOCHOOSE:APersonalStatementsingleperson...knowshowtomakeme."Thenheproceedstotellaboutallthethingsthatgointothemakingofapencil.First,thewoodcomesfromatree,"acedarofstraightgrainthatgrowsinNorthernCaliforniaandOregon."Tocutdownthetreeandcartthelogstotherailroadsidingrequires"sawsandtrucksandropeand...countlessothergear."Manypersonsandnumberlessskillsareinvolvedintheirfabrication:in"theminingofore,themakingofsteelanditsrefinementintosaws,axes,motors;thegrowingofhempandbringingitthroughallthestagestoheavyandstrongrope;theloggingcampswiththeirbedsandmesshalls,...untoldthousandsofpersonshadahandineverycupofcoffeetheloggersdrink!"AndsoMr.Readgoesontothebringingofthelogstothemill,themillworkinvolvedinconvertingthelogstoslats,andthetransportationoftheslatsfromCaliforniatoWilkes-Barre,wheretheparticularpencilthattellsthestorywasmanufactured.Andsofarwehaveonlytheoutsidewoodofthepencil.The"lead"centerisnotreallyleadatall.ItstartsasgraphiteminedinCeylon.Aftermanycomplicatedprocessesitendsupastheleadinthecenterofthepencil.Thebitofmetaltheferrulenearthetopofthepencilisbrass."Thinkofallthepersons,"hesays,"whominezincandcopperandthosewhohavetheskillstomakeshinysheetbrassfromtheseproductsofnature.""Whatwecalltheeraserisknowninthetradeas"theplug.Itisthoughttoberubber.ButMr.Readtellsustherubberisonlyforbindingpurposes.Theerasingisactuallydoneby"Factice,"arubberlikeproductmadebyreactingrapeseedoilfromtheDutchEastIndies(nowIndonesia)withsulfurchloride.Afterallofthis,saysthepencil,"Doesanyonewishtochal-lengemyearlierassertionthatnosinglepersononthefaceofthisearthknowshowtomakeme?"Noneofthethousandsofpersonsinvolvedinproducingthepencilperformedhistaskbecausehewantedapencil.Someamongthemneversawapencilandwouldnotknowwhatitisfor.Eachsawhisworkasawaytogetthegoodsandserviceshewantedgoodsandservicesweproducedinordertogetthepencilwewanted.Everytimewegotothestoreandbuyapencil, ThePoweroftheMarket13weareexchangingalittlebitofourservicesfortheinfinitesimalamountofservicesthateachofthethousandscontributedtowardproducingthepencil.Itisevenmoreastoundingthatthepencilwaseverproduced.Noonesittinginacentralofficegaveorderstothesethousandsofpeople.Nomilitarypoliceenforcedtheordersthatwerenotgiven.Thesepeopleliveinmanylands,speakdifferentlanguages,prac-ticedifferentreligions,mayevenhateoneanotheryetnoneofthesedifferencespreventedthemfromcooperatingtoproduceapencil.Howdidithappen?AdamSmithgaveustheanswertwohundredyearsago.THEROLEOFPRICESThekeyinsightofAdamSmith'sWealthofNationsismislead-inglysimple:ifanexchangebetweentwopartiesisvoluntary,itwillnottakeplaceunlessbothbelievetheywillbenefitfromit.Mosteconomicfallaciesderivefromtheneglectofthissimpleinsight,fromthetendencytoassumethatthereisafixedpie,thatonepartycangainonlyattheexpenseofanother.Thiskeyinsightisobviousforasimpleexchangebetweentwoindividuals.Itisfarmoredifficulttounderstandhowitcanenablepeoplelivingallovertheworldtocooperatetopromotetheirseparateinterests.Thepricesystemisthemechanismthatperformsthistaskwith-outcentraldirection,withoutrequiringpeopletospeaktooneanotherortolikeoneanother.Whenyoubuyyourpenciloryourdailybread,youdon'tknowwhetherthepencilwasmadeorthewheatwasgrownbyawhitemanorablackman,byaChineseoranIndian.Asaresult,thepricesystemenablespeopletoco-operatepeacefullyinonephaseoftheirlifewhileeachonegoesabouthisownbusinessinrespectofeverythingelse.AdamSmith'sflashofgeniuswashisrecognitionthatthepricesthatemergedfromvoluntarytransactionsbetweenbuyersandsellersforshort,inafreemarketcouldcoordinatetheactivityofmillionsofpeople,eachseekinghisowninterest,insuchawayastomakeeveryonebetteroff.Itwasastartlingideathen,anditremainsonetoday,thateconomicordercanemergeastheunin- 14FREETOCHOOSE:APersonalStatementtendedconsequenceoftheactionsofmanypeople,eachseekinghisowninterest.Thepricesystemworkssowell,soefficiently,thatwearenotawareofitmostofthetime.Weneverrealizehowwellitfunc-tionsuntilitispreventedfromfunctioning,andeventhenweseldomrecognizethesourceofthetrouble.Thelonggasolinelinesthatsuddenlyemergedin1974aftertheOPECoilembargo,andagaininthespringandsummerof1979aftertherevolutioninIran,areastrikingrecentexample.Onbothoccasionstherewasasharpdisturbanceinthesupplyofcrudeoilfromabroad.ButthatdidnotleadtogasolinelinesinGermanyorJapan,whicharewhollydependentonimportedoil.ItledtolonggasolinelinesintheUnitedStates,eventhoughweproducemuchofourownoil,foronereasonandonereasononly:becauselegislation,administeredbyagovernmentagency,didnotpermitthepricesystemtofunction.Pricesinsomeareaswerekeptbycommandbelowthelevelthatwouldhaveequatedtheamountofgasolineavailableatthegasstationstotheamountconsumerswantedtobuyatthatprice.Supplieswereallocatedtodifferentareasofthecountrybycommand,ratherthaninre-sponsetothepressuresofdemandasreflectedinprice.Theresultwassurplusesinsomeareasandshortagespluslonggasolinelinesinothers.Thesmoothoperationofthepricesystemwhichformanydecadeshadassuredeveryconsumerthathecouldbuygasolineatanyofalargenumberofservicestationsathiscon-venienceandwithaminimalwaitwasreplacedbybureaucraticimprovisation.Pricesperformthreefunctionsinorganizingeconomicactivity:first,theytransmitinformation;second,theyprovideanincentivetoadoptthosemethodsofproductionthatareleastcostlyandtherebyuseavailableresourcesforthemosthighlyvaluedpur-poses;third,theydeterminewhogetshowmuchoftheproductthedistributionofincome.Thesethreefunctionsarecloselyin-terrelated.TransmissionofInformationSupposethat,forwhateverreason,thereisanincreaseddemandforleadpencilsperhapsbecauseababyboomincreasesschool ThePoweroftheMarket15enrollment.Retailstoreswillfindthattheyaresellingmorepencils.Theywillordermorepencilsfromtheirwholesalers.Thewholesalerswillordermorepencilsfromthemanufacturers.Themanufacturerswillordermorewood,morebrass,moregraphiteallthevariedproductsusedtomakeapencil.Inordertoinducetheirsupplierstoproducemoreoftheseitems,theywillhavetoofferhigherpricesforthem.Thehigherpriceswillinducethesupplierstoincreasetheirworkforcetobeabletomeetthehigherdemand.Togetmoreworkerstheywillhavetoofferhigherwagesorbetterworkingconditions.Inthiswayripplesspreadoutovereverwideningcircles,transmittingtheinforma-tiontopeopleallovertheworldthatthereisagreaterdemandforpencilsor,tobemoreprecise,forsomeproducttheyareengagedinproducing,forreasonstheymaynotandneednotknow.Thepricesystemtransmitsonlytheimportantinformationandonlytothepeoplewhoneedtoknow.Theproducersofwood,forexample,donothavetoknowwhetherthedemandforpencilshasgoneupbecauseofababyboomorbecause14,000moregovernmentformshavetobefilledoutinpencil.Theydon'tevenhavetoknowthatthedemandforpencilshasgoneup.Theyneedtoknowonlythatsomeoneiswillingtopaymoreforwoodandthatthehigherpriceislikelytolastlongenoughtomakeitworthwhiletosatisfythedemand.Bothitemsofinformationareprovidedbymarketpricesthefirstbythecurrentprice,thesecondbythepriceofferedforfuturedelivery.Amajorproblemintransmittinginformationefficientlyistomakesurethateveryonewhocanusetheinformationgetsitwithoutcloggingthe"in"basketsofthosewhohavenouseforit.Thepricesystemautomaticallysolvesthisproblem.Thepeoplewhotransmittheinformationhaveanincentivetosearchoutthepeoplewhocanuseitandtheyareinapositiontodoso.Peoplewhocanusetheinformationhaveanincentivetogetitandtheyareinapositiontodoso.Thepencilmanufacturerisintouchwithpeoplesellingthewoodheuses.Heisalwaystry-ingtofindadditionalsupplierswhocanofferhimabetterproductoralowerprice.Similarly,theproducerofwoodisintouchwithhiscustomersandisalwaystryingtofindnewones.Ontheotherhand,peoplewhoarenotcurrentlyengagedinthese 16FREETOCHOOSE:APersonalStatementactivitiesandarenotconsideringthemasfutureactivitieshavenointerestinthepriceofwoodandwillignoreit.Thetransmissionofinformationthroughpricesisenormouslyfacilitatedthesedaysbyorganizedmarketsandbyspecializedcommunicationfacilities.Itisafascinatingexercisetolookthroughthepricequotationspublisheddailyin,say,theWallStreetJournal,nottomentionthenumerousmorespecializedtradepublications.Thesepricesmirroralmostinstantlywhatishappeningallovertheworld.Thereisarevolutioninsomeremotecountrythatisamajorproducerofcopper,orthereisadisruptionofcopperproductionforsomeotherreason.Thecur-rentpriceofcopperwillshootupatonce.Tofindouthowlongknowledgeablepeopleexpectthesuppliesofcoppertobeaffected,youneedmerelyexaminethepricesforfuturedeliveryonthesamepage.FewreadersevenoftheWallStreetJournalareinterestedinmorethanafewofthepricesquoted.Theycanreadilyignoretherest.TheWallStreetJournaldoesnotprovidethisinformationoutofaltruismorbecauseitrecognizeshowimportantitisfortheoperationoftheeconomy.Rather,itisledtoprovidethisinformationbytheverypricesystemwhosefunctioningitfacili-tates.Ithasfoundthatitcanachievealargeroramoreprofitablecirculationbypublishingthesepricesinformationtransmittedtoitbyadifferentsetofprices.Pricesnotonlytransmitinformationfromtheultimatebuyerstoretailers,wholesalers,manufacturers,andownersofresources;theyalsotransmitinformationtheotherway.Supposethataforestfireorstrikereducestheavailabilityofwood.Thepriceofwoodwillgoup.Thatwilltellthemanufacturerofpencilsthatitwillpayhimtouselesswood,anditwillnotpayhimtoproduceasmanypencilsasbeforeunlesshecansellthemforahigherprice.Thesmallerproductionofpencilswillenabletheretailertochargeahigherprice,andthehigherpricewillinformthefinaluserthatitwillpayhimtowearhispencildowntoashorterstubbeforehediscardsit,orshifttoamechanicalpencil.Again,hedoesn'tneedtoknowwhythepencilhasbecomemoreexpensive,onlythatithas.Anythingthatpreventspricesfromexpressingfreelythecondi- ThePoweroftheMarket17tionsofdemandorsupplyinterfereswiththetransmissionofaccurateinformation.Privatemonopolycontroloverapar-ticularcommoditybyoneproduceroracartelofproducersisoneexample.Thatdoesnotpreventthetransmissionofinforma-tionthroughthepricesystem,butitdoesdistorttheinformationtransmitted.Thequadruplingofthepriceofoilin1973bytheoilcarteltransmittedveryimportantinformation.However,theinformationittransmitteddidnotreflectasuddenreductioninthesupplyofcrudeoil,orasuddendiscoveryofnewtechnicalknowledgeaboutfuturesuppliesofoil,oranythingelseofaphysicalortechnicalcharacterbearingontherelativeavailabilityofoilandothersourcesofenergy.Itsimplytransmittedthein-formationthatagroupofcountrieshadsucceededinorganizingaprice-fixingandmarket-sharingarrangement.PricecontrolsonoilandotherformsofenergybytheU.S.governmentintheirturnpreventedinformationabouttheeffectoftheOPECcartelfrombeingtransmittedaccuratelytousersofpetroleum.TheresultbothstrengthenedtheOPECcartel,bypreventingahigherpricefromleadingU.S.consumerstoeconomizeontheuseofoil,andrequiredtheintroductionofmajorcommandelementsintheUnitedStatesinordertoallocatethescarcesupply(byaDepartmentofEnergyspendingin1979about$10billionandemploying20,000people).Importantasprivatedistortionsofthepricesystemare,thesedaysthegovernmentisthemajorsourceofinterferencewithafreemarketsystemthroughtariffsandotherrestraintsonin-ternationaltrade,domesticactionfixingoraffectingindividualprices,includingwages(seeChapter2),governmentregulationofspecificindustries(seeChapter7),monetaryandfiscalpoli-ciesproducingerraticinflation(seeChapter9),andnumerousotherchannels.Oneofthemajoradverseeffectsoferraticinflationisthein-troductionofstatic,asitwere,intothetransmissionofinforma-tionthroughprices.Ifthepriceofwoodgoesup,forexample,producersofwoodcannotknowwhetherthatisbecauseinflationisraisingallpricesorbecausewoodisnowingreaterdemandorlowersupplyrelativetootherproductsthanitwasbeforethepricehike.Theinformationthatisimportantfortheorganization 18FREETOCHOOSE:APersonalStatementofproductionisprimarilyaboutrelativepricesthepriceofoneitemcomparedwiththepriceofanother.Highinflation,andparticularlyhighlyvariableinflation,drownsthatinformationinmeaninglessstatic.IncentivesTheeffectivetransmissionofaccurateinformationiswastedun-lesstherelevantpeoplehaveanincentivetoact,andactcor-rectly,onthebasisofthatinformation.Itdoesnogoodfortheproducerofwoodtobetoldthatthedemandforwoodhasgoneupunlesshehassomeincentivetoreacttothehigherpriceofwoodbyproducingmorewood.Oneofthebeautiesofafreepricesystemisthatthepricesthatbringtheinformationalsoprovidebothanincentivetoreacttotheinformationandthemeanstodoso.Thisfunctionofpricesisintimatelyconnectedwiththethirdfunctiondeterminingthedistributionofincomeandcannotbeexplainedwithoutbringingthatfunctionintotheaccount.Theproducer'sincomewhathegetsforhisactivitiesisdeterminedbythedifferencebetweentheamounthereceivesfromthesaleofhisoutputandtheamounthespendsinordertoproduceit.Hebalancestheoneagainsttheotherandproducesanoutputsuchthatproducingalittlemorewouldaddasmuchtohiscostsastohisreceipts.Ahigherpriceshiftsthismargin.Ingeneral,themoreheproduces,thehigherthecostofproduc-ingstillmore.Hemustresorttowoodinlessaccessibleorother-wiselessfavorablelocations;hemusthirelessskilledworkersorpayhigherwagestoattractskilledworkersfromotherpursuits.Butnowthehigherpriceenableshimtobearthesehighercostsandsoprovidesboththeincentivetoincreaseoutputandthemeanstodoso.Pricesalsoprovideanincentivetoactoninformationnotonlyaboutthedemandforoutputbutalsoaboutthemostefficientwaytoproduceaproduct.Supposeonekindofwoodbecomesscarcerandthereforemoreexpensivethananother.Thepencilmanufacturergetsthatinformationthroughariseinthepriceofthefirstkindofwood.Becausehisincome,too,isdeterminedby ThePoweroftheMarket19thedifferencebetweensalesreceiptsandcosts,hehasanincen-tivetoeconomizeonthatkindofwood.Totakeadifferentex-ample,whetheritislesscostlyforloggerstouseachainsaworhandsawdependsonthepriceofthechainsawandthehandsaw,theamountoflaborrequiredwitheach,andthewagesofdiffer-entkindsoflabor.Theenterprisedoingthelogginghasanincen-tivetoacquiretherelevanttechnicalknowledgeandtocombineitwiththeinformationtransmittedbypricesinordertominimizecosts.Ortakeamorefancifulcasethatillustratesthesubtletyofthepricesystem.TheriseinthepriceofoilengineeredbytheOPECcartelin1973alteredslightlythebalanceinfavorofthehand-sawbyraisingthecostofoperatingachainsaw.Ifthatseemsfar-fetched,considertheeffectontheuseofdiesel-poweredversusgasoline-poweredtruckstohaullogsoutoftheforestsandtothesawmill.Tocarrythisexampleonestepfurther,thehigherpriceofoil,insofarasitwaspermittedtooccur,raisedthecostofproductsthatusedmoreoilrelativetoproductsthatusedless.Consumershadanincentivetoshiftfromtheonetotheother.Themostobviousexamplesareshiftsfromlargecarstosmallonesandfromheatingbyoiltoheatingbycoalorwood.Togomuchfurtherafieldtomoreremoteeffects:insofarastherelativepriceofwoodwasraisedbythehighercostofproducingitorbythegreaterdemandforwoodasasubstitutesourceofenergy,theresultinghigherpriceofleadpencilsgaveconsumersanincentivetoeconomizeonpencils!Andsoonininfinitevariety.Wehavediscussedtheincentiveeffectsofarintermsofproducersandconsumers.Butitalsooperateswithrespecttoworkersandownersofotherproductiveresources.Ahigherde-mandforwoodwilltendtoproduceahigherwageforloggers.Thisisasignalthatlaborofthattypeisingreaterdemandthanbefore.Thehigherwagegivesworkersanincentivetoactonthatinformation.Someworkerswhowereindifferentaboutbeingloggersordoingsomethingelsemaynowchoosetobecomeloggers.Moreyoungpeopleenteringthelabormarketmaybe-comeloggers.Here,too,interferencebygovernment,throughminimumwages,forexample,orbytradeunions,throughre- 20FREETOCHOOSE:APersonalStatementstrictingentry,maydistorttheinformationtransmittedormaypreventindividualsfromfreelyactingonthatinformation(seeChapter8).Informationaboutpriceswhetheritbewagesindifferentactivities,therentofland,orthereturntocapitalfromdifferentusesisnottheonlyinformationthatisrelevantindecidinghowtouseaparticularresource.Itmaynotevenbethemostim-portantinformation,particularlyabouthowtouseone'sownlabor.Thatdecisiondependsinadditiononone'sowninterestsandcapacitieswhatthegreateconomistAlfredMarshallcalledthewholeoftheadvantagesanddisadvantagesofanoccupation,monetaryandnonmonetary.Satisfactioninajobmaycompensateforlowwages.Ontheotherhand,higherwagesmaycompensateforadisagreeablejob.DistributionoflncomeTheincomeeachpersongetsthroughthemarketisdetermined,aswehaveseen,bythedifferencebetweenhisreceiptsfromthesaleofgoodsandservicesandthecostsheincursinproducingthosegoodsandservices.Thereceiptsconsistpredominantlyofdirectpaymentsfortheproductiveresourcesweownpaymentsforlaborortheuseoflandorbuildingsorothercapital.Thecaseoftheentrepreneurlikethemanufacturerofpencilsisdif-ferentinformbutnotinsubstance.Hisincome,too,dependsonhowmuchofeachproductiveresourceheownsandonthepricethatthemarketsetsontheservicesofthoseresources,thoughinhiscasethemajorproductiveresourceheownsmaybethecapacitytoorganizeanenterprise,coordinatetheresourcesituses,assumerisks,andsoon.Hemayalsoownsomeoftheotherproductiveresourcesusedintheenterprise,inwhichcasepartofhisincomeisderivedfromthemarketpricefortheirservices.Similarly,theexistenceofthemoderncorporationdoesnotaltermatters.Wespeaklooselyofthe"corporation'sincome"orof"business"havinganincome.Thatisfigurativelanguage.Thecorporationisanintermediarybetweenitsownersthestock-holdersandtheresourcesotherthanthestockholders'capital,theservicesofwhichitpurchases.Onlypeoplehaveincomesand ThePoweroftheMarket21theyderivethemthroughthemarketfromtheresourcestheyown,whetherthesebeintheformofcorporatestock,orofbonds,orofland,oroftheirpersonalcapacity.IncountriesliketheUnitedStatesthemajorproductivere-sourceispersonalproductivecapacitywhateconomistscall"humancapital."Somethinglikethree-quartersofallincomegeneratedintheUnitedStatesthroughmarkettransactionstakestheformofthecompensationofemployees(wagesandsalariesplussupplements),andabouthalftheresttakestheformoftheincomeofproprietorsoffarmsandnonfarmenterprises,whichisamixtureofpaymentforpersonalservicesandforownedcapital.Theaccumulationofphysicalcapitaloffactories,mines,officebuildings,shoppingcenters;highways,railroads,airports,cars,trucks,planes,ships;dams,refineries,powerplants;houses,refrigerators,washingmachines,andsoonandoninendlessvarietyhasplayedanessentialroleineconomicgrowth.With-outthataccumulationthekindofeconomicgrowththatwehaveenjoyedcouldneverhaveoccurred.Withoutthemaintenanceofinheritedcapitalthegainsmadebyonegenerationwouldbedissipatedbythenext.Buttheaccumulationofhumancapitalintheformofin-creasedknowledgeandskillsandimprovedhealthandlongevityhasalsoplayedanessentialrole.Andthetwohavereinforcedoneanother.Thephysicalcapitalenabledpeopletobefarmoreproductivebyprovidingthemwiththetoolstoworkwith.Andthecapacityofpeopletoinventnewformsofphysicalcapital,tolearnhowtouseandgetthemostoutofphysicalcapital,andtoorganizetheuseofbothphysicalandhumancapitalonalargerandlargerscaleenabledthephysicalcapitaltobemoreproduc-tive.Bothphysicalandhumancapitalmustbecaredforandreplaced.Thatisevenmoredifficultandcostlyforhumanthanforphysicalcapitalamajorreasonwhythereturntohumancapitalhasrisensomuchmorerapidlythanthereturntophysicalcapital.Theamountofeachkindofresourceeachofusownsispartlytheresultofchance,partlyofchoicebyourselvesorothers.Chancedeterminesourgenesandthroughthemaffectsourphysi- 22FREETOCHOOSE:APersonalStatementcalandmentalcapacities.Chancedeterminesthekindoffamilyandculturalenvironmentintowhichwearebornandasaresultouropportunitiestodevelopourphysicalandmentalcapacity.Chancedeterminesalsootherresourceswemayinheritfromourparentsorotherbenefactors.Chancemaydestroyorenhancetheresourceswestartwith.Butchoicealsoplaysanimportantrole.Ourdecisionsabouthowtouseourresources,whethertoworkhardortakeiteasy,toenteroneoccupationoranother,toengageinoneventureoranother,tosaveorspendthesemaydeterminewhetherwedissipateourresourcesorimproveandaddtothem.Similardecisionsbyourparents,byotherbenefac-tors,bymillionsofpeoplewhomayhavenodirectconnectionwithuswillaffectourinheritance.Thepricethatthemarketsetsontheservicesofourresourcesissimilarlyaffectedbyabewilderingmixtureofchanceandchoice.FrankSinatra'svoicewashighlyvaluedintwentieth-centuryUnitedStates.Wouldithavebeenhighlyvaluedintwentieth-centuryIndia,ifhehadhappenedtobebornandtolivethere?Skillasahunterandtrapperhadahighvalueineighteenth-andnineteenth-centuryAmerica,amuchlowervalueintwentieth-centuryAmerica.Skillasabaseballplayerbroughtmuchhigherreturnsthanskillasabasketballplayerinthe1920s;thereverseistrueinthe1970s.Theseareallmattersinvolvingchanceandchoiceintheseexamples,mostlythechoicesmadebyconsumersofservicesthatdeterminetherelativemarketpricesofdifferentitems.Butthepricewereceivefortheservicesofourresourcesthroughthemarketalsodependsonourownchoiceswherewechoosetosettle,howwechoosetousethoseresources,towhomwechoosetoselltheirservices,andsoon.Ineverysociety,howeveritisorganized,thereisalwaysdis-satisfactionwiththedistributionofincome.Allofusfindithardtounderstandwhyweshouldreceivelessthanotherswhoseemnomoredeservingorwhyweshouldbereceivingmorethansomanyotherswhoseneedsseemasgreatandwhosedesertsseemnoless.Thefartherfieldsalwayslookgreenersoweblametheexistingsystem.Inacommandsystemenvyanddissatisfactionaredirectedattherulers.Inafreemarketsystemtheyaredirectedatthemarket. ThePoweroftheMarket23Oneresulthasbeenanattempttoseparatethisfunctionofthepricesystemdistributingincomefromitsotherfunctionstransmittinginformationandprovidingincentives.Muchgovern-mentactivityduringrecentdecadesintheUnitedStatesandothercountriesthatrelypredominantlyonthemarkethasbeendirectedatalteringthedistributionofincomegeneratedbythemarketinordertoproduceadifferentandmoreequaldistributionofincome.Thereisastrongcurrentofopinionpressingforstillfurtherstepsinthisdirection.WediscussthismovementatgreaterlengthinChapter5.Howeverwemightwishitotherwise,itsimplyisnotpossibletousepricestotransmitinformationandprovideanincentivetoactonthatinformationwithoutusingpricesalsotoaffect,evenifnotcompletelydetermine,thedistributionofincome.Ifwhatapersongetsdoesnotdependonthepricehereceivesfortheservicesofhisresources,whatincentivedoeshehavetoseekoutinformationonpricesortoactonthebasisofthatinformation?IfRedAdair'sincomewouldbethesamewhetherornotheper-formsthedangeroustaskofcappingarunawayoilwell,whyshouldheundertakethedangeroustask?Hemightdosoonce,fortheexcitement.Butwouldhemakeithismajoractivity?Ifyourincomewillbethesamewhetheryouworkhardornot,whyshouldyouworkhard?Whyshouldyoumaketheefforttosearchoutthebuyerwhovaluesmosthighlywhatyouhavetosellifyouwillnotgetanybenefitfromdoingso?Ifthereisnorewardforaccumulatingcapital,whyshouldanyonepostponetoalaterdatewhathecouldenjoynow?Whysave?Howwouldtheexistingphysicalcapitaleverhavebeenbuiltupbythevoluntaryrestraintofindividuals?Ifthereisnorewardformaintainingcapital,whyshouldpeoplenotdissipateanycapitalwhichtheyhaveeitheraccumulatedorinherited?Ifpricesarepreventedfromaffectingthedistributionofincome,theycannotbeusedforotherpurposes.Theonlyalternativeiscommand.Someauthoritywouldhavetodecidewhoshouldproducewhatandhowmuch.Someauthoritywouldhavetodecidewhoshouldsweepthestreetsandwhoman-agethefactory,whoshouldbethepolicemanandwhothephysi-cian.Theintimateconnectionamongthethreefunctionsofthe 24FREETOCHOOSE:APersonalStatementpricesystemhasmanifesteditselfinadifferentwayinthecom-munistcountries.Theirwholeideologycentersontheallegedex-ploitationoflaborundercapitalismandtheassociatedsuperiorityofasocietybasedonMarx'sdictum:"toeachaccordingtohisneeds,fromeachaccordingtohisability."Buttheinabilitytorunapurecommandeconomyhasmadeitimpossibleforthemtoseparateincomecompletelyfromprices.Forphysicalresourcesland,buildings,andtheliketheyhavebeenabletogofarthestbymakingthemthepropertyofthegovernment.Butevenheretheeffectisalackofincentivetomaintainandimprovethephysicalcapital.Wheneverybodyownssomething,nobodyownsit,andnobodyhasadirectinterestinmaintainingorimprovingitscondition.ThatiswhybuildingsintheSovietUnionlikepublichousingintheUnitedStateslookdecrepitwithinayearortwooftheirconstruction,whymachinesingovernmentfactoriesbreakdownandarecontinuouslyinneedofrepair,whycitizensmustresorttotheblackmarketformain-tainingthecapitalthattheyhavefortheirpersonaluse.Forhumanresourcesthecommunistgovernmentshavenotbeenabletogoasfaraswithphysicalresources,thoughtheyhavetriedto.Eventheyhavehadtopermitpeopletoownthem-selvestosomeextentandtoletthemmaketheirowndecisions,andhavehadtoletpricesaffectandguidethosedecisionsanddeterminetheincomereceived.Theyhave,ofcourse,distortedthoseprices,preventedthemfrombeingfreemarketprices,buttheyhavebeenunabletoeliminatemarketforces.Theobviousinefficienciesthathaveresultedfromthecom-mandsystemhaveledtomuchdiscussionbyplannersinsocialistcountriesRussia,Czechoslovakia,Hungary,Chinaofthepos-sibilityofmakinggreateruseofthemarketinorganizingproduc-tion.AtaconferenceofeconomistsfromEastandWest,weonceheardabrillianttalkbyaHungarianMarxisteconomist.HehadrediscoveredforhimselfAdamSmith'sinvisiblehandaremark-ableifsomewhatredundantintellectualachievement.Hetried,however,toimproveonitinordertousethepricesystemtotransmitinformationandorganizeproductionefficientlybutnottodistributeincome.Needlesstosay,hefailedintheory,asthecommunistcountrieshavefailedinpractice. ThePoweroftheMarket25ABROADERVIEWAdamSmith's"invisiblehand"isgenerallyregardedasreferringtopurchasesorsalesofgoodsorservicesformoney.Buteconomicactivityisbynomeanstheonlyareaofhumanlifeinwhichacomplexandsophisticatedstructurearisesasanunintendedcon-sequenceofalargenumberofindividualscooperatingwhileeachpursueshisowninterests.Consider,forexample,language.Itisacomplexstructurethatiscontinuallychanginganddeveloping.Ithasawell-definedorder,yetnocentralbodyplannedit.Noonedecidedwhatwordsshouldbeadmittedintothelanguage,whattherulesofgrammarshouldbe,whichwordsshouldbeadjectives,whichnouns.TheFrenchAcademydoestrytocontrolchangesintheFrenchlan-guage,butthatwasalatedevelopment.ItwasestablishedlongafterFrenchwasalreadyahighlystructuredlanguageanditmainlyservestoputthesealofapprovalonchangesoverwhichithasnocontrol.Therehavebeenfewsimilarbodiesforotherlanguages.Howdidlanguagedevelop?Inmuchthesamewayasaneconomicorderdevelopsthroughthemarketoutofthevolun-taryinteractionofindividuals,inthiscaseseekingtotradeideasorinformationorgossipratherthangoodsandserviceswithoneanother.Oneoranothermeaningwasattributedtoaword,orwordswereaddedastheneedarose.Grammaticalusagesdevel-opedandwerelatercodifiedintorules.Twopartieswhowanttocommunicatewithoneanotherbothbenefitfromcomingtoacommonagreementaboutthewordstheyuse.Asawiderandwidercircleofpeoplefinditadvantageoustocommunicatewithoneanother,acommonusagespreadsandiscodifiedindic-tionaries.Atnopointisthereanycoercion,anycentralplannerwhohaspowertocommand,thoughinmorerecenttimesgovern-mentschoolsystemshaveplayedanimportantroleinstandardiz-ingusage.Anotherexampleisscientificknowledge.Thestructureofdisciplinesphysics,chemistry,meteorology,philosophy,human-ities,sociology,economicswasnottheproductofadeliberate 26FREETOCHOOSE:APersonalStatementdecisionbyanyone.LikeTopsy,it"justgrowed."Itdidsobecausescholarsfounditconvenient.Itisnotfixed,butchangesasdif-ferentneedsdevelop.Withinanydisciplinethegrowthofthesubjectstrictlyparallelstheeconomicmarketplace.Scholarscooperatewithoneanotherbecausetheyfinditmutuallybeneficial.Theyacceptfromoneanother'sworkwhattheyfinduseful.Theyexchangetheirfind-ingsbyverbalcommunication,bycirculatingunpublishedpapers,bypublishinginjournalsandbooks.Cooperationisworldwide,justasintheeconomicmarket.Theesteemorap-provaloffellowscholarsservesverymuchthesamefunctionthatmonetaryrewarddoesintheeconomicmarket.Thedesiretoearnthatesteem,tohavetheirworkacceptedbytheirpeers,leadsscholarstodirecttheiractivitiesinscientificallyefficientdirections.Thewholebecomesgreaterthanthesumofitsparts,asonescholarbuildsonanother'swork.Hisworkinturnbe-comesthebasisforfurtherdevelopment.Modernphysicsisasmuchaproductofafreemarketinideasasamodernautomobileisaproductofafreemarketingoods.Hereagain,developmentshavebeenmuchinfluenced,particularlyrecently,bygovernmentinvolvement,whichhasaffectedboththeresourcesavailableandthekindsofknowledgethathavebeenindemand.Yetgovern-menthasplayedasecondaryrole.Indeed,oneoftheironiesofthesituationisthatmanyscholarswhohavestronglyfavoredgovernmentcentralplanningofeconomicactivityhaverecognizedveryclearlythedangertoscientificprogressthatwouldbeim-posedbycentralgovernmentplanningofscience,thedangerofhavingprioritiesimposedfromaboveratherthanemergingspon-taneouslyfromthegropingsandexplorationsofindividualscien-tists.Asociety'svalues,itsculture,itssocialconventionsallthesedevelopinthesameway,throughvoluntaryexchange,spon-taneouscooperation,theevolutionofacomplexstructurethroughtrialanderror,acceptanceandrejection.NomonarcheverdecreedthatthekindofmusicthatisenjoyedbyresidentsofCalcutta,forexample,shoulddifferradicallyfromthekindenjoyedbyresidentsofVienna.Thesewidelydifferentmusicalculturesdevelopedwithoutanyone's"planning"themthatway, ThePoweroftheMarket27throughakindofsocialevolutionparallelingbiologicalevolu-tionthough,ofcourse,individualsovereignsorevenelectedgovernmentsmayhaveaffectedthedirectionofsocialevolutionbysponsoringoneoranothermusicianortypeofmusic,justaswealthyprivateindividualsdid.Thestructuresproducedbyvoluntaryexchange,whethertheybelanguageorscientificdiscoveriesormusicalstylesoreconomicsystems,developalifeoftheirown.Theyarecapableoftakingmanydifferentformsunderdifferentcircumstances.Voluntaryexchangecanproduceuniformityinsomerespectscombinedwithdiversityinothers.Itisasubtleprocesswhosegeneralprinciplesofoperationcanfairlyreadilybegraspedbutwhosedetailedresultscanseldombeforeseen.Theseexamplesmaysuggestnotonlythewidescopeforvoluntaryexchangebutalsothebroadmeaningthatmustbeattachedtotheconceptof"self-interest."Narrowpreoccupationwiththeeconomicmarkethasledtoanarrowinterpretationofself-interestasmyopicselfishness,asexclusiveconcernwithim-mediatematerialrewards.Economicshasbeenberatedforallegedlydrawingfar-reachingconclusionsfromawhollyun-realistic"economicman"whoislittlemorethanacalculatingmachine,respondingonlytomonetarystimuli.Thatisagreatmistake.Self-interestisnotmyopicselfishness.Itiswhateveritisthatintereststheparticipants,whatevertheyvalue,whatevergoalstheypursue.Thescientistseekingtoadvancethefrontiersofhisdiscipline,themissionaryseekingtoconvertinfidelstothetruefaith,thephilanthropistseekingtobringcomforttotheneedyallarepursuingtheirinterests,astheyseethem,astheyjudgethembytheirownvalues.THEROLEOFGOVERNMENTWheredoesgovernmententerintothepicture?Tosomeextentgovernmentisaformofvoluntarycooperation,awayinwhichpeoplechoosetoachievesomeoftheirobjectivesthroughgov-ernmentalentitiesbecausetheybelievethatisthemosteffectivemeansofachievingthem.Theclearestexampleislocalgovernmentunderconditions 28FREETOCHOOSE:APersonalStatementwherepeoplearefreetochoosewheretolive.Youmaydecidetoliveinonecommunityratherthananotherpartlyonthebasisofthekindofservicesitsgovernmentoffers.Ifitengagesinactivi-tiesyouobjecttoorareunwillingtopayfor,andthesemorethanbalancetheactivitiesyoufavorandarewillingtopayfor,youcanvotewithyourfeetbymovingelsewhere.Thereiscom-petition,limitedbutreal,solongasthereareavailablealterna-tives.Butgovernmentismorethanthat.Itisalsotheagencythatiswidelyregardedashavingamonopolyonthelegitimateuseofforceorthethreatofforceasthemeansthroughwhichsomeofuscanlegitimatelyimposerestraintsthroughforceuponothersofus.Theroleofgovernmentinthatmorebasicsensehaschangeddrasticallyovertimeinmostsocietiesandhasdifferedwidelyamongsocietiesatanygiventime.MuchoftherestofthisbookdealswithhowitsrolehaschangedintheUnitedStatesinrecentdecades,andwhattheeffectsofitsactivitieshavebeen.Inthisinitialsketchwewanttoconsideraverydifferentques-tion.Inasocietywhoseparticipantsdesiretoachievethegreatestpossiblefreedomtochooseasindividuals,asfamilies,asmem-bersofvoluntarygroups,ascitizensofanorganizedgovernment,whatroleshouldbeassignedtogovernment?ItisnoteasytoimproveontheanswerthatAdamSmithgavetothisquestiontwohundredyearsago:Allsystemseitherofpreferenceorofrestraint,therefore,beingthuscompletelytakenaway,theobviousandsimplesystemofnaturallibertyestablishesitselfofitsownaccord.Everyman,aslongashedoesnotviolatethelawsofjustice,isleftperfectlyfreetopursuehisowninteresthisownway,andtobringbothhisindustryandcapitalintocompetitionwiththoseofanyotherman,ororderofmen.Thesovereigniscompletelydischargedfromaduty,intheattemptingtoperformwhichhemustalwaysbeexposedtoinnumerabledelusions,andfortheproperperformanceofwhichnohumanwisdomorknowledgecouldeverbesufficient;thedutyofsuperintendingtheindustryofprivatepeople,andofdirectingittowardstheemploy-mentsmostsuitabletotheinterestofthesociety.Accordingtothesystemofnaturalliberty,thesovereignhasonlythreedutiestoattendto;threedutiesofgreatimportance,indeed,butplainandintelligibletocommonunderstandings:first,thedutyofprotectingthesocietyfromtheviolenceandinvasionofotherindependentsocieties; ThePoweroftheMarket29secondly,thedutyofprotecting,asfaraspossible,everymemberofthesocietyfromtheinjusticeoroppressionofeveryothermemberofit,orthedutyofestablishinganexactadministrationofjustice;and,thirdly,thedutyoferectingandmaintainingcertainpublicworksandcertainpublicinstitutions,whichitcanneverbefortheinterestofanyindividual,orsmallnumberofindividuals,toerectandmaintain;becausetheprofitcouldneverrepaytheexpencetoanyindividualorsmallnumberofindividuals,thoughitmayfre-3quentlydomuchmorethanrepayittoagreatsociety.Thefirsttwodutiesareclearandstraightforward:theprotectionofindividualsinthesocietyfromcoercionwhetheritcomesfromoutsideorfromtheirfellowcitizens.Unlessthereissuchprotec-tion,wearenotreallyfreetochoose.Thearmedrobber's"Yourmoneyoryourlife"offersmeachoice,butnoonewouldde-scribeitasafreechoiceorthesubsequentexchangeasvoluntary.Ofcourse,asweshallseerepeatedlythroughoutthisbook,itisonethingtostatethepurposethataninstitution,particularlyagovernmentalinstitution,"ought"toserve;itisquiteanothertodescribethepurposestheinstitutionactuallyserves.Thein-tentionsofthepersonsresponsibleforsettinguptheinstitutionandofthepersonswhooperateitoftendiffersharply.Equallyimportant,theresultsachievedoftendifferwidelyfromthosein-tended.Militaryandpoliceforcesarerequiredtopreventcoercionfromwithoutandwithin.Theydonotalwayssucceedandthepowertheypossessissometimesusedforverydifferentpurposes.Amajorprobleminachievingandpreservingafreesocietyispreciselyhowtoassurethatcoercivepowersgrantedtogovern-mentinordertopreservefreedomarelimitedtothatfunctionandarekeptfrombecomingathreattofreedom.ThefoundersofourcountrywrestledwiththatproblemindrawinguptheConstitu-tion.Wehavetendedtoneglectit.AdamSmith'sseconddutygoesbeyondthenarrowpolicefunc-tionofprotectingpeoplefromphysicalcoercion;itincludes"anexactadministrationofjustice."Novoluntaryexchangethatisatallcomplicatedorextendsoveranyconsiderableperiodoftimecanbefreefromambiguity.Thereisnotenoughfineprintintheworldtospecifyinadvanceeverycontingencythatmightariseandtodescribepreciselytheobligationsofthevariouspartiesto 30FREETOCHOOSE:APersonalStatementtheexchangeineachcase.Theremustbesomewaytomediatedisputes.Suchmediationitselfcanbevoluntaryandneednotinvolvegovernment.IntheUnitedStatestoday,mostdisagree-mentsthatariseinconnectionwithcommercialcontractsaresettledbyresorttoprivatearbitratorschosenbyaprocedurespecifiedinadvance.Inresponsetothisdemandanextensiveprivatejudicialsystemhasgrownup.Butthecourtoflastresortisprovidedbythegovernmentaljudicialsystem.Thisroleofgovernmentalsoincludesfacilitatingvoluntaryexchangesbyadoptinggeneralrulestherulesoftheeconomicandsocialgamethatthecitizensofafreesocietyplay.Themostobviousexampleisthemeaningtobeattachedtoprivateprop-erty.Iownahouse.Areyou"trespassing"onmyprivatepropertyifyouflyyourprivateairplanetenfeetovermyroof?Onethousandfeet?Thirtythousandfeet?Thereisnothing"natural"aboutwheremypropertyrightsendandyoursbegin.Themajorwaythatsocietyhascometoagreeontherulesofpropertyisthroughthegrowthofcommonlaw,thoughmorerecentlylegisla-tionhasplayedanincreasingrole.AdamSmith'sthirddutyraisesthemosttroublesomeissues.Hehimselfregardeditashavinganarrowapplication.Ithassincebeenusedtojustifyanextremelywiderangeofgovern-mentactivities.Inourviewitdescribesavaliddutyofagovern-mentdirectedtopreservingandstrengtheningafreesociety;butitcanalsobeinterpretedtojustifyunlimitedextensionsofgov-ernmentpower.Thevalidelementarisesbecauseofthecostofproducingsomegoodsorservicesthroughstrictlyvoluntaryexchanges.TotakeonesimpleexamplesuggesteddirectlybySmith'sdescriptionofthethirdduty:citystreetsandgeneral-accesshighwayscouldbeprovidedbyprivatevoluntaryexchange,thecostsbeingpaidforbychargingtolls.Butthecostsofcollectingthetollswouldoftenbeverylargecomparedtothecostofbuildingandmain-tainingthestreetsorhighways.Thisisa"publicwork"thatitmightnot"befortheinterestofanyindividual...toerectandmaintain...thoughit"mightbeworthwhilefor"agreatsociety."Amoresubtleexampleinvolveseffectson"thirdparties," ThePoweroftheMarket31peoplewhoarenotpartiestotheparticularexchangetheclassic"smokenuisance"case.Yourfurnacepoursforthsootysmokethatdirtiesathirdparty'sshirtcollar.Youhaveunintentionallyimposedcostsonathirdparty.Hewouldbewillingtoletyoudirtyhiscollarforapricebutitissimplynotfeasibleforyoutoidentifyallofthepeoplewhomyouaffectorforthemtodis-coverwhohasdirtiedtheircollarsandtorequireyoutoindemnifythemindividuallyorreachindividualagreementswiththem.Theeffectofyouractionsonthirdpartiesmaybetoconferbenefitsratherthanimposecosts.Youlandscapeyourhousebeautifully,andallpassersbyenjoythesight.Theywouldbewillingtopaysomethingfortheprivilegebutitisnotfeasibletochargethemforlookingatyourlovelyflowers.Tolapseintotechnicaljargon,thereisa"marketfailure"be-causeof"external"or"neighborhood"effectsforwhichitisnotfeasible(i.e.,wouldcosttoomuch)tocompensateorchargethepeopleaffected;thirdpartieshavehadinvoluntaryexchangesimposedonthem.Almosteverythingwedohassomethird-partyeffects,how-eversmallandhoweverremote.Inconsequence,AdamSmith'sthirddutymayatfirstblushappeartojustifyalmostanyproposedgovernmentmeasure.Butthereisafallacy.Governmentmeasuresalsohavethird-partyeffects."Governmentfailure"nolessthan"marketfailure"arisesfrom"external"or"neighborhood"effects.Andifsucheffectsareimportantforamarkettransaction,theyarelikelyalsotobeimportantforgovernmentmeasuresintendedtocorrectthe"marketfailure."Theprimarysourceofsignificantthird-partyeffectsofprivateactionsisthedifficultyofidentifyingtheexternalcostsorbenefits.Whenitiseasytoidentifywhoishurtorwhoisbenefited,andbyhowmuch,itisfairlystraight-forwardtoreplaceinvoluntarybyvoluntaryexchange,oratleasttorequireindividualcompensation.Ifyourcarhitssomeoneelse'sbecauseofyournegligence,youcanbemadetopayhimfordamageseventhoughtheexchangewasinvoluntary.Ifitwereeasytoknowwhosecollarsweregoingtobedirtied,itwouldbepossibleforyoutocompensatethepeopleaffected,oralterna-tively,forthemtopayyoutopouroutlesssmoke.Ifitisdifficultforprivatepartiestoidentifywhoimposescosts 32FREETOCHOOSE:APersonalStatementorbenefitsonwhom,itisdifficultforgovernmenttodoso.Asaresultagovernmentattempttorectifythesituationmayverywellendupmakingmattersworseratherthanbetterimposingcostsoninnocentthirdpartiesorconferringbenefitsonluckybystanders.Tofinanceitsactivitiesitmustcollecttaxes,whichthemselvesaffectwhatthetaxpayersdostillanotherthird-partyeffect.Inaddition,everyaccretionofgovernmentpowerforwhateverpurposeincreasesthedangerthatgovernment,insteadofservingthegreatmajorityofitscitizens,willbecomeameanswherebysomeofitscitizenscantakeadvantageofothers.Everygovernmentmeasurebears,asitwere,asmokestackonitsback.Voluntaryarrangementscanallowforthird-partyeffectstoamuchgreaterextentthanmayatfirstappear.Totakeatrivialexample,tippingatrestaurantsisasocialcustomthatleadsyoutoassurebetterserviceforpeopleyoumaynotknoworevermeetand,inreturn,beassuredbetterservicebytheactionsofstillanothergroupofanonymousthirdparties.Nonetheless,third-partyeffectsofprivateactionsdooccurthataresufficientlyim-portanttojustifygovernmentaction.ThelessontobedrawnfromthemisuseofSmith'sthirddutyisnotthatgovernmentinterven-tionisneverjustified,butratherthattheburdenofproofshouldbeonitsproponents.Weshoulddevelopthepracticeofexaminingboththebenefitsandthecostsofproposedgovernmentinterven-tionsandrequireaveryclearbalanceofbenefitsovercostsbe-foreadoptingthem.Thiscourseofactionisrecommendednotonlybythedifficultyofassessingthehiddencostsofgovernmentinterventionbutalsobyanotherconsideration.Experienceshowsthatoncegovernmentundertakesanactivity,itisseldomter-minated.Theactivitymaynotliveuptoexpectationbutthatismorelikelytoleadtoitsexpansion,toitsbeinggrantedalargerbudget,thantoitscurtailmentorabolition.AfourthdutyofgovernmentthatAdamSmithdidnotex-plicitlymentionisthedutytoprotectmembersofthecommunitywhocannotberegardedas"responsible"individuals.LikeAdamSmith'sthirdduty,thisone,too,issusceptibleofgreatabuse.Yetitcannotbeavoided.Freedomisatenableobjectiveonlyforresponsibleindividuals.Wedonotbelieveinfreedomformadmenorchildren.Wemustsomehowdrawalinebetweenresponsibleindividualsandothers, ThePoweroftheMarket33yetdoingsointroducesafundamentalambiguityintoourulti-mateobjectiveoffreedom.Wecannotcategoricallyrejectpater-nalismforthosewhomweconsiderasnotresponsible.Forchildrenweassignresponsibilityinthefirstinstancetoparents.Thefamily,ratherthantheindividual,hasalwaysbeenandremainstodaythebasicbuildingblockofoursociety,thoughitsholdhasclearlybeenweakeningoneofthemostunfortunateconsequencesofthegrowthofgovernmentpaternalism.Yettheassignmentofresponsibilityforchildrentotheirparentsislargelyamatterofexpediencyratherthanprinciple.Webelieve,andwithgoodreason,thatparentshavemoreinterestintheirchildrenthananyoneelseandcanbereliedontoprotectthemandtoassuretheirdevelopmentintoresponsibleadults.However,wedonotbelieveintherightoftheparentstodowhatevertheywillwiththeirchildrentobeatthem,murderthem,orsellthemintoslavery.Childrenareresponsibleindividualsinembryo.Theyhaveultimaterightsoftheirownandarenotsimplytheplay-thingsoftheirparents.AdamSmith'sthreeduties,orourfourdutiesofgovernment,areindeed"ofgreatimportance,"buttheyarefarless"plainandintelligibletocommonunderstandings"thanhesupposed.Thoughwecannotdecidethedesirabilityorundesirabilityofanyactualorproposedgovernmentinterventionbymechanicalreferencetooneoranotherofthem,theyprovideasetofprinciplesthatwecanuseincastingupabalancesheetofprosandcons.Evenontheloosestinterpretation,theyruleoutmuchexistinggovern-mentinterventionallthose"systemseitherofpreferenceorofrestraint"thatAdamSmithfoughtagainst,thatweresubsequentlydestroyed,buthavesincereappearedintheformoftoday'stariffs,governmentallyfixedpricesandwages,restrictionsonentryintovariousoccupations,andnumerousotherdeparturesfromhis"simplesystemofnaturalliberty."(Manyofthesearediscussedinlaterchapters.)LIMITEDGOVERNMENTINPRACTICEIntoday'sworldbiggovernmentseemspervasive,Wemaywellaskwhetherthereexistanycontemporaneousexamplesofsocie-tiesthatrelyprimarilyonvoluntaryexchangethroughthemarket 34FREETOCHOOSE:APersonalStatementtoorganizetheireconomicactivityandinwhichgovernmentislimitedtoourfourduties.PerhapsthebestexampleisHongKongaspeckoflandnexttomainlandChinacontaininglessthan400squaremileswithapopulationofroughly4.5millionpeople.Thedensityofpopula-tionisalmostunbelievable14timesasmanypeoplepersquaremileasinJapan,185timesasmanyasintheUnitedStates.YettheyenjoyoneofthehigheststandardsoflivinginallofAsiasecondonlytoJapanandperhapsSingapore.HongKonghasnotariffsorotherrestraintsoninternationaltrade(exceptforafew"voluntary"restraintsimposedbytheUnitedStatesandsomeothermajorcountries).Ithasnogov-ernmentdirectionofeconomicactivity,nominimumwagelaws,nofixingofprices.Theresidentsarefreetobuyfromwhomtheywant,toselltowhomtheywant,toinvesthowevertheywant,tohirewhomtheywant,toworkforwhomtheywant.Governmentplaysanimportantrolethatislimitedprimarilytoourfourdutiesinterpretedrathernarrowly.Itenforceslawandorder,providesameansforformulatingtherulesofconduct,adjudicatesdisputes,facilitatestransportationandcommunica-tion,andsupervisestheissuanceofcurrency.IthasprovidedpublichousingforarrivingrefugeesfromChina.Thoughgovern-mentspendinghasgrownastheeconomyhasgrown,itremainsamongthelowestintheworldasafractionoftheincomeofthepeople.Asaresult,lowtaxespreserveincentives.Businessmencanreapthebenefitsoftheirsuccessbutmustalsobearthecostsoftheirmistakes.ItissomewhatironicthatHongKong,aCrowncolonyofGreatBritain,shouldbethemodernexemplaroffreemarketsandlimitedgovernment.TheBritishofficialswhogovernithaveenabledHongKongtoflourishbyfollowingpoliciesradicallyatvariancewiththewelfarestatepoliciesthathavebeenadoptedbythemothercountry.ThoughHongKongisanexcellentcurrentexample,itisbynomeansthemostimportantexampleoflimitedgovernmentandfreemarketsocietiesinpractice.Forthiswemustgobackintimetothenineteenthcentury.Oneexample,JapaninthefirstthirtyyearsaftertheMeijiRestorationin1867,weleaveforChapter2. ThePoweroftheMarket35TwootherexamplesareGreatBritainandtheUnitedStates.AdamSmith'sWealthofNationswasoneoftheearlyblowsinthebattletoendgovernmentrestrictionsonindustryandtrade.Thefinalvictoryinthatbattlecameseventyyearslater,in1846,withtherepealoftheso-calledCornLawslawsthatimposedtariffsandotherrestrictionsontheimportationofwheatandothergrains,referredtocollectivelyas"corn."Thatusheredinthree-quartersofacenturyofcompletefreetradelastinguntiltheoutbreakofWorldWarIandcompletedatransitionthathadbegundecadesearliertoahighlylimitedgovernment,onethatlefteveryresidentofBritain,inAdamSmith'swordsquotedearlier,"perfectlyfreetopursuehisowninteresthisownway,andtobringbothhisindustryandcapitalintocompetitionwiththoseofanyotherman,ororderofmen."Economicgrowthwasrapid.Thestandardoflifeoftheordi-narycitizenimproveddramaticallymakingallthemorevisibletheremainingareasofpovertyandmiseryportrayedsomovinglybyDickensandothercontemporarynovelists.Populationin-creasedalongwiththestandardoflife.Britaingrewinpowerandinfluencearoundtheworld.Allthiswhilegovernmentspendingfellasafractionofnationalincomefromclosetoone-quarterofthenationalincomeearlyinthenineteenthcenturytoaboutone-tenthofnationalincomeatthetimeofQueenVictoria'sJubileein1897,whenBritainwasattheveryapexofitspowerandglory.TheUnitedStatesisanotherstrikingexample.Thereweretariffs,justifiedbyAlexanderHamiltoninhisfamousReportonManufacturesinwhichheattemptedwithadecidedlackofsuccesstorefuteAdamSmith'sargumentsinfavoroffreetrade.Buttheyweremodest,bymodernstandards,andfewothergovernmentrestrictionsimpededfreetradeathomeorabroad.UntilafterWorldWarIimmigrationwasalmostcompletelyfree(therewererestrictionsonimmigrationfromtheOrient).AstheStatueofLibertyinscriptionhasit:Givemeyourtired,yourpoor,Yourhuddledmassesyearningtobreathefree,Thewretchedrefuseofyourteemingshore.Sendthese,thehomeless,tempest-tossedtome:Iliftmylampbesidethegoldendoor. 36FREETOCHOOSE:APersonalStatementTheycamebythemillions,andbythemillionstheywereab-sorbed.Theyprosperedbecausetheywerelefttotheirowndevices.AmythhasgrownupabouttheUnitedStatesthatpaintsthenineteenthcenturyastheeraoftherobberbaron,ofrugged,unrestrainedindividualism.Heartlessmonopolycapitalistsal-legedlyexploitedthepoor,encouragedimmigration,andthenfleecedtheimmigrantsunmercifully.WallStreetispicturedasconningMainStreet,asbleedingthesturdyfarmersintheMiddleWest,whosurviveddespitethewidespreaddistressandmiseryinflictedonthem.Therealitywasverydifferent.Immigrantskeptcoming.Theearlyonesmighthavebeenfooled,butitisinconceivablethatmillionskeptcomingtotheUnitedStatesdecadeafterdecadetobeexploited.Theycamebecausethehopesofthosewhohadprecededthemwerelargelyrealized.ThestreetsofNewYorkwerenotpavedwithgold,buthardwork,thrift,andenterprisebroughtrewardsthatwerenotevenimaginableintheOldWorld.Thenewcomersspreadfromeasttowest.Astheyspread,citiessprangup,evermorelandwasbroughtintocultivation.Thecountrygrewmoreprosperousandmoreproductive,andtheim-migrantssharedintheprosperity.Iffarmerswereexploited,whydidtheirnumberincrease?Thepricesoffarmproductsdiddecline.Butthatwasasignofsuc-cess,notoffailure,reflectingthedevelopmentofmachinery,thebringingundercultivationofmoreland,andimprovementsincommunication,allofwhichledtoarapidgrowthinfarmout-put.Thefinalproofisthatthepriceoffarmlandrosesteadilyhardlyasignthatfarmingwasadepressedindustry!Thechargeofheartlessness,epitomizedintheremarkthatWilliamH.Vanderbilt,arailroadtycoon,issaidtohavemadetoaninquiringreporter,"Thepublicbedamned,"isbeliedbythefloweringofcharitableactivityintheUnitedStatesinthenineteenthcentury.Privatelyfinancedschoolsandcollegesmul-tiplied;foreignmissionaryactivityexploded;nonprofitprivatehospitals,orphanages,andnumerousotherinstitutionsspranguplikeweeds.Almosteverycharitableorpublicserviceorganiza-tion,fromtheSocietyforthePreventionofCrueltytoAnimals ThePoweroftheMarket37totheYMCAandYWCA,fromtheIndianRightsAssociationtotheSalvationArmy,datesfromthatperiod.Voluntarycoopera-tionisnolesseffectiveinorganizingcharitableactivitythaninorganizingproductionforprofit.Thecharitableactivitywasmatchedbyaburstofculturalactivityartmuseums,operahouses,symphonies,museums,pub-liclibrariesaroseinbigcitiesandfrontiertownsalike.Thesizeofgovernmentspendingisonemeasureofgovern-ment'srole.Majorwarsaside,governmentspendingfrom1800to1929didnotexceedabout12percentofthenationalincome.Two-thirdsofthatwasspentbystateandlocalgovernments,mostlyforschoolsandroads.Aslateas1928,federalgovern-mentspendingamountedtoabout3percentofthenationalin-come.ThesuccessoftheUnitedStatesisoftenattributedtoitsgenerousnaturalresourcesandwideopenspaces.Theycertainlyplayedapartbutthen,iftheywerecrucial,whatexplainsthesuccessofnineteenth-centuryGreatBritainandJapanortwen-tieth-centuryHongKong?Itisoftenmaintainedthatwhilealet-alone,limitedgovern-mentpolicywasfeasibleinsparselysettlednineteenth-centuryAmerica,governmentmustplayafarlarger,indeeddominant,roleinamodernurbanizedandindustrialsociety.OnehourinHongKongwilldisposeofthatview.Oursocietyiswhatwemakeit.Wecanshapeourinstitutions.Physicalandhumancharacteristicslimitthealternativesavailabletous.Butnonepreventsus,ifwewill,frombuildingasocietythatreliesprimarilyonvoluntarycooperationtoorganizebotheco-nomicandotheractivity,asocietythatpreservesandexpandshumanfreedom,thatkeepsgovernmentinitsplace,keepingitourservantandnotlettingitbecomeourmaster. CHAPTER2TheTyrannyofControlsIndiscussingtariffsandotherrestrictionsoninternationaltradeinhisWealthofNations,AdamSmithwrote:Whatisprudenceintheconductofeveryprivatefamily,canscarcebefollyinthatofagreatkingdom.Ifaforeigncountrycansupplyuswithacommoditycheaperthanweourselvescanmakeit,betterbuyitofthemwithsomepartoftheproduceofourownindustry,employedinawayinwhichwehavesomeadvantage....Ineverycountry,italwaysisandmustbetheinterestofthegreatbodyofthepeopletobuywhatevertheywantofthosewhosellitcheapest.Thepropositionissoverymanifest,thatitseemsridiculoustotakeanypainstoproveit;norcoulditeverhavebeencalledinquestion,hadnottheinterestedsophistryofmerchantsandmanufacturerscon-foundedthecommonsenseofmankind.Theirinterestis,inthisirespect,directlyoppositetothatofthegreatbodyofthepeople.Thesewordsareastruetodayastheywerethen.Indomesticaswellasforeigntrade,itisintheinterestof"thegreatbodyofthepeople"tobuyfromthecheapestsourceandselltothedearest.Yet"interestedsophistry"hasledtoabewilderingproliferationofrestrictionsonwhatwemaybuyandsell,fromwhomwemaybuyandtowhomwemaysellandonwhatterms,whomwemayem-ployandwhomwemayworkfor,wherewemaylive,andwhatwemayeatanddrink.AdamSmithpointedto"theinterestedsophistryofmerchantsandmanufacturers."Theymayhavebeenthechiefculpritsinhisday.Todaytheyhavemuchcompany.Indeed,thereishardlyoneofuswhoisnotengagedin"interestedsophistry"inoneareaoranother.InPogo'simmortalwords,"Wehavemettheenemyandtheyisus."Werailagainst"specialinterests"exceptwhenthe"specialinterest"happenstobeourown.Eachofusknowsthatwhatisgoodforhimisgoodforthecountrysoour"specialinterest"isdifferent.Theendresultisamazeofrestraintsandrestrictionsthatmakesalmostallofusworseoffthanwewould38 TheTyrannyofControls39beiftheywerealleliminated.Welosefarmorefrommeasuresthatserveother"specialinterests"thanwegainfrommeasuresthatserveour"specialinterest."Theclearestexampleisininternationaltrade.Thegainstosomeproducersfromtariffsandotherrestrictionsaremorethanoffsetbythelosstootherproducersandespeciallytoconsumersingeneral.Freetradewouldnotonlypromoteourmaterialwel-fare,itwouldalsofosterpeaceandharmonyamongnationsandspurdomesticcompetition.Controlsonforeigntradeextendtodomestictrade.Theybe-comeintertwinedwitheveryaspectofeconomicactivity.Suchcontrolshaveoftenbeendefended,particularlyforunderdevel-opedcountries,asessentialtoprovidedevelopmentandprogress.AcomparisonoftheexperienceofJapanaftertheMeijiRestora-tionin1867andofIndiaafterindependencein1947teststhisview.Itsuggests,asdootherexamples,thatfreetradeathomeandabroadisthebestwaythatapoorcountrycanpromotethewell-beingofitscitizens.TheeconomiccontrolsthathaveproliferatedintheUnitedStatesinrecentdecadeshavenotonlyrestrictedourfreedomtouseoureconomicresources,theyhavealsoaffectedourfreedomofspeech,ofpress,andofreligion.INTERNATIONALTRADEItisoftensaidthatbadeconomicpolicyreflectsdisagreementamongtheexperts;thatifalleconomistsgavethesameadvice,economicpolicywouldbegood.Economistsoftendodisagree,butthathasnotbeentruewithrespecttointernationaltrade.EversinceAdamSmiththerehasbeenvirtualunanimityamongeconomists,whatevertheirideologicalpositiononotherissues,thatinternationalfreetradeisinthebestinterestofthetradingcountriesandoftheworld.Yettariffshavebeentherule.TheonlymajorexceptionsarenearlyacenturyoffreetradeinGreatBritainaftertherepealoftheCornLawsin1846,thirtyyearsoffreetradeinJapanaftertheMeijiRestoration,andfreetradeinHongKongtoday.TheUnitedStateshadtariffsthroughoutthenineteenthcenturyandtheywereraisedstillhigherinthe 40FREETOCHOOSE:APersonalStatementtwentiethcentury,especiallybytheSmoot-Hawleytariffbillof1930,whichsomescholarsregardaspartlyresponsiblefortheseverityofthesubsequentdepression.Tariffshavesincebeenre-ducedbyrepeatedinternationalagreements,buttheyremainhigh,probablyhigherthaninthenineteenthcentury,thoughthevastchangesinthekindsofitemsenteringinternationaltrademakeaprecisecomparisonimpossible.Today,asalways,thereismuchsupportfortariffseuphemis-ticallylabeled"protection,"agoodlabelforabadcause.Pro-ducersofsteelandsteelworkers'unionspressforrestrictionsonsteelimportsfromJapan.ProducersofTVsetsandtheirworkerslobbyfor"voluntaryagreements"tolimitimportsofTVsetsorcomponentsfromJapan,Taiwan,orHongKong.Producersoftextiles,shoes,cattle,sugartheyandmyriadotherscomplainabout"unfair"competitionfromabroadanddemandthatgov-ernmentdosomethingto"protect"them.Ofcourse,nogroupmakesitsclaimonthebasisofnakedself-interest.Everygroupspeaksofthe""generalinterest,oftheneedtopreservejobsortopromotenationalsecurity.Theneedtostrengthenthedollarvis-a-visthemarkortheyenhasmorerecentlyjoinedthetradi-tionalrationalizationsforrestrictionsonimports.TheEconomicCaseforFreeTradeOnevoicethatishardlyeverraisedistheconsumer's.So-calledconsumerspecialinterestgroupshaveproliferatedinrecentyears.Butyouwillsearchthenewsmedia,ortherecordsofcongres-sionalhearingsinvain,tofindanyrecordoftheirlaunchingaconcentratedattackontariffsorotherrestrictionsonimports,eventhoughconsumersaremajorvictimsofsuchmeasures.Theself-styledconsumeradvocateshaveotherconcernsasweshallseeinChapter7.Theindividualconsumer'svoiceisdrownedoutinthecacoph-onyofthe"interestedsophistryofmerchantsandmanufacturers"andtheiremployees.Theresultisaseriousdistortionoftheissue.Forexample,thesupportersoftariffstreatitasself-evidentthatthecreationofjobsisadesirableend,inandofitself,regardlessofwhatthepersonsemployeddo.Thatisclearlywrong.Ifallwe TheTyrannyofControls41wantarejobs,wecancreateanynumberforexample,havepeopledigholesandthenfillthemupagain,orperformotheruselesstasks.Workissometimesitsownreward.Mostly,however,itisthepricewepaytogetthethingswewant.Ourrealobjectiveisnotjustjobsbutproductivejobsjobsthatwillmeanmoregoodsandservicestoconsume.Anotherfallacyseldomcontradictedisthatexportsaregood,importsbad.Thetruthisverydifferent.Wecannoteat,wear,orenjoythegoodswesendabroad.WeeatbananasfromCentralAmerica,wearItalianshoes,driveGermanautomobiles,andenjoyprogramsweseeonourJapaneseTVsets.Ourgainfromforeigntradeiswhatweimport.Exportsarethepricewepaytogetimports.AsAdamSmithsawsoclearly,thecitizensofana-tionbenefitfromgettingaslargeavolumeofimportsaspossibleinreturnforitsexports,orequivalently,fromexportingaslittleaspossibletopayforitsimports.Themisleadingterminologyweusereflectstheseerroneousideas."Protection"reallymeansexploitingtheconsumer.A"fa-vorablebalanceoftrade"reallymeansexportingmorethanweimport,sendingabroadgoodsofgreatertotalvaluethanthegoodswegetfromabroad.Inyourprivatehousehold,youwouldsurelyprefertopaylessformoreratherthantheotherwayaround,yetthatwouldbetermedan"unfavorablebalanceofpayments"inforeigntrade.TheargumentinfavoroftariffsthathasthegreatestemotionalappealtothepublicatlargeistheallegedneedtoprotectthehighstandardoflivingofAmericanworkersfromthe"unfair"com-petitionofworkersinJapanorKoreaorHongKongwhoarewillingtoworkforamuchlowerwage.Whatiswrongwiththisargument?Don'twewanttoprotectthehighstandardoflivingofourpeople?Thefallacyinthisargumentisthelooseuseoftheterms"high"wageand"low"wage.Whatdohighandlowwagesmean?Americanworkersarepaidindollars;Japaneseworkersarepaidinyen.Howdowecomparewagesindollarswithwagesinyen?Howmanyyenequaladollar?Whatdeterminesthatexchangerate?Consideranextremecase.Supposethat,tobeginwith,360yen 42FREETOCHOOSE:APersonalStatementequaladollar.Atthisexchangerate,theactualrateofexchangeformanyyears,supposethattheJapanesecanproduceandselleverythingforfewerdollarsthanwecanintheUnitedStatesTVsets,automobiles,steel,andevensoybeans,wheat,milk,andicecream.Ifwehadfreeinternationaltrade,wewouldtrytobuyallourgoodsfromJapan.ThiswouldseemtobetheextremehorrorstoryofthekinddepictedbydefendersoftariffswewouldbefloodedwithJapanesegoodsandcouldsellthemnoth-ing.Beforethrowingupyourhandsinhorror,carrytheanalysisonestepfurther.HowwouldwepaytheJapanese?Wewouldofferthemdollarbills.Whatwouldtheydowiththedollarbills?Wehaveassumedthatat360yentothedollareverythingischeaperinJapan,sothereisnothingintheU.S.marketthattheywouldwanttobuy.IftheJapaneseexporterswerewillingtoburnorburythedollarbills,thatwouldbewonderfulforus.Wewouldgetallkindsofgoodsforgreenpiecesofpaperthatwecanpro-duceingreatabundanceandverycheaply.Wewouldhavethemostmarvelousexportindustryconceivable.Ofcourse,theJapanesewouldnotinfactsellususefulgoodsinordertogetuselesspiecesofpapertoburyorburn.Likeus,theywantt.1getsomethingrealinreturnfortheirwork.IfallgoodswerecheaperinJapanthanintheUnitedStatesat360yentothedollar,theexporterswouldtrytogetridoftheirdollars,wouldtrytosellthemfor360yentothedollarinordertobuythecheaperJapanesegoods.Butwhowouldbewillingtobuythedollars?WhatistruefortheJapaneseexporteristrueforevery-oneinJapan.Noonewillbewillingtogive360yeninexchangeforonedollarif360yenwillbuymoreofeverythinginJapanthanonedollarwillbuyintheUnitedStates.Theexporters,ondiscoveringthatnoonewillbuytheirdollarsat360yen,willoffertotakefeweryenforadollar.Thepriceofthedollarintermsofyenwillgodownto300yenforadollar,or250yen,or200yen.Puttheotherwayaround,itwilltakemoreandmoredollarstobuyagivennumberofJapaneseyen.Japanesegoodsarepricedinyen,sotheirpriceindollarswillgoup.Conversely,U.S.goodsarepricedindollars,sothemoredollarstheJapanesegetforagivennumberofyen,thecheaperU.S.goodsbecometotheJap-aneseintermsofyen. TheTyrannyofControls43Thepriceofthedollarintermsofyenwouldfalluntil,ontheaverage,thedollarvalueofgoodsthattheJapanesebuyfromtheUnitedStatesroughlyequaledthedollarvalueofgoodsthattheUnitedStatesbuysfromJapan.Atthatpriceeverybodywhowantedtobuyyenfordollarswouldfindsomeonewhowaswill-ingtosellhimyenfordollars.Theactualsituationis,ofcourse,morecomplicatedthanthishypotheticalexample.Manynations,andnotmerelytheUnitedStatesandJapan,areengagedintrade,andthetradeoftentakesroundaboutdirections.TheJapanesemayspendsomeofthedol-larstheyearninBrazil,theBraziliansinturnmayspendthosedollarsinGermany,andtheGermansintheUnitedStates,andsooninendlesscomplexity.However,theprincipleisthesame.People,inwhatevercountry,wantdollarsprimarilytobuyusefulitems,nottohoard.Anothercomplicationisthatdollarsandyenareusednotonlytobuygoodsandservicesfromothercountriesbutalsotoinvestandmakegifts.ThroughoutthenineteenthcenturytheUnitedStateshadabalanceofpaymentsdeficitalmosteveryyearan"unfavorable"balanceoftradethatwasgoodforeveryone.For-eignerswantedtoinvestcapitalintheUnitedStates.TheBritish,forexample,wereproducinggoodsandsendingthemtousinreturnforpiecesofpapernotdollarbills,butbondspromisingtopaybackasumofmoneyatalatertimeplusinterest.TheBritishwerewillingtosendustheirgoodsbecausetheyregardedthosebondsasagoodinvestment.Ontheaverage,theywereright.Theyreceivedahigherreturnontheirsavingsthanwasavailableinanyotherway.We,inturn,benefitedbyforeignin-vestmentthatenabledustodevelopmorerapidlythanwecouldhavedevelopedifwehadbeenforcedtorelysolelyonourownsavings.Inthetwentiethcenturythesituationwasreversed.U.S.citizensfoundthattheycouldgetahigherreturnontheircapitalbyin-vestingabroadthantheycouldathome.AsaresulttheUnitedStatessentgoodsabroadinreturnforevidenceofdebtbondsandthelike.AfterWorldWarII,theU.S.governmentmadegiftsabroadintheformoftheMarshallPlanandotherforeignaidprograms.Wesentgoodsandservicesabroadasanexpressionofourbeliefthatweweretherebycontributingtoamorepeaceful 44FREETOCHOOSE:APersonalStatementworld.Thesegovernmentgiftssupplementedprivategiftsfromcharitablegroups,churchessupportingmissionaries,individualscontributingtothesupportofrelativesabroad,andsoon.Noneofthesecomplicationsalterstheconclusionsuggestedbythehypotheticalextremecase.Intherealworld,aswellasinthathypotheticalworld,therecanbenobalanceofpaymentsproblemsolongasthepriceofthedollarintermsoftheyenorthemarkorthefrancisdeterminedinafreemarketbyvoluntarytransac-tions.Itissimplynottruethathigh-wageAmericanworkersare,asagroup,threatenedby"unfair"competitionfromlow-wageforeignworkers.Ofcourse,particularworkersmaybeharmedifaneworimprovedproductisdevelopedabroad,orifforeignpro-ducersbecomeabletoproducesuchproductsmorecheaply.ButthatisnodifferentfromtheeffectonaparticulargroupofworkersofotherAmericanfirms'developingneworimprovedproductsordiscoveringhowtoproduceatlowercosts.Thatissimplymar-ketcompetitioninpractice,themajorsourceofthehighstandardoflifeoftheAmericanworker.Ifwewanttobenefitfromavital,dynamic,innovativeeconomicsystem,wemustaccepttheneedformobilityandadjustment.Itmaybedesirabletoeasetheseadjustments,andwehaveadoptedmanyarrangements,suchasunemploymentinsurance,todoso,butweshouldtrytoachievethatobjectivewithoutdestroyingtheflexibilityofthesystemthatwouldbetokillthegoosethathasbeenlayingthegoldeneggs.Inanyevent,whateverwedoshouldbeevenhandedwithrespecttoforeignanddomestictrade.Whatdeterminestheitemsitpaysustoimportandtoexport?AnAmericanworkeriscurrentlymoreproductivethanaJapaneseworker.Itishardtodeterminejusthowmuchmoreproductiveestimatesdiffer.Butsupposeheisoneandahalftimesaspro-ductive.Then,onaverage,theAmerican'swageswouldbuyaboutoneandahalftimesasmuchasaJapaneseworker'swages.ItiswastefultouseAmericanworkerstodoanythingatwhichtheyarelessthanoneandahalftimesasefficientastheirJapanesecounterparts.Intheeconomicjargoncoinedmorethan150yearsago,thatistheprincipleofcomparativeadvantage.EvenifweweremoreefficientthantheJapaneseatproducingeverything,itwouldnotpayustoproduceeverything.Weshouldconcentrate TheTyrannyofControls45ondoingthosethingswedobest,thosethingswhereoursuperi-orityisthegreatest.Asahomelyillustration,shouldalawyerwhocantypetwiceasfastashissecretaryfirethesecretaryanddohisowntyping?Ifthelawyeristwiceasgoodatypistbutfivetimesasgoodalawyerashissecretary,bothheandthesecretaryarebetteroffifhepracticeslawandthesecretarytypesletters.Anothersourceof"unfaircompetition"issaidtobesubsidiesbyforeigngovernmentstotheirproducersthatenablethemtosellintheUnitedStatesbelowcost.Supposeaforeigngovern-mentgivessuchsubsidies,asnodoubtsomedo.Whoishurtandwhobenefits?Topayforthesubsidiestheforeigngovernmentmusttaxitscitizens.Theyaretheoneswhopayforthesubsidies.U.S.consumersbenefit.TheygetcheapTVsetsorautomobilesorwhateveritisthatissubsidized.Shouldwecomplainaboutsuchaprogramofreverseforeignaid?WasitnobleoftheUnitedStatestosendgoodsandservicesasgiftstoothercountriesintheformofMarshallPlanaidor,later,foreignaid,butignobleforforeigncountriestosendusgiftsintheindirectformofgoodsandservicessoldtousbelowcost?Thecitizensoftheforeigngovern-mentmightwellcomplain.TheymustsufferalowerstandardoflivingforthebenefitofAmericanconsumersandofsomeoftheirfellowcitizenswhoownorworkintheindustriesthataresubsi-dized.Nodoubt,ifsuchsubsidiesareintroducedsuddenlyorerratically,thatwilladverselyaffectownersandworkersinU.S.industriesproducingthesameproducts.However,thatisoneoftheordinaryrisksofdoingbusiness.Enterprisesnevercomplainaboutunusualoraccidentaleventsthatconferwindfallgains.Thefreeenterprisesystemisaprofitandlosssystem.Asalreadynoted,anymeasurestoeasetheadjustmenttosuddenchangesshouldbeappliedevenhandedlytodomesticandforeigntrade.Inanyevent,disturbancesarelikelytobetemporary.Supposethat,forwhateverreason,Japandecidedtosubsidizesteelveryheavily.Ifnoadditionaltariffsorquotaswereimposed,importsofsteelintotheUnitedStateswouldgoupsharply.ThatwoulddrivedownthepriceofsteelintheUnitedStatesandforcesteelproducerstocuttheiroutput,causingunemploymentinthesteelindustry.Ontheotherhand,productsmadeofsteelcouldbe 46FREETOCHOOSE:APersonalStatementpurchasedmorecheaply.Buyersofsuchproductswouldhaveextramoneytospendonotherthings.Thedemandforotheritemswouldgoup,aswouldemploymentinenterprisesproducingthoseitems.Ofcourse,itwouldtaketimetoabsorbthenowun-employedsteelworkers.However,tobalancethateffect,workersinotherindustrieswhohadbeenunemployedwouldfindjobsavailable.Thereneedbenonetlossofemployment,andtherewouldbeagaininoutputbecauseworkersnolongerneededtoproducesteelwouldbeavailabletoproducesomethingelse.Thesamefallacyoflookingatonlyonesideoftheissueispresentwhentariffsareurgedinordertoaddtoemployment.Iftariffsareimposedon,say,textiles,thatwilladdtooutputandemploymentinthedomestictextileindustry.However,foreignproducerswhonolongercanselltheirtextilesintheUnitedStatesearnfewerdollars.TheywillhavelesstospendintheUnitedStates.Exportswillgodowntobalancedecreasedimports.Em-ploymentwillgoupinthetextileindustry,downintheexportindustries.Andtheshiftofemploymenttolessproductiveuseswillreducetotaloutput.Thenationalsecurityargumentthatathrivingdomesticsteelindustry,forexample,isneededfordefensehasnobetterbasis.NationaldefenseneedstakeonlyasmallfractionoftotalsteelusedintheUnitedStates.AnditisinconceivablethatcompletefreetradeinsteelwoulddestroytheU.S.steelindustry.Thead-vantagesofbeingclosetosourcesofsupplyandfuelandtothemarketwouldguaranteearelativelylargedomesticsteelindustry.Indeed,theneedtomeetforeigncompetition,ratherthanbeingshelteredbehindgovernmentalbarriers,mightverywellproduceastrongerandmoreefficientsteelindustrythanwehavetoday.Supposetheimprobabledidhappen.Supposeitdidprovecheapertobuyalloursteelabroad.Therearealternativewaystoprovidefornationalsecurity.Wecouldstockpilesteel.Thatiseasy,sincesteeltakesrelativelylittlespaceandisnotperishable.Wecouldmaintainsomesteelplantsinmothballs,thewaywemaintainships,togointoproductionincaseofneed.Nodoubttherearestillotheralternatives.Beforeasteelcompanydecidestobuildanewplant,itinvestigatesalternativewaysofdoingso,alternativelocations,inordertochoosethemostefficientandeco- TheTyrannyofControls47nomical.Yetinallitspleasforsubsidiesonnationalsecuritygrounds,thesteelindustryhasneverpresentedcostestimatesforalternativewaysofprovidingnationalsecurity.Untiltheydo,wecanbesurethenationalsecurityargumentisarationalizationofindustryself-interest,notavalidreasonforthesubsidies.Nodoubttheexecutivesofthesteelindustryandofthesteellaborunionsaresincerewhentheyadducenationalsecurityargu-ments.Sincerityisamuchoverratedvirtue.Weareallcapableofpersuadingourselvesthatwhatisgoodforusisgoodforthecoun-try.Weshouldnotcomplainaboutsteelproducersmakingsucharguments,butaboutlettingourselvesbetakeninbythem.Whatabouttheargumentthatwemustdefendthedollar,thatwemustkeepitfromfallinginvalueintermsofothercurrenciestheJapaneseyen,theGermanmark,ortheSwissfranc?Thatisawhollyartificialproblem.Ifforeignexchangeratesaredeter-minedinafreemarket,theywillsettleatwhateverlevelwillclearthemarket.Theresultingpriceofthedollarintermsoftheyen,say,maytemporarilyfallbelowtheleveljustifiedbythecostindollarsandyenrespectivelyofAmericanandJapanesegoods.Ifso,itwillgivepersonswhorecognizethatsituationanincentivetobuydollarsandholdthemforawhileinordertomakeaprofitwhenthepricegoesup.ByloweringthepriceinyenofAmericanexportstoJapanese,itwillstimulateAmericanexports;byraisingthepriceindollarsofJapanesegoods,itwilldiscourageimportsfromJapan.Thesedevelopmentswillincreasethedemandfordollarsandsocorrecttheinitiallylowprice.Thepriceofthedol-lar,ifdeterminedfreely,servesthesamefunctionasallotherprices.Ittransmitsinformationandprovidesanincentivetoactonthatinformationbecauseitaffectstheincomesthatparticipantsinthemarketreceive.Whythenallthefuroraboutthe"weakness"ofthedollar?Whytherepeatedforeignexchangecrises?Theproximatereasonisbecauseforeignexchangerateshavenotbeendeterminedinafreemarket.Governmentcentralbankshaveintervenedonagrandscaleinordertoinfluencethepriceoftheircurrencies.Intheprocesstheyhavelostvastsumsoftheircitizens'money(fortheUnitedStatescloseto$2billionfrom1973toearly1979).Evenmoreimportant,theyhavepreventedthisimportantsetof 48FREETOCHOOSE:APersonalStatementpricesfromperformingitsproperfunction.Theyhavenotbeenabletopreventthebasicunderlyingeconomicforcesfromulti-matelyhavingtheireffectonexchangerates,buthavebeenabletomaintainartificialexchangeratesforsubstantialintervals.Theeffecthasbeentopreventgradualadjustmenttotheunderlyingforces.Smalldisturbanceshaveaccumulatedintolargeones,andultimatelytherehasbeenamajorforeignexchange"crisis."Whyhavegovernmentsintervenedinforeignexchangemar-kets?Becauseforeignexchangeratesreflectinternalpolicies.TheU.S.dollarhasbeenweakcomparedtotheJapaneseyen,theGermanmark,andtheSwissfrancprimarilybecauseinflationhasbeenmuchhigherintheUnitedStatesthanintheothercountries.Inflationmeantthatthedollarwasabletobuylessandlessathome.Shouldwebesurprisedthatithasalsobeenabletobuylessabroad?OrthatJapaneseorGermansorSwissshouldnotbewillingtoexchangeasmanyoftheirowncurrencyunitsforadollar?Butgovernments,liketherestofus,gotogreatlengthstotrytoconcealoroffsettheundesirableconsequencesoftheirownpolicies.Agovernmentthatinflatesisthereforeledtotrytomanipulatetheforeignexchangerate.Whenitfails,itblamesinternalinflationonthedeclineintheexchangerate,insteadofacknowledgingthatcauseandeffectruntheotherway.Inallthevoluminousliteratureofthepastseveralcenturiesonfreetradeandprotectionism,onlythreeargumentshaveeverbeenadvancedinfavoroftariffsthateveninprinciplemayhavesomevalidity.Firstisthenationalsecurityargumentalreadymentioned.Al-thoughthatargumentismoreoftenarationalizationforparticulartariffsthanavalidreasonforthem,itcannotbedeniedthatonoccasionitmightjustifythemaintenanceofotherwiseuneco-nomicalproductivefacilities.Togobeyondthisstatementofpossibilityandestablishinaspecificcasethatatarifforothertraderestrictionisjustifiedinordertopromotenationalsecurity,itwouldbenecessarytocomparethecostofachievingthespecificsecurityobjectiveinalternativewaysandestablishatleastaprimafaciecasethatatariffistheleastcostlyway.Suchcostcompari-sonsareseldommadeinpractice.Thesecondisthe"infantindustry"argumentadvanced,for TheTyrannyofControls49example,byAlexanderHamiltoninhisReportonManufactures.Thereis,itissaid,apotentialindustrywhich,ifonceestablishedandassistedduringitsgrowingpains,couldcompeteonequaltermsintheworldmarket.Atemporarytariffissaidtobejusti-fiedinordertoshelterthepotentialindustryinitsinfancyandenableittogrowtomaturity,whenitcanstandonitsownfeet.Eveniftheindustrycouldcompetesuccessfullyonceestablished,thatdoesnotofitselfjustifyaninitialtariff.Itisworthwhileforconsumerstosubsidizetheindustryinitiallywhichiswhattheyineffectdobylevyingatariffonlyiftheywillsubsequentlygetbackatleastthatsubsidyinsomeotherway,throughpriceslaterlowerthantheworldprice,orthroughsomeotheradvantagesofhavingtheindustry.Butinthatcase,isasubsidyneeded?Willitthennotpaytheoriginalentrantsintotheindustrytosufferini-tiallossesintheexpectationofbeingabletorecoupthemlater?Afterall,mostfirmsexperiencelossesintheirearlyyears,whentheyaregettingestablished.Thatistrueiftheyenteranewin-dustryoriftheyenteranexistingone.Perhapstheremaybesomespecialreasonwhytheoriginalentrantscannotrecouptheirinitiallosseseventhoughitbeworthwhileforthecommunityatlargetomaketheinitialinvestment.Butsurelythepresumptionistheotherway.Theinfantindustryargumentisasmokescreen.Theso-calledinfantsnevergrowup.Onceimposed,tariffsareseldomelimi-nated.Moreover,theargumentisseldomusedonbehalfoftrueunborninfantsthatmightconceivablybebornandsurviveifgiventemporaryprotection.Theyhavenospokesmen.Itisusedtojus-tifytariffsforratheragedinfantsthatcanmountpoliticalpres-sure.Thethirdargumentfortariffsthatcannotbedismissedoutofhandisthe"beggar-thy-neighbor"argument.Acountrythatisamajorproducerofaproduct,orthatcanjoinwithasmallnum-berofotherproducersthattogethercontrolamajorshareofproduction,maybeabletotakeadvantageofitsmonopolyposi-tionbyraisingthepriceoftheproduct(theOPECcartelistheobviouscurrentexample).Insteadofraisingthepricedirectly,thecountrycandosoindirectlybyimposinganexporttaxontheproductanexporttariff.Thebenefittoitselfwillbelessthan 50FREETOCHOOSE:APersonalStatementthecosttoothers,butfromthenationalpointofview,therecanbeagain.Similarly,acountrythatistheprimarypurchaserofaproductineconomicjargon,hasmonopsonypowermaybeabletobenefitbydrivingahardbargainwiththesellersandim-posinganundulylowpriceonthem.Onewaytodosoistoim-poseatariffontheimportoftheproduct.Thenetreturntotheselleristhepricelessthetariff,whichiswhythiscanbeequiva-lenttobuyingatalowerprice.Ineffect,thetariffispaidbytheforeigners(wecanthinkofnoactualexample).Inpracticethisnationalisticapproachishighlylikelytopromoteretaliationbyothercountries.Inaddition,asfortheinfantindustryargument,theactualpoliticalpressurestendtoproducetariffstructuresthatdonotinfacttakeadvantageofanymonopolyormonopsonypositions.Afourthargument,onethatwasmadebyAlexanderHamiltonandcontinuestoberepeateddowntothepresent,isthatfreetradewouldbefineifallothercountriespracticedfreetradebutthatsolongastheydonot,theUnitedStatescannotaffordto.Thisargumenthasnovaliditywhatsoever,eitherinprincipleorinpractice.Othercountriesthatimposerestrictionsoninterna-tionaltradedohurtus.Buttheyalsohurtthemselves.Asidefromthethreecasesjustconsidered,ifweimposerestrictionsinturn,wesimplyaddtotheharmtoourselvesandalsoharmthemaswell.Competitioninmasochismandsadismishardlyaprescrip-tionforsensibleinternationaleconomicpolicy!Farfromleadingtoareductioninrestrictionsbyothercountries,thiskindofre-taliatoryactionsimplyleadstofurtherrestrictions.Weareagreatnation,theleaderofthefreeworld.Itillbe-hoovesustorequireHongKongandTaiwantoimposeexportquotasontextilesto"protect"ourtextileindustryattheexpenseofU.S.consumersandofChineseworkersinHongKongandTaiwan.Wespeakglowinglyofthevirtuesoffreetrade,whileweuseourpoliticalandeconomicpowertoinduceJapantore-strictexportsofsteelandTVsets.Weshouldmoveunilaterallytofreetrade,notinstantaneously,butoveraperiodof,say,fiveyears,atapaceannouncedinadvance.Fewmeasuresthatwecouldtakewoulddomoretopromotethecauseoffreedomathomeandabroadthancompletefree TheTyrannyofControls51trade.Insteadofmakinggrantstoforeigngovernmentsinthenameofeconomicaidtherebypromotingsocialismwhileatthesametimeimposingrestrictionsontheproductstheyproducetherebyhinderingfreeenterprisewecouldassumeaconsistentandprincipledstance.Wecouldsaytotherestoftheworld:webelieveinfreedomandintendtopracticeit.Wecannotforceyoutobefree.Butwecanofferfullcooperationonequaltermstoall.Ourmarketisopentoyouwithouttariffsorotherrestrictions.Sellherewhatyoucanandwishto.Buywhateveryoucanandwishto.Inthatwaycooperationamongindividualscanbeworld-wideandfree.ThePoliticalCaseforFreeTradeInterdependenceisapervasivecharacteristicofthemodernworld:intheeconomicsphereproper,betweenonesetofpricesandan-other,betweenoneindustryandanother,betweenonecountryandanother;inthebroadersociety,betweeneconomicactivityandcultural,social,andcharitableactivities;intheorganizationofsociety,betweeneconomicarrangementsandpoliticalarrange-ments,betweeneconomicfreedomandpoliticalfreedom.Intheinternationalsphereaswell,economicarrangementsareintertwinedwithpoliticalarrangements.Internationalfreetradefostersharmoniousrelationsamongnationsthatdifferincultureandinstitutionsjustasfreetradeathomefostersharmoniousre-lationsamongindividualswhodifferinbeliefs,attitudes,andin-terests.Inafreetradeworld,asinafreeeconomyinanyonecountry,transactionstakeplaceamongprivateentitiesindividuals,busi-nessenterprises,charitableorganizations.Thetermsatwhichanytransactiontakesplaceareagreedonbyallthepartiestothattransaction.Thetransactionwillnottakeplaceunlessallpartiesbelievetheywillbenefitfromit.Asaresult,theinterestsofthevariouspartiesareharmonized.Cooperation,notconflict,istherule.Whengovernmentsintervene,thesituationisverydifferent.Withinacountry,enterprisesseeksubsidiesfromtheirgovern-ment,eitherdirectlyorintheformoftariffsorotherrestrictions 52FREETOCHOOSE:APersonalStatementontrade.Theywillseektoevadeeconomicpressuresfromcom-petitorsthatthreatentheirprofitabilityortheirveryexistencebyresortingtopoliticalpressuretoimposecostsonothers.Interven-tionbyonegovernmentinbehalfoflocalenterprisesleadsenter-prisesinothercountriestoseektheaidoftheirowngovernmenttocounteractthemeasurestakenbytheforeigngovernment.Pri-vatedisputesbecometheoccasionfordisputesbetweengovern-ments.Everytradenegotiationbecomesapoliticalmatter.Highgovernmentofficialsjetaroundtheworldtotradeconferences.Frictionsdevelop.Manycitizensofeverycountryaredisappointedattheoutcomeandendupfeelingtheygottheshortendofthestick.Conflict,notcooperation,istherule.ThecenturyfromWaterloototheFirstWorldWaroffersastrikingexampleofthebeneficialeffectsoffreetradeontherela-tionsamongnations.Britainwastheleadingnationoftheworld,andduringthewholeofthatcenturyithadnearlycompletefreetrade.Othernations,particularlyWesternnations,includingtheUnitedStates,adoptedasimilarpolicy,ifinsomewhatdilutedform.Peoplewereinthemainfreetobuyandsellgoodsfromandtoanyone,whereverhelived,whetherinthesameoradiffer-entcountry,atwhatevertermsweremutuallyagreeable.Perhapsevenmoresurprisingtoustoday,peoplewerefreetotravelalloverEuropeandmuchoftherestoftheworldwithoutapassportandwithoutrepeatedcustomsinspection.Theywerefreetoemi-grateandinmuchoftheworld,particularlytheUnitedStates,freetoenterandbecomeresidentsandcitizens.Asaresult,thecenturyfromWaterloototheFirstWorldWarwasoneofthemostpeacefulinhumanhistoryamongWesternnations,marredonlybysomeminorwarstheCrimeanWarandtheFranco-PrussianWarsarethemostmemorableand,ofcourse,amajorcivilwarwithintheUnitedStates,whichitselfwasaresultofthemajorrespectslavery--inwhichtheUnitedStatesdepartedfromeconomicandpoliticalfreedom.Inthemodernworld,tariffsandsimilarrestrictionsontradehavebeenonesourceoffrictionamongnations.Butafarmoretroublesomesourcehasbeenthefar-reachinginterventionofthestateintotheeconomyinsuchcollectiviststatesasHitler'sGer-many,Mussolini'sItaly,andFranco'sSpain,andespeciallythe TheTyrannyofControls53communistcountries,fromRussiaanditssatellitestoChina.Tariffsandsimilarrestrictionsdistortthesignalstransmittedbythepricesystem,butatleasttheyleaveindividualsfreetorespondtothosedistortedsignals.Thecollectivistcountrieshaveintro-ducedmuchfarther-reachingcommandelements.Completelyprivatetransactionsareimpossiblebetweencitizensofalargelymarketeconomyandofacollectiviststate.Onesideisnecessarilyrepresentedbygovernmentofficials.Politicalcon-siderationsareunavoidable,butfrictionwouldbeminimizedifthegovernmentsofmarketeconomiespermittedtheircitizensthemaximumpossibleleewaytomaketheirowndealswithcollec-tivistgovernments.Tryingtousetradeasapoliticalweaponorpoliticalmeasuresasameanstoincreasetradewithcollectivistcountriesonlymakestheinevitablepoliticalfrictionsevenworse.FreelnternationalTradeandlnternalCompetitionTheextentofcompetitionathomeiscloselyrelatedtointerna-tionaltradearrangements.Apublicoutcryagainst"trusts"and"monopolies"inthelatenineteenthcenturyledtotheestablish-mentoftheInterstateCommerceCommissionandtheadoptionoftheShermanAnti-TrustLaw,latersupplementedbymanyotherlegislativeactionstopromotecompetition.Thesemeasureshavehadverymixedeffects.Theyhavecontributedinsomewaystoincreasedcompetition,butinotherstheyhavehadperverseeffects.Butnosuchmeasure,evenifitliveduptoeveryexpectationofitssponsors,coulddoasmuchtoassureeffectivecompetitionastheeliminationofallbarrierstointernationaltrade.TheexistenceofonlythreemajorautomobileproducersintheUnitedStatesandoneofthoseonthevergeofbankruptcydoesraiseathreatofmonopolypricing.ButlettheautomobileproducersoftheworldcompetewithGeneralMotors,Ford,andChryslerforthecustomoftheAmericanbuyer,andthespecterofmonopolypric-ingdisappears.Soitisthroughout.Amonopolycanseldombeestablishedwithinacountrywithoutovertandcovertgovernmentassistanceintheformofatarifforsomeotherdevice.Itisclosetoim-possibletodosoonaworldscale.TheDeBeersdiamondmonop- 54FREETOCHOOSE:APersonalStatementolyistheonlyoneweknowofthatappearstohavesucceeded.WeknowofnootherthathasbeenabletoexistforlongwithoutthedirectassistanceofgovernmentstheOPECcartelandearlierrubberandcoffeecartelsbeingperhapsthemostprominentexam-ples.Andmostsuchgovernment-sponsoredcartelshavenotlastedlong.TheyhavebrokendownunderthepressureofinternationalcompetitionafatethatwebelieveawaitsOPECaswell.Inaworldoffreetrade,internationalcartelswoulddisappearevenmorequickly.Eveninaworldoftraderestrictions,theUnitedStates,byfreetrade,unilateralifnecessary,couldcomeclosetoeliminatinganydangerofsignificantinternalmonopolies.CENTRALECONOMICPLANNINGTravelinginunderdevelopedcountries,wehaveoverandoveragainbeendeeplyimpressedbythestrikingcontrastbetweentheideasaboutfactsheldbytheintellectualsofthosecountriesandmanyintellectualsintheWest,andthefactsthemselves.Intellectualseverywheretakeforgrantedthatfreeenterprisecapitalismandafreemarketaredevicesforexploitingthemasses,whilecentraleconomicplanningisthewaveofthefuturethatwillsettheircountriesontheroadtorapideconomicprogress.Weshallnotsoonforgetthetongue-lashingoneofusreceivedfromaprominent,highlysuccessful,andextremelyliterateIndianentre-preneurphysicallytheverymodeloftheMarxistcaricatureofanobesecapitalistinreactiontoremarksthathecorrectlyin-terpretedascriticismofIndia'sdetailedcentralplanning.Hein-formedusinnouncertaintermsthatthegovernmentofacountryaspoorasIndiasimplyhadtocontrolimports,domesticproduc-tion,andtheallocationofinvestmentandbyimplicationgranthimthespecialprivilegesinalltheseareasthatarethesourceofhisownaffluenceinordertoassurethatsocialprioritiesover-ridetheselfishdemandsofindividuals.AndhewassimplyechoingtheviewsoftheprofessorsandotherintellectualsinIndiaandelsewhere.Thefactsthemselvesareverydifferent.Whereverwefindanylargeelementofindividualfreedom,somemeasureofprogressinthematerialcomfortsatthedisposalofordinarycitizens,and TheTyrannyofControls55widespreadhopeoffurtherprogressinthefuture,therewealsofindthateconomicactivityisorganizedmainlythroughthefreemarket.Whereverthestateundertakestocontrolindetailtheeconomicactivitiesofitscitizens,wherever,thatis,detailedcen-traleconomicplanningreigns,thereordinarycitizensareinpo-liticalfetters,havealowstandardofliving,andhavelittlepowertocontroltheirowndestiny.Thestatemayprosperandproduceimpressivemonuments.Privilegedclassesmayenjoyafullmeasureofmaterialcomforts.Buttheordinarycitizensareinstrumentstobeusedforthestate'spurposes,receivingnomorethannecessarytokeepthemdocileandreasonablyproductive.ThemostobviousexampleisthecontrastbetweenEastandWestGermany,originallypartofonewhole,tornasunderbythevicissitudesofwarfare.Peopleofthesameblood,thesameciviliza-tion,thesameleveloftechnicalskillandknowledgeinhabitthetwoparts.Whichhasprospered?Whichhadtoerectawalltopeninitscitizens?Whichmustmanittodaywitharmedguards,assistedbyfiercedogs,minefields,andsimilardevicesofdevilishingenuityinordertofrustratebraveanddesperatecitizenswhoarewillingtorisktheirlivestoleavetheircommunistparadiseforthecapitalisthellontheothersideofthewall?Ononesideofthatwallthebrightlylitstreetsandstoresarefilledwithcheerful,bustlingpeople.Someareshoppingforgoodsfromallovertheglobe.Othersaregoingtothenumerousmoviehousesorotherplacesofentertainment.Theycanbuyfreelynews-papersandmagazinesexpressingeveryvarietyofopinion.Theyspeakwithoneanotherorwithstrangersonanysubjectandex-pressawiderangeofopinionswithoutasinglebackwardglanceovertheshoulder.Awalkofafewhundredfeet,afteranhourspentinline,fillinginformsandwaitingforpassportstobere-turned,willtakeyou,asittookus,totheothersideofthatwall.There,thestreetsappearempty;thecity,grayandpallid;thestorewindows,dull;thebuildings,grimy.Wartimedestructionhasnotyetbeenrepairedaftermorethanthreedecades.TheonlysignofcheerfulnessoractivitythatwefoundduringourbriefvisittoEastBerlinwasattheentertainmentcenter.OnehourinEastBerlinisenoughtounderstandwhytheauthoritiesputupthewall. 56FREETOCHOOSE:APersonalStatementItseemedamiraclewhenWestGermanyadefeatedanddev-astatedcountrybecameoneofthestrongesteconomiesonthecontinentofEuropeinlessthanadecade.Itwasthemiracleofafreemarket.LudwigErhard,aneconomist,wastheGermanMinisterofEconomics.OnSunday,thetwentiethofJune,1948,hesimultaneouslyintroducedanewcurrency,today'sDeutschemark,andabolishedalmostallcontrolsonwagesandprices.HeactedonaSunday,hewasfondofsaying,becausetheofficesoftheFrench,American,andBritishoccupationauthoritieswereclosedthatday.Giventheirfavorableattitudestowardcontrols,hewassurethatifhehadactedwhentheofficeswereopen,theoccupationauthoritieswouldhavecountermandedhisorders.Hismeasuresworkedlikeacharm.Withindaystheshopswerefullofgoods.WithinmonthstheGermaneconomywashummingaway.Eventwocommunistcountries,RussiaandYugoslavia,offerasimilar,thoughlessextreme,contrast.Russiaiscloselycon-trolledfromthecenter.Ithasnotbeenabletodispensewhollywithprivatepropertyandfreemarkets,butithastriedtolimittheirscopeasmuchaspossible.Yugoslaviastarteddownthesameroad.However,afterYugoslaviaunderTitobrokewithStalin'sRussia,itchangeditscoursedrastically.Itisstillcom-munistbutdeliberatelypromotesdecentralizationandtheuseofmarketforces.Mostagriculturallandisprivatelyowned,itspro-ducesoldonrelativelyfreemarkets.Smallenterprises(thosethathavefewerthanfiveemployees)maybeprivatelyownedandoperated.Theyareflourishing,particularlyinhandicraftsand'tourism.Largerenterprisesareworkerscooperativesanineffi-cientformoforganizationbutonethatatleastprovidessomeopportunityforindividualresponsibilityandinitiative.Thein-habitantsofYugoslaviaarenotfree.TheyhaveamuchlowerstandardoflivingthantheinhabitantsofneighboringAustriaorothersimilarWesterncountries.YetYugoslaviastrikestheob-servanttravelerwhocomestoitfromRussia,aswedid,asaparadisebycomparison.IntheMiddleEast,Israel,despiteanannouncedsocialistphi-losophyandpolicyandextensivegovernmentinterventionintotheeconomy,hasavigorousmarketsector,primarilyasanin- TheTyrannyofControls57directconsequenceoftheimportanceofforeigntrade.Itsso-cialistpolicieshaveretardeditseconomicgrowth,yetitscitizensenjoybothmorepoliticalfreedomandafarhigherstandardoflivingthanthecitizensofEgypt,whichhassufferedfromamuchmoreextensivecentralizationofpoliticalpowerandwhichhasimposedmuchmorerigidcontrolsoneconomicactivity.IntheFarEast,Malaysia,Singapore,Korea,Taiwan,HongKong,andJapanallrelyingextensivelyonprivatemarketsarethriving.Theirpeoplearefullofhope.Aneconomicexplo-sionisunderwayinthesecountries.Asbestsuchthingscanbemeasured,theannualincomeperpersoninthesecountriesinthelate1970srangedfromabout$700inMalaysiatoabout$5,000inJapan.Bycontrast,India,Indonesia,andCommunistChina,allrelyingheavilyoncentralplanning,haveexperiencedeco-nomicstagnationandpoliticalrepression.Theannualincomeperpersoninthosecountrieswaslessthan$250.Theintellectualapologistsforcentralizedeconomicplanning'sangthepraisesofMao'sChinauntilMaossuccessorstrumpetedChina'sbackwardnessandbemoanedthelackofprogressduringthepasttwenty-fiveyears.Partoftheirdesigntomodernizethecountryistoletpricesandmarketsplayalargerrole.Thesetacticsmayproducesizablegainsfromthecountry'spresentloweconomiclevelastheydidinYugoslavia.However,thegainswillbeseverelylimitedsolongaspoliticalcontrolovereconomicactivityremainstightandprivatepropertyisnarrowlylimited.Moreover,lettingthegenieofprivateinitiativeoutofthebottleeventothislimitedextentwillgiverisetopoliticalproblemsthat,soonerorlater,arelikelytoproduceareactiontowardgreaterauthoritarianism.Theoppositeoutcome,thecollapseofcom-munismanditsreplacementbyamarketsystem,seemsfarlesslikely,thoughasincurableoptimists,wedonotruleitoutcom-pletely.Similarly,oncetheagedMarshalTitodies,Yugoslaviawillexperiencepoliticalinstabilitythatmayproduceareactiontowardgreaterauthoritarianismor,farlesslikely,acollapseofexistingcollectivistarrangements.Anespeciallyilluminatingexample,worthexaminingingreaterdetail,isthecontrastbetweentheexperiencesofIndiaandJapanIndiaduringthefirstthirtyyearsafteritachievedindependence 58FREETOCHOOSE:APersonalStatementin1947,andJapannottodaybutduringthefirstthirtyyearsaftertheMeijiRestorationin1867.Economistsandsocialsci-entistsingeneralcanseldomconductcontrolledexperimentsofthekindthataresoimportantintestinghypothesesinthephysicalsciences.However,experiencehashereproducedsomethingveryclosetoacontrolledexperimentthatwecanusetotesttheim-portanceofthedifferenceinmethodsofeconomicorganization.Thereisalapseofeightdecadesintime.Inallotherrespectsthetwocountrieswereinverysimilarcircumstancesattheoutsetoftheperiodswecompare.Bothwerecountrieswithancientcivilizationsandasophisticatedculture.Eachhadahighlystruc-turedpopulation.Japanhadafeudalstructurewithdaimyos(feudallords)andserfs.IndiahadarigidcastesystemwithBrahmansatthetopandtheuntouchables,designatedbytheBritishthe"scheduledcastes,"atthebottom.Bothcountriesexperiencedamajorpoliticalchangethatper-mittedadrasticalterationinpolitical,economic,andsocialar-rangements.Inbothcountriesagroupofable,dedicatedleaderstookpower.Theywereimbuedwithnationalprideanddeterminedtoconverteconomicstagnationintorapidgrowth,totransformtheircountriesintogreatpowers.AlmostalldifferencesfavoredIndiaratherthanJapan.ThepriorrulesofJapanhadenforcedalmostcompleteisolationfromtherestoftheworld.InternationaltradeandcontactwaslimitedtoonevisitfromoneDutchshipayear.ThefewWesternersper-mittedtostayinthecountrywereconfinedtoasmallenclaveonanislandintheharborofOsaka.Threeormorecenturiesofen-forcedisolationhadleftJapanignorantoftheoutsideworld,farbehindtheWestinscienceandtechnology,andwithalmostnoonewhocouldspeakorreadanyforeignlanguageotherthanChinese.Indiawasmuchmorefortunate.IthadenjoyedsubstantialeconomicgrowthbeforeWorldWarI.Thatgrowthwascon-vertedintostagnationbetweenthetwoworldwarsbythestruggleforindependencefromBritain,butwasnotreversed.Improve-mentsintransportationhadendedthelocalizedfaminesthathadearlierbeenarecurrentcurse.Manyofitsleadershadbeenedu-catedinadvancedcountriesoftheWest,particularlyinGreat TheTyrannyofControls59Britain.Britishruleleftitwithahighlyskilledandtrainedcivilservice,modernfactories,andanexcellentrailroadsystem.NoneoftheseexistedinJapanin1867.Indiawastechnologicallyback-wardcomparedtotheWest,butthedifferentialwaslessthanthatbetweenJapanin1867andtheadvancedcountriesofthatday.India'sphysicalresources,too,werefarsuperiortoJapan's.AbouttheonlyphysicaladvantageJapanhadwasthesea,whichofferedeasytransportationandaplentifulsupplyoffish.Fortherest,IndiaisnearlyninetimesaslargeasJapan,andamuchlargerpercentageofitsareaconsistsofrelativelylevelandac-cessibleland.Japanismostlymountainous.Ithasonlyanarrowfringeofhabitableandarablelandalongtheseacoasts.Finally,Japanwasonitsown.NoforeigncapitalwasinvestedinJapan;noforeigngovernmentsorforeignfoundationsincapi-talistcountriesformedconsortiumstomakegrantsorofferlow-interestloanstoJapan.Ithadtodependonitselfforcapitaltofinanceitseconomicdevelopment.Itdidhaveoneluckybreak.IntheearlyyearsaftertheMeijiRestoration,theEuropeansilkcropsexperiencedadisastrousfailurethatenabledJapantoearnmoreforeignexchangebysilkexportsthansheotherwisecouldhave.Asidefromthat,therewerenoimportantfortuitousoror-ganizedsourcesofcapital.Indiafaredfarbetter.Sinceitachievedindependencein1947,ithasreceivedanenormousvolumeofresourcesfromtherestoftheworld,mostlyasgifts.Theflowcontinuestoday.DespitethesimilarcircumstancesofJapanin1867andIndiain1947,theoutcomewasvastlydifferent.Japandismantleditsfeudalstructureandextendedsocialandeconomicopportunitytoallitscitizens.Thelotoftheordinarymanimprovedrapidly,eventhoughpopulationexploded.Japanbecameapowertobereckonedwithontheinternationalpoliticalscene.Itdidnotachievefullindividualhumanandpoliticalfreedom,butitmadegreatprogressinthatdirection.Indiapaidlipservicetotheeliminationofcastebarriersyetmadelittleprogressinpractice.Differencesinincomeandwealthbetweenthefewandthemanygrewwider,notnarrower.Popula-tionexploded,asitdidinJapaneightdecadesearlier,buteco-nomicoutputpercapitadidnot.Itremainednearlystationary. 60FREETOCHOOSE:APersonalStatementIndeed,thestandardoflifeofthepoorestthirdofthepopulationhasprobablydeclined.IntheaftermathofBritishrule,Indiaprideditselfonbeingthelargestdemocracyintheworld,butitlapsedforatimeintoadictatorshipthatrestrictedfreedomofspeechandpress.Itisindangerofdoingsoagain.Whatexplainsthedifferenceinresults?Manyobserverspointtodifferentsocialinstitutionsandhumancharacteristics.Reli-gioustaboos,thecastesystem,afatalisticphilosophyallthesearesaidtoimprisontheinhabitantsofIndiainastraitjacketoftradition.TheIndiansaresaidtobeunenterprisingandslothful.Bycontrast,theJapanesearelaudedashardworking,energetic,eagertorespondtoinfluencesfromabroad,andincrediblyin-geniousatadaptingwhattheylearnfromoutsidetotheirownneeds.ThisdescriptionoftheJapanesemaybeaccuratetoday.Itwasnotin1867.AnearlyforeignresidentinJapanwrote:"Wealthywedonotthinkit[Japan]willeverbecome.TheadvantagesconferredbyNature,withexceptionoftheclimate,andtheloveofindolenceandpleasureofthepeoplethemselvesforbidit.TheJapaneseareahappyrace,andbeingcontentwithlittlearenotlikelytoachievemuch."Wroteanother:"Inthispartoftheworld,principles,establishedandrecognizedintheWest,appeartolosewhatevervirtueandvitalitytheyoriginallypossessedandtotendfatallytowardweedinessandcorruption."Similarly,thedescriptionoftheIndiansmaybeaccuratetodayforsomeIndiansinIndia,evenperhapsformost,butitcertainlyisnotaccurateforIndianswhohavemigratedelsewhere.InmanyAfricancountries,inMalaya,HongKong,theFijiIslands,Panama,and,mostrecently,GreatBritain,Indiansaresuccessfulentrepreneurs,sometimesconstitutingthemainstayoftheentre-preneurialclass.Theyhaveoftenbeenthedynamoinitiatingandpromotingeconomicprogress.WithinIndiaitself,enclavesofenterprise,drive,andinitiativeexistwhereverithasbeenpos-sibletoescapethedeadeninghandofgovernmentcontrol.Inanyevent,economicandsocialprogressdonotdependontheattributesorbehaviorofthemasses.Ineverycountryatinyminoritysetsthepace,determinesthecourseofevents.Inthecountriesthathavedevelopedmostrapidlyandsuccessfully, TheTyrannyofControls61aminorityofenterprisingandrisk-takingindividualshaveforgedahead,createdopportunitiesforimitatorstofollow,haveenabledthemajoritytoincreasetheirproductivity.ThecharacteristicsoftheIndiansthatsomanyoutsideob-serversdeplorereflectratherthancausethelackofprogress.Slothandlackofenterpriseflourishwhenhardworkandthetakingofrisksarenotrewarded.Afatalisticphilosophyisanaccommodationtostagnation.IndiahasnoshortageofpeoplewiththequalitiesthatcouldsparkandfuelthesamekindofeconomicdevelopmentthatJapanexperiencedafter1867,oreventhatGermanyandJapandidafterWorldWarII.Indeed,therealtragedyofIndiaisthatitremainsasubcontinentteemingwithdesperatelypoorpeoplewhenitcould,webelieve,beaflourishing,vigorous,increasinglyprosperousandfreesociety.Werecentlycameacrossafascinatingexampleofhowaneco-nomicsystemcanaffectthequalitiesofpeople.ChineserefugeeswhostreamedintoHongKongafterthecommunistsgainedpowersparkeditsremarkableeconomicdevelopmentandgainedadeservedreputationforinitiative,enterprise,thrift,andhardwork.TherecentliberalizationofemigrationfromRedChinahasproducedanewstreamofimmigrantsfromthesameracialstock,withthesamefundamentalculturaltraditions,butraisedandformedbythirtyyearsofcommunistrule.WehearfromseveralfirmsthathiredsomeoftheserefugeesthattheyareverydifferentfromtheearlierChineseentrantsintoHongKong.Thenewimmigrantsshowlittleinitiativeandwanttobetoldpreciselywhattodo.Theyareindolentanduncooperative.NodoubtafewyearsinHongKong'sfreemarketwillchangeallthat.WhatthenaccountsforthedifferentexperiencesofJapanfrom1867to1897andofIndiafrom1947todate?WebelievethattheexplanationisthesameasforthedifferencebetweenWestandEastGermany,IsraelandEgypt,TaiwanandRedChina.Japanreliedprimarilyonvoluntarycooperationandfreemar-ketsonthemodeloftheBritainofitstime.IndiareliedoncentraleconomicplanningonthemodeloftheBritainofitstime.TheMeijigovernmentdidinterveneinmanywaysandplayedakeyroleintheprocessofdevelopment.ItsentmanyJapanese 62FREETOCHOOSE:APersonalStatementabroadfortechnicaltraining.Itimportedforeignexperts.Itestablishedpilotplantsinmanyindustriesandgavenumeroussubsidiestoothers.Butatnotimedidittrytocontrolthetotalamountordirectionofinvestmentorthestructureofoutput.Thestatemaintainedalargeinterestonlyinshipbuildingandironandsteelindustriesthatitthoughtnecessaryformilitarypower.Itretainedtheseindustriesbecausetheywerenotattractivetoprivateenterpriseandrequiredheavygovernmentsubsidies.ThesesubsidieswereadrainonJapaneseresources.Theyim-pededratherthanstimulatedJapaneseeconomicprogress.Finally,aninternationaltreatyprohibitedJapanduringthefirstthreedecadesaftertheMeijiRestorationfromimposingtariffshigherthan5percent.ThisrestrictionprovedanunmitigatedboontoJapan,thoughitwasresentedatthetime,andtariffswereraisedafterthetreatyprohibitionsexpired.Indiaisfollowingaverydifferentpolicy.Itsleadersregardcapitalismassynonymouswithimperialism,tobeavoidedatallcosts.TheyembarkedonaseriesofRussian-typefive-yearplansthatoutlineddetailedprogramsofinvestment.Someareasofpro-ductionarereservedtogovernment;inothersprivatefirmsarepermittedtooperate,butonlyinconformitywithThePlan.Tariffsandquotascontrolimports,subsidiescontrolexports.Self-sufficiencyistheideal.Needlesstosay,thesemeasuresproduceshortagesofforeignexchange.Thesearemetbydetailedandextensiveforeignexchangecontrolamajorsourcebothofin-efficiencyandofspecialprivilege.Wagesandpricesarecontrolled.Agovernmentpermitisrequiredtobuildafactoryortomakeanyotherinvestment.Taxesareubiquitous,highlygraduatedonpaper,evadedinpractice.Smuggling,blackmarkets,illegaltrans-actionsofallkindsareeverybitasubiquitousastaxes,under-miningallrespectforlaw,yetperformingavaluablesocialservicebyoffsettingtosomeextenttherigidityofcentralplanningandmakingitpossibleforurgentneedstobesatisfied.RelianceonthemarketinJapanreleasedhiddenandunsus-pectedresourcesofenergyandingenuity.Itpreventedvestedinterestsfromblockingchange.Itforceddevelopmenttoconformtotheharshtestofefficiency.RelianceongovernmentcontrolsinIndiafrustratesinitiativeordivertsitintowastefulchannels. TheTyrannyofControls63Itprotectsvestedinterestsfromtheforcesofchange.Itsubstitutesbureaucraticapprovalformarketefficiencyasthecriterionofsurvival.Theexperienceinthetwocountrieswithhomemadeandfac-tory-madetextilesservestoillustratethedifferenceinpolicy.BothJapanin1867andIndiain1947hadextensiveproductionoftextilesinthehome.InJapanforeigncompetitiondidnothavemucheffectonthehomeproductionofsilk,perhapsbecauseofJapan'sadvantageinrawsilkreinforcedbythefailureoftheEuropeancrop,butitallbutwipedoutthehomespinningofcottonandlaterthehand-loomweavingofcottoncloth.AJapa-nesefactorytextileindustrydeveloped.Atfirst,itmanufacturedonlythecoarsestandlowest-gradefabrics,butthenmovedtohigherandhighergradesandultimatelybecameamajorexportindustry.InIndiahand-loomweavingwassubsidizedandguaranteedamarket,allegedlytoeasethetransitiontofactoryproduction.Factoryproductionisgrowinggraduallybuthasbeendeliberatelyheldbacktoprotectthehand-loomindustry.Protectionhasmeantexpansion.Thenumberofhandloomsroughlydoubledfrom1948to1978.Today,inthousandsofvillagesthroughoutIndia,thesoundofhandloomscanbeheardfromearlymorningtolateatnight.Thereisnothingwrongwithahand-loomindustry,pro-videditcancompeteoneventermswithotherindustries.InJapanaprosperous,thoughextremelysmall,hand-loomindustrystillexists.Itweavesluxurysilkandotherfabrics.InIndiathehand-loomindustryprospersbecauseitissubsidizedbythegov-ernment.Taxesare,ineffect,imposedonpeoplewhoarenobetteroffthantheoneswhooperatetheloomsinordertopaythemahigherincomethantheycouldearninafreemarket.EarlyinthenineteenthcenturyGreatBritainfacedpreciselythesameproblemthatJapandidafewdecadeslaterandIndiadidmorethanacenturylater.Thepowerloomthreatenedtodestroyaprosperoushand-loomweavingindustry.Aroyalcom-missionwasappointedtoinvestigatetheindustry.ItconsideredexplicitlythepolicyfollowedbyIndia:subsidizinghand-loomweavingandguaranteeingtheindustryamarket.Itrejectedthatpolicyoutofhandonthegroundthatitwouldonlymakethe 64FREETOCHOOSE:APersonalStatementbasicproblem,anexcessofhand-loomweavers,worsepreciselywhathappenedinIndia.BritainadoptedthesamesolutionasJapanthetemporarilyharshbutultimatelybeneficentpolicyoflettingmarketforceswork.'ThecontrastingexperiencesofIndiaandJapanareinterestingbecausetheybringoutsoclearlynotonlythedifferentresultsofthetwomethodsoforganizationbutalsothelackofrelationbetweenobjectivespursuedandpoliciesadopted.TheobjectivesofthenewMeijirulerswhowerededicatedtostrengtheningthepowerandgloryoftheircountryandwhoattachedlittlevaluetoindividualfreedomweremoreintunewiththeIndianpoliciesthanwiththosetheythemselvesadopted.TheobjectivesofthenewIndianleaderswhowereardentlydevotedtoindividualfreedomweremoreintunewiththeJapanesepoliciesthanwiththosetheythemselvesadopted.CONTROLSANDFREEDOMThoughtheUnitedStateshasnotadoptedcentraleconomicplan-ning,wehavegoneveryfarinthepastfiftyyearsinexpandingtheroleofgovernmentintheeconomy.Thatinterventionhasbeencostlyineconomicterms.Thelimitationsimposedonoureconomicfreedomthreatentobringtwocenturiesofeconomicprogresstoanend.Interventionhasalsobeencostlyinpoliticalterms.Ithasgreatlylimitedourhumanfreedom.TheUnitedStatesremainsapredominantlyfreecountryoneofthefreestmajorcountriesintheworld.However,inthewordsofAbrahamLincoln'sfamous"HouseDivided"speech,"Ahousedividedagainstitselfcannotstand....Idonotexpectthehousetofall,butIdoexpectitwillceasetobedivided.Itwillbecomeallonethingoralltheother."Hewastalkingabouthumanslavery.Hispropheticwordsapplyequallytogovernmentinterventionintotheeconomy.Wereittogomuchfurther,ourdividedhousewouldfallonthecollectivistside.Fortunately,evi-dencegrowsthatthepublicisrecognizingthedangerandisdeterminedtostopandreversethetrendtowardeverbiggergovernment.Allofusareaffectedbythestatusquo.Wetendtotakefor TheTyrannyofControls65grantedthesituationasitis,toregarditasthenaturalstateofaffairs,especiallywhenithasbeenshapedbyaseriesofsmallgradualchanges.Itishardtoappreciatehowgreatthecumulativeeffecthasbeen.Ittakesaneffortoftheimaginationtogetoutsidetheexistingsituationandviewitwithfresheyes.Theeffortiswellworthmaking.Theresultislikelytocomeasasurprise,nottosayashock.EconomicFreedomAnessentialpartofeconomicfreedomisfreedomtochoosehowtouseourincome:howmuchtospendonourselvesandonwhatitems;howmuchtosaveandinwhatform;howmuchtogiveawayandtowhom.Currently,morethan40percentofourin-comeisdisposedofonourbehalfbygovernmentatfederal,state,andlocallevelscombined.Oneofusoncesuggestedanewna-tionalholiday,"PersonalIndependenceDaythatdayintheyearwhenwestopworkingtopaytheexpensesofgovernment...andstartworkingtopayfortheitemsweseverallyandindi-viduallychooseinlightofourownneedsanddesires."In1929thatholidaywouldhavecomeonAbrahamLincoln'sbirthday,February12;todayitwouldcomeaboutMay30;ifpresenttrendsweretocontinue,itwouldcoincidewiththeotherIndependenceDay,July4,around1988.Ofcourse,wehavesomethingtosayabouthowmuchofourincomeisspentonourbehalfbygovernment.Weparticipateinthepoliticalprocessthathasresultedingovernment'sspendinganamountequaltomorethan40percentofourincome.Majorityruleisanecessaryanddesirableexpedient.Itis,however,verydifferentfromthekindoffreedomyouhavewhenyoushopatasupermarket.Whenyouenterthevotingboothonceayear,youalmostalwaysvoteforapackageratherthanforspecificitems.Ifyouareinthemajority,youwillatbestgetboththeitemsyoufavoredandtheonesyouopposedbutregardedasonbalancelessimportant.Generally,youendupwithsomethingdifferentfromwhatyouthoughtyouvotedfor.Ifyouareintheminority,youmustconformtothemajorityvoteandwaitforyourturntocome.Whenyouvotedailyinthesupermarket,yougetprecisely 66FREETOCHOOSE:APersonalStatementwhatyouvotedfor,andsodoeseveryoneelse.Theballotboxproducesconformitywithoutunanimity;themarketplace,una-nimitywithoutconformity.Thatiswhyitisdesirabletousetheballotbox,sofaraspossible,onlyforthosedecisionswherecon-formityisessential.Asconsumers,wearenotevenfreetochoosehowtospendthepartofourincomethatisleftaftertaxes.Wearenotfreetobuycyclamatesorlaetrile,andsoon,perhaps,saccharin.Ourphysicianisnotfreetoprescribemanydrugsforusthathemayregardasthemosteffectiveforourailments,eventhoughthedrugsmaybewidelyavailableabroad.Wearenotfreetobuyanautomobilewithoutseatbelts,though,forthetimebeing,wearestillfreetochoosewhetherornottobuckleup.Anotheressentialpartofeconomicfreedomisfreedomtousetheresourceswepossessinaccordancewithourownvaluesfreedomtoenteranyoccupation,engageinanybusinessenter-prise,buyfromandselltoanyoneelse,solongaswedosoonastrictlyvoluntarybasisanddonotresorttoforceinordertocoerceothers.Todayyouarenotfreetoofferyourservicesasalawyer,aphysician,adentist,aplumber,abarber,amortician,orengageinahostofotheroccupations,withoutfirstgettingapermitorlicensefromagovernmentofficial.Youarenotfreetoworkover-timeattermsmutuallyagreeabletoyouandyouremployer,unlessthetermsconformtorulesandregulationslaiddownbyagovern-mentofficial.Youarenotfreetosetupabank,gointothetaxicabbusiness,orthebusinessofsellingelectricityortelephoneservice,orrun-ningarailroad,busline,orairline,withoutfirstreceivingpermis-sionfromagovernmentofficial.YouarenotfreetoraisefundsonthecapitalmarketsunlessyoufilloutthenumerouspagesofformstheSECrequiresandunlessyousatisfytheSECthattheprospectusyouproposetoissuepresentssuchableakpictureofyourprospectsthatnoin-vestorinhisrightmindwouldinvestinyourprojectifhetooktheprospectusliterally.AndgettingSECapprovalmaycostup-wardsof$100,000-whichcertainlydiscouragesthesmallfirmsourgovernmentprofessestohelp. TheTyrannyofControls67Freedomtoownpropertyisanotheressentialpartofeconomicfreedom.Andwedohavewidespreadpropertyownership.Welloverhalfofusownthehomeswelivein.Whenitcomestomachines,factories,andsimilarmeansofproduction,thesitua-tionisverydifferent.Werefertoourselvesasafreeprivateenter-prisesociety,asacapitalistsociety.Yetintermsoftheownershipofcorporateenterprise,weareabout46percentsocialist.Owning1percentofacorporationmeansthatyouareentitledtoreceive1percentofitsprofitsandmustshare1percentofitslossesuptothefullvalueofyourstock.The1979federalcorporateincometaxis46percentonallincomeover$100,000(reducedfrom48percentinprioryears).Thefederalgovernmentisentitledto46centsoutofeverydollarofprofit,anditshares46centsoutofeverydollaroflosses(providedtherearesomeearlierprofitstooffsetthoselosses).Thefederalgovernmentowns46percentofeverycorporationthoughnotinaformthatentitlesittovotedirectlyoncorporateaffairs.Itwouldtakeabookmuchlongerthanthisoneeventolistinfullalltherestrictionsonoureconomicfreedom,letalonedescribethemindetail.Theseexamplesareintendedsimplytosuggesthowpervasivesuchrestrictionshavebecome.HumanFreedomRestrictionsoneconomicfreedominevitablyaffectfreedomingeneral,evensuchareasasfreedomofspeechandpress.Considerthefollowingexcerptsfroma1977letterfromLeeGrace,thenexecutivevice-presidentofanoilandgasassociation.Thisiswhathewrotewithrespecttoenergylegislation:Asyouknow,therealissuemoresothanthepriceperthousandcubicfeetisthecontinuationoftheFirstAmendmentoftheConsti-tution,theguaranteeoffreedomofspeech.Withincreasingregula-tion,asbigbrotherlookscloseroverourshoulder,wegrowtimidagainstspeakingoutfortruthandourbeliefsagainstfalsehoodsandwrongdoings.FearofIRSaudits,bureaucraticstrangulationorgov-ernmentharassmentisapowerfulweaponagainstfreedomofspeech.IntheOctober31[19771editionoftheU.S.News&WorldReport,theWashingtonWhisperssectionnotedthat,"OilindustryofficialsclaimthattheyhavereceivedthisultimatumfromEnergySecretary 68FREETOCHOOSE:APersonalStatement`JamesSchlesinger:SupporttheAdministration'sproposedtaxoncrudeoilorelsefacetougherregulationandapossibledrivetobreakuptheoilcompanies.'"Hisjudgmentisamplyconfirmedbythepublicbehaviorofoilofficials.Tongue-lashedbySenatorHenryJacksonforearning"obsceneprofits,"notasinglememberofagroupofoilindustryexecutivesansweredback,orevenlefttheroomandrefusedtosubmittofurtherpersonalabuse.Oilcompanyexecutives,whoinprivateexpressstrongoppositiontothepresentcomplexstructureoffederalcontrolsunderwhichtheyoperateortothemajorextensionofgovernmentinterventionproposedbyPresidentCarter,makeblandpublicstatementsapprovingtheobjectivesofthecontrols.FewbusinessmenregardPresidentCarter'sso-calledvoluntarywageandpricecontrolsasadesirableoreffectivewaytocombatinflation.Yetonebusinessmanafteranother,onebusinessorgani-zationafteranother,haspaidlipservicetotheprogram,saidnicethingsaboutit,andpromisedtocooperate.Onlyafew,likeDonaldRumsfeld,formercongressman,WhiteHouseofficial,andCabinetmember,hadthecouragetodenounceitpublicly.TheywerejoinedbyGeorgeMeany,thecrustyoctogenarianformerheadoftheAFL-CIO.Itisentirelyappropriatethatpeopleshouldbearacostifonlyofunpopularityandcriticismforspeakingfreely.However,thecostshouldbereasonableandnotdisproportionate.Thereshouldnotbe,inthewordsofafamousSupremeCourtdecision,"achillingeffect"onfreespeech.Yetthereislittledoubtthatcur-rentlythereissuchaneffectonbusinessexecutives.The"chillingeffect"isnotrestrictedtobusinessexecutives.Itaffectsallofus.Weknowmostintimatelytheacademiccom-munity.ManyofourcolleaguesineconomicsandthenaturalsciencedepartmentsreceivegrantsfromtheNationalScienceFoundation;inthehumanities,fromtheNationalFoundationfortheHumanities;allthosewhoteachinstateuniversitiesgettheirsalariespartlyfromthestatelegislatures.WebelievethattheNa-tionalScienceFoundation,theNationalFoundationfortheHumanities,andtaxsubsidiestohighereducationareallun-desirableandshouldbeterminated.Thatisundoubtedlyaminor- TheTyrannyofControls69ityviewintheacademiccommunity,buttheminorityismuchlargerthananyonewouldgatherfrompublicstatementstothateffect.Thepressishighlydependentongovernmentnotonlyasamajorsourceofnewsbutinnumerousotherday-to-dayoperatingmatters.ConsiderastrikingexamplefromGreatBritain.TheLondonTimes,agreatnewspaper,waspreventedfrompublishingonedayseveralyearsagobyoneofitsunionsbecauseofastorythatitwasplanningtopublishabouttheunion'sattempttoin-fluencethecontentofthepaper.Subsequently,labordisputescloseddownthepaperentirely.Theunionsinquestionareabletoexercisethispowerbecausetheyhavebeengrantedspecialim-munitiesbygovernment.AnationalUnionofJournalistsinBritainispushingforaclosedshopofjournalistsandthreateningtoboycottpapersthatemploynonmembersoftheunion.Allthisinthecountrythatwasthesourceofsomanyofourliberties.Withrespecttoreligiousfreedom,AmishfarmersintheUnitedStateshavehadtheirhousesandotherpropertyseizedbecausetheyrefused,onreligiousgrounds,topaySocialSecuritytaxesandalsotoacceptSocialSecuritybenefits.Churchschoolshavehadtheirstudentscitedastruantsinviolationofcompulsoryattendancelawsbecausetheirteachersdidnothavetherequisiteslipsofpapercertifyingtotheirhavingsatisfiedstaterequirements.Althoughtheseexamplesonlyscratchthesurface,theyillus-tratethefundamentalpropositionthatfreedomisonewhole,thatanythingthatreducesfreedominonepartofourlivesislikelytoaffectfreedomintheotherparts.Freedomcannotbeabsolute.Wedoliveinaninterdependentsociety.Somerestrictionsonourfreedomarenecessarytoavoidother,stillworse,restrictions.However,wehavegonefarbeyondthatpoint.Theurgentneedtodayistoeliminaterestrictions,notaddtothem. CHAPTER3TheAnatomyofCrisisThedepressionthatstartedinmid-1929wasacatastropheofunprecedenteddimensionsfortheUnitedStates.Thedollarin-comeofthenationwascutinhalfbeforetheeconomyhitbottomin1933.Totaloutputfellbyathird,andunemploymentreachedtheunprecedentedlevelof25percentoftheworkforce.Thedepressionwasnolessacatastrophefortherestoftheworld.Asitspreadtoothercountries,itbroughtloweroutput,higherun-employment,hunger,andmiseryeverywhere.InGermanythedepressionhelpedAdolfHitlerrisetopower,pavingthewayforWorldWarII.InJapanitstrengthenedthemilitarycliquethatwasdedicatedtocreatingaGreaterEastAsiacoprosperitysphere.InChinaitledtomonetarychangesthatacceleratedthefinalhyperinflationthatsealedthedoomoftheChiangKai-shekregimeandbroughtthecommuniststopower.Intherealmofideas,thedepressionpersuadedthepublicthatcapitalismwasanunstablesystemdestinedtosufferevermoreseriouscrises.Thepublicwasconvertedtoviewsthathadalreadygainedincreasingacceptanceamongtheintellectuals:govern-menthadtoplayamoreactiverole;ithadtointervenetooffsettheinstabilitygeneratedbyunregulatedprivateenterprise;ithadtoserveasabalancewheeltopromotestabilityandassuresecu-rity.Thechangeinthepublic'sperceptionoftheproperroleofprivateenterpriseontheonehandandofthegovernmentontheotherprovedamajorcatalystfortherapidgrowthofgovernment,andparticularlycentralgovernment,fromthatdaytothis.Thedepressionalsoproducedafar-reachingchangeinpro-fessionaleconomicopinion.Theeconomiccollapseshatteredthelong-heldbelief,whichhadbeenstrengthenedduringthe1920s,thatmonetarypolicywasapotentinstrumentforpromotingeconomicstability.Opinionshiftedalmosttotheoppositeextreme,that"moneydoesnotmatter."JohnMaynardKeynes,oneofthe70 TheAnatomyofCrisis71greateconomistsofthetwentiethcentury,offeredanalternativetheory.TheKeynesianrevolutionnotonlycapturedtheeconomicsprofession,butalsoprovidedbothanappealingjustificationandaprescriptionforextensivegovernmentintervention.Theshiftinopinionofboththepublicandtheeconomicspro-fessionresultedfromamisunderstandingofwhathadactuallyhappened.Wenowknow,asafewknewthen,thatthedepressionwasnotproducedbyafailureofprivateenterprise,butratherbyafailureofgovernmentinanareainwhichthegovernmenthadfromthefirstbeenassignedresponsibility"Tocoinmoney,regu-latetheValuethereof,andofforeignCoin,"inthewordsofSec-tion8,Article1,oftheU.S.Constitution.Unfortunately,asweshallseeinChapter9,governmentfailureinmanagingmoneyisnotmerelyahistoricalcuriositybutcontinuestobeapresent-dayreality.THEORIGINOFTHEFEDERALRESERVESYSTEMOnMonday,October21,1907,somefivemonthsafterthestartofaneconomicrecession,theKnickerbockerTrustCompany,thethirdlargesttrustcompanyinNewYorkCity,begantoexperiencefinancialdifficulties.Thenextdaya"run"onthebankforcedittoclose(temporarily,asitturnedout;itresumedbusinessinMarch1908).TheclosingoftheKnickerbockerTrustprecipi-tatedrunsonothertrustcompaniesinNewYorkandtheninotherpartsofthecountryabanking"panic"wasunderwayofakindthathadoccurredeverynowandthenduringthenine-teenthcentury.Withinaweek,banksthroughoutthecountryreactedtothe"panic"by"restrictionofpayments,"i.e.,theyannouncedthattheywouldnolongerpayoutcurrencyondemandtodepositorswhowantedtowithdrawtheirdeposits.Insomestatesthegov-ernororattorneygeneraltookmeasuresthatgavelegalsanctiontotherestrictionofpayments;intheremainingstatesthepracticewassimplytoleratedandbankswerepermittedtostayopeneventhoughtheyweretechnicallyviolatingthestatebankinglaws.Therestrictionofpaymentscutshortbankfailuresandendedtheruns.Butitimposedseriousinconvenienceonbusiness.Itled 72FREETOCHOOSE:APersonalStatementtoashortageofcoinandcurrency,aswellastotheprivatecir-culationofwoodennickelsandothertemporarysubstitutesforlegalmoney.Attheheightoftheshortageofcurrency,ittook$104ofdepositstobuy$100ofcurrency.Together,thepanicandtherestriction,bothdirectly,throughtheireffectsonconfidenceandonthepossibilityofconductingbusinessefficiently,andin-directly,byforcingadeclineinthequantityofmoney,turnedtherecessionintooneofthemostseverethattheUnitedStateshadexperienceduptothattime.However,theseverephaseoftherecessionwasshort-lived.Banksresumedpaymentsinearly1908.Afewmonthslater,economicrecoverybegan.Therecessionlastedonlythirteenmonthsinall,anditsseverephaseonlyabouthalfthatlong.Thisdramaticepisodewaslargelyresponsiblefortheenact-mentoftheFederalReserveActin1913.Itmadesomeactioninthemonetaryandbankingareapoliticallyessential.DuringTheodoreRoosevelt'sRepublicanadministrationaNationalMon-etaryCommissionwasestablishedthatwasheadedbyaprominentRepublicansenator,NelsonW.Aldrich.DuringWoodrowWil-'sonsDemocraticadministration,aprominentDemocraticcon-gressman,latersenator,CarterGlass,rewroteandrepackagedthecommission'srecommendations.TheresultingFederalReserveSystemhasservedasthekeymonetaryauthorityofthecountryeversince.Whatdotheterms"run"and"panic"and"restrictionofpay-ments"reallymean?Whydidtheyhavethefar-reachingeffectswehaveattributedtothem?AndhowdidtheauthorsoftheFederalReserveActproposetopreventsimilarepisodes?Arunonabankisanattemptbymanyofitsdepositorsto"withdraw"theirdepositsincash,allatthesametime.Therunarisesfromrumorsorfactsthatleaddepositorstofearthatthebankisinsolventandwillbeunabletoliveuptoitsobligations.Itrepresentsanattemptbyeveryonetoget"his"moneyoutbeforeitisallgone.Itiseasytoseewhyarunwouldcauseaninsolventbanktofailsoonerthanitotherwisemight.Butwhyshouldaruncausearesponsibleandsolventbanktrouble?TheanswerislinkedtooneofthemostmisleadingwordsintheEnglishlanguagethe TheAnatomyofCrisis73word"deposit,"whenusedtorefertoaclaimagainstabank.Ifyou"deposit"currencyinabank,itistemptingtosupposethatthebanktakesyourgreenbacksand"deposits"theminabankvaultforsafekeepinguntilyouaskforthem.Itdoesnothingofthekind.Ifitdid,wherewouldthebankgetincometopayitsexpenses,letalonetopayinterestondeposits?Thebankmaytakeafewofthegreenbacksandputtheminavaultasa"re-serve."Therestitlendstosomeoneelse,chargingtheborrowerinterest,orusestobuyaninterest-bearingsecurity.If,asistypicallythecase,youdepositnotcurrencybutchecksonotherbanks,yourbankdoesnotevenhavecurrencyinhandtodepositinavault.Ithasonlyaclaimonanotherbankforcurrency,whichittypicallywillnotexercisebecauseotherbankshavematchingclaimsonit.Forevery$100ofdeposits,allthebankstogetherhaveonlyafewdollarsofcashintheirvaults.Wehavea"fractionalreservebankingsystem."Thatsystemworksverywell,solongaseveryoneisconfidentthathecanalwaysgetcashforhisdepositsandthereforeonlytriestogetcashwhenhereallyneedsit.Usually,newdepositsofcashroughlyequalwithdrawals,sothatthesmallamountinreserveissufficienttomeettemporarydiscrepancies.However,ifeveryonetriestogetcashatonce,thesituationisverydifferentapanicislikelytooccur,justasitdoeswhensomeonecries"fire"inacrowdedtheaterandeveryonerushestogetout.Onebankalonecanmeetarunbyborrowingfromotherbanks,orbyaskingitsborrowerstorepaytheirloans.Thebor-rowersmaybeabletorepaytheirloansbywithdrawingcashfromotherbanks.Butifabankrunspreadswidely,allbankstogethercannotmeettheruninthisway.Theresimplyisnotenoughcurrencyinbankvaultstosatisfythedemandsofallde-positors.Moreover,anyattempttomeetawidespreadrunbydrawingdownvaultcashunlessitsucceedspromptlyinre-storingconfidenceandendstherunsothatthecashisredepositedenforcesamuchlargerreductionindeposits.Ontheaver-agein1907,thebankshadonly$12ofcashforevery$100ofdeposits.Everydollarofdepositsconvertedintocashandtransferredfromthevaultsofbankstothemattressesofdepositorsmadenecessarythereductionofdepositsbyanadditional$7if 74FREETOCHOOSE:APersonalStatementbanksweretomaintainthepriorratioofreservestodeposits.Thatiswhyarunthatresultsinhoardingofcashbythepublictendstoreducethetotalmoneysupply.Itisalsowhy,ifnotstoppedpromptly,itcausessuchdistress.Individualbankstrytogetcashtomeetthedemandsoftheirdepositorsbypressingtheirborrowerstorepayloansandbyrefusingtorenewloansortoextendadditionalones.Borrowersasawholehavenowheretoturn,sobanksfailandbusinessesfail.Howcanapanicbestoppedonceitisunderway,orbetteryet,howcanitbepreventedfromstarting?Onewaytostopapanicisthemethodadoptedin1907:aconcertedrestrictionofpay-mentsbythebanks.Banksstayedopenbuttheyagreedwithoneanotherthattheywouldnotpaycashondemandtodepositors.In-stead,theyoperatedthroughbookkeepingentries.Theyhonoredcheckswrittenbyoneoftheirowndepositorstoanotherbyre-ducingthedepositsrecordedontheirbookstothecreditoftheoneandincreasingthedepositsoftheother.Forcheckswrittenbytheirdepositorstoanotherbank'sdepositors,orbyanotherbank'sdepositorstotheirdepositors,theyoperatedalmostasusual"throughtheclearinghouse,"thatis,byoffsettingthechecksonotherbanksreceivedasdepositsagainstthechecksontheirownhankdepositedinotherbanks.Theonedifferencewasthatanydifferencesbetweentheamounttheyowedotherbanksandtheamountotherbanksowedthemwassettledbyapromisetopayinsteadof,asordinarily,bythetransferofcash.Bankspaidoutsomecurrency,notondemand,buttoregularcustomerswhoneededitforpayrollsandsimilarurgentpurposes,andsimi-larly,theyreceivedsomecurrencyfromsuchregularcustomers.Underthissystembanksmightanddidstillfailbecausetheywere"unsound"banks.Theydidnotfailmerelybecausetheycouldnotconvertperfectlysoundassetsintocash.Astimepassed,panicsubsided,confidenceinbankswasrestored,andthebankscouldresumepaymentofcashondemandwithoutstartinganewseriesofruns.Thatisaratherdrasticwaytostopapanicbutitworked.Anotherwaytostopapanicistoenablesoundbankstocon-verttheirassetsintocashrapidly,notattheexpenseofotherbanksbutthroughtheavailabilityofadditionalcashofan TheAnatomyofCrisis75emergencyprintingpress,asitwere.ThiswasthewayembodiedintheFederalReserveAct.Itwassupposedtopreventeventhetemporarydisruptionsproducedbytherestrictionofpayments.Thetwelveregionalbanksestablishedbytheact,operatingunderthesupervisionofaFederalReserveBoardinWashington,weregiventhepowertoserveas"lendersoflastresort"tothecom-mercialbanks.TheycouldmakesuchloanseitherintheformofcurrencyFederalReserveNotes,whichtheyhadthepowertoprintorintheformofdepositcreditsontheirbooks,whichtheyhadthepowertocreatethemagicofthebookkeeper'spen.Theyweretoserveasbankers'banks,astheU.S.counterpartoftheBankofEnglandandothercentralbanks.Initially,itwasexpectedthattheFederalReserveBankswouldoperatemostlybydirectloanstobanks,onthesecurityofthebanks'ownassets,inparticular,thepromissorynotescorrespond-ingtoloansbybankstobusinesses.Inmanysuchloans,thebanks"discounted"thenotesthatis,paidoutlessthanthefaceamount,thediscountrepresentingtheinterestchargedbythebanks.TheFederalReserveinturn"rediscounted"thepromis-sorynotes,therebychargingthebanksinterestontheloans.Astimepassed,"openmarketoperations"thepurchaseorsaleofgovernmentbondsratherthanrediscountsbecamethemainwayinwhichtheSystemaddedtoorsubtractedfromtheamountofmoney.WhenaFederalReserveBankbuysagovern-mentbond,itpaysforiteitherwithFederalReserveNotesthatithasinitsvaultsorthatithasfreshlyprintedor,moretypically,byaddingonitsbookstothedepositsofacommercialbank.Thecommercialbankmayitselfbethesellerofthebondoritmaybethebankinwhichthesellerofthebondkeepshisdepositaccount.Theextracurrencyanddepositsserveasreservesforthecommercialbanks,enablingthemasawholetoexpandtheirde-positsbyamultipleoftheadditionalreserves,whichiswhycur-rencyplusdepositsatFederalReserveBanksaredesignated"high-poweredmoney"orthe"monetarybase."WhenaFederalReserveBanksellsabond,theprocessisreversed.Reservesofcommercialbanksdeclineandtheyareledtocontract.UntilfairlyrecentlythepoweroftheFederalReserveBankstocreatecur-rencyanddepositswaslimitedbytheamountofgoldheldbythe 76FREETOCHOOSE:APersonalStatementSystem.ThatlimithasnowbeenremovedsothattodaythereisnoeffectivelimitexceptthediscretionofthepeopleinchargeoftheSystem.AftertheFederalReserveSystemfailedintheearly1930stodowhatithadbeensetuptodo,aneffectivemethodofpreventingapanicwasfinallyadoptedin1934.TheFederalDepositIn-suranceCorporationwasestablishedtoguaranteedepositsagainstlossuptoamaximum.Theinsurancegivesdepositorsconfidencethattheirdepositsaresafe.Ittherebypreventsthefailureorfinan-cialdifficultiesofanunsoundbankfromcreatingrunsonotherbanks.Thepeopleinthecrowdedtheaterareconfidentthatitisreallyfireproof.Since1934therehavebeenbankfailuresandsomerunsonindividualbanks.Therehavebeennobankingpanicsoftheoldstyle.Guaranteeingdepositsinordertopreventapanichadfrequentlybeenusedearlierbythebanksthemselvesinamorepartialandlesseffectiveway.Timeandagain,whenanindividualbankwasinfinancialtroubleorwasthreatenedbyarunbecauseofrumorsoftrouble,otherbanksbandedtogethervoluntarilytosubscribetoafundguaranteeingthedepositsofthebankintrouble.Thatdevicepreventedmanyputativepanicsandcutothersshort.Itfailedonotheroccasionseitherbecauseasatisfactoryagreementcouldnotbereachedorbecauseconfidencewasnotpromptlyre-stored.Weshallexamineaparticularlydramaticandimportantcaseofsuchafailurelaterinthischapter.THEEARLYYEARSOFTHERESERVESYSTEMTheFederalReserveSystemstartedtooperateinlate1914,afewmonthsaftertheoutbreakofwarinEurope.ThatwarchangeddrasticallytheroleandimportanceoftheFederalReserveSystem.WhentheSystemwasestablished,Britainwasthecenterofthefinancialworld.Theworldwassaidtobeonagoldstandardbutitcouldequallywellhavebeensaidtobeonasterlingstandard.TheFederalReserveSystemwasenvisionedprimarilyasameansofavoidingbankingpanicsandfacilitatingcommerce;secondarily,asthegovernment'sbanker.Itwas,takenforgrantedthatitwouldoperatewithinaworldgoldstandard,reactingtoexternaleventsbutnotshapingthem. TheAnatomyofCrisis77BytheendofthewartheUnitedStateshadreplacedBritainasthecenterofthefinancialworld.Theworldwaseffectivelyonadollarstandardandremainedsoevenafteraweakenedversionoftheprewargoldstandardwasreestablished.TheFederalReserveSystemwasnolongeraminorbodyreactingpassivelytoexternalevents.Itwasamajorindependentforceshapingtheworldmon-etarystructure.ThewaryearsdemonstratedthepoweroftheFederalReserveSystemforbothgoodandill,especiallyaftertheUnitedStatesenteredthewar.Asinallprevious(andsubsequent)wars,theequivalentoftheprintingpresswasresortedtoinordertofinancewarspending.ButtheSystemmadeitpossibletodosoinamoresophisticatedandsubtlemannerthanwaspossibleearlier.Theliteralprintingpresswasusedtosomeextent,whentheFederalReserveBanksboughtbondsfromtheU.S.TreasuryandpaidforthemwithFederalReserveNotesthattheTreasurycouldpayouttomeetsomeofitsexpenses.ButmostlytheFedpaidforbondsitboughtbycreditingtheTreasurywithdepositsattheFederalRe-serveBanks.TheTreasurypaidforpurchaseswithchecksdrawnonthesedeposits.WhentherecipientsdepositedthechecksintheirownbanksandthesebanksinturndepositedthemataFederalReserveBank,theTreasurydepositsattheFedweretransferredtothecommercialbanks,increasingtheirreserves.Thatincreaseenabledthecommercialbankingsystemtoexpand,largelyatthetimebybuyinggovernmentbondsthemselvesormakingloanstotheircustomerstoenablethemtobuygovernmentbonds.Bythisroundaboutprocess,theTreasurygotnewlycreatedmoneytopayforwarexpenses,buttheincreaseinthequantityofmoneymostlytooktheformofincreasesindepositsatcommercialbanks,ratherthanofcurrency.Thesubtletyoftheprocesswherebythequantityofmoneywasincreaseddidnotpreventinflation,butitdidsmooththeoperationand,byconcealingwhatwasactuallyhappening,lessenorpostponethepublic'sfearsaboutinflation.AfterthewartheSystemcontinuedtoincreasethequantityofmoneyrapidly,therebyfeedingtheinflation.Atthisstage,how-ever,theadditionalmoneywasbeingusednottopayforthegovernment'sexpensesbuttofinanceprivatebusinessactivities.Athirdofourtotalwartimeinflationoccurredaftertheendnotonlyofthewarbutalsoofgovernmentdeficitstopayforthewar. 78FREETOCHOOSE:APersonalStatementBelatedly,theSystemdiscovereditsmistake.Itthenreactedsharply,plungingthecountryintothesharpbutshortdepressionof1920-21.ThehightideoftheSystemwasundoubtedlytherestofthetwenties.Duringthosefewyearsitdidserveasaneffectivebalancewheel,increasingtherateofmonetarygrowthwhentheeconomyshowedsignsoffaltering,andreducingtherateofmonetarygrowthwhentheeconomystartedexpandingmorerapidly.Itdidnotpreventfluctuationsintheeconomybutitdidcontributetokeepingthemmild.Moreover,itwassufficientlyevenhandedsothatitavoidedinflation.Theresultofthestablemonetaryandeconomicclimatewasrapideconomicgrowth.Itwaswidelytrumpetedthatanewerahadarrived,thatthebusinesscyclewasdead,dispatchedbyavigilantFederalReserveSystem.MuchofthesuccessduringthetwentiescanbecreditedtoBenjaminStrong,aNewYorkbankerwhowasthefirstheadoftheFederalReserveBankofNewYorkandremaineditsheaduntilhisuntimelydeathin1928.Untilhedied,theNewYorkBankwastheprimemoverinFederalReservepolicybothathomeandabroad,andBenjaminStrongwasunquestionablythedominantfigure.Hewasaremarkableman,describedbyamem-beroftheFederalReserveBoardas"ageniusaHamiltonamongbankers."MorethananyotherindividualintheSystem,hehadtheconfidenceandbackingofotherfinancialleadersin-sideandoutsidetheSystem,thepersonalforcetomakehisviewsprevail,andthecouragetoactuponthem.Strong'sdeathunleashedastruggleforpowerwithintheSys-temthatwasfatedtohavefar-reachingconsequences.AsStrong'sbiographerputsit,"Strong'sdeathlefttheSystemwithnocenterofenterprisingandacceptableleadership.TheFederalReserveBoard[inWashington]wasdeterminedthattheNewYorkBankshouldnolongerplaythatrole.ButtheBoarditselfcouldnotplaytheroleinanenterprisingway.Itwasstillweakanddi-vided....Moreover,mostoftheotherReserveBanks,aswellasthatinNewYork,werereluctanttofollowtheleadershipoftheBoard....ThusitwaseasyfortheSystemtoslideinto1indecisionanddeadlock."Thisstruggleforpowerprovedtobeasnoonecouldhave TheAnatomyofCrisis79foreseenatthetimethefirststepinagreatlyspeeded-uptrans-ferofpowerfromtheprivatemarkettogovernment,andfromlocalandstategovernmenttoWashington.THEONSETOFDEPRESSIONThepopularviewisthatthedepressionstartedonBlackThurs-day,October24,1929,whentheNewYorkstockmarketcol-lapsed.Afterseveralintermediateupsanddowns,themarketendedupin1933ataboutone-sixththedizzyinglevelof1929.Thestockmarketcrashwasimportant,butitwasnotthebe-ginningofthedepression.BusinessactivityreacheditspeakinAugust1929,twomonthsbeforethestockmarketcrashed,andhadalreadyfallenappreciablybythen.Thecrashreflectedthegrowingeconomicdifficultiesplusthepuncturingofanunsus-tainablespeculativebubble.Ofcourse,oncethecrashoccurred,itspreaduncertaintyamongbusinessmenandotherswhohadbeenbemusedbydazzlinghopesofanewera.Itdampenedthewillingnessofbothconsumersandbusinessentrepreneurstospendandenhancedtheirdesiretoincreasetheirliquidreservesforemergencies.ThesedepressingeffectsofthestockmarketcrashwerestronglyreinforcedbythesubsequentbehavioroftheFederalReserveSystem.Atthetimeofthecrash,theNewYorkFederalReserveBank,almostbyconditionedreflexinstilledduringtheStrongera,immediatelyactedonitsowntocushiontheshockbypur-chasinggovernmentsecurities,therebyaddingtobankreserves.Thatenabledcommercialbankstocushiontheshockbypro-vidingadditionalloanstostockmarketfirmsandpurchasingse-curitiesfromthemandothersaffectedadverselybythecrash.ButStrongwasdead,andtheBoardwantedtoestablishitslead-ership.ItmovedrapidlytoimposeitsdisciplineonNewYork,andNewYorkyielded.ThereaftertheSystemactedverydif-ferentlythanithadduringearliereconomicrecessionsinthe1920s.Insteadofactivelyexpandingthemoneysupplybymorethantheusualamounttooffsetthecontraction,theSystemallowedthequantityofmoneytodeclineslowlythroughout1930.Comparedtothedeclineofroughlyone-thirdinthequantityof 80FREETOCHOOSE:APersonalStatementmoneyfromlate1930toearly1933,thedeclineinthequantityofmoneyuptoOctober1930seemsmildamere2.6percent.However,bycomparisonwithpastepisodes,itwassizable.In-deed,itwasalargerdeclinethanhadoccurredduringorpre-cedingallbutafewoftheearlierrecessions.Thecombinedeffectoftheaftermathofthestockmarketcrashandtheslowdeclineinthequantityofmoneyduring1930wasarathersevererecession.Eveniftherecessionhadcometoanendinlate1930orearly1931,asitmightwellhavedoneifamon-etarycollapsehadnotoccurred,itwouldhaverankedasoneofthemostsevererecessionsonrecord.BANKINGCRISESButtheworstwasyettocome.Untiltheautumnof1930thecontraction,thoughsevere,wasnotmarredbybankingdifficultiesorrunsonbanks.Thecharacteroftherecessionchangeddrasti-callywhenaseriesofbankfailuresintheMiddleWestandSouthunderminedconfidenceinbanksandledtowidespreadattemptstoconvertdepositsintocurrency.ThecontagionfinallyspreadtoNewYork,thefinancialcenterofthecountry.ThecriticaldateisDecember11,1930,whentheBankofUnitedStatescloseditsdoors.ItwasthelargestcommercialbankthathadeverfaileduptothattimeinU.S.history.Inaddition,althoughitwasanordinarycommercialbank,itsnameledmanyathomeandabroadtoregarditasanofficialbank.Itsfailurewasthereforeaparticularlyseriousblowtoconfidence.ItwassomethingofanaccidentthattheBankofUnitedStatesplayedsuchakeyrole.GiventhedecentralizedstructureoftheU.S.bankingsystemplusthepolicythattheFederalReserveSystemwasfollowingoflettingthemoneystockdeclineandnotrespondingvigorouslytobankfailures,thestreamofminorfailureswouldsoonerorlaterhaveproducedrunsonothermajorbanks.IftheBankofUnitedStateshadnotfailedwhenitdid,thefailureofanothermajorbankwouldhavebeenthepebblethatstartedtheavalanche.ItwasalsoanaccidentthattheBankofUnitedStatesitselffailed.Itwasasoundbank.Though TheAnatomyofCrisis81liquidatedduringtheworstyearsofthedepression,itendeduppayingoffdepositors92.5centsonthedollar.Thereislittledoubtthatifithadbeenabletoweathertheimmediatecrisis,nodepositorwouldhavelostacent.WhenrumorsstartedtospreadabouttheBankofUnitedStates,theNewYorkStateSuperintendentofBanks,theFederalReserveBankofNewYork,andtheNewYorkClearingHouseAssociationofBankstriedtodeviseplanstosavethebank,throughprovidingaguaranteefundormergingitwithotherbanks.Thishadbeenthestandardpatterninearlierpanics.Untiltwodaysbeforethebankclosed,theseeffortsseemedassuredofsuccess.Theplanfailed,however,primarilybecauseoftheparticularcharacteroftheBankofUnitedStatesplustheprejudicesofthebankingcommunity.Thenameitself,becauseitappealedtoim-migrants,wasresentedbyotherbanks.Farmoreimportant,thebankwasownedandmanagedbyJewsandservedmostlytheJewishcommunity.ItwasoneofahandfulofJewish-ownedbanksinanindustrythat,morethanalmostanyother,hasbeenthepreserveofthewell-bornandwell-placed.Bynoaccident,theplannedrescueinvolvedmergingtheBankofUnitedStateswiththeonlyothermajorbankinNewYorkCitythatwaslargelyownedandrunbyJews,plustwomuchsmallerJewish-ownedbanks.TheplanfailedbecausetheNewYorkClearingHouseatthelastmomentwithdrewfromtheproposedarrangementpur-portedlyinlargepartbecauseoftheanti-Semitismofsomeoftheleadingmembersofthebankingcommunity.Atthefinalmeetingofthebankers,JosephA.Broderick,thentheNewYorkStateSuperintendentofBanks,triedbutfailedtogetthemtogoalong."Isaid,"helatertestifiedatacourttrial,it[theBankofUnitedStates]hadthousandsofborrowers,thatitfinancedsmallmerchants,especiallyJewishmerchants,andthatitsclosingmightandprobablywouldresultinwidespreadbankruptcyamongthoseitserved.Iwarnedthatitsclosingwouldresultintheclosingofatleast10otherbanksinthecityandthatitmightevenaffectthesavingsbanks.Theinfluenceoftheclosingmightevenex-tendoutsidethecity,Itoldthem. 82FREETOCHOOSE:APersonalStatementIremindedthemthatonlytwoorthreeweeksbeforetheyhadrescuedtwoofthelargestprivatebankersofthecityandhadwill-inglyputupthemoneyneeded.IrecalledthatonlysevenoreightyearsbeforethattheyhadcometotheaidofoneofthebiggesttrustcompaniesinNewYork,puttingupmanytimesthesumneededtosavetheBankofUnitedStatesbutonlyaftersomeoftheirheadshadbeenknockedtogether.Iaskedthemiftheirdecisiontodroptheplanwasstillfinal.Theytoldmeitwas.ThenIwarnedthemthattheyweremakingthemost2colossalmistakeinthebankinghistoryofNewYork.TheclosingoftheBankofUnitedStateswastragicforitsownersanddepositors.Twooftheownersweretried,convicted,andservedprisonsentencesforwhateverybodyagreedweretech-nicalinfractionsofthelaw.Thedepositorshadeventhatpartoftheirfundsthattheyfinallyrecoveredtiedupforyears.Forthecountryasawholetheeffectsweremorefar-reaching.Depositorsalloverthecountry,frightenedaboutthesafetyoftheirdeposits,addedtothesporadicrunsthathadstartedearlier.Banksfailedbythedroves352banksinthemonthofDecember1930alone.HadtheFederalReserveSystemneverbeenestablished,andhadasimilarseriesofrunsstarted,thereislittledoubtthatthesamemeasureswouldhavebeentakenasin1907arestrictionofpayments.Thatwouldhavebeenmoredrasticthanwhatactu-allyoccurredinthefinalmonthsof1930.However,byprevent-ingthedrainingofreservesfromgoodbanks,restrictionwouldalmostcertainlyhavepreventedthesubsequentseriesofbankfailuresin1931,1932,and1933,justasrestrictionin1907quicklyendedbankfailuresthen.Indeed,theBankofUnitedStatesitselfmighthavebeenabletoreopen,astheKnickerbockerTrustCompanyhadin1908.Thepanicover,confidencerestored,economicrecoverywouldverylikelyhavebeguninearly1931,justasithadinearly1908.TheexistenceoftheReserveSystempreventedthisdrastictherapeuticmeasure:directly,byreducingtheconcernofthestrongerbanks,who,mistakenlyasitturnedout,wereconfidentthatborrowingfromtheSystemofferedthemareliableescapemechanismincaseofdifficulty;indirectly,bylullingthecom-munityasawhole,andthebankingsysteminparticular,intothebeliefthatsuchdrasticmeasureswerenolongernecessarynowthattheSystemwastheretotakecareofsuchmatters. TheAnatomyofCrisis83TheSystemcouldhaveprovidedafarbettersolutionbyen-gaginginlarge-scaleopenmarketpurchasesofgovernmentbonds.Thatwouldhaveprovidedbankswithadditionalcashtomeetthedemandsoftheirdepositors.Thatwouldhaveendedoratleastsharplyreducedthestreamofbankfailuresandhavepre-ventedthepublic'sattemptedconversionofdepositsintocur-rencyfromreducingthequantityofmoney.Unfortunately,theFed'sactionswerehesitantandsmall.Inthemain,itstoodidlybyandletthecrisistakeitscourseapatternofbehaviorthatwastoberepeatedagainandagainduringthenexttwoyears.Itwasrepeatedinthespringof1931,whenasecondbankingcrisisdeveloped.AnevenmoreperversepolicywasfollowedinSeptember1931,whenBritainabandonedthegoldstandard.TheFedreactedaftertwoyearsofseveredepressionbyraisingtherateofinterest(thediscountrate)thatitchargedbanksforloansmoresharplythaneverbeforeinitshistory.IttookthisactiontoavertadrainonitsgoldreservesbyforeignholdersofdollarsthatitfearedwouldbesetoffbyBritain'sabandonmentofthegoldstandard.Theeffectdomestically,however,washighlydeflationaryputtingfurtherpressureonbothcommercialbanksandbusinessenterprises.TheFedcould,byopenmarketpurchasesofgovernmentsecurities,haveoffsetthissharpmone-taryblowthatitgavetoastrugglingeconomy,butitdidnotdoso.In1932,understrongpressurefromCongress,theFedfinallyundertooklarge-scaleopenmarketpurchases.Thefavorableef-fectswerejuststartingtobefeltwhenCongressadjournedandtheFedpromptlyterminateditsprogram.Thefinalepisodeinthissorrytalewasthebankingpanicof1933,onceagaininitiatedbyaseriesofbankfailures.Itwasin-tensifiedbytheinterregnumbetweenHerbertHooverandFrank-linD.Roosevelt,whowaselectedonNovember8,1932,butnotinaugurateduntilMarch4,1933.HerbertHooverwasunwillingtotakedrasticmeasureswithoutthecooperationofthePresident-elect,andFDRwasunwillingtoassumeanyresponsibilityuntilhewasinaugurated.AspanicspreadintheNewYorkfinancialcommunity,theSystemitselfpanicked.TheheadoftheNewYorkFederalRe-serveBanktriedunsuccessfullytopersuadePresidentHoovertodeclareanationalbankingholidayonHoover'slastdayinoffice. 84FREETOCHOOSE:APersonalStatementHethenjoinedwiththeNewYorkClearingHousebanksandtheStateSuperintendentofBankstopersuadeGovernorLehmanofNewYorktodeclareastatebankingholidayeffectiveonMarch4,1933,thedayofFDR'sinauguration.TheFederalReserveBankclosedalongwiththecommercialbanks.Similaractionsweretakenbyothergovernors.AnationwideholidaywasfinallyproclaimedbyPresidentRooseveltonMarch6.Thecentralbankingsystem,setupprimarilytorenderun-necessarytherestrictionofpaymentsbycommercialbanks,itselfjoinedthecommercialbanksinamorewidespread,complete,andeconomicallydisturbingrestrictionofpaymentsthanhadeverbeenexperiencedinthehistoryofthecountry.OnecancertainlysympathizewithHoover'scommentinhismemoirs:"Iconcludedit[theReserveBoard]wasindeedaweakreedforanationtoleanonintimeoftrouble."Atthepeakofbusinessinmid-1929,nearly25,000commercialbankswereinoperationintheUnitedStates.Byearly1933thenumberhadshrunkto18,000.WhenthebankingholidaywasendedbyPresidentRoosevelttendaysafteritbegan,fewerthan12,000bankswerepermittedtoopen,andonly3,000additionalbankswerelaterpermittedtodoso.Allinall,therefore,roughly10,000outof25,000banksdisappearedduringthosefouryearsthroughfailure,merger,orliquidation.Thetotalstockofmoneyshowedanequallydrasticdecline.Forevery$3ofdepositsandcurrencyinthehandsofthepublicin1929,lessthan$2remainedin1933amonetarycollapsewithoutprecedent.FACTSANDINTERPRETATIONThesefactsarenotinquestiontodaythoughitshouldbestressedthattheywerenotknownoravailabletomostcon-temporaryobservers,includingJohnMaynardKeynes.Buttheyaresusceptibleofdifferentinterpretations.Wasthemonetarycollapseacauseoftheeconomiccollapseoraresult?CouldtheSystemhavepreventedthemonetarycollapse?OrdidithappeninspiteofthebesteffortsoftheFedasmanyobserversatthetimeconcluded?DidthedepressionstartintheUnitedStates TheAnatomyofCrisis85andspreadabroad?Ordidforcesemanatingfromabroadcon-vertwhatmighthavebeenafairlymildrecessionintheUnitedStatesintoasevereone?fCauseorEfectTheSystemitselfexpressednodoubtaboutitsrole.Sogreatisthecapacityforself-justificationthattheFederalReserveBoardcouldsayinitsAnnualReportfor1933,"TheabilityoftheFed-eralReserveBankstomeetenormousdemandsforcurrencyduringthecrisisdemonstratedtheeffectivenessofthecountry'scurrencysystemundertheFederalReserveAct....Itisdiffi-culttosaywhatthecourseofthedepressionwouldhavebeenhadtheFederalReserveSystemnotpursuedapolicyofliberalopenmarketpurchases."4Themonetarycollapsewasbothacauseandaneffectoftheeconomiccollapse.ItoriginatedinlargemeasurefromFederalReservepolicy,anditunquestionablymadetheeconomiccollapsefarworsethanitwouldotherwisehavebeen.However,theeco-nomiccollapse,onceitstarted,madethemonetarycollapseworse.Banksloansthatmighthavebeen"good"loansinamilderreces-sionbecame"bad"loansinthesevereeconomiccollapse.Defaultsonloansweakenedthelendingbanks,whichaddedtothetempta-tionfordepositorstostartarunonthem.Businessfailures,de-cliningoutput,growingunemploymentallfostereduncertaintyandfear.Thedesiretoconvertassetsintotheirmostliquidform,money,andintothesafestkindofmoney,currency,becamewide-spread."Feedback"isapervasivefeatureofaneconomicsystem.TheevidencebynowisallbutconclusivethattheSystemnotonlyhadalegislativemandatetopreventthemonetarycollapse,butcouldhavedonesoifithadusedwiselythepowersthathadbeengrantedtoitintheFederalReserveAct.DefendersoftheSystemhaveofferedaseriesofexcuses.Nonehaswithstoodcare-fulexamination.NoneisavalidjustificationforthefailureoftheSystemtoperformthetaskforwhichitsfoundershadestablishedit.TheSystemnotonlyhadthepowertopreventthemonetarycollapse,italsoknewhowtousethatpower.In1929,1930,1931,theNewYorkFederalReserveBankrepeatedlyurgedthe 86FREETOCHOOSE:APersonalStatementSystemtoengageinlarge-scaleopenmarketpurchases,thekeyactiontheSystemshouldhavetakenbutdidnot.NewYorkwasoverrulednotbecauseitsproposalsweredemonstratedtobemis-directedornotfeasiblebutbecauseofthestruggleforpowerwithintheSystem,whichmadebothotherFederalReserveBanksandtheBoardinWashingtonunwillingtoacceptNewYork'sleadership.ThealternativeprovedtobeconfusedandindecisiveleadershipbytheBoard.KnowledgeablevoicesoutsidetheSys-temalsocalledforthecorrectaction.AnIllinoiscongressman,A.J.Sabath,saidontheflooroftheHouse,"IinsistitiswithinthepoweroftheFederalReserveBoardtorelievethefinancialandcommercialdistress."SomeacademiccriticsincludingKarlBopp,wholaterbecametheheadoftheFederalReserveBankofPhiladelphiaexpressedsimilarviews.AttheFederalReservemeetingatwhichthe1932openmarketpurchaseswereap-proved,underdirectpressurefromtheCongress,OgdenL.Mills,thenSecretaryoftheTreasuryandanexofficiomemberoftheBoard,stated,inexplaininghisvotefortheaction,"Foragreatcentralbankingsystemtostandbywitha70%goldreservewith-outtakingactivestepsinsuchasituationwasalmostincon-ceivableandalmostunforgivable."YetthatwaspreciselyhowtheSystemhadbehavedforthetwoprioryearsandwastoresumebehavingassoonasCongressadjournedafewmonthslater,as6wellasduringtheclimacticfinalbankingcrisisofMarch1933.WheretheDepressionStartedThedecisiveevidencethatthedepressionspreadfromtheUnitedStatestotherestoftheworld,ratherthantheotherwayaround,comesfromthemovementofgold.In1929theUnitedStateswasonagoldstandardinthesensethattherewasanofficialpriceofgold($20.67perfineounce)atwhichtheU.S.governmentwouldbuyorsellgoldondemand.Mostothermajorcountrieswereonaso-calledgold-exchangestandard,underwhichthey,too,specifiedanofficialpriceforgoldintermsoftheirowncur-rencies.ThatofficialpriceofgoldintheircurrencydividedbytheU.S.officialpricegaveanofficialexchangerate,thatis,thepriceoftheircurrencyintermsofthedollar.Theymightormightnot TheAnatomyofCrisis87buyandsellgoldfreelyattheofficialprice,buttheycommittedthemselvestokeeptheexchangeratefixedattheleveldeterminedbythetwoofficialpricesofgoldbybuyingandsellingdollarsondemandatthatexchangerate.Undersuchasystem,ifUnitedStatesresidents,orotherswhohaddollars,spent(orlentorgave)abroadmoredollarsthantherecipientsofthosedollarswantedtospend(orlendorgive)intheUnitedStates,therecipientswoulddemandgoldforthedifference.GoldwouldgofromtheUnitedStatestoforeigncountries.Ifthebalancewasintheoppositedirection,sothatholdersofforeigncurrencieswantedtospend(orlendorgive)moredollarsintheUnitedStatesthanholdersofdollarswantedtoconvertintoforeigncurrenciestospend(orlendorgive)abroad,theywouldgettheextradollarsbybuyingthemfromtheircentralbanksattheofficialexchangerates.Thecentralbanks,inturn,wouldgettheextradollarsbysendinggoldtotheUnitedStates.(Inpractice,ofcourse,mostofthesetransfersdidnotinvolvetheliteralshippingofgoldacrosstheoceans.MuchofthegoldownedbyforeigncentralbankswasstoredinthevaultsoftheNewYorkFederalReserveBank,"earmarked"forthecountrythatownedit.Thetransferwasmadebychangingthelabelsonthecontainersholdingthegoldbarsinthedeepbasementsunderthebankbuildingat33LibertyStreetintheWallStreetarea.)IfthedepressionhadoriginatedabroadwhiletheU.S.economycontinued,foratime,toboom,thedeterioratingeconomiccon-ditionsabroadwouldhavereducedU.S.exportsand,byloweringthecostofforeigngoods,encouragedU.S.imports.Theresultwouldhavebeenanattempttospend(orlendorgive)moredollarsabroadthanrecipientswantedtouseintheUnitedStatesandanoutflowofgoldfromtheUnitedStates.TheoutflowofgoldwouldhavereducedtheFederalReserveSystem'sgoldreserves.Andthatwould,inturn,haveinducedtheSystemtoreducethequantityofmoney.Thatishowasystemoffixedex-changeratestransmitsdeflationary(orinflationary)pressurefromonecountrytoanother.Ifthishadbeenthecourseofevents,theFederalReservecouldcorrectlyhaveclaimedthatitsactionswerearesponsetopressurescomingfromabroad.Conversely,ifthedepressionoriginatedintheUnitedStates, 88FREETOCHOOSE:APersonalStatementanearlyeffectwouldbeadeclineinthenumberofU.S.dollarsthattheirholderswantedtouseabroadandanincreaseinthenumberofdollarsthatotherswantedtouseintheUnitedStates.ThatwouldhaveproducedaninflowofgoldintotheUnitedStates.That,inturn,wouldbringpressureonforeigncountriestoreducetheirquantityofmoneyandwouldbethewaytheU.S.deflationwouldbetransmittedtothem.Thefactsareclear.TheU.S.goldstockrosefromAugust1929toAugust1931,thefirsttwoyearsofthecontractionclinchingevidencethattheUnitedStateswasinthevanofthemovement.HadtheFederalReserveSystemfollowedtherulesofthegoldstandard,itshouldhavereactedtotheinflowofgoldbyin-creasingthequantityofmoney.Instead,itactuallyletthequan-tityofmoneydecline.Oncethedepressionwasunderwayandhadbeentransmittedtoothercountries,therewas,ofcourse,areflexinfluenceontheUnitedStatesanotherexampleofthefeedbackthatissoubiqui-tousinanycomplexeconomy.Thecountryinthevanguardofaninternationalmovementneednotstaythere.Francehadac-cumulatedalargestockofgoldasaresultofreturningtothegoldstandardin1928atanexchangeratethatundervaluedthefranc.ItthereforehadmuchleewayandcouldhaveresistedthedeflationarypressurecomingfromtheUnitedStates.Instead,FrancefollowedevenmoredeflationarypoliciesthantheUnitedStatesandnotonlybegantoaddtoitslargegoldstockbutalso,afterlate1931,todraingoldfromtheUnitedStates.Itsdubiousrewardforsuchleadershipwasthat,althoughtheU.S.economyhitbottomwhenitsuspendedgoldpaymentsinMarch1933,theFrencheconomydidnothitbottomuntilApril1935.EffectontheReserveSystemOneironicresultoftheperversemonetarypolicyoftheFederalReserveBoard,despitethegoodadviceoftheNewYorkFederalReserveBank,wasacompletevictoryfortheBoardagainstbothNewYorkandtheotherFederalReserveBanksinthestruggleforpower.Themyththatprivateenterprise,includingtheprivatebankingsystem,hadfailed,andthatgovernmentneededmore TheAnatomyofCrisis89powertocounteracttheallegedinherentinstabilityofthefreemarket,meantthattheSystem'sfailureproducedapoliticalen-vironmentfavorabletogivingtheBoardgreatercontrolovertheregionalbanks.OnesymbolofthechangewasthetransferoftheFederalRe-serveBoardfrommodestofficesintheU.S.TreasuryBuildingtoamagnificentGreektempleofitsownonConstitutionAvenue(sincesupplementedbyamassiveadditionalstructure).ThefinalsealontheshiftofpowerwasachangeinthenameoftheBoardandinthetitleoftheheadofficersoftheregionalbanks.IncentralbankcirclestheprestigioustitleisGovernor,notPresident.From1913to1935,theheadofaregionalbankwasdesignated"Governor";thecentralWashingtonbodywascalled"TheFederalReserveBoard";onlythechairmanoftheBoardwasdesignated"Governor";theremainingmembersweresimply"membersoftheFederalReserveBoard."TheBankingActof1935changedallthat.Theheadsoftheregionalbanksweredesignated"Presidents"insteadof"Governors";andthecompact"FederalReserveBoard"wasreplacedbythecumbrous"BoardofGovernorsoftheFederalReserveSystem,"solelyinorderthateachofthemembersoftheBoardcouldbedesignateda"Governor."Unfortunately,theincreaseinpower,prestige,andtrappingsofofficehasnotbeenaccompaniedbyacorrespondingimprove-mentinperformance.Since1935theSystemhaspresidedoverandgreatlycontributedtoamajorrecessionin193738,awartimeandimmediatepostwarinflation,andarollercoastereconomysince,withalternaterisesandfallsininflationandde-creasesandincreasesinunemployment.Eachinflationarypeakandeachtemporaryinflationarytroughhasbeenatahigherandhigherlevel,andtheaveragelevelofunemploymenthasgradu-allyincreased.TheSystemhasnotmadethesamemistakethatitmadein192933ofpermittingorfosteringamonetarycol-lapsebutithasmadetheoppositemistake,offosteringanun-dulyrapidgrowthinthequantityofmoneyandsopromotinginflation.Inaddition,ithascontinued,byswingingfromoneextremetoanother,toproducenotonlyboomsbutalsoreces-sions,somemild,somesharp. 90FREETOCHOOSE:APersonalStatementInonerespecttheSystemhasremainedcompletelyconsistentthroughout.Itblamesallproblemsonexternalinfluencesbeyonditscontrolandtakescreditforanyandallfavorableoccurrences.Ittherebycontinuestopromotethemyththattheprivateecon-omyisunstable,whileitsbehaviorcontinuestodocumenttherealitythatgovernmentistodaythemajorsourceofeconomicinstability. CHAPTER4CradletoGraveThepresidentialelectionof1932wasapoliticalwatershedfortheUnitedStates.HerbertHoover,seekingreelectionontheRepub-licanticket,wassaddledwithadeepdepression.Millionsofpeoplewereunemployed.Thestandardimageofthetimewasabreadlineoranunemployedpersonsellingapplesonastreetcorner.ThoughtheindependentFederalReserveSystemwastoblameforthemistakenmonetarypolicythatconvertedareces-sionintoacatastrophicdepression,thePresident,astheheadofstate,couldnotescaperesponsibility.Thepublichadlostfaithintheprevailingeconomicsystem.Peopleweredesperate.Theywantedreassurance,apromiseofawayout.FranklinDelanoRoosevelt,thecharismaticgovernorofNewYork,wastheDemocraticcandidate.Hewasafreshface,exud-inghopeandoptimism.Trueenough,hecampaignedontheoldprinciples.Hepromisedifelectedtocutwasteingovernmentandbalancethebudget,andberatedHooverforextravaganceingovernmentspendingandforpermittinggovernmentdeficitstomount.Atthesametime,bothbeforetheelectionandduringtheinterludebeforehisinauguration,hemetregularlywithagroupofadvisersattheGovernor'sMansioninAlbanyhis"braintrust,"asitwaschristened.Theydevisedmeasurestobetakenafterhisinaugurationthatgrewintothe"NewDeal"FDRhadpledgedtotheAmericanpeopleinacceptingtheDemocraticnominationforPresident.Theelectionof1932wasawatershedinnarrowlypoliticalterms.Intheseventy-twoyearsfrom1860to1932,Republicansheldthepresidencyforfifty-sixyears,Democratsforsixteen.Intheforty-eightyearsfrom1932to1980,thetableswereturned:Democratsheldthepresidencyforthirty-twoyears,Republicansforsixteen.Theelectionwasalsoawatershedinamoreimportantsense;91 92FREETOCHOOSE:APersonalStatementitmarkedamajorchangeinboththepublic'sperceptionoftheroleofgovernmentandtheactualroleassignedtogovernment.Onesimplesetofstatisticssuggeststhemagnitudeofthechange.FromthefoundingoftheRepublicto1929,spendingbygovern-mentsatalllevels,federal,state,andlocal,neverexceeded12percentofthenationalincomeexceptintimeofmajorwar,andtwo-thirdsofthatwasstateandlocalspending.Federalspendingtypicallyamountedto3percentorlessofthenationalincome.Since1933governmentspendinghasneverbeenlessthan20per-centofnationalincomeandisnowover40percent,andtwo-thirdsofthatisspendingbythefederalgovernment.True,muchoftheperiodsincetheendofWorldWarIIhasbeenaperiodofcoldorhotwar.However,since1946nondefensespendingalonehasneverbeenlessthan16percentofthenationalincomeandisnowroughlyone-thirdthenationalincome.Federalgovern-mentspendingaloneismorethanone-quarterofthenationalincomeintotal,andmorethanafifthfornondefensepurposesalone.Bythismeasuretheroleofthefederalgovernmentintheeconomyhasmultipliedroughlytenfoldinthepasthalf-century.RooseveltwasinauguratedonMarch4,1933whentheecon-omywasatitslowestebb.Manystateshaddeclaredabankingholiday,closingtheirbanks.Twodaysafterhewasinaugurated,PresidentRooseveltorderedallbanksthroughoutthenationtoclose.ButRooseveltusedhisinauguraladdresstodeliverames-sageofhope,proclaimingthat"theonlythingwehavetofearisfearitself."Andheimmediatelylaunchedafreneticprogramoflegislativemeasuresthe"hundreddays"ofaspecialcongres-sionalsession.ThemembersofFDR'sbraintrustweredrawnmainlyfromtheuniversitiesinparticular,ColumbiaUniversity.Theyreflectedthechangethathadoccurredearlierintheintellectualatmosphereonthecampusesfrombeliefinindividualresponsibility,laissez-faire,andadecentralizedandlimitedgovernmenttobeliefinsocialresponsibilityandacentralizedandpowerfulgovernment.Itwasthefunctionofgovernment,theybelieved,toprotectindi-vidualsfromthevicissitudesoffortuneandtocontroltheopera-tionoftheeconomyinthe"generalinterest,"evenifthatinvolvedgovernmentownershipandoperationofthemeansofproduction. CradletoGrave93Thesetwostrandswerealreadypresentinafamousnovelpub-lishedin1887,LookingBackwardbyEdwardBellamy,autopianfantasyinwhichaRipVanWinklecharacterwhogoestosleepintheyear1887awakensintheyear2000todiscoverachangedworld."Lookingbackward,"hisnewcompanionsexplaintohimhowtheutopiathatastonisheshimemergedinthe1930sapropheticdatefromthehelloftheI880s.Thatutopiainvolvedthepromiseofsecurity"fromcradletograve"thefirstuseofthatphrasewehavecomeacrossaswellasdetailedgovernmentplanning,includingcompulsorynationalservicebyallpersonsoveranextendedperiod.'Comingfromthisintellectualatmosphere,Roosevelt'sadviserswerealltooreadytoviewthedepressionasafailureofcapitalismandtobelievethatactiveinterventionbygovernmentandespe-ciallycentralgovernmentwastheappropriateremedy.Benevo-lentpublicservants,disinterestedexperts,shouldassumethepowerthatnarrow-minded,selfish"economicroyalists"had'abused.InthewordsofRooseveltsfirstinauguraladdress,"Themoneychangershavefledfromthehighseatsinthetempleofourcivilization."IndesigningprogramsforRoosevelttoadopt,theycoulddrawnotonlyonthecampus,butontheearlierexperienceofBis-'marcksGermany,FabianEngland,andmiddle-waySweden.TheNewDeal,asitemergedduringthe1930s,clearlyreflectedtheseviews.Itincludedprogramsdesignedtoreformthebasicstructureoftheeconomy.SomeofthesehadtobeabandonedwhentheyweredeclaredunconstitutionalbytheSupremeCourt,notablytheNRA(NationalRecoveryAdministration)andtheAAA(AgriculturalAdjustmentAdministration).Othersarestillwithus,notablytheSecuritiesandExchangeCommission,theNa-tionalLaborRelationsBoard,nationwideminimumwages.TheNewDealalsoincludedprogramstoprovidesecurityagainstmisfortune,notablySocialSecurity(OASI:OldAgeandSurvivorsInsurance),unemploymentinsurance,andpublicas-sistance.Thischapterdiscussesthesemeasuresandtheirlaterprogeny.TheNewDealalsoincludedprogramsintendedtobestrictlytemporary,designedtodealwiththeemergencysituationcreated 94FREETOCHOOSE:APersonalStatementbytheGreatDepression.Someofthetemporaryprogramsbe-camepermanent,asisthewaywithgovernmentprograms.Themostimportanttemporaryprogramsincluded"makework"projectsundertheWorksProgressAdministration,theuseofunemployedyouthtoimprovethenationalparksandforestsundertheCivilianConservationCorps,anddirectfederalrelieftotheindigent.Atthetime,theseprogramsservedausefulfunc-tion.Therewasdistressonavastscale;itwasimportanttodosomethingaboutthatdistresspromptly,bothtoassistthepeopleindistressandtorestorehopeandconfidencetothepublic.Theseprogramswerehastilycontrived,andnodoubtwereimperfectandwasteful,butthatwasunderstandableandunavoidableunderthecircumstances.TheRooseveltadministrationachievedaconsider-ablemeasureofsuccessinrelievingimmediatedistressandre-storingconfidence.WorldWarIIinterruptedtheNewDeal,whileatthesametimestrengtheninggreatlyitsfoundations.Thewarbroughtmas-sivegovernmentbudgetsandunprecedentedcontrolbygovern-mentoverthedetailsofeconomiclife:fixingofpricesandwagesbyedict,rationingofconsumergoods,prohibitionoftheproduc-tionofsomeciviliangoods,allocationofrawmaterialsandfinishedproducts,controlofimportsandexports.Theeliminationofunemployment,thevastproductionofwarmaterielthatmadetheUnitedStatesthe"arsenalofdemocracy,"andunconditionalvictoryoverGermanyandJapanallthesewerewidelyinterpretedasdemonstratingthecapacityofgovern-menttoruntheeconomicsystemmoreeffectivelythan"unplannedcapitalism."OneofthefirstpiecesofmajorlegislationenactedafterthewarwastheEmploymentActof1946,whichexpressedgovernment'sresponsibilityformaintaining"maximumemploy-ment,productionandpurchasingpower"and,ineffect,enactedKeynesianpoliciesintolaw.Thewar'seffectonpublicattitudeswasthemirrorimageofthedepression's.Thedepressionconvincedthepublicthatcapitalismwasdefective;thewar,thatcentralizedgovernmentwasefficient.Bothconclusionswerefalse.Thedepressionwasproducedbyafailureofgovernment,notofprivateenterprise.Astothewar,itisonethingforgovernmenttoexercisegreatcontroltemporarily CradletoGrave95forasingleoverridingpurposesharedbyalmostallcitizensandforwhichalmostallcitizensarewillingtomakeheavysacrifices;itisaverydifferentthingforgovernmenttocontroltheeconomypermanentlytopromoteavaguelydefined"publicinterest"shapedbytheenormouslyvariedanddiverseobjectivesofitscitizens.Attheendofthewaritlookedasifcentraleconomicplanningwasthewaveofthefuture.Thatoutcomewaspassionatelywel-comedbysomewhosawitasthedawnofaworldofplentysharedequally.Itwasjustaspassionatelyfearedbyothers,includingus,whosawitasaturntotyrannyandmisery.Sofar,neitherthehopesoftheonenorthefearsoftheotherhavebeenrealized.Governmenthasexpandedgreatly.However,thatexpansionhasnottakentheformofdetailedcentraleconomicplanningac-companiedbyeverwideningnationalizationofindustry,finance,andcommerce,assomanyofusfeareditwould.Experienceputanendtodetailedeconomicplanning,partlybecauseitwasnotsuccessfulinachievingtheannouncedobjectives,butalsobecauseitconflictedwithfreedom.ThatconflictwasclearlyevidentintheattemptbytheBritishgovernmenttocontrolthejobspeoplecouldhold.Adversepublicreactionforcedtheabandonmentoftheattempt.Nationalizedindustriesprovedsoinefficientandgener-atedsuchlargelossesinBritain,Sweden,France,andtheUnitedStatesthatonlyafewdie-hardMarxiststodayregardfurthernationalizationasdesirable.Theillusionthatnationalizationin-creasesproductiveefficiency,oncewidelyshared,isgone.Addi-tionalnationalizationdoesoccurpassengerrailroadserviceandsomefreightserviceintheUnitedStates,LeylandMotorsinGreatBritain,steelinSweden.Butitoccursforverydifferentreasonsbecauseconsumerswishtoretainservicessubsidizedbythegovernmentwhenmarketconditionscallfortheircurtail-mentorbecauseworkersinunprofitableindustriesfearunemploy-ment.Eventhesupportersofsuchnationalizationregarditasatbestanecessaryevil.Thefailureofplanningandnationalizationhasnoteliminatedpressureforaneverbiggergovernment.Ithassimplyaltereditsdirection.Theexpansionofgovernmentnowtakestheformofwelfareprogramsandofregulatoryactivities.AsW.AllenWallisputitinasomewhatdifferentcontext,socialism,"intellectually 96FREETOCHOOSE:APersonalStatementbankruptaftermorethanacenturyofseeingoneafteranotherofitsargumentsforsocializingthemeansofproductiondemol-ishednowseekstosocializetheresultsofproduction."2Inthewelfareareathechangeofdirectionhasledtoanex-plosioninrecentdecades,especiallyafterPresidentLyndonJohnsondeclareda"WaronPoverty"in1964.NewDealpro-gramsofSocialSecurity,unemploymentinsurance,anddirectreliefwereallexpandedtocovernewgroups;paymentswereincreased;andMedicare,Medicaid,foodstamps,andnumerousotherprogramswereadded.Publichousingandurbanrenewalprogramswereenlarged.Bynowthereareliterallyhundredsofgovernmentwelfareandincometransferprograms.TheDepart-mentofHealth,EducationandWelfare,establishedin1953toconsolidatethescatteredwelfareprograms,beganwithabudgetof$2billion,lessthan5percentofexpendituresonnationaldefense.Twenty-fiveyearslater,in1978,itsbudgetwas$160billion,oneandahalftimesasmuchastotalspendingonthearmy,thenavy,andtheairforce.Ithadthethirdlargestbudgetintheworld,exceededonlybytheentirebudgetoftheU.S.gov-ernmentandoftheSovietUnion.Thedepartmentsupervisedahugeempire,penetratingeverycornerofthenation.Morethanoneoutofevery100personsemployedinthiscountryworkedintheHEWempire,eitherdirectlyforthedepartmentorinpro-gramsforwhichHEWhadresponsibilitybutwhichwereadmin-isteredbystateorlocalgovernmentunits.Allofuswereaffectedbyitsactivities.(Inlate1979,HEWwassubdividedbythecrea-tionofaseparateDepartmentofEducation.)Noonecandisputetwosuperficiallycontradictoryphenomena:widespreaddissatisfactionwiththeresultsofthisexplosioninwelfareactivities;continuedpressureforfurtherexpansion.Theobjectiveshaveallbeennoble;theresults,disappointing.SocialSecurityexpenditureshaveskyrocketed,andthesystemisindeepfinancialtrouble.Publichousingandurbanrenewalpro-gramshavesubtractedfromratherthanaddedtothehousingavailabletothepoor.Publicassistancerollsmountdespitegrow-ingemployment.Bygeneralagreement,thewelfareprogramisa"mess"saturatedwithfraudandcorruption.Asgovernmenthaspaidalargershareofthenation'smedicalbills,bothpatients CradletoGrave97andphysicianscomplainofrocketingcostsandoftheincreasingimpersonalityofmedicine.Ineducation,studentperformancehasdroppedasfederalinterventionhasexpanded(Chapter6).Therepeatedfailureofwell-intentionedprogramsisnotanaccident.Itisnotsimplytheresultofmistakesofexecution.Thefailureisdeeplyrootedintheuseofbadmeanstoachievegoodobjectives.Despitethefailureoftheseprograms,thepressuretoexpandthemgrows.FailuresareattributedtothemiserlinessofCongressinappropriatingfunds,andsoaremetwithacryforstillbiggerprograms.Specialintereststhatbenefitfromspecificprogramspressfortheirexpansionforemostamongthemthemassivebu-reaucracyspawnedbytheprograms.Anattractivealternativetothepresentwelfaresystemisanega-tiveincometax.Thisproposalhasbeenwidelysupportedbyin-dividualsandgroupsofallpoliticalpersuasions.AvarianthasbeenproposedbythreePresidents;yetitseemspoliticallyun-feasiblefortheforeseeablefuture.THEEMERGENCEOFTHEMODERNWELFARESTATEThefirstmodernstatetointroduceonafairlylargescalethekindofwelfaremeasuresthathavebecomepopularinmostsocietiestodaywasthenewlycreatedGermanempireundertheleadershipofthe"IronChancellor,"OttovonBismarck.Intheearly1880sheintroducedacomprehensiveschemeofsocialsecurity,offeringtheworkerinsuranceagainstaccident,sickness,andoldage.Hismotiveswereacomplexmixtureofpaternalisticconcernforthelowerclassesandshrewdpolitics.Hismeasuresservedtounder-minethepoliticalappealofthenewlyemergingSocialDemocrats.ItmayseemparadoxicalthatanessentiallyautocraticandaristocraticstatesuchaspreWorldWarIGermanyintoday'sjargon,aright-wingdictatorshipshouldhaveledthewayinintroducingmeasuresthataregenerallylinkedtosocialismandtheLeft.ButthereisnoparadoxevenputtingtoonesideBismarck'spoliticalmotives.Believersinaristocracyandsocialismshareafaithincentralizedrule,inrulebycommandratherthanbyvoluntarycooperation.Theydifferinwhoshouldrule:whether 98FREETOCHOOSE:APersonalStatementanelitedeterminedbybirthorexpertssupposedlychosenonmerit.Bothproclaim,nodoubtsincerely,thattheywishtopro-motethewell-beingofthe"generalpublic,"thattheyknowwhatisinthe"publicinterest"andhowtoattainitbetterthantheordinaryperson.Both,therefore,professapaternalisticphilos-ophy.Andbothendup,iftheyattainpower,promotingtheinterestsoftheirownclassinthenameofthe"generalwelfare."Moreimmediateprecursorsofthesocialsecuritymeasuresadoptedinthe1930swerethemeasurestakeninGreatBritainbeginningwiththeOldAgePensionsActpassedin1908andtheNationalInsuranceActin1911.TheOldAgePensionsActgrantedtoanypersonovertheageofseventywhoseincomefellbelowaspecifiedsumaweeklypensionthatvariedaccordingtotherecipient'sincome.Itwasstrictlynoncontributory,andsowasinonesensesimplydirectreliefanextensionofPoorLawprovisionsthathadinoneformoranotherexistedinGreatBritainforcenturies.However,asA.V.Diceypointsout,therewasafundamentaldifference.Thepensionwasregardedasarightwhosereceipt,inthewordsoftheact,"shallnotdeprivethepensionerofanyfranchise,rightorprivilege,orsubjecthimtoanydisability."ItshowshowfarwehavecomefromthatmodestbeginningthatDicey,commentingontheactfiveyearsafteritsenactment,couldwrite,"SurelyasensibleandabenevolentmanmaywellaskhimselfwhetherEnglandasawholewillgainbyenactingthatthereceiptofpoorrelief,intheshapeofapension,shallbeconsistentwiththepen-sioner'sretainingtherighttojoinintheelectionofaMemberofParliament."ItwouldtakeamodernDiogeneswithapowerfullamptofindanyonetodaywhocouldvoteifreceiptofgovernmentlargessewereadisqualification.TheNationalInsuranceActaimed"attheattainmentoftwoobjects:Thefirstisthatanyperson...whoisemployedintheUnitedKingdom...shall,fromtheageof16to70,beinsuredagainstill-health,orinotherwords,beinsuredthemeansforcuringillness....ThesecondobjectisthatanysuchpersonwhoisemployedincertainemploymentsspecifiedintheActshallbeinsuredagainstunemployment,or,inotherwords,besecuredsupportduringperiodsofunemployment."'Unlikeold-agepen- CradletoGrave99sions,thesystemestablishedwascontributory.Itwastobefinancedpartlybyemployers,partlybyemployees,partlybythegovernment.Bothbecauseofitscontributorynatureandbecauseofthecontingenciesthatitsoughttoinsureagainst,thisactwasanevenmoreradicaldeparturefrompriorpracticethantheOldAgePensionsAct."[U]ndertheNationalInsuranceAct,"wroteDicey,theStateincursnewand,itmaybe,veryburdensome,duties,andconfersuponwage-earnersnewandveryextensiverights....[B]e-fore1908thequestionwhetheraman,richorpoor,shouldinsurehishealth,wasamatterleftentirelytothefreediscretionorindiscretionofeachindividual.HisconductnomoreconcernedtheStatethanthequestionwhetherheshouldwearablackcoatorabrowncoat.ButtheNationalInsuranceActwill,inthelongrun,bringupontheState,thatis,uponthetaxpayers,afarheavierresponsibilitythanisanticipatedbyEnglishelectors....[Ulnemploymentinsur-ance...isinfacttheadmissionbyaStateofitsdutytoinsureamanagainsttheevilensuingfromhishavingnowork....TheNationalInsuranceActisinaccordancewiththedoctrineofsocial-ism,itishardlyreconcilablewiththeliberalism,oreventheradi-5calismof1865.TheseearlyBritishmeasures,likeBismarck's,illustratetheaffinitybetweenaristocracyandsocialism.In1904WinstonChurchilllefttheTorypartythepartyofthearistocracyfortheLiberalparty.AsamemberofLloydGeorge'scabinethetookaleadingroleinsocialreformlegislation.Thechangeofparty,whichprovedtemporary,requirednochangeofprinciplesasitwouldhaveahalf-centuryearlier,whentheLiberalpartywasthepartyoffreetradeabroadandlaissez-faireathome.Thesocialleg-islationhesponsored,whiledifferentinscopeandkind,wasinthetraditionofthepaternalisticFactoryActsthathadbeenadoptedinthenineteenthcenturylargelyundertheinfluenceoftheso-calledToryRadicals"agroupdrawninconsiderablepartfromthearistocracyandimbuedwithasenseofobligationtolookaftertheinterestsoftheworkingclasses,andtodosowiththeirconsentandbacking,notthroughcoercion.ItisnoexaggerationtosaythattheshapeofBritaintodayowesmoretoToryprinciplesofthenineteenthcenturythantotheideasofKarlMarxandFriedrichEngels. 100FREETOCHOOSE:APersonalStatementAnotherexamplethatdoubtlessinfluencedFDR'sNewDealwasSweden,TheMiddleWay,asMarquisChildswouldtitlehisbook,publishedin1936.Swedenenactedcompulsoryold-agepensionsin1915asacontributorysystem.Pensionswerepayabletoallaftertheageofsixty-sevenregardlessoffinancialstatus.Thesizeofthepensiondependedonthepaymentsindividualshadmadeintothesystem.Suchpaymentsweresupplementedbygov-ernmentfunds.Inadditiontoold-agepensionsand,later,unemploymentin-surance,Swedenwentinforgovernmentownershipofindustry,publichousing,andconsumers'cooperativesonalargescale.RESULTSOFTHEWELFARESTATEBritainandSweden,longthetwocountriesmostfrequentlypointedtoassuccessfulwelfarestates,havehadincreasingdif-ficulties.Dissatisfactionhasmountedinbothcountries.Britainhasfounditincreasinglydifficulttofinancegrowinggovernmentspending.Taxeshavebecomeamajorsourceofre-sentment.Andresentmenthasbeenmultipliedmanyfoldbytheimpactofinflation(seeChapter9).TheNationalHealthService,oncetheprizejewelinthewelfarestatecrownandstillwidelyregardedbymuchoftheBritishpublicasoneofthegreatachieve-mentsoftheLabourgovernment,hasrunintoincreasingdiffi-cultiesplaguedbystrikes,risingcosts,andlengtheningwaitinglistsofpatients.Andmoreandmorepeoplehavebeenturningtoprivatephysicians,privatehealthinsurance,hospitals,andresthomes.Thoughstillaminorsectorofthehealthindustry,theprivatesectorhasbeengrowingrapidly.UnemploymentinBritainhasmountedalongwithinflation.Thegovernmenthashadtorenegeonitscommitmenttofullemployment.Underlyingeverythingelse,productivityandrealincomeinBritainhaveatbestbeenstagnant,sothatBritainhasbeenfallingfarbehinditscontinentalneighbors.Thedissatisfac-tionsurfaceddramaticallyintheToryparty'ssizableelectionvictoryin1979,avictorygainedonMargaretThatcher'spromiseofadrasticchangeingovernmentdirection.SwedenhasdonefarbetterthanBritain.Itwassparedthe CradletoGrave101burdenoftwoworldwarsand,indeed,reapedeconomicbenefitsfromitsneutrality.Nonetheless,ittoohasrecentlybeenex-periencingthesamedifficultiesasBritain:highinflationandhighunemployment;oppositiontohightaxes,resultingintheemigra-tionofsomeofitsmosttalentedpeople;dissatisfactionwithso-cialprograms.Here,too,thevotershaveexpressedtheirviewsattheballotbox.In1976thevotersendedoverfourdecadesofrulebytheSocialDemocraticparty,andreplaceditbyacoalitionofotherparties,thoughasyettherehasbeennobasicchangeinthedirectionofgovernmentpolicy.NewYorkCityisthemostdramaticexampleintheUnitedStatesoftheresultsoftryingtodogoodthroughgovernmentpro-grams.NewYorkisthemostwelfare-orientedcommunityintheUnitedStates.SpendingbythecitygovernmentislargerrelativetoitspopulationthaninanyothercityintheUnitedStatesdoublethatinChicago.ThephilosophythatguidedthecitywasexpressedbyMayorRobertWagnerinhis1965budgetmessage:"Idonotproposetopermitourfiscalproblemstosetthelimitsofourcommitmentstomeettheessentialneedsofthepeopleofthecity."Wagnerandhissuccessorsproceededtointerpret"essen-tialneeds"verybroadlyindeed.Butmoremoney,moreprograms,moretaxesdidn'twork.Theyledtofinancialcatastrophewithoutmeeting"theessentialneedsofthepeople"evenonanarrowinter-pretation,letaloneonWagner's.BankruptcywaspreventedonlybyassistancefromthefederalgovernmentandtheStateofNewYork,inreturnforwhichNewYorkCitysurrenderedcontroloveritsaffairs,becomingacloselysupervisedwardofstateandfederalgovernments.NewYorkersnaturallysoughttoblameoutsideforcesfortheirproblem,butasKenAulettawroteinarecentbook,NewYork"wasnotcompelledtocreateavastmunicipalhospitalorCityUniversitysystem,tocontinuefreetuition,instituteopenenroll-ment,ignorebudgetlimitations,imposethesteepesttaxesinthenation,borrowbeyonditsmeans,subsidizemiddle-incomehous-ing,continuerigidrentcontrols,rewardmunicipalworkerswithlushpension,payandfringebenefits."Hequips,"Goadedbyliberalism'scompassionandideologicalcommitmenttotheredistributionofwealth,NewYorkofficials 102FREETOCHOOSE:APersonalStatementhelpedredistributemuchofthetaxbaseandthousandsofjobsoutofNewYork."8OnefortunatecircumstancewasthatNewYorkCityhasnopowertoissuemoney.Itcouldnotuseinflationasameansoftaxationandthuspostponetheevilday.Unfortunately,insteadofreallyfacinguptoitsproblems,itsimplycriedforhelpfromtheStateofNewYorkandthefederalgovernment.Letustakeacloserlookatafewotherexamples.SocialSecurityThemajorwelfare-stateprogramintheUnitedStatesonthefed-erallevelisSocialSecurityoldage,survivors,disability,andhealthinsurance.Ontheonehand,itisasacredcowthatnopoliticiancanquestionasBarryGoldwaterdiscoveredin1964.Ontheotherhand,itisthetargetofcomplaintsfromallsides.Personsreceivingpaymentscomplainthatthesumsareinade-quatetomaintainthestandardoflifetheyhadbeenledtoexpect.PersonspayingSocialSecuritytaxescomplainthattheyareaheavyburden.Employerscomplainthatthewedgeintroducedbythetaxesbetweenthecosttotheemployerofaddingaworkertohispayrollandthenetgaintotheworkeroftakingajobcreatesunemployment.Taxpayerscomplainthattheunfundedobliga-tionsoftheSocialSecuritysystemtotalmanytrillionsofdollars,andthatnoteventhepresenthightaxeswillkeepitsolventforlong.Andallcomplaintsarejustified!SocialSecurityandunemploymentinsurancewereenactedinthe1930stoenableworkingpeopletoprovidefortheirownre-tirementandfortemporaryperiodsofunemploymentratherthanbecomingobjectsofcharity.Publicassistancewasintroducedtoaidpersonsindistress,withtheexpectationthatitwouldbephasedoutasemploymentimprovedandasSocialSecuritytookoverthetask.Bothprogramsstartedsmall.BothhavegrownlikeTopsy.SocialSecurityhasshownnosignofdisplacingpublicassistancebothareatalltimehighsintermsofbothdollarexpendituresandnumberofpersonsreceivingpayments.In1978paymentsunderSocialSecurityforretirement,disability,unem-ployment,hospitalandmedicalcare,andtosurvivorstotaled CradletoGrave103morethan$130billionandweremadetomorethan40millionrecipients.'Publicassistancepaymentsofmorethan$40billionweremadetomorethan17millionrecipients.Tokeepthediscussionwithinmanageablelimits,weshallre-strictthissectiontothemajorcomponentofSocialSecurityoldageandsurvivors'benefits,whichaccountedfornearlytwo-thirdsoftotalexpendituresandthree-quartersoftherecipients.Thenextsectiondealswithpublicassistanceprograms.SocialSecuritywasenactedinthe1930sandhasbeenpromotedeversincethroughmisleadinglabelinganddeceptiveadvertising.AprivateenterprisethatengagedinsuchlabelingandadvertisingwoulddoubtlessbeseverelycastigatedbytheFederalTradeCom-mission.Considerthefollowingparagraphthatappearedyearafteryearuntil1977inmillionsofcopiesofanunsignedHEWbookletentitledYourSocialSecurity:"Thebasicideaofsocialsecurityisasimpleone:Duringworkingyearsemployees,theiremploy-ers,andself-employedpeoplepaysocialsecuritycontributionswhicharepooledintospecialtrustfunds.Whenearningsstoporarereducedbecausetheworkerretires,becomesdisabled,ordies,monthlycashbenefitsarepaidtoreplacepartoftheearningsthe10familyhaslost."ThisisOrwelliandoublethink.Payrolltaxesarelabeled"contributions"(or,asthePartymighthaveputitinthebookNineteenEighty-four,""Compul-soryisVoluntary").Trustfundsareconjuredwithasiftheyplayedanimportantrole.Infact,theyhavelongbeenextremelysmall($32billionforOASIasofJune1978,orlessthanhalfayear'soutlaysatthecurrentrate)andconsistonlyofpromisesbyonebranchofgov-ernmenttopayanotherbranch.Thepresentvalueoftheold-agepensionsalreadypromisedtopersonscoveredbySocialSecurity(boththosewhohaveretiredandthosewhohavenot)isinthetrillionsofdollars.Thatisthesizeofthetrustfundthatwouldberequiredtojustifythewordsofthebooklet(inOrwellianterms,"LittleisMuch").Theimpressionisgiventhataworker's"benefits"arefinancedbyhis"contributions."Thefactisthattaxescollectedfromper- 104FREETOCHOOSE:APersonalStatementsonsatworkwereusedtopaybenefitstopersonswhohadretiredortotheirdependentsandsurvivors.Notrustfundinanymean-ingfulsensewasbeingaccumulated("IamYou").Workerspayingtaxestodaycanderivenoassurancefromtrustfundsthattheywillreceivebenefitswhentheyretire.Anyassur-ancederivessolelyfromthewillingnessoffuturetaxpayerstoimposetaxesonthemselvestopayforbenefitsthatpresenttax-payersarepromisingthemselves.Thisone-sided"compactbe-tweenthegenerations,"foistedongenerationsthatcannotgivetheirconsent,isaverydifferentthingfroma"trustfund."Itismorelikeachainletter.TheHEWbooklets,includingthosecurrentlybeingdistributed,alsosay,"NineoutoftenworkingpeopleintheUnitedStatesareearningprotectionforthemselvesandtheirfamiliesundertheso-cialsecurityprogram."12Moredoublethink.Whatnineoutoftenworkingpeoplearenowdoingispayingtaxestofinancepaymentstopersonswhoarenotworking.Theindividualworkerisnot"earning"protectionforhimselfandhisfamilyinthesenseinwhichapersonwhocontributestoaprivatevestedpensionsystemcanbesaidtobe"earning"hisownprotection.Heisonly"earning"protectioninthepoliticalsenseofsatisfyingcertainadministrativerequirementsforqualifyingforbenefits.Personswhonowreceivepaymentsgetmuchmorethantheactuarialvalueofthetaxesthattheypaidandthatwerepaidontheirbehalf.YoungpersonswhonowpaySocialSecuritytaxesarebeingpromisedmuchlessthantheac-tuarialvalueofthetaxesthattheywillpayandthatwillbepaidontheirbehalf.SocialSecurityisinnosenseaninsuranceprograminwhichindividualpaymentspurchaseequivalentactuarialbenefits.Asevenitsstrongestsupportersadmit,"Therelationshipbetweenindividualcontributions(thatis,payrolltaxes)andbenefitsre-13ceivedisextremelytenuous."SocialSecurityis,rather,acom-binationofaparticulartaxandaparticularprogramoftransferpayments.Thefascinatingthingisthatwehavenevermetanyone,what-everhispoliticalpersuasion,whowoulddefendeitherthetaxsystembyitselforthebenefitsystembyitself.Hadthetwocorn- CradletoGrave105ponentsbeenconsideredseparately,neitherwouldeverhavebeenadopted!Considerthetax.Exceptforarecentminormodification(re-batesundertheearnedincomecredit),itisaflatrateonwagesuptoamaximum,ataxthatisregressive,bearingmostheavilyonpersonswithlowincomes.Itisataxonwork,whichdiscour-agesemployersfromhiringworkersanddiscouragespeoplefromseekingwork.Considerthebenefitarrangement.Paymentsaredeterminedneitherbytheamountpaidbythebeneficiarynorbyhisfinancialstatus.Theyconstituteneitherafairreturnforpriorpaymentsnoraneffectivewayofhelpingtheindigent.Thereisalinkbe-tweentaxespaidandbenefitsreceived,butthatisatbestafigleaftogivesomesemblanceofcredibilitytocallingthecombination"insurance."Theamountofmoneyapersongetsdependsonallsortsofadventitiouscircumstances.Ifhehappenedtoworkinacoveredindustry,hegetsabenefit;ifhehappenedtoworkinanoncoveredindustry,hedoesnot.Ifheworkedinacoveredindustryforonlyafewquarters,hegetsnothing,nomatterhowindigenthemaybe.Awomanwhohasneverworked,butisthewifeorwidowofamanwhoqualifiesforthemaximumbenefit,getspreciselythesameamountasasimilarlysituatedwomanwho,inaddition,qualifiesforbenefitsonthebasisofherownearnings.Apersonoversixty-fivewhodecidestoworkandwhoearnsmorethanamodestamountayearnotonlygetsnobene-fitsbut,toaddinsulttoinjury,mustpayadditionaltaxessup-posedlytofinancethebenefitsthatarenotbeingpaid.Andthislistcouldbeextendedindefinitely.WefindithardtoconceiveofagreatertriumphofimaginativepackagingthanthecombinationofanunacceptabletaxandanunacceptablebenefitprogramintoaSocialSecurityprogramthatiswidelyregardedasoneofthegreatestachievementsoftheNewDeal.AswehavegonethroughtheliteratureonSocialSecurity,wehavebeenshockedattheargumentsthathavebeenusedtodefendtheprogram.Individualswhowouldnotlietotheirchildren,theirfriends,ortheircolleagues,whomallofuswouldtrustimplicitlyinthemostimportantpersonaldealings,havepropagatedafalse 106FREETOCHOOSE:APersonalStatementviewofSocialSecurity.Theirintelligenceandexposuretocon-traryviewsmakeithardtobelievethattheyhavedonesounin-tentionallyandinnocently.Apparentlytheyhaveregardedthem-selvesasanelitegroupwithinsocietythatknowswhatisgoodforotherpeoplebetterthanthosepeopledoforthemselves,anelitethathasadutyandaresponsibilitytopersuadethevoterstopasslawsthatwillbegoodforthem,eveniftheyhavetofoolthevotersinordertogetthemtodoso.Thelong-runfinancialproblemsofSocialSecuritystemfromonesimplefact:thenumberofpeoplereceivingpaymentsfromthesystemhasincreasedandwillcontinuetoincreasefasterthanthenumberofworkersonwhosewagestaxescanbeleviedtofinancethosepayments.In1950seventeenpersonswereemployedforeverypersonreceivingbenefits;by1970onlythree;byearlyinthetwenty-firstcentury,ifpresenttrendscontinue,atmosttwowillbe.Astheseremarksindicate,theSocialSecurityprograminvolvesatransferfromtheyoungtotheold.Tosomeextentsuchatrans-ferhasoccurredthroughouthistorytheyoungsupportingtheirparents,orotherrelatives,inoldage.Indeed,inmanypoorcoun-trieswithhighinfantdeathrates,likeIndia,thedesiretoassureoneselfofprogenywhocanprovidesupportinoldageisamajorreasonforhighbirthratesandlargefamilies.Thedifferencebe-tweenSocialSecurityandearlierarrangementsisthatSocialSe-curityiscompulsoryandimpersonalearlierarrangementswerevoluntaryandpersonal.Moralresponsibilityisanindividualmat-ter,notasocialmatter.Childrenhelpedtheirparentsoutofloveorduty.Theynowcontributetothesupportofsomeoneelse'sparentsoutofcompulsionandfear.Theearliertransfersstrength-enedthebondsofthefamily;thecompulsorytransfersweakenthem.Inadditiontothetransferfromyoungtoold,SocialSecurityalsoinvolvesatransferfromthelesswell-offtothebetter-off.True,thebenefitscheduleisbiasedinfavorofpersonswithlowerwages,butthiseffectismuchmorethanoffsetbyanother.Chil-drenfrompoorfamiliestendtostartworkandstartpayingemploymenttaxesatarelativelyearlyage;childrenfromhigherincomefamiliesatamuchlaterage.Attheotherendofthelife CradletoGrave107cycle,personswithlowerincomesontheaveragehaveashorterlifespanthanpersonswithhigherincomes.Thenetresultisthatthepoortendtopaytaxesformoreyearsandreceivebenefitsforfeweryearsthantherichallinthenameofhelpingthepoor!ThisperverseeffectisreinforcedbyanumberofotherfeaturesofSocialSecurity.Theexemptionofbenefitsfromincometaxismorevaluable,thehighertheotherincomeoftherecipient.Therestrictiononpaymentstopersonssixty-fivetoseventy-two(tobecomeseventyin1982)isbasedsolelyonearningsduringthoseyearsandnotonothercategoriesofincome$1millionofdivi-dendsdoesnotdisqualifyanyonefromreceivingSocialSecuritybenefits;wagesorsalaryofmorethan$4,500ayearproducea14lossof$1ofbenefitsforevery$2ofearnings.Allinall,SocialSecurityisanexcellentexampleofDirector'sLawinoperation,namely,"Publicexpendituresaremadefortheprimarybenefitofthemiddleclass,andfinancedwithtaxeswhichareborneinconsiderablepartbythepoorandrich."15PublicAssistanceWecanbefarbrieferindiscussingthe"welfaremess"thanindis-cussingSocialSecuritybecauseonthisquestionthereismoreagreement.Thedefectsofourpresentsystemofwelfarehavebe-comewidelyrecognized.Thereliefrollsgrowdespitegrowingaffluence.Avastbureaucracyislargelydevotedtoshufflingpa-persratherthantoservingpeople.Oncepeoplegetonrelief,itishardtogetoff.Thecountryisincreasinglydividedintotwoclassesofcitizens,onereceivingreliefandtheotherpayingforit.Thoseonreliefhavelittleincentivetoearnincome.Reliefpay-mentsvarywidelyfromonepartofthecountrytoanother,whichencouragesmigrationfromtheSouthandtheruralareastotheNorth,andparticularlytourbancenters.Personswhoareorhavebeenonreliefaretreateddifferentlyfromthosewhohavenotbeenonrelief(theso-calledworkingpoor)thoughbothmaybeonthesameeconomiclevel.Publicangerisrepeatedlystirredbywide-spreadcorruptionandcheating,well-publicizedreportsofwelfare"queens"drivingaroundinCadillacsboughtwithmultiplereliefchecks. 108FREETOCHOOSE:APersonalStatementAscomplaintsaboutwelfareprogramshavemounted,sohavethenumberofprogramstobecomplainedabout.Thereisarag-bagofwellover100federalprogramsthathavebeenenactedtohelpthepoor.TherearemajorprogramslikeSocialSecurity,un-employmentinsurance,Medicare,Medicaid,aidtofamilieswithdependentchildren,supplementalsecurityincome,foodstamps,andmyriadminoronesmostpeoplehaveneverheardof,suchasassistancetoCubanrefugees;specialsupplementalfeedingforwomen,infants,andchildren;intensiveinfantcareproject;rentsupplements;urbanratcontrol;comprehensivehemophiliatreat-mentcenters;andsoon.Oneprogramduplicatesanother.Somefamilieswhomanagetoreceiveassistancefromnumerouspro-gramsendupwithanincomedecidedlyhigherthantheaverageincomeforthecountry.Otherfamilies,throughignoranceorapathy,failtoapplyforprogramsthatmighteaserealdistress.Buteveryprogramrequiresabureaucracytoadministerit.Overandabovethemorethan$130billionperyearspentun-derSocialSecurity,expenditureontheseprogramsisaround$90billionayeartentimestheamountspentin1960.Thisisclearlyoverkill.Theso-calledpovertylevelfor1978,asestimatedbytheCensus,wascloseto$7,000foranonfarmfamilyoffour,andabout25millionpersonsweresaidtobemembersoffamiliesbelowthepovertylevel.Thatisagrossoverestimatebecauseitclassifiesfamiliessolelybymoneyincome,neglectingentirelyanyincomeinkindfromanownedhome,agarden,foodstamps,Medicaid,publichousing.SeveralstudiessuggestthatallowingfortheseomissionswouldcuttheCensusestimatesbyone-half16orthree-quarters.ButevenifyouusetheCensusestimates,theyimplythatexpendituresonwelfareprogramsamountedtoabout$3,500perpersonbelowthepovertylevel,orabout$14,000perfamilyoffourroughlytwicethepovertylevelitself.Ifthesefundswereallgoingtothe"poor,"therewouldbenopoorlefttheywouldbeamongthecomfortablywell-off,atleast.Clearly,thismoneyisnotgoingprimarilytothepoor.Someissiphonedoffbyadministrativeexpenditures,supportingamassivebureaucracyatattractivepayscales.Somegoestopeoplewhobynostretchoftheimaginationcanberegardedasindigent.Thesearethecollegestudentswhogetfoodstampsandperhapsother CradletoGrave109formsofassistance,thefamilieswithcomfortableincomeswhogethousingsubsidies,andsooninmorevariedformsthanyourorourimaginationcanencompass.Somegoestothewelfarecheats.Yetthismuchmustbesaidfortheseprograms.UnlikethatofSocialSecurityrecipients,theaverageincomeofthepeoplewhoaresubsidizedbythesevastsumsisprobablylowerthantheaverageincomeofthepeoplewhopaythetaxestosupportthemthougheventhatcannotbeassertedwithcertainty.AsMartinAndersonputit,Theremaybegreatinefficienciesinourwelfareprograms,theleveloffraudmayheveryhigh,thequalityofmanagementmaybeter-rible,theprogramsmayoverlap,inequitiesmayabound,andthefinancialincentivetoworkmaybevirtuallynon-existent.Butifwestephackandjudgethevastarrayofwelfareprograms...bytwobasiccriteriathecompletenessofcoverageforthosewhoreallyneedhelp,andtheadequacyoftheamountofhelptheydoreceivethepicturechangesdramatically.Judgedbythesestandardsourwel-17faresystemhasbeenabrilliantsuccess.HousingSubsidiesFromsmallbeginningsintheNewDealyears,governmentpro-gramstoprovidehousinghaveexpandedrapidly.AnewCabinetdepartment,theDepartmentofHousingandUrbanDevelopment,wascreatedin1965.Itnowhasastaffofnearly20,000personsthatdisbursesmorethan$10billionayear.Federalhousingpro-gramshavebeensupplementedbystateandcitygovernmentprograms,especiallyinNewYorkStateandNewYorkCity.Theprogramsstartedwithgovernmentconstructionofhousingunitsforlow-incomefamilies.Afterthewaranurbanrenewalprogramwasadded,andinmanyareas,publichousingwasex-tendedto"middle-income"families.Morerecently"rentsupple-ments"governmentsubsidizationofrentsforprivatelyownedhousingunitshavebeenadded.Intermsoftheinitialobjective,theseprogramshavebeenaconspicuousfailure.Moredwellingunitsweredestroyedthanwerebuilt.Thosefamilieswhogotapartmentsatsubsidizedrentsbenefited.Thosefamilieswhowereforcedtomovetopoorer 110FREETOCHOOSE:APersonalStatementhousingbecausetheirhomesweredestroyedandnotreplacedwereworseoff.HousingisbetterandmorewidelydistributedintheUnitedStatestodaythanwhenthepublichousingprogramwasstarted,butthathasoccurredthroughprivateenterprisede-spitethegovernmentsubsidies.Thepublichousingunitsthemselveshavefrequentlybecomeslumsandhotbedsofcrime,especiallyjuveniledelinquency.ThemostdramaticcasewasthePruitt-IgoepublichousingprojectinSt.Louisamassiveapartmentcomplexcoveringfifty-threeacresthatwonanarchitecturalprizefordesign.Itdeterioratedtosuchanextentthatpartofithadtobeblownup.Atthatpointonly600of2,000unitswereoccupiedandtheprojectwassaidtolooklikeanurbanbattleground.WewellrememberanepisodethatoccurredwhenwetouredtheWattsareaofLosAngelesin1968.Wewerebeingshowntheareabythemanwhowasinchargeofawell-runself-helpprojectsponsoredbyatradeunion.Whenwecommentedontheattrac-tivenessofsomeapartmenthousesinthearea,hebrokeoutan-grily:"That'stheworstthingthateverhappenedtoWatts.That'spublichousing."Hewentontosay,"Howdoyouexpectyoung-sterstodevelopgoodcharacterandvalueswhentheyliveinadevelopmentconsistingentirelyofbrokenfamilies,almostallonwelfare?"Hedeploredalsotheeffectofthepublichousingde-velopmentsonjuveniledelinquencyandontheneighborhoodschools,whichweredisproportionatelyfilledwithchildrenfrombrokenfamilies.Recentlyweheardasimilarevaluationofpublichousingfromaleaderofa"sweat-equity"housingprojectintheSouthBronx,NewYork.Thearealookslikeabombed-outcity,withmanybuildingsabandonedasaresultofrentcontrolandothersde-stroyedbyriots.The"sweat-equity"grouphasundertakentorehabilitateanareaoftheseabandonedbuildingsbytheirowneffortsintohousingthattheycansubsequentlyoccupy.Initiallytheyreceivedoutsidehelponlyintheformofafewprivategrants.Morerecentlytheyhavealsobeenreceivingsomeassistancefromgovernment.Whenweaskedourrespondentwhyhisgroupadoptedtheirarduousapproachratherthansimplymovingintopublichousing,hegaveananswerliketheonewehadheardinLosAngeles, CradletoGrave111withtheaddedtwistthatbuildingandowningtheirownhomeswouldgivetheparticipantsintheprojectasenseofprideintheirhomesthatwouldleadthemtomaintainthemproperly.Partofthegovernmentassistancethat"sweat-equity"receivedwastheservicesofCETAworkers.ThesepeoplewerepaidbythegovernmentundertheComprehensiveEmploymentandTrainingActandassignedtovariouspublicprojectstoacquiretrainingthatitwashopedwouldenablethemtogetprivatejobs.Whenweaskedourrespondentwhetherthesweat-equitygroupwouldratherhavethehelpofCETAworkersorthemoneythatwasbeingspentonthem,heleftnodoubtwhatsoeverthattheywouldpreferthemoney.Allinall,itwashearteningtoobservethesenseofself-reliance,independence,andenergydisplayedonthisself-helpprojectbycontrastwiththeapathy,senseoffutility,andboredomsoevidentatpublichousingprojectswevisited.NewYork'ssubsidized"middle-income"housing,justifiedasawaytokeepmiddle-incomefamiliesfromfleeingthecity,presentsaverydifferentpicture.Spaciousandluxuriousapartmentsarerentedatsubsidizedratestofamilieswhoare"middle-income"onlybyamostgeneroususeofthatterm.Theapartmentsareontheaveragesubsidizedintheamountofmorethan$200permonth."Director'sLaw"atworkagain.Urbanrenewalwasadoptedwiththeaimofeliminatingslums"urbanblight."Thegovernmentsubsidizedtheacquisitionandclearanceofareastoberenewedandmademuchoftheclearedlandavailabletoprivatedevelopersatartificiallylowprices.Urbanrenewaldestroyed"fourhomes,mostofthemoccupiedbyblacks,foreveryhomeitbuiltmostofthemtobeoccupiedby18middle-andupper-incomewhites."Theoriginaloccupantswereforcedtomoveelsewhere,oftenturninganotherareaintoa"blighted"one.Theprogramwelldeservesthenames"slumre-moval"and"Negroremoval"thatsomecriticsgaveit.Thechiefbeneficiariesofpublichousingandurbanrenewalhavenotbeenthepoorpeople.Thebeneficiarieshave,rather,beentheownersofpropertypurchasedforpublichousingorlo-catedinurbanrenewalareas;middle-andupper-incomefamilieswhowereabletofindhousinginthehigh-pricedapartmentsortownhousesthatfrequentlyreplacedthelow-rentalhousingthatwasrenewedoutofexistence;thedevelopersandoccupantsof 112FREETOCHOOSE:APersonalStatementshoppingcentersconstructedinurbanareas;institutionssuchasuniversitiesandchurchesthatwereabletouseurbanrenewalprojectstoimprovetheirneighborhoods.AsarecentWallStreetJournaleditorialputit,TheFederalTradeCommissionhaslookedintothegovernment'shousingpoliciesanddiscoveredthattheyaredrivenbysomethingmorethanpurealtruism.AnFTCstaffpolicybriefinghookfindsthatthemainthrustseemstocomefrompeoplewhomakemoneybuild-inghousingcontractors,bankers,laborunions,materialssuppliers,etc.Afterthehousingisbuilt,thegovernmentandthesevarious"constituencies"takelessinterestinit.SotheFTChasbeengettingcomplaintsaboutthequalityofhousingbuiltunderfederalprograms,iaboutleakyroofs,inadequateplumbing,badfoundations,etc."Inthemeantime,evenwhereitwasnotdeliberatelydestroyed,low-pricedrentalhousingdeterioratedbecauseofrentcontrolandsimilarmeasures.MedicalCareMedicineisthelatestwelfarefieldinwhichtheroleofgovern-menthasbeenexploding.Stateandlocalgovernments,andtoalesserextentthefederalgovernment,havelonghadaroleinpublichealth(sanitation,contagiousdiseases,etc.)andinprovi-sionofhospitalfacilities.Inaddition,thefederalgovernmenthasprovidedmedicalcareforthemilitaryandveterans.How-ever,aslateas1960governmentexpendituresforcivilianhealthpurposes(i.e.,omittingthemilitaryandveterans)werelessthan$5billion,oralittleover1percentofthenationalincome.AftertheintroductionofMedicareandMedicaidin1965,governmentspendingonhealthmountedrapidly,reaching$68billionby1977,orabout4.5percentofnationalincome.Thegovernment'sshareoftotalexpendituresonmedicalcarehasalmostdoubled,from25percentin1960to42percentin1977.Theclamorforthefederalgovernmenttoassumeastilllargerrolecontinues.PresidentCarterhascomeoutinfavorofnationalhealthinsur-ance,thoughinalimitedformbecauseoffinancialconstraints.SenatorEdwardM.Kennedyhasnosuchinhibitions;hefavorstheimmediateenactmentofcompletegovernmentresponsibilityforthehealthcareofthenation'scitizens. CradletoGrave113Extragovernmentspendinghasbeenparalleledbyarapidgrowthinprivatehealthinsurance.Totalspendingonmedicalcaredoubledfrom1965to1977asafractionofnationalincome.Medicalfacilitieshaveexpanded,too,butnotasrapidlyasex-penditures.Theinevitableresulthasbeensharpincreasesinthepriceofmedicalcareandintheincomesofphysiciansandothersengagedinrenderingmedicalservices.Thegovernmenthasrespondedbytryingtoregulatethemedi-calproceduresfollowedandtoholddownthefeeschargedbyphysiciansandhospitals.Andsoitshould.Ifthegovernmentspendsthetaxpayers'money,itisrightandproperthatitshouldbeconcernedwithwhatitgetsforwhatitspends:hewhopaysthepipercallsthetune.Ifthepresenttrendscontinue,theendresultwillinevitablybesocializedmedicine.Nationalhealthinsuranceisanotherexampleofmisleadinglabeling.Insuchasystemtherewouldbenoconnectionbetweenwhatyouwouldpayandtheactuarialvalueofwhatyouwouldbeentitledtoreceive,asthereisinprivateinsurance.Inadditionitisnotdirectedatinsuring"nationalhealth"ameaninglessphrasebutatprovidingmedicalservicestotheresidentsofthecountry.Whatitsproponentsareinfactproposingisasystemofsocializedmedicine.AsDr.GunnarBiorck,aneminentSwedishprofessorofmedicineandheadofthedepartmentofmedicineatamajorSwedishhospital,haswritten:Thesettinginwhichmedicinehasbeenpracticedduringthousandsofyearshasbeenoneinwhichthepatienthasbeentheclientandemployerofthephysician.TodaytheState,inonemanifestationortheother,claimstobetheemployerand,thus,theonetoprescribetheconditionsunderwhichthephysicianhastocarryouthiswork.Theseconditionsmaynotandwilleventuallynotberestrictedtoworkinghours,salariesandcertifieddrugs;theymayinvadethewholeterritoryofthepatient-physicianrelationship....Ifthebattleoftodayisnotfoughtandnotwon,therewillbenobattletofighttomorrow.`'ProponentsofsocializedmedicineintheUnitedStatestogivetheircauseitspropernametypicallyciteGreatBritain,andmorerecentlyCanada,asexamplesofitssuccess.TheCanadianexperiencehasbeentoorecenttoprovideanadequatetestmost 114FREETOCHOOSE:APersonalStatementnewbroomssweepprettycleanbutdifficultiesarealreadyemerging.TheBritishNationalHealthServicehasnowbeeninoperationmorethanthreedecades,andtheresultsareprettycon-clusive.That,nodoubt,iswhyCanadahasbeenreplacingBritainastheexamplepointedto.ABritishphysician,Dr.MaxGam-mon,spentfiveyearsstudyingtheBritishHealthService.InaDecember1976reporthewrote:"[TheNationalHealthService]broughtcentralizedstatefinancingandcontrolofdeliverytovir-tuallyallmedicalservicesinthecountry.ThevoluntarysystemoffinancinganddeliveryofmedicalcarewhichhadbeendevelopedinBritainoverthepreceding200yearswasalmostentirelyelim-inated.Theexistingcompulsorysystemwasreorganizedandmadepracticallyuniversal."Also,"NonewhospitalswereinfactbuiltinBritainduringthefirstthirteenyearsoftheNationalHealthServiceandtherearenow,in1976,fewerhospitalbedsinBritainthaninJuly194821whentheNationalHealthServicetookover."And,wemayadd,two-thirdsofthosebedsareinhospitalsthatwerebuiltbefore1900byprivatemedicineandprivatefunds.Dr.Gammonwasledbyhissurveytopromulgatewhathecallsatheoryofbureaucraticdisplacement:themorebureaucraticanorganization,thegreatertheextenttowhichuselessworktendstodisplaceusefulworkaninterestingextensionofoneofPark-inson'slaws.HeillustratesthetheorywithhospitalservicesinBritainfrom1965to1973.Inthateight-yearperiodhospitalstaffsintotalincreasedinnumberby28percent,administrativeandclericalhelpby51percent.Butoutput,asmeasuredbytheaveragenumberofhospitalbedsoccupieddaily,actuallywentdownby11percent.Andnot,asDr.Gammonhastenedtopointout,becauseofanylackofpatientstooccupythebeds.Atalltimestherewasawaitinglistforhospitalbedsofaround600,000people.Manymustwaitforyearstohaveanoperationthatthehealthserviceregardsasoptionalorpostponable.PhysiciansarefleeingtheBritishHealthService.Aboutone-thirdasmanyphysiciansemigrateeachyearfromBritaintoothercountriesasgraduatefromitsmedicalschools.Therecentrapidgrowthofstrictlyprivatemedicalpractice,privatehealthinsur-ance,andprivatehospitalsandnursinghomesisanotherresultofdissatisfactionwiththeHealthService. CradletoGrave115TwomajorargumentsareofferedforintroducingsocializedmedicineintheUnitedStates:first,thatmedicalcostsarebeyondthemeansofmostAmericans;second,thatsocializationwillsomehowreducecosts.Thesecondcanbedismissedoutofhandatleastuntilsomeonecanfindsomeexampleofanactivitythatisconductedmoreeconomicallybygovernmentthanbypri-vateenterprise.Astothefirst,thepeopleofthecountrymustpaythecostsonewayoranother;theonlyquestioniswhethertheypaythemdirectlyontheirownbehalf,orindirectlythroughthemediationofgovernmentbureaucratswhowillsubtractasub-stantialslicefortheirownsalariesandexpenses.Inanyevent,thecostsofordinarymedicalcarearewellwithinthemeansofmostAmericanfamilies.Privateinsurancearrange-mentsareavailabletomeetthecontingencyofanunusuallylargeexpense.Already,90percentofallhospitalbillsarepaidthroughthird-partypayments.Exceptionalhardshipcasesnodoubtarise,andsomehelp,privateorpublic,maywellbedesirableforthem.Buthelpforafewhardshipcaseshardlyjustifiesputtingthewholepopulationinastraitjacket.Togiveasenseofproportion,thetotalexpendituresonmedi-calcare,privateandgovernmental,amounttolessthantwo-thirdsasmuchasspendingonhousing,aboutthree-quartersasmuchasspendingonautomobiles,andonlytwoandahalftimesasmuchasspendingonalcoholandtobaccowhichundoubtedlyaddstomedicalbills.Inouropinionthereisnocasewhatsoeverforsocializedmedi-cine.Onthecontrary,governmentalreadyplaystoolargearoleinmedicalcare.Anyfurtherexpansionofitsrolewouldbeverymuchagainsttheinterestsofpatients,physicians,andhealthcarepersonnel.Wediscussanotheraspectofmedicalcaretheli-censingofphysiciansanditsbearingonthepoweroftheAmeri-canMedicalAssociationinChapter8on"WhoProtectstheWorker?"THEFALLACYOFTHEWELFARESTATEWhyhavealltheseprogramsbeensodisappointing?Theirob-jectivesweresurelyhumanitarianandnoble.Whyhavetheynotbeenachieved? 116FREETOCHOOSE:APersonalStatementAtthedawnoftheneweraallseemedwell.Thepeopletobebenefitedwerefew;thetaxpayersavailabletofinancethem,manysoeachwaspayingasmallsumthatprovidedsignificantbene-fitstoafewinneed.Aswelfareprogramsexpanded,thenumberschanged.Todayallofusarepayingoutofonepockettoputmoneyorsomethingmoneycouldbuyintheother.Asimpleclassificationofspendingshowswhythatprocessleadstoundesirableresults.Whenyouspend,youmayspendyourownmoneyorsomeoneelse's;andyoumayspendforthebenefitofyourselforsomeoneelse.Combiningthesetwopairsofalternativesgivesfourpossibilitiessummarizedinthefollowing22simpletable:YOUARETHESPENDEROnWhomSpentWhoseMoneyYouSomeoneElseYoursIIISomeoneElse'sIIIIVCategory1inthetablereferstoyourspendingyourownmoneyonyourself.Youshopinasupermarket,forexample.Youclearlyhaveastrongincentivebothtoeconomizeandtogetasmuchvalueasyoucanforeachdollaryoudospend.CategoryIlreferstoyourspendingyourownmoneyonsome-oneelse.YoushopforChristmasorbirthdaypresents.YouhavethesameincentivetoeconomizeasinCategoryIbutnotthesameincentivetogetfullvalueforyourmoney,atleastasjudgedbythetastesoftherecipient.Youwill,ofcourse,wanttogetsomethingtherecipientwilllikeprovidedthatitalsomakestherightimpressionanddoesnottaketoomuchtimeandeffort.(If,indeed,yourmainobjectiveweretoenabletherecipienttogetasmuchvalueaspossibleperdollar,youwouldgivehim CradletoGrave117cash,convertingyourCategoryIIspendingtoCategoryIspend-ingbyhim.)CategoryIllreferstoyourspendingsomeoneelse'smoneyonyourselflunchingonanexpenseaccount,forinstance.Youhavenostrongincentivetokeepdownthecostofthelunch,butyoudohaveastrongincentivetogetyourmoney'sworth.CategorylVreferstoyourspendingsomeoneelse'smoneyonstillanotherperson.Youarepayingforsomeoneelse'slunchoutofanexpenseaccount.Youhavelittleincentiveeithertoeconomizeortotrytogetyourguestthelunchthathewillvaluemosthighly.However,ifyouarehavinglunchwithhim,sothatthelunchisamixtureofCategoryIIIandCategoryIV,youdohaveastrongincentivetosatisfyyourowntastesatthesacrificeofhis,ifnecessary.AllwelfareprogramsfallintoeitherCategoryIIIforex-ample,SocialSecuritywhichinvolvescashpaymentsthattherecipientisfreetospendashemaywish;orCategoryIVforexample,publichousing;exceptthatevenCategoryIVprogramsshareonefeatureofCategoryIII,namely,thatthebureaucratsadministeringtheprogrampartakeofthelunch;andallCategoryIIIprogramshavebureaucratsamongtheirrecipients.Inouropinionthesecharacteristicsofwelfarespendingarethemainsourceoftheirdefects.Legislatorsvotetospendsomeoneelse'smoney.Thevoterswhoelectthelegislatorsareinonesensevotingtospendtheirownmoneyonthemselves,butnotinthedirectsenseofCategoryIspending.Theconnectionbetweenthetaxesanyindividualpaysandthespendinghevotesforisexceedinglyloose.Inpractice,voters,likelegislators,areinclinedtoregardsomeoneelseaspayingfortheprogramsthelegislatorvotesfordirectlyandthevotervotesforindirectly.Bureaucratswhoadministerthepro-gramsarealsospendingsomeoneelse'smoney.Littlewonderthattheamountspentexplodes.Thebureaucratsspendsomeoneelse'smoneyonsomeoneelse.Onlyhumankindness,notthemuchstrongerandmoredepend-ablespurofself-interest,assuresthattheywillspendthemoneyinthewaymostbeneficialtotherecipients.Hencethewasteful-nessandineffectivenessofthespending. 118FREETOCHOOSE:APersonalStatementButthatisnotall.Thelureofgettingsomeoneelse'smoneyisstrong.Many,includingthebureaucratsadministeringthepro-grams,willtrytogetitforthemselvesratherthanhaveitgotosomeoneelse.Thetemptationtoengageincorruption,tocheat,isstrongandwillnotalwaysberesistedorfrustrated.Peoplewhoresistthetemptationtocheatwilluselegitimatemeanstodirectthemoneytothemselves.Theywilllobbyforlegislationfavorabletothemselves,forrulesfromwhichtheycanbenefit.Thebureau-cratsadministeringtheprogramswillpressforbetterpayandperquisitesforthemselvesanoutcomethatlargerprogramswillfacilitate.Theattemptbypeopletodivertgovernmentexpenditurestothemselveshastwoconsequencesthatmaynotbeobvious.First,itexplainswhysomanyprogramstendtobenefitmiddle-andupper-incomegroupsratherthanthepoorforwhomtheyaresupposedlyintended.Thepoortendtolacknotonlytheskillsvaluedinthemarket,butalsotheskillsrequiredtobesuccessfulinthepoliticalscrambleforfunds.Indeed,theirdisadvantageinthepoliticalmarketislikelytobegreaterthanintheeconomic.Oncewell-meaningreformerswhomayhavehelpedtogetawel-faremeasureenactedhavegoneontotheirnextreform,thepoorarelefttofendforthemselvesandtheywillalmostalwaysheoverpoweredbythegroupsthathavealreadydemonstratedagreatercapacitytotakeadvantageofavailableopportunities.Thesecondconsequenceisthatthenetgaintotherecipientsofthetransferwillbelessthanthetotalamounttransferred.If$100ofsomebodyelse'smoneyisupforgrabs,itpaystospendupto$100ofyourownmoneytogetit.Thecostsincurredtolobbylegislatorsandregulatoryauthorities,forcontributionstopoliti-calcampaigns,andformyriadotheritemsareapurewasteharmingthetaxpayerwhopaysandbenefitingnoone.Theymustbesubtractedfromthegrosstransfertogetthenetgainandmay,ofcourse,attimesexceedthegrosstransfer,leavinganetloss,notgain.Theseconsequencesofsubsidyseekingalsohelptoexplainthepressureformoreandmorespending,moreandmoreprograms.Theinitialmeasuresfailtoachievetheobjectivesofthewell-meaningreformerswhosponsoredthem.Theyconcludethatnot CradletoGrave119enoughhasbeendoneandseekadditionalprograms.Theygainasalliesbothpeoplewhoenvisioncareersasbureaucratsadminis-teringtheprogramsandpeoplewhobelievethattheycantapthemoneytobespent.CategoryIVspendingtendsalsotocorruptthepeoplein-volved.Allsuchprogramsputsomepeopleinapositiontode-cidewhatisgoodforotherpeople.TheeffectistoinstillintheonegroupafeelingofalmostGod-likepower;intheother,afeelingofchildlikedependence.Thecapacityofthebeneficiariesforindependence,formakingtheirowndecisions,atrophiesthroughdisuse.Inadditiontothewasteofmoney,inadditiontothefailuretoachievetheintendedobjectives,theendresultistorotthemoralfabricthatholdsadecentsocietytogether.Anotherby-productofCategoryIIIorIVspendinghasthesameeffect.Voluntarygiftsaside,youcanspendsomeoneelse'smoneyonlybytakingitawayasgovernmentdoes.Theuseofforceisthereforeattheveryheartofthewelfarestateabadmeansthattendstocorruptthegoodends.Thatisalsothereasonwhythewelfarestatethreatensourfreedomsoseriously.WHATSHOULDBEDONEMostofthepresentwelfareprogramsshouldneverhavebeenenacted.Iftheyhadnotbeen,manyofthepeoplenowdependentonthemwouldhavebecomeself-reliantindividualsinsteadofwardsofthestate.Intheshortrunthatmighthaveappearedcruelforsome,leavingthemnooptiontolow-paying,unattrac-tivework.Butinthelongrunitwouldhavebeenfarmorehumane.However,giventhatthewelfareprogramsexist,theycannotsimplybeabolishedovernight.Weneedsomewaytoeasethetransitionfromwherewearetowherewewouldliketobe,ofprovidingassistancetopeoplenowdependentonwelfarewhileatthesametimeencouraginganorderlytransferofpeoplefromwelfarerollstopayrolls.Suchatransitionalprogramhasbeenproposedthatcoulden-hanceindividualresponsibility,endthepresentdivisionofthenationintotwoclasses,reducebothgovernmentspendingandthepresentmassivebureaucracy,andatthesametimeassureasafety 120FREETOCHOOSE:APersonalStatementnetforeverypersoninthecountry,sothatnooneneedsufferdiredistress.Unfortunately,theenactmentofsuchaprogramseemsautopiandreamatpresent.Toomanyvestedinterestsideological,political,andfinancialstandintheway.Nonetheless,itseemsworthoutliningthemajorelementsofsuchaprogram,notwithanyexpectationthatitwillbeadoptedinthenearfuture,butinordertoprovideavisionofthedirectioninwhichweshouldbemoving,avisionthatcanguideincremen-talchanges.Theprogramhastwoessentialcomponents:first,reformthepresentwelfaresystembyreplacingtheragbagofspecificpro-gramswithasinglecomprehensiveprogramofincomesupple-mentsincashanegativeincometaxlinkedtothepositiveincometax;second,unwindSocialSecuritywhilemeetingpresentcommitmentsandgraduallyrequiringpeopletomaketheirownarrangementsfortheirownretirement.Suchacomprehensivereformwoulddomoreefficientlyandhumanelywhatourpresentwelfaresystemdoessoinefficientlyandinhumanely.Itwouldprovideanassuredminimumtoallpersonsinneedregardlessofthereasonsfortheirneedwhiledoingaslittleharmaspossibletotheircharacter,theirinde-pendence,ortheirincentivetobettertheirowncondition.Thebasicideaofanegativeincometaxissimple,oncewepenetratethesmokescreenthatconcealstheessentialfeaturesofthepositiveincometax.Underthecurrentpositiveincometaxyouarepermittedtoreceiveacertainamountofincomewithoutpayinganytax.Theexactamountdependsonthesizeofyourfamily,yourage,andonwhetheryouitemizeyourdeductions.Thisamountiscomposedofanumberofelementspersonalexemptions,low-incomeallowance,standarddeduction(whichhasrecentlybeenrelabeledthezerobracketamount),thesumcorrespondingtothegeneraltaxcredit,andforallweknowstillotheritemsthathavebeenaddedbytheRubeGoldberggeniuseswhohavebeenhavingafielddaywiththepersonalincometax.Tosimplifythediscussion,letususethesimplerBritishtermof"personalallowances"torefertothisbasicamount.Ifyourincomeexceedsyourallowances,youpayataxontheexcessatratesthataregraduatedaccordingtothesizeoftheex- CradletoGrave121cess.Supposeyourincomeislessthantheallowances?Underthecurrentsystem,thoseunusedallowancesingeneralareofno23value.Yousimplypaynotax.Ifyourincomehappenedjusttoequalyourallowancesineachoftwosucceedingyears,youwouldpaynotaxineitheryear.Supposeyouhadthatsameincomeforthetwoyearstogether,butmorethanhalfwasreceivedthefirstyear.Youwouldhaveapositivetaxableincome,thatis,incomeinexcessofallowancesforthatyear,andwouldpaytaxonit.Inthesecondyear,youwouldhaveanegativetaxableincome,thatis,yourallowanceswouldexceedyourincomebutyouwould,ingeneral,getnobenefitfromyourunusedallowances.Youwouldenduppay-ingmoretaxforthetwoyearstogetherthaniftheincomehad24beensplitevenly.Withanegativeincometax,youwouldreceivefromthegov-ernmentsomefractionoftheunusedallowances.Ifthefractionyoureceivedwasthesameasthetaxrateonthepositiveincome,thetotaltaxyoupaidinthetwoyearswouldbethesameregard-lessofhowyourincomewasdividedbetweenthem.Whenyourincomewasaboveallowances,youwouldpaytax,theamountdependingonthetaxrateschargedonvariousamountsofincome.Whenyourincomewasbelowallowances,youwouldreceiveasubsidy,theamountdependingonthesub-sidyratesattributedtovariousamountsofunusedallowances.Thenegativeincometaxwouldallowforfluctuatingincome,asinourexample,butthatisnotitsmainpurpose.Itsmainpur-poseisrathertoprovideastraightforwardmeansofassuringeveryfamilyaminimumamount,whileatthesametimeavoidingamassivebureaucracy,preservingaconsiderablemeasureofin-dividualresponsibility,andretaininganincentiveforindividualstoworkandearnenoughtopaytaxesinsteadofreceivingasubsidy.Consideraparticularnumericalexample.In1978allowancesamountedto$7,200forafamilyoffour,noneaboveagesixty-five.Supposeanegativeincometaxhadbeeninexistencewithasubsidyrateof50percentofunusedallowances.Inthatcase,afamilyoffourthathadnoincomewouldhavequalifiedforasubsidyof$3,600.Ifmembersofthefamilyhadfoundjobsand 122FREETOCHOOSE:APersonalStatementearnedanincome,theamountofthesubsidywouldhavegonedown,butthefamily'stotalincomesubsidyplusearningswouldhavegoneup.Ifearningshadbeen$1,000,thesubsidywouldhavegonedownto$3,100andtotalincomeupto$4,100.Ineffect,theearningswouldhavebeensplitbetweenreducingthesubsidyandraisingthefamily'sincome.Whenthefamily'searningsreached$7,200,thesubsidywouldhavefallentozero.Thatwouldhavebeenthebreak-evenpointatwhichthefamilywouldhaveneitherreceivedasubsidynorpaidatax.Ifearningshadgonestillhigher,thefamilywouldhavestartedpayingatax.Weneednotheregointoadministrativedetailswhethersub-sidieswouldbepaidweekly,biweekly,ormonthly,howcom-pliancewouldbechecked,andsoon.Itsufficestosaythatthesequestionshaveallbeenthoroughlyexplored;thatdetailedplanshavebeendevelopedandsubmittedtoCongressamattertowhichweshallreturn.Thenegativeincometaxwouldbeasatisfactoryreformofourpresentwelfaresystemonlyifitreplacesthehostofotherspecificprogramsthatwenowhave.Itwoulddomoreharmthangoodifitsimplybecameanotherragintheragbagofwelfareprograms.Ifitdidreplacethem,thenegativeincometaxwouldhaveenormousadvantages.Itisdirectedspecificallyattheproblemofpoverty.Itgiveshelpintheformmostusefultotherecipient,namely,cash.Itisgeneralitdoesnotgivehelpbecausetherecipientisoldordisabledorsickorlivesinaparticulararea,oranyoftheothermanyspecificfeaturesentitlingpeopletobenefitsundercurrentprograms.Itgiveshelpbecausetherecip-ienthasalowincome.Itmakesexplicitthecostbornebytax-payers.Likeanyothermeasuretoalleviatepoverty,itreducestheincentiveofpeoplewhoarehelpedtohelpthemselves.How-ever,ifthesubsidyrateiskeptatareasonablelevel,itdoesnoteliminatethatincentiveentirely.Anextradollarearnedalwaysmeansmoremoneyavailableforspending.Equallyimportant,thenegativeincometaxwoulddispensewiththevastbureaucracythatnowadministersthehostofwel-fareprograms.Anegativeincometaxwouldfitdirectlyintoourcurrentincometaxsystemandcouldbeadministeredalongwithit.Itwouldreduceevasionunderthecurrentincometaxsince CradletoGrave123everyonewouldberequiredtofileincometaxforms.Someaddi-tionalpersonnelmightberequired,butnothinglikethenumberwhoarenowemployedtoadministerwelfareprograms.Bydispensingwiththevastbureaucracyandintegratingthesubsidysystemwiththetaxsystem,thenegativeincometaxwouldeliminatethepresentdemoralizingsituationunderwhichsomepeoplethebureaucratsadministeringtheprogramsrunotherpeople'slives.Itwouldhelptoeliminatethepresentdivisionofthepopulationintotwoclassesthosewhopayandthosewhoaresupportedonpublicfunds.Atreasonablebreak-evenlevelsandtaxrates,itwouldbefarlessexpensivethanourpresentsystem.Therewouldstillbeneedforpersonalassistancetosomefami-lieswhoareunableforonereasonoranothertomanagetheirownaffairs.However,iftheburdenofincomemaintenancewerehandledbythenegativeincometax,thatassistancecouldandwouldbeprovidedbyprivatecharitableactivities.Webelievethatoneofthegreatestcostsofourpresentwelfaresystemisthatitnotonlyunderminesanddestroysthefamily,butalsopoisonsthespringsofprivatecharitableactivity.WheredoesSocialSecurityfitintothisbeautiful,ifpoliticallyunfeasible,dream?Thebestsolutioninourviewwouldbetocombinetheenact-mentofanegativeincometaxwithwindingdownSocialSecuritywhilelivinguptopresentobligations.Thewaytodothatwouldbe:1.Repealimmediatelythepayrolltax.2.ContinuetopayallexistingbeneficiariesunderSocialSe-curitytheamountsthattheyareentitledtoundercurrentlaw.3.Giveeveryworkerwhohasalreadyearnedcoverageaclaimtothoseretirement,disability,andsurvivorsbenefitsthathistaxpaymentsandearningstodatewouldentitlehimtoundercurrentlaw,reducedbythepresentvalueofthereductioninhisfuturetaxesasaresultoftherepealofthepayrolltax.Theworkercouldchoosetotakehisbenefitsintheformofafutureannuityorgovernmentbondsequaltothepresentvalueofthebenefitstowhichhewouldbeentitled.4.Giveeveryworkerwhohasnotyetearnedcoverageacapi-talsum(againintheformofbonds)equaltotheaccumulated 124FREETOCHOOSE:APersonalStatementvalueofthetaxesthatheorhisemployerhaspaidonhisbehalf.5.Terminateanyfurtheraccumulationofbenefits,allowingindividualstoprovidefortheirownretirementastheywish.6.Financepaymentsunderitems2,3,and4outofgeneraltaxfundsplustheissuanceofgovernmentbonds.ThistransitionprogramdoesnotaddinanywaytothetruedebtoftheU.S.government.Onthecontrary,itreducesthatdebtbyendingpromisestofuturebeneficiaries.Itsimplybringsintotheopenobligationsthatarenowhidden.Itfundswhatisnowunfunded.ThesestepswouldenablemostofthepresentSocialSecurityadministrativeapparatustobedismantledatonce.ThewindingdownofSocialSecuritywouldeliminateitspres-enteffectofdiscouragingemploymentandsowouldmeanalargernationalincomecurrently.Itwouldaddtopersonalsavingandsoleadtoahigherrateofcapitalformationandamorerapidrateofgrowthofincome.Itwouldstimulatethedevelopmentandexpansionofprivatepensionplansandsoaddtothesecurityofmanyworkers.WHATISPOLITICALLYFEASIBLE?Thisisafinedream,butunfortunatelyithasnochancewhatso-everofbeingenactedatpresent.ThreePresidentsPresidentsNixon,Ford,andCarterhaveconsideredorrecommendedaprogramincludingelementsofanegativeincometax.Ineachcasepoliticalpressureshaveledthemtooffertheprogramasanadditiontomanyexistingprograms,ratherthanasasubstituteforthem.Ineachcasethesubsidyratewassohighthatthepro-gramgavelittleifanyincentivetorecipientstoearnincome.Thesemisshapenprogramswouldhavemadethewholesystemworse,notbetter.Despiteourhavingbeenthefirsttohavepro-posedanegativeincometaxasareplacementforourpresentwelfaresystem,oneofustestifiedbeforeCongressagainsttheversionthatPresidentNixonofferedastheFamilyAssistance26Plan.Thepoliticalobstaclestoanacceptablenegativeincometaxareoftworelatedkinds.Themoreobviousistheexistenceofvestedinterestsinpresentprograms:therecipientsofbenefits, CradletoGrave125stateandlocalofficialswhoregardthemselvesasbenefitingfromtheprograms,and,aboveall,thewelfarebureaucracythatad-ministersthem."Thelessobviousobstacleistheconflictamongtheobjectivesthatadvocatesofwelfarereform,includingexistingvestedinterests,seektoachieve.AsMartinAndersonputsitinanexcellentchapteron"TheImpossibilityofRadicalWelfareReform,"Allradicalwelfarereformschemeshavethreebasicpartsthatarepoliticallysensitivetoahighdegree.Thefirstisthebasicbenefitlevelprovided,forexample,toafamilyoffouronwelfare.Thesecondisthedegreetowhichtheprogramaffectstheincentiveofapersononwelfaretofindworkortoearnmore.Thethirdistheadditionalcosttothetaxpayers....Tobecomeapoliticalrealitytheplanmustprovideadecentlevelofsupportforthoseonwelfare,itmustcontainstrongincen-tivestowork,anditmusthaveareasonablecost.Anditmustdoall27threeatthesametime.Theconflictarisesfromthecontentgivento"decent,"to"strong,"andto"reasonable,"butespeciallyto"decent."Ifa"decent"levelofsupportmeansthatfewifanycurrentrecipientsaretoreceivelessfromthereformedprogramthantheynowdofromthecollectionofprogramsavailable,thenitisimpossibletoachieveallthreeobjectivessimultaneously,nomatterhow"strong"and"reasonable"areinterpreted.Yet,asAndersonsays,"ThereisnowaythattheCongress,atleastinthenearfuture,isgoingtopassanykindofwelfarereformthatactuallyreducespaymentsformillionsofwelfarerecipients."Considerthesimplenegativeincometaxthatweintroducedasanillustrationintheprecedingsection:abreak-evenpointforafamilyoffourof$7,200,asubsidyrateof50percent,whichmeansapaymentof$3,600toafamilywithnoothersourceofsupport.Asubsidyrateof50percentwouldgiveatolerablystrongincentivetowork.Thecostwouldbefarlessthanthecostofthepresentcomplexofprograms.However,thesupportlevelispoliticallyunacceptabletoday.AsAndersonsays,"ThetypicalwelfarefamilyoffourintheUnitedStatesnow[early1978]qualifiesforabout$6,000inservicesandmoneyeveryyear.Inhigherpayingstates,likeNewYork,anumberofwelfare 126FREETOCHOOSE:APersonalStatementfamiliesreceiveannualbenefitsrangingfrom$7,000to$12,00028andmore."Eventhe$6,000"typical"figurerequiresasubsidyrateof83.3percentifthebreak-evenpointiskeptat$7,200.Sucharatewouldbothseriouslyunderminetheincentivetoworkandaddenormouslytocost.Thesubsidyratecouldbereducedbymakingthebreak-evenpointhigher,butthatwouldaddgreatlytothecost.Thisisaviciouscirclefromwhichthereisnoescape.Solongasitisnotpoliticallyfeasibletoreducethepaymentstomanypersonswhonowreceivehighbenefitsfrommultiplecur-rentprograms,Andersonisright:"Thereisnowaytoachieveallthepoliticallynecessaryconditionsforradicalwelfarereformatthesametime."2sHowever,whatisnotpoliticallyfeasibletodaymaybecomepoliticallyfeasibletomorrow.Politicalscientistsandeconomistshavehadamiserablerecordinforecastingwhatwillbepoliticallyfeasible.Theirforecastshaverepeatedlybeencontradictedbyexperience.OurgreatandreveredteacherFrankH.KnightwasfondofillustratingdifferentformsofleadershipwithducksthatflyinaVwithaleaderinfront.Everynowandthen,hewouldsay,theducksbehindtheleaderwouldveeroffinadifferentdirectionwhiletheleadercontinuedflyingahead.Whentheleaderlookedaroundandsawthatnoonewasfollowing,hewouldrushtogetinfrontoftheVagain.Thatisoneformofleadershipun-doubtedlythemostprevalentforminWashington.Whileweaccepttheviewthatourproposalsarenotcurrentlyfeasiblepolitically,wehaveoutlinedthemasfullyaswehave,notonlyasanidealthatcanguideincrementalreform,butalsointhehopethattheymay,soonerorlater,becomepoliticallyfeasible.CONCLUSIONTheempireruledoveruntilrecentlybytheDepartmentofHealth,EducationandWelfarehasbeenspendingmoreandmoreofourmoneyeachyearonourhealth.Themaineffecthassimplybeentoraisethecostsofmedicalandhealthserviceswithoutanycor-respondingimprovementinthequalityofmedicalcare. CradletoGrave127Spendingoneducationhasbeenskyrocketing,yetbycommonconsentthequalityofeducationhasbeendeclining.Increasingsumsandincreasinglyrigidcontrolshavebeenimposedonustopromoteracialintegration,yetoursocietyseemstobebecomingmorefragmented.Billionsofdollarsarebeingspenteachyearonwelfare,yetatatimewhentheaveragestandardoflifeoftheAmericancitizenishigherthanithaseverbeeninhistory,thewelfarerollsaregrowing.TheSocialSecuritybudgetiscolossal,yetSocialSe-curityisindeepfinancialtrouble.Theyoungcomplain,andwithmuchjustice,aboutthehightaxestheymustpay,taxesthatareneededtofinancethebenefitsgoingtotheold.Yettheoldcom-plain,andwithmuchjustice,thattheycannotmaintainthestan-dardoflivingthattheywereledtoexpect.Aprogramthatwasenactedtomakesurethatourolderfolksneverbecameobjectsofcharityhasseenthenumberofoldpersonsonwelfarerollsgrow.Byitsownaccounting,inoneyearHEWlostthroughfraud,abuse,andwasteanamountofmoneythatwouldhavesufficedtobuildwellover100,000housescostingmorethan$50,000each.Thewasteisdistressing,butitistheleastoftheevilsofthepaternalisticprogramsthathavegrowntosuchmassivesize.Theirmajorevilistheireffectonthefabricofoursociety.Theyweakenthefamily;reducetheincentivetowork,save,andinnovate;re-ducetheaccumulationofcapital;andlimitourfreedom.Thesearethefundamentalstandardsbywhichtheyshouldbejudged. CHAPTER5CreatedEqual"Equality,""liberty"whatpreciselydothesewordsfromtheDeclarationofIndependencemean?Cantheidealstheyexpressberealizedinpractice?Areequalityandlibertyconsistentonewiththeother,oraretheyinconflict?SincewellbeforetheDeclarationofIndependence,theseques-tionshaveplayedacentralroleinthehistoryoftheUnitedStates.Theattempttoanswerthemhasshapedtheintellectualclimateofopinion,ledtobloodywar,andproducedmajorchangesineco-nomicandpoliticalinstitutions.Thisattemptcontinuestodomi-nateourpoliticaldebate.Itwillshapeourfutureasithasourpast.IntheearlydecadesoftheRepublic,equalitymeantequalitybeforeGod;libertymeantthelibertytoshapeone'sownlife.TheobviousconflictbetweentheDeclarationofIndependenceandtheinstitutionofslaveryoccupiedthecenterofthestage.ThatconflictwasfinallyresolvedbytheCivilWar.Thedebatethenmovedtoadifferentlevel.Equalitycamemoreandmoretobeinterpretedas"equalityofopportunity"inthesensethatnooneshouldbepreventedbyarbitraryobstaclesfromusinghiscapaci-tiestopursuehisownobjectives.Thatisstillitsdominantmean-ingtomostcitizensoftheUnitedStates.NeitherequalitybeforeGodnorequalityofopportunitypre-sentedanyconflictwithlibertytoshapeone'sownlife.Quitetheopposite.Equalityandlibertyweretwofacesofthesamebasicvaluethateveryindividualshouldberegardedasanendinhim-self.AverydifferentmeaningofequalityhasemergedintheUnitedStatesinrecentdecadesequalityofoutcome.Everyoneshouldhavethesameleveloflivingorofincome,shouldfinishtheraceatthesametime.Equalityofoutcomeisinclearconflictwithliberty.Theattempttopromoteithasbeenamajorsourceofbig-1.28 CreatedEqual129gerandbiggergovernment,andofgovernment-imposedrestric-tionsonourliberty.EQUALITYBEFOREGODWhenThomasJefferson,attheageofthirty-three,wrote"allmenarecreatedequal,"heandhiscontemporariesdidnottakethesewordsliterally.Theydidnotregard"men"oraswewouldsaytoday,"persons"asequalinphysicalcharacteristics,emotionalreactions,mechanicalandintellectualabilities.ThomasJeffersonhimselfwasamostremarkableperson.Attheageoftwenty-sixhedesignedhisbeautifulhouseatMonticello(Italianfor"littlemountain"),superviseditsconstruction,and,indeed,issaidtohavedonesomeoftheworkhimself.Inthecourseofhislife,hewasaninventor,ascholar,anauthor,astatesman,governoroftheStateofVirginia,PresidentoftheUnitedStates,MinistertoFrance,founderoftheUniversityofVirginiahardlyanaverageman.ThecluetowhatThomasJeffersonandhiscontemporariesmeantbyequalisinthenextphraseoftheDeclaration"en-dowedbytheirCreatorwithcertainunalienablerights;thatamongtheseareLife,Liberty,andthepursuitofHappiness."MenwereequalbeforeGod.Eachpersonispreciousinandofhimself.Hehasunalienablerights,rightsthatnooneelseisentitledtoinvade.Heisentitledtoservehisownpurposesandnottobetreatedsim-plyasaninstrumenttopromotesomeoneelse'spurposes."Lib-erty"ispartofthedefinitionofequality,notinconflictwithit.lEqualitybeforeGodpersonalequalityisimportantpre-ciselybecausepeoplearenotidentical.Theirdifferentvalues,theirdifferenttastes,theirdifferentcapacitieswillleadthemtowanttoleadverydifferentlives.Personalequalityrequiresre-spectfortheirrighttodoso,nottheimpositiononthemofsome-oneelse'svaluesorjudgment.Jeffersonhadnodoubtthatsomemenweresuperiortoothers,thattherewasanelite.Butthatdidnotgivethemtherighttoruleothers.Ifanelitedidnothavetherighttoimposeitswillonothers,neitherdidanyothergroup,evenamajority.Everypersonwastobehisownrulerprovidedthathedidnotinterferewiththe 130FREETOCHOOSE:APersonalStatementsimilarrightofothers.Governmentwasestablishedtoprotectthatrightfromfellowcitizensandfromexternalthreatnottogiveamajorityunbridledrule.Jeffersonhadthreeachievementshewantedtoberememberedforinscribedonhistombstone:theVirginiastatuteforreligiousfreedom(aprecursoroftheU.S.BillofRightsdesignedtoprotectminoritiesagainstdominationbymajorities),authorshipoftheDeclarationofIndependence,andthefoundingoftheUniversityofVirginia.ThegoaloftheframersoftheConstitutionoftheUnitedStates,draftedbyJefferson'scontemporaries,wasanationalgovernmentstrongenoughtodefendthecountryandpromotethegeneralwelfarebutatthesametimesufficientlylimitedinpowertoprotecttheindividualcitizen,andtheseparatestategovernments,fromdominationbythenationalgovernment.Democratic,inthesenseofwidespreadparticipationingovernment,yes;inthepoliticalsenseofmajorityrule,clearlyno.Similarly,AlexisdeTocqueville,thefamousFrenchpoliticalphilosopherandsociologist,inhisclassicDemocracyinAmerica,writtenafteralengthyvisitinthe1830s,sawequality,notma-jorityrule,astheoutstandingcharacteristicofAmerica."InAmerica,"hewrote,thearistocraticelementhasalwaysbeenfeeblefromitsbirth;andifatthepresentdayitisnotactuallydestroyed,itisatanyratesocompletelydisabled,thatwecanscarcelyassigntoitanydegreeofinfluenceonthecourseofaffairs.Thedemocraticprinciple,onthecontrary,hasgainedsomuchstrengthbytime,byevents,andbylegislation,astohavebecomenotonlypredominantbutall-powerful.Thereisnofamilyorcorporateauthority....America,then,exhibitsinhersocialstateamostextraordinaryphenomenon.Menarethereseenonagreaterequalityinpointoffortuneandintellect,or,inotherwords,moreequalintheirstrength,thaninanyothercountryoftheworld,orinanyageofwhichhistory2haspreservedtheremembrance.Tocquevilleadmiredmuchofwhatheobserved,buthewasbynomeansanuncriticaladmirer,fearingthatdemocracycarriedtoofarmightunderminecivicvirtue.Asheputit,"Thereis...amanlyandlawfulpassionforequalitywhichincitesmentowishalltobepowerfulandhonored.Thispassiontendstoelevatethehumbletotherankofthegreat;butthereexistsalsointhehuman CreatedEqual131heartadepravedtasteforequality,whichimpelstheweaktoat-tempttolowerthepowerfultotheirownlevel,andreducesmentopreferequalityinslaverytoinequalitywithfreedom."ItisstrikingtestimonytothechangingmeaningofwordsthatinrecentdecadestheDemocraticpartyoftheUnitedStateshasbeenthechiefinstrumentforstrengtheningthatgovernmentpowerwhichJeffersonandmanyofhiscontemporariesviewedasthegreatestthreattodemocracy.Andithasstriventoincreasegov-ernmentpowerinthenameofaconceptof"equality"thatisalmosttheoppositeoftheconceptofequalityJeffersonidentifiedwithlibertyandTocquevillewithdemocracy.Ofcoursethepracticeofthefoundingfathersdidnotalwayscorrespondtotheirpreaching.Themostobviousconflictwasslavery.ThomasJeffersonhimselfownedslavesuntilthedayhediedJuly4,1826.Heagonizedrepeatedlyaboutslavery,sug-gestedinhisnotesandcorrespondenceplansforeliminatingslavery,butneverpubliclyproposedanysuchplansorcampaignedagainsttheinstitution.YettheDeclarationhedraftedhadeithertobeblatantlyvio-latedbythenationhedidsomuchtocreateandform,orslaveryhadtobeabolished.LittlewonderthattheearlydecadesoftheRepublicsawarisingtideofcontroversyabouttheinstitutionofslavery.Thatcontroversyendedinacivilwarthat,inthewordsofAbrahamLincoln'sGettysburgAddress,testedwhethera"na-tion,conceivedinlibertyanddedicatedtothepropositionthatallmenarecreatedequal...canlongendure."Thenationen-dured,butonlyatatremendouscostinlives,property,andsocialcohesion.EQUALITYOFOPPORTUNITYOncetheCivilWarabolishedslaveryandtheconceptofpersonalequalityequalitybeforeGodandthelawcameclosertore-alization,emphasisshifted,inintellectualdiscussionandingov-ernmentandprivatepolicy,toadifferentconceptequalityofopportunity.Literalequalityofopportunityinthesenseof"identity"isimpossible.Onechildisbornblind,anotherwithsight.Onechild 132FREETOCHOOSE:APersonalStatementhasparentsdeeplyconcernedabouthiswelfarewhoprovideabackgroundofcultureandunderstanding;anotherhasdissolute,improvidentparents.OnechildisbornintheUnitedStates,an-otherinIndia,orChina,orRussia.Theyclearlydonothaveidenticalopportunitiesopentothematbirth,andthereisnowaythattheiropportunitiescanbemadeidentical.Likepersonalequality,equalityofopportunityisnottobeinterpretedliterally.ItsrealmeaningisperhapsbestexpressedbytheFrenchexpressiondatingfromtheFrenchRevolution:Unecarriereouverteauxlestalentsacareeropentothetalents.Noarbitraryobstaclesshouldpreventpeoplefromachievingthosepositionsforwhichtheirtalentsfitthemandwhichtheirvaluesleadthemtoseek.Notbirth,nationality,color,religion,sex,noranyotherirrelevantcharacteristicshoulddeterminetheoppor-tunitiesthatareopentoapersononlyhisabilities.Onthisinterpretation,equalityofopportunitysimplyspellsoutinmoredetailthemeaningofpersonalequality,ofequalitybeforethelaw.Andlikepersonalequality,ithasmeaningandimportancepreciselybecausepeoplearedifferentintheirgeneticandculturalcharacteristics,andhencebothwanttoandcanpursuedifferentcareers.Equalityofopportunity,likepersonalequality,isnotincon-sistentwithliberty;onthecontrary,itisanessentialcomponentofliberty.Ifsomepeoplearedeniedaccesstoparticularpositionsinlifeforwhichtheyarequalifiedsimplybecauseoftheirethnicbackground,color,orreligion,thatisaninterferencewiththeirrightto"Life,Liberty,andthepursuitofHappiness."Itdeniesequalityofopportunityand,bythesametoken,sacrificesthefree-domofsomefortheadvantageofothers.Likeeveryideal,equalityofopportunityisincapableofbeingfullyrealized.Themostseriousdeparturewasundoubtedlywithrespecttotheblacks,particularlyintheSouthbutintheNorthaswell.Yettherewasalsotremendousprogressforblacksandforothergroups.Theveryconceptofa"meltingpot"reflectedthegoalofequalityofopportunity.Soalsodidtheexpansionof"free"educationatelementary,secondary,andhigherlevelsthough,asweshallseeinthenextchapter,thisdevelopmenthasnotbeenanunmixedblessing. CreatedEqual133TheprioritygiventoequalityofopportunityinthehierarchyofvaluesgenerallyacceptedbythepublicaftertheCivilWarismanifestedparticularlyineconomicpolicy.Thecatchwordswerefreeenterprise,competition,laissez-faire.Everyonewastobefreetogointoanybusiness,followanyoccupation,buyanyproperty,subjectonlytotheagreementoftheotherpartiestothetransac-tion.Eachwastohavetheopportunitytoreapthebenefitsifhesucceeded,tosufferthecostsifhefailed.Thereweretobenoarbitraryobstacles.Performance,notbirth,religion,ornational-ity,wasthetouchstone.Onecorollarywasthedevelopmentofwhatmanywhoregardedthemselvesastheculturalelitesneeredatasvulgarmaterialismanemphasisonthealmightydollar,onwealthasboththesymbolandthesealofsuccess.AsTocquevillepointedout,thisemphasisreflectedtheunwillingnessofthecommunitytoacceptthetradi-tionalcriteriainfeudalandaristocraticsocieties,namelybirthandparentage.Performancewastheobviousalternative,andtheaccumulationofwealthwasthemostreadilyavailablemeasureofperformance.Anothercorollary,ofcourse,wasanenormousreleaseofhumanenergythatmadeAmericaanincreasinglyproductiveanddy-namicsocietyinwhichsocialmobilitywasaneverydayreality.Stillanother,perhapssurprisingly,wasanexplosionincharitableactivity.Thisexplosionwasmadepossiblebytherapidgrowthinwealth.Ittooktheformitdidofnonprofithospitals,privatelyendowedcollegesanduniversities,aplethoraofcharitableorgani-zationsdirectedtohelpingthepoorbecauseofthedominantvaluesofthesociety,including,especially,promotionofequalityofopportunity.Ofcourse,intheeconomicsphereaselsewhere,practicedidnotalwaysconformtotheideal.Governmentwas-kepttoaminorrole;nomajorobstaclestoenterprisewereerected,andbytheendofthenineteenthcentury,positivegovernmentmeasures,es-peciallytheShermanAnti-TrustLaw,wereadoptedtoeliminateprivatebarrierstocompetition.Butextralegalarrangementscon-tinuedtointerferewiththefreedomofindividualstoentervariousbusinessesorprofessions,andsocialpracticesunquestionablygavespecialadvantagestopersonsborninthe"right"families,ofthe 134FREETOCHOOSE:APersonalStatement"right"color,andpracticingthe"right"religion.However,therapidriseintheeconomicandsocialpositionofvariouslessprivilegedgroupsdemonstratesthattheseobstacleswerebynomeansinsurmountable.Inrespectofgovernmentmeasures,onemajordeviationfromfreemarketswasinforeigntrade,whereAlexanderHamilton'sReportonManufactureshadenshrinedtariffprotectionfordo-mesticindustriesaspartoftheAmericanway.Tariffprotectionwasinconsistentwiththoroughgoingequalityofopportunity(seeChapter2)and,indeed,withthefreeimmigrationofpersons,whichwastheruleuntilWorldWarI,exceptonlyforOrientals.Yetitcouldberationalizedbothbytheneedsofnationaldefenseandontheverydifferentgroundthatequalitystopsatthewater'sedgeanillogicalrationalizationthatisadoptedalsobymostoftoday'sproponentsofaverydifferentconceptofequality.EQUALITYOFOUTCOMEThatdifferentconcept,equalityofoutcome,hasbeengaininggroundinthiscentury.ItfirstaffectedgovernmentpolicyinGreatBritainandontheEuropeancontinent.Overthepasthalf-centuryithasincreasinglyaffectedgovernmentpolicyintheUnitedStatesaswell.Insomeintellectualcirclesthedesirabilityofequalityofoutcomehasbecomeanarticleofreligiousfaith:everyoneshouldfinishtheraceatthesametime.AstheDodosaidinAliceinWonderland,"Everybodyhaswon,andallmusthaveprizes."Forthisconcept,asfortheothertwo,"equal"isnottobein-terpretedliterallyas"identical."Noonereallymaintainsthateveryone,regardlessofageorsexorotherphysicalqualities,shouldhaveidenticalrationsofeachseparateitemoffood,cloth-ing,andsoon.Thegoalisrather"fairness,"amuchvaguerno-tionindeed,onethatitisdifficult,ifnotimpossible,todefineprecisely."Fairsharesforall"isthemodernsloganthathasre-placedKarlMarx's,"Toeachaccordingtohisneeds,fromeachaccordingtohisability."Thisconceptofequalitydiffersradicallyfromtheothertwo.Governmentmeasuresthatpromotepersonalequalityorequalityofopportunityenhanceliberty;governmentmeasurestoachieve CreatedEqual135"fairsharesforall"reduceliberty.Ifwhatpeoplegetistobedeterminedby"fairness,"whoistodecidewhatis"fair"?Asa"chorusofvoicesaskedtheDodo,"Butwhoistogivetheprizes?"Fairness"isnotanobjectivelydeterminedconceptonceitdepartsfromidentity."Fairness,"like"needs,"isintheeyeofthebe-holder.Ifallaretohave"fairshares,"someoneorsomegroupofpeoplemustdecidewhatsharesarefairandtheymustbeabletoimposetheirdecisionsonothers,takingfromthosewhohavemorethantheir"fair"shareandgivingtothosewhohaveless.Arethosewhomakeandimposesuchdecisionsequaltothose'forwhomtheydecide?ArewenotinGeorgeOrwellsAnimalFarm,where"allanimalsareequal,butsomeanimalsaremoreequalthanothers"?Inaddition,ifwhatpeoplegetisdeterminedby"fairness"andnotbywhattheyproduce,wherearethe"prizes"tocomefrom?Whatincentiveistheretoworkandproduce?Howisittobedecidedwhoistobethedoctor,whothelawyer,whothegarbagecollector,whothestreetsweeper?Whatassuresthatpeoplewillaccepttherolesassignedtothemandperformthoserolesinaccordancewiththeirabilities?Clearly,onlyforceorthethreatofforcewilldo.Thekeypointisnotmerelythatpracticewilldepartfromtheideal.Ofcourseitwill,asitdoeswithrespecttotheothertwoconceptsofequalityaswell.Thepointisratherthatthereisafundamentalconflictbetweentheidealof"fairshares"orofitsprecursor,"toeachaccordingtohisneeds,"andtheidealofper-sonalliberty.Thisconflicthasplaguedeveryattempttomakeequalityofoutcometheoverridingprincipleofsocialorganiza-tion.Theendresulthasinvariablybeenastateofterror:Russia,China,and,morerecently,Cambodiaofferclearandconvincingevidence.Andeventerrorhasnotequalizedoutcomes.Ineverycase,wideinequalitypersistsbyanycriterion;inequalitybetweentherulersandtheruled,notonlyinpower,butalsoinmaterialstandardsoflife.'ThefarlessextrememeasurestakeninWesterncountriesinthenameofequalityofoutcomehavesharedthesamefatetoalesserextent.They,too,haverestrictedindividualliberty.They,too,havefailedtoachievetheirobjective.Ithasprovedim- 136FREETOCHOOSE:APersonalStatementpossibletodefine"fairshares"inawaythatisgenerallyac-ceptable,ortosatisfythemembersofthecommunitythattheyarebeingtreated"fairly."Onthecontrary,dissatisfactionhasmountedwitheveryadditionalattempttoimplementequalityofoutcome.Muchofthemoralfervorbehindthedriveforequalityofout-comecomesfromthewidespreadbeliefthatitisnotfairthatsomechildrenshouldhaveagreatadvantageoverotherssimplybecausetheyhappentohavewealthyparents.Ofcourseitisnotfair.However,unfairnesscantakemanyforms.Itcantaketheformoftheinheritanceofpropertybondsandstocks,houses,factories;itcanalsotaketheformoftheinheritanceoftalentmusicalability,strength,mathematicalgenius.Theinheritanceofpropertycanbeinterferedwithmorereadilythantheinheritanceoftalent.Butfromanethicalpointofview,isthereanydifferencebetweenthetwo?Yetmanypeopleresenttheinheritanceofprop-ertybutnottheinheritanceoftalent.Lookatthesameissuefromthepointofviewoftheparent.Ifyouwanttoassureyourchildahigherincomeinlife,youcandosoinvariousways.Youcanbuyhim(orher)aneducationthatwillequiphimtopursueanoccupationyieldingahighin-come;oryoucansethimupinabusinessthatwillyieldahigherincomethanhecouldearnasasalariedemployee;oryoucanleavehimproperty,theincomefromwhichwillenablehimtolivebetter.Isthereanyethicaldifferenceamongthesethreewaysofusingyourproperty?Oragain,ifthestateleavesyouanymoneytospendoverandabovetaxes,shouldthestatepermityoutospenditonriotouslivingbutnottoleaveittoyourchildren?Theethicalissuesinvolvedaresubtleandcomplex.Theyarenottoberesolvedbysuchsimplisticformulasas"fairsharesforall."Indeed,ifwetookthatseriously,youngsterswithlessmu-sicalskillshouldbegiventhegreatestamountofmusicaltraininginordertocompensatefortheirinheriteddisadvantage,andthosewithgreatermusicalaptitudeshouldbepreventedfromhavingaccesstogoodmusicaltraining;andsimilarlywithallothercate-goriesofinheritedpersonalqualities.Thatmightbe"fair"totheyoungsterslackingintalent,butwoulditbe"fair"tothetalented,letalonetothosewhohadtoworktopayfortrainingtheyoung-sterslackingtalent,ortothepersonsdeprivedofthebenefitsthat CreatedEqual137mighthavecomefromthecultivationofthetalentsofthegifted?Lifeisnotfair.Itistemptingtobelievethatgovernmentcanrectifywhatnaturehasspawned.Butitisalsoimportanttorecognizehowmuchwebenefitfromtheveryunfairnesswede-plore.There'snothingfairaboutMarleneDietrich'shavingbeenbornwithbeautifullegsthatweallwanttolookat;oraboutMuham-madAli'shavingbeenbornwiththeskillthatmadehimagreatfighter.Butontheotherside,millionsofpeoplewhohaveen-joyedlookingatMarleneDietrich'slegsorwatchingoneof''sunfairnessMuhammadAlisfightshavebenefitedfromnatureinproducingaMarleneDietrichandaMuhammadAli.Whatkindofaworldwoulditbeifeveryonewereaduplicateofevery-oneelse?ItiscertainlynotfairthatMuhammadAlishouldbeabletoearnmillionsofdollarsinonenight.Butwouldn'tithavebeenevenmoreunfairtothepeoplewhoenjoyedwatchinghimif,inthepursuitofsomeabstractidealofequality,MuhammadAlihadnotbeenpermittedtoearnmoreforonenight'sfightorforeachdayspentinpreparingforafightthanthelowestmanonthetotempolecouldgetforaday'sunskilledworkonthedocks?Itmighthavebeenpossibletodothat,buttheresultwouldhavebeentodenypeopletheopportunitytowatchMuhammadAli.Wedoubtverymuchthathewouldhavebeenwillingtoundergothearduousregimenoftrainingthatprecededhisfights,ortosubjecthimselftothekindoffightshehashad,ifhewerelimitedtothepayofanunskilleddockworker.Stillanotherfacetofthiscomplexissueoffairnesscanbeillus-tratedbyconsideringagameofchance,forexample,aneveningatbaccarat.Thepeoplewhochoosetoplaymaystarttheeve-ningwithequalpilesofchips,butastheplayprogresses,thosepileswillbecomeunequal.Bytheendoftheevening,somewillbebigwinners,othersbiglosers.Inthenameoftheidealofequality,shouldthewinnersberequiredtorepaythelosers?Thatwouldtakeallthefunoutofthegame.Noteventheloserswouldlikethat.Theymightlikeitfortheoneevening,butwouldtheycomebackagaintoplayiftheyknewthatwhateverhappened,they'dendupexactlywheretheystarted?Thisexamplehasagreatdealmoretodowiththerealworld 138FREETOCHOOSE:APersonalStatementthanonemightatfirstsuppose.Everydayeachofusmakesdeci-sionsthatinvolvetakingachance.Occasionallyit'sabigchanceaswhenwedecidewhatoccupationtopursue,whomtomarry,whethertobuyahouseormakeamajorinvestment.Moreoftenit'sasmallchance,aswhenwedecidewhatmovietogoto,whethertocrossthestreetagainstthetraffic,whethertobuyonesecurityratherthananother.Eachtimethequestionis,whoistodecidewhatchanceswetake?Thatinturndependsonwhobearstheconsequencesofthedecision.Ifwebeartheconse-quences,wecanmakethedecision.Butifsomeoneelsebearstheconsequences,shouldweorwillwebepermittedtomakethedeci-sion?Ifyouplaybaccaratasanagentforsomeoneelsewithhismoney,willhe,orshouldhe,permityouunlimitedscopefordeci-sionmaking?Ishenotalmostcertaintosetsomelimittoyourdis-cretion?Willhenotlaydownsomerulesforyoutoobserve?Totakeaverydifferentexample,ifthegovernment(i.e.,yourfellowtaxpayers)assumesthecostsofflooddamagetoyourhouse,canyoubepermittedtodecidefreelywhethertobuildyourhouseonafloodplain?Itisnoaccidentthatincreasinggovernmentin-terventionintopersonaldecisionshasgonehandinhandwiththedrivefor"fairsharesforall."Thesystemunderwhichpeoplemaketheirownchoicesandbearmostoftheconsequencesoftheirdecisionsisthesystemthathasprevailedformostofourhistory.ItisthesystemthatgavetheHenryFords,theThomasAlvaEdisons,theGeorgeEastmans,theJohnD.Rockefellers,theJamesCashPenneystheincentivetotransformoursocietyoverthepasttwocenturies.Itisthesystemthatgaveotherpeopleanincentivetofurnishven-turecapitaltofinancetheriskyenterprisesthattheseambitiousinventorsandcaptainsofindustryundertook.Ofcourse,thereweremanylosersalongthewayprobablymorelosersthanwinners.Wedon'tremembertheirnames.Butforthemostparttheywentinwiththeireyesopen.Theyknewtheyweretakingchances.Andwinorlose,societyasawholebenefitedfromtheirwillingnesstotakeachance.Thefortunesthatthissystemproducedcameoverwhelminglyfromdevelopingnewproductsorservices,ornewwaysofpro-ducingproductsorservices,orofdistributingthemwidely.The CreatedEqual139resultingadditiontothewealthofthecommunityasawhole,tothewell-beingofthemassesofthepeople,amountedtomanytimesthewealthaccumulatedbytheinnovators.HenryFordacquiredagreatfortune.Thecountryacquiredacheapandreliablemeansoftransportationandthetechniquesofmassproduction.Moreover,inmanycasestheprivatefortuneswerelargelydevotedintheendtothebenefitofsociety.TheRocke-feller,Ford,andCarnegiefoundationsareonlythemostpromi-nentofthenumerousprivatebenefactionswhicharesooutstand-ingaconsequenceoftheoperationofasystemthatcorrespondedto"equalityofopportunity"and"liberty"asthesetermswereunderstooduntilrecently.Onelimitedsamplemaygivetheflavoroftheoutpouringofphilanthropicactivityinthenineteenthandearlytwentiethcen-tury.Inabookdevotedto"culturalphilanthropyinChicagofromthe1880'sto1917,"HelenHorowitzwrites:Attheturnofthecentury,Chicagowasacityofcontradictoryimpulses:itwasbothacommercialcenterdealinginthebasiccom-moditiesofanindustrialsocietyandacommunitycaughtinthewindsofculturaluplift.Asonecommentatorputit,thecitywas"astrangecombinationofporkandPlato."AmajormanifestationofChicago'sdrivetowardculturewastheestablishmentofthecity'sgreatculturalinstitutionsinthe1880'sandearly1890's(theArtInstitute,theNewberryLibrary,theChicagoSymphonyOrchestra,theUniversityofChicago,theFieldMuseum,theCrerarLibrary)....Theseinstitutionswereanewphenomenoninthecity.Whatevertheinitialimpetusbehindtheirfounding,theywerelargelyorganized,sustained,andcontrolledbyagroupofbusinessmen....Yetwhileprivatelysupportedandmanaged,theinstitutionsweredesignedforthewholecity.Theirtrusteeshadturnedtoculturalphilanthropynotsomuchtosatisfypersonalaestheticorscholarlyyearningsastoaccomplishsocialgoals.Disturbedbysocialforcestheycouldnotcontrolandfilledwithidealisticnotionsofculture,thesebusinessmensawinthemuseum,thelibrary,thesymphonyorchestra,andtheuni-5versityawaytopurifytheircityandtogenerateacivicrenaissance.Philanthropywasbynomeansrestrictedtoculturalinstitutions.Therewas,asHorowitzwritesinanotherconnection,"akindofexplosionofactivityonmanydifferentlevels."AndChicagowasnotanisolatedcase.Rather,asHorowitzputsit,"Chicagoseemed 140FREETOCHOOSE:APersonalStatement6ThesameperiodsawtheestablishmenttoepitomizeAmerica."ofHullHouseinChicagounderJaneAddams,thefirstofmanysettlementhousesestablishedthroughoutthenationtospreadcultureandeducationamongthepoorandtoassistthemintheirdailyproblems.Manyhospitals,orphanages,andothercharitableagenciesweresetupinthesameperiod.Thereisnoinconsistencybetweenafreemarketsystemandthepursuitofbroadsocialandculturalgoals,orbetweenafreemarketsystemandcompassionforthelessfortunate,whetherthatcompassiontakestheform,asitdidinthenineteenthcen-tury,ofprivatecharitableactivity,or,asithasdoneincreasinglyinthetwentieth,ofassistancethroughgovernmentprovidedthatinbothcasesitisanexpressionofadesiretohelpothers.Thereisallthedifferenceintheworld,however,betweentwokindsofassistancethroughgovernmentthatseemsuperficiallysimilar:first,90percentofusagreeingtoimposetaxesonourselvesinordertohelpthebottom10percent,andsecond,80percentvotingtoimposetaxesonthetop10percenttohelpthebottom10percentWilliamGrahamSumner'sfamousexampleofB7andCdecidingwhatDshalldoforA.Thefirstmaybewiseorunwise,aneffectiveoranineffectivewaytohelpthedisadvan-tagedbutitisconsistentwithbeliefinbothequalityofopportu-nityandliberty.Thesecondseeksequalityofoutcomeandisentirelyantitheticaltoliberty.WHOFAVORSEQUALITYOFOUTCOME?Thereislittlesupportforthegoalofequalityofoutcomedespitetheextenttowhichithasbecomealmostanarticleofreligiousfaithamongintellectualsanddespiteitsprominenceinthespeechesofpoliticiansandthepreamblesoflegislation.Thetalkisbeliedalikebythebehaviorofgovernment,oftheintellectualswhomostardentlyespouseegalitariansentiments,andofthepub-licatlarge.Forgovernment,oneobviousexampleisthepolicytowardlot-teriesandgambling.NewYorkStateandparticularlyNewYorkCityiswidelyandcorrectlyregardedasastrongholdofegali-tariansentiment.YettheNewYorkStategovernmentconducts CreatedEqual141lotteriesandprovidesfacilitiesforoff-trackbettingonraces.Itadvertisesextensivelytoinduceitscitizenstobuylotteryticketsandbetontheracesattermsthatyieldaverylargeprofittothegovernment.Atthesametimeittriestosuppressthe"num-bers"game,which,asithappens,offersbetteroddsthanthegov-ernmentlottery(especiallywhenaccountistakenofthegreatereaseofavoidingtaxonwinnings).GreatBritain,astronghold,ifnotthebirthplace,ofegalitariansentiment,permitsprivategamblingclubsandbettingonracesandothersportingevents.Indeed,wageringisanationalpastimeandamajorsourceofgovernmentincome.Forintellectuals,theclearestevidenceistheirfailuretoprac-ticewhatsomanyofthempreach.Equalityofoutcomecanbepromotedonado-it-yourselfbasis.First,decideexactlywhatyoumeanbyequality.DoyouwanttoachieveequalitywithintheUnitedStates?Inaselectedgroupofcountriesasawhole?Intheworldasawhole?Isequalitytobejudgedintermsofincomeperperson?Perfamily?Peryear?Perdecade?Perlifetime?In-comeintheformofmoneyalone?Orincludingsuchnonmonetaryitemsastherentalvalueofanownedhome;foodgrownforone'sownuse;servicesrenderedbymembersofthefamilynotem-ployedformoney,notablythehousewife?Howarephysicalandmentalhandicapsoradvantagestobeallowedfor?Howeveryoudecidetheseissues,youcan,ifyouareanegali-tarian,estimatewhatmoneyincomewouldcorrespondtoyourconceptofequality.Ifyouractualincomeishigherthanthat,youcankeepthatamountanddistributetheresttopeoplewhoarebelowthatlevel.Ifyourcriterionweretoencompasstheworldasmostegalitarianrhetoricsuggestsitshouldsome-thinglessthan,say,$200ayear(in1979dollars)perpersonwouldbeanamountthatwouldcorrespondtotheconceptionofequalitythatseemsimplicitinmostegalitarianrhetoric.Thatisabouttheaverageincomeperpersonworldwide.WhatIrvingKristolhascalledthe"newclass"governmentbureaucrats,academicswhoseresearchissupportedbygovern-mentfundsorwhoareemployedingovernmentfinanced"think-tanks,"staffsofthemanyso-called"generalinterest"or"publicpolicy"groups,journalistsandothersinthecommunicationsin- 142FREETOCHOOSE:APersonalStatementdustryareamongthemostardentpreachersofthedoctrineofequality.Yettheyremindusverymuchoftheold,ifunfair,sawabouttheQuakers:"TheycametotheNewWorldtodogood,andendedupdoingwell."Themembersofthenewclassareingeneralamongthehighestpaidpersonsinthecommunity.Andformanyamongthem,preachingequalityandpromotingoradministeringtheresultinglegislationhasprovedaneffectivemeansofachievingsuchhighincomes.Allofusfinditeasytoidentifyourownwelfarewiththewelfareofthecommunity.Ofcourse,anegalitarianmayprotestthatheisbutadropintheocean,thathewouldbewillingtoredistributetheexcessofhisincomeoverhisconceptofanequalincomeifeveryoneelsewerecompelledtodothesame.Ononelevelthiscontentionthatcompulsionwouldchangemattersiswrongevenifeveryoneelsedidthesame,hisspecificcontributiontotheincomeofotherswouldstillbeadropintheocean.Hisindividualcontributionwouldbejustaslargeifheweretheonlycontributorasifhewereoneofmany.Indeed,itwouldbemorevaluablebecausehecouldtargethiscontributiontogototheveryworstoffamongthoseheregardsasappropriaterecipients.Onanotherlevelcom-pulsionwouldchangemattersdrastically:thekindofsocietythatwouldemergeifsuchactsofredistributionwerevoluntaryisaltogetherdifferentand,byourstandards,infinitelypreferabletothekindthatwouldemergeifredistributionwerecompul-sory.Personswhobelievethatasocietyofenforcedequalityispreferablecanalsopracticewhattheypreach.Theycanjoinoneofthemanycommunesinthiscountryandelsewhere,orestab-lishnewones.And,ofcourse,itisentirelyconsistentwithabeliefinpersonalequalityorequalityofopportunityandlibertythatanygroupofindividualswhowishtoliveinthatwayshouldbefreetodoso.Ourthesisthatsupportforequalityofoutcomeisword-deepreceivesstrongsupportfromthesmallnumberofpersonswhohavewishedtojoinsuchcommunesandfromthefragilityofthecommunesthathavebeenestablished.EgalitariansintheUnitedStatesmayobjectthatthefewnessofcommunesandtheirfragilityreflecttheopprobriumthatapredominantly"capitalist"societyvisitsonsuchcommunesand CreatedEqual143theresultingdiscriminationtowhichtheyaresubjected.That$maybetruefortheUnitedStatesbutasRobertNozickhaspointedout,thereisonecountrywherethatisnottrue,where,onthecontrary,egalitariancommunesarehighlyregardedandprized.ThatcountryisIsrael.ThekibbutzplayedamajorroleinearlyJewishsettlementinPalestineandcontinuestoplayanimportantroleinthestateofIsrael.AdisproportionatefractionoftheleadersoftheIsraelistateweredrawnfromthekibbutzim.Farfrombeingasourceofdisapproval,membershipinakibbutzconferssocialstatusandcommandsapprobation.Everyoneisfreetojoinorleaveakibbutz,andkibbutzimhavebeenviablesocialorganizations.Yetatnotime,andcertainlynottoday,havemorethanabout5percentoftheJewishpopulationofIsraelchosentobemembersofakibbutz.Thatpercentagecanberegardedasanupperestimateofthefractionofpeoplewhowouldvoluntarilychooseasystemenforcingequalityofoutcomeinpreferencetoasystemcharacterizedbyinequality,diversity,andopportunity.Publicattitudesaboutgraduatedincometaxesaremoremixed.Recentreferendaontheintroductionofgraduatedstateincometaxesinsomestatesthatdonothavethem,andonanincreaseintheextentofgraduationinotherstates,havegenerallybeendefeated.Ontheotherhand,thefederalincometaxishighlygraduated,atleastonpaper,thoughitalsocontainsalargenum-berofprovisions("loopholes")thatgreatlyreducetheextentofgraduationinpractice.Onthisshowing,thereisatleastpublictoleranceofamoderateamountofredistributivetaxation.However,weventuretosuggestthatthepopularityofReno,LasVegas,andnowAtlanticCityisnolessfaithfulanindicationofthepreferencesofthepublicthanthefederalincometax,theeditorialsintheNewYorkTimesandtheWashingtonPost,andthepagesoftheNewYorkReviewofBooks.CONSEQUENCESOFEGALITARIANPOLICIESInshapingourownpolicy,wecanlearnfromtheexperienceofWesterncountrieswithwhichweshareacommonintellectualandculturalbackground,andfromwhichwederivemanyofourvalues.PerhapsthemostinstructiveexampleisGreatBritain, 144FREETOCHOOSE:APersonalStatementwhichledthewayinthenineteenthcenturytowardimplement-ingequalityofopportunityandinthetwentiethtowardimple-mentingequalityofoutcome.SincetheendofWorldWarII,Britishdomesticpolicyhasbeendominatedbythesearchforgreaterequalityofoutcome.Measureaftermeasurehasbeenadopteddesignedtotakefromtherichandgivetothepoor.Taxeswereraisedonincomeuntiltheyreachedatoprateof98percentonpropertyincomeand83percenton"earned"income,andweresupplementedbyeverheaviertaxesoninheritances.State-providedmedical,hous-ing,andotherwelfareservicesweregreatlyexpanded,alongwithpaymentstotheunemployedandtheaged.Unfortunately,theresultshavebeenverydifferentfromthosethatwereintendedbythepeoplewhowerequiteproperlyoffendedbytheclassstruc-turethatdominatedBritainforcenturies.Therehasbeenavastredistributionofwealth,buttheendresultisnotanequitabledistribution.Instead,newclassesofprivilegedhavebeencreatedtoreplaceorsupplementtheold:thebureaucrats,secureintheirjobs,pro-tectedagainstinflationbothwhentheyworkandwhentheyretire;thetradeunionsthatprofesstorepresentthemostdown-troddenworkersbutinfactconsistofthehighestpaidlaborersinthelandthearistocratsofthelabormovement;andthenewmillionairespeoplewhohavebeencleverestatfindingwaysaroundthelaws,therules,theregulationsthathavepouredfromParliamentandthebureaucracy,whohavefoundwaystoavoidpayingtaxesontheirincomeandtogettheirwealthoverseasbeyondthegraspofthetaxcollectors.Avastreshufflingofin-comeandwealth,yes;greaterequity,hardly.ThedriveforequalityinBritainfailed,notbecausethewrongmeasureswereadoptedthoughsomenodoubtwere;notbe-causetheywerebadlyadministeredthoughsomenodoubtwere;notbecausethewrongpeopleadministeredthemthoughnodoubtsomedid.Thedriveforequalityfailedforamuchmorefundamentalreason.Itwentagainstoneofthemostbasicinstinctsofallhumanbeings.InthewordsofAdamSmith,"Theuniform,constant,anduninterruptedeffortofeverymanto9betterhiscondition"and,onemayadd,theconditionofhis CreatedEqual145childrenandhischildren'schildren.Smith,ofcourse,meantby"condition"notmerelymaterialwell-being,thoughcertainlythatwasonecomponent.Hehadamuchbroaderconceptinmind,onethatincludedallofthevaluesbywhichmenjudgetheirsuccessinparticularthekindofsocialvaluesthatgaverisetotheoutpouringofphilanthropicactivitiesinthenineteenthcen-tury.Whenthelawinterfereswithpeople'spursuitoftheirownvalues,theywilltrytofindawayaround.Theywillevadethelaw,theywillbreakthelaw,ortheywillleavethecountry.Fewofusbelieveinamoralcodethatjustifiesforcingpeopletogiveupmuchofwhattheyproducetofinancepaymentstopersonstheydonotknowforpurposestheymaynotapproveof.Whenthelawcontradictswhatmostpeopleregardasmoralandproper,theywillbreakthelawwhetherthelawisenactedinthenameofanobleidealsuchasequalityorinthenakedinterestofonegroupattheexpenseofanother.Onlyfearofpunishment,notasenseofjusticeandmorality,willleadpeopletoobeythelaw.Whenpeoplestarttobreakonesetoflaws,thelackofrespectforthelawinevitablyspreadstoalllaws,eventhosethatevery-oneregardsasmoralandproperlawsagainstviolence,theft,andvandalism.Hardasitmaybetobelieve,thegrowthofcrudecriminalityinBritaininrecentdecadesmaywellbeonecon-sequenceofthedriveforequality.Inaddition,thatdriveforequalityhasdrivenoutofBritainsomeofitsablest,best-trained,mostvigorouscitizens,muchtothebenefitoftheUnitedStatesandothercountriesthathavegiventhemagreateropportunitytousetheirtalentsfortheirownbenefit.Finally,whocandoubttheeffectthatthedriveforequalityhashadonefficiencyandproductivity?Surely,thatisoneofthemainreasonswhyeconomicgrowthinBritainhasfallensofarbehinditscontinentalneighbors,theUnitedStates,Japan,andothernationsoverthepastfewdecades.WeintheUnitedStateshavenotgoneasfarasBritaininpromotingthegoalofequalityofoutcome.Yetmanyofthesameconsequencesarealreadyevidentfromafailureofegali-tarianmeasurestoachievetheirobjectives,toareshufflingofwealththatbynostandardscanberegardedasequitable,toa 146FREETOCHOOSE:APersonalStatementriseincriminality,toadepressingeffectonproductivityandefficiency.CAPITALISMANDEQUALITYEverywhereintheworldtherearegrossinequitiesofincomeandwealth.Theyoffendmostofus.Fewcanfailtobemovedbythecontrastbetweentheluxuryenjoyedbysomeandthegrindingpovertysufferedbyothers.Inthepastcenturyamythhasgrownupthatfreemarketcapitalismequalityofopportunityaswehaveinterpretedthattermincreasessuchinequalities,thatitisasystemunderwhichtherichexploitthepoor.Nothingcouldbefurtherfromthetruth.Whereverthefreemarkethasbeenpermittedtooperate,whereveranythingap-proachingequalityofopportunityhasexisted,theordinarymanhasbeenabletoattainlevelsoflivingneverdreamedofbefore.Nowhereisthegapbetweenrichandpoorwider,nowherearetherichricherandthepoorpoorer,thaninthosesocietiesthatdonotpermitthefreemarkettooperate.ThatistrueoffeudalsocietieslikemedievalEurope,Indiabeforeindependence,andmuchofmodernSouthAmerica,whereinheritedstatusdeterminesposi-tion.Itisequallytrueofcentrallyplannedsocieties,likeRussiaorChinaorIndiasinceindependence,whereaccesstogovern-mentdeterminesposition.Itistrueevenwherecentralplanningwasintroduced,asinallthreeofthesecountries,inthenameofequality.Russiaisacountryoftwonations:asmallprivilegedupperclassofbureaucrats,Communistpartyofficials,technicians;andagreatmassofpeoplelivinglittlebetterthantheirgreat-grand-parentsdid.Theupperclasshasaccesstospecialshops,schools,andluxuriesofallkind;themassesarecondemnedtoenjoylittlemorethanthebasicnecessities.WerememberaskingatouristguideinMoscowthecostofalargeautomobilethatwesawandbeingtold,"Oh,thosearen'tforsale;they'reonlyforthePolitburo."SeveralrecentbooksbyAmericanjournalistsdocu-mentingreatdetailthecontrastbetweentheprivilegedlifeof CreatedEqual1471theupperclassesandthepovertyofthemasses."Evenonasimplerlevel,itisnoteworthythattheaveragewageofafore-manisalargermultipleoftheaveragewageofanordinaryworkerinaRussianfactorythaninafactoryintheUnitedStatesandnodoubthedeservesit.Afterall,anAmericanforemanonlyhastoworryaboutbeingfired;aRussianforemanalsohastoworryaboutbeingshot.China,too,isanationwithwidedifferencesinincomebe-tweenthepoliticallypowerfulandtherest;betweencityandcountryside;betweensomeworkersinthecitiesandotherwork-ers.AperceptivestudentofChinawritesthat"theinequalitybetweenrichandpoorregionsinChinawasmoreacutein1957thaninanyofthelargernationsoftheworldexceptperhapsBrazil."Hequotesanotherscholarassaying,"TheseexamplessuggestthattheChineseindustrialwagestructureisnotsig-nificantlymoreegalitarianthanthatofothercountries."AndheconcludeshisexaminationofequalityinChina,"HowevenlydistributedwouldChina'sincomebetoday?Certainly,itwouldnotbeasevenasTaiwan'sorSouthKorea's....Ontheotherhand,incomedistributioninChinaisobviouslymoreeventhaninBrazilorSouthAmerica....WemustconcludethatChinaisfarfrombeingasocietyofcompleteequality.Infact,incomedifferencesinChinamaybequiteabitgreaterthaninanumberofcountriescommonlyassociatedwith`fascist'elitesandex-ploitedmasses."11Industrialprogress,mechanicalimprovement,allofthegreatwondersofthemodernerahavemeantrelativelylittletothewealthy.TherichinAncientGreecewouldhavebenefitedhardlyatallfrommodernplumbing:runningservantsreplacedrun-ningwater.TelevisionandradiothepatriciansofRomecouldenjoytheleadingmusiciansandactorsintheirhome,couldhavetheleadingartistsasdomesticretainers.Ready-to-wearclothing,supermarketsalltheseandmanyothermoderndevel-opmentswouldhaveaddedlittletotheirlife.Theywouldhavewelcomedtheimprovementsintransportationandinmedicine,butfortherest,thegreatachievementsofWesterncapitalismhaveredoundedprimarilytothebenefitoftheordinaryperson.Theseachievementshavemadeavailabletothemassescon- 148FREETOCHOOSE:APersonalStatementveniencesandamenitiesthatwerepreviouslytheexclusivepre-rogativeoftherichandpowerful.In1848JohnStuartMillwrote:"Hithertoitisquestionableifallthemechanicalinventionsyetmadehavelightenedtheday'stoilofanyhumanbeing.Theyhaveenabledagreaterpopulationtolivethesamelifeofdrudgeryandimprisonment,andanin-creasednumberofmanufacturersandotherstomakefortunes.Theyhaveincreasedthecomfortsofthemiddleclasses.Buttheyhavenotyetbeguntoeffectthosegreatchangesinhumandes-tiny,whichitisintheirnatureandintheirfuturitytoaccom-plish."12Noonecouldsaythattoday.Youcantravelfromoneendoftheindustrializedworldtotheotherandalmosttheonlypeopleyouwillfindengaginginbackbreakingtoilarepeoplewhoaredoingitforsport.Tofindpeoplewhoseday'stoilhasnotbeenlightenedbymechanicalinvention,youmustgotothenon-capitalistworld:toRussia,China,IndiaorBangladesh,partsofYugoslavia;ortothemorebackwardcapitalistcountriesinAfrica,theMideast,SouthAmerica;anduntilrecently,SpainorItaly.CONCLUSIONAsocietythatputsequalityinthesenseofequalityofout-comeaheadoffreedomwillendupwithneitherequalitynorfreedom.Theuseofforcetoachieveequalitywilldestroyfree-dom,andtheforce,introducedforgoodpurposes,willendupinthehandsofpeoplewhouseittopromotetheirowninterests.Ontheotherhand,asocietythatputsfreedomfirstwill,asahappyby-product,endupwithbothgreaterfreedomandgreaterequality.Thoughaby-productoffreedom,greaterequalityisnotanaccident.Afreesocietyreleasestheenergiesandabilitiesofpeopletopursuetheirownobjectives.Itpreventssomepeoplefromarbitrarilysuppressingothers.Itdoesnotpreventsomepeoplefromachievingpositionsofprivilege,butsolongasfreedomismaintained,itpreventsthosepositionsofprivilegefrombecominginstitutionalized;theyaresubjecttocontinuedattackbyotherable,ambitiouspeople.Freedommeansdiversity CreatedEqual149butalsomobility.Itpreservestheopportunityfortoday'sdis-advantagedtobecometomorrow'sprivilegedand,intheprocess,enablesalmosteveryone,fromtoptobottom,toenjoyafullerandricherlife. CHAPTER6What'sWrongwithOurSchools?EducationhasalwaysbeenamajorcomponentoftheAmericanDream.InPuritanNewEngland,schoolswerequicklyestab-lished,firstasanadjunctofthechurch,latertakenoverbysecularauthorities.AftertheopeningoftheErieCanal,thefarmerswholefttherockyhillsofNewEnglandforthefertileplainsoftheMiddleWestestablishedschoolswherevertheywent,notonlyprimaryandsecondaryschools,butalsoseminariesandcolleges.ManyoftheimmigrantswhostreamedovertheAtlanticinthesecondhalfofthenineteenthcenturyhadathirstforeducation.Theyeagerlyseizedtheopportunitiesavailabletotheminthemetropolisesandlargecitieswheretheymostlysettled.Atfirst,schoolswereprivateandattendancestrictlyvoluntary.Increasingly,governmentcametoplayalargerrole,firstbycon-tributingtofinancialsupport,laterbyestablishingandadminister-inggovernmentschools.ThefirstcompulsoryattendancelawwasenactedbyMassachusettsin1852,butattendancedidnotbecomecompulsoryinallstatesuntil1918.Governmentcontrolwasprimarilylocaluntilwellintothetwentiethcentury.Theneigh-borhoodschool,andcontrolbythelocalschoolboard,wastherule.Thenaso-calledreformmovementgotunderway,par-ticularlyinthebigcities,sparkedbythewidedifferencesintheethnicandsocialcompositionofdifferentschooldistrictsandbythebeliefthatprofessionaleducatorsshouldplayalargerrole.Thatmovementgainedadditionalgroundinthe1930salongwiththegeneraltendencytowardbothexpansionandcentraliza-tionofgovernment.Wehavealwaysbeenproud,andwithgoodreason,ofthewidespreadavailabilityofschoolingtoallandtherolethatpublicschoolinghasplayedinfosteringtheassimilationofnewcomersintooursociety,preventingfragmentationanddivisiveness,and150 What'sWrongwithOurSchools?151enablingpeoplefromdifferentculturalandreligiousbackgroundstolivetogetherinharmony.Unfortunately,inrecentyearsoureducationalrecordhasbe-cometarnished.Parentscomplainaboutthedecliningqualityoftheschoolingtheirchildrenreceive.Manyareevenmoredis-turbedaboutthedangerstotheirchildren'sphysicalwell-being.Teacherscomplainthattheatmosphereinwhichtheyarerequiredtoteachisoftennotconducivetolearning.Increasingnumbersofteachersarefearfulabouttheirphysicalsafety,evenintheclassroom.Taxpayerscomplainaboutgrowingcosts.Hardlyany-onemaintainsthatourschoolsaregivingthechildrenthetoolstheyneedtomeettheproblemsoflife.Insteadoffosteringassimi-lationandharmony,ourschoolsareincreasinglyasourceoftheveryfragmentationthattheyearlierdidsomuchtoprevent.Attheelementaryandsecondarylevel,thequalityofschoolingvariestremendously:outstandinginsomewealthysuburbsofmajormetropolises,excellentorreasonablysatisfactoryinmanysmalltownsandruralareas,incrediblybadintheinnercitiesofmajormetropolises."Theeducation,orrathertheuneducation,ofblackchildrenfromlowincomefamiliesisundoubtedlythegreatestdisasterareainpubliceducationanditsmostdevastatingfailure.Thisisdoublytragicforithasalwaysbeentheofficialethicofpublicschoolingthatitwasthepoorandtheoppressedwhowereitsgreatestbeneficiaries."Publiceducationis,wefear,sufferingfromthesamemaladyasaresomanyoftheprogramsdiscussedintheprecedingandsubsequentchapters.MorethanfourdecadesagoWalterLipp-manndiagnoseditas"thesicknessofanover-governedsociety,"thechangefrom"theolderfaith...thattheexerciseofun-limitedpowerbymenwithlimitedmindsandself-regardingprejudicesissoonoppressive,reactionary,andcorrupt,...thattheveryconditionofprogresswasthelimitationofpowertothecapacityandthevirtueofrulers"tothenewerfaith"thattherearenolimitstoman'scapacitytogovernothersandthat,there-fore,nolimitationsoughttobeimposedupongovernment."2Forschooling,thissicknesshastakentheformofdenyingmanyparentscontroloverthekindofschoolingtheirchildrenreceive 152FREETOCHOOSE:APersonalStatementeitherdirectly,throughchoosingandpayingfortheschoolstheirchildrenattend,orindirectly,throughlocalpoliticalactivity.Powerhasinsteadgravitatedtoprofessionaleducators.Thesick-nesshasbeenaggravatedbyincreasingcentralizationandbureau-cratizationofschools,especiallyinthebigcities.Privatemarketarrangementshaveplayedagreaterroleatthecollegeanduniversitylevelthanattheelementaryandsecondarylevel.Butthissectorhasnotbeenimmunefromthesicknessofanovergovernedsociety.In1928fewerstudentswereenrolledingovernmentinstitutionsofhighereducationthaninprivateinsti-tutions;by1978closetofourtimesasmanywere.Directgovern-mentfinancinggrewlessrapidlythangovernmentoperationbecauseoftuitionchargespaidbystudents,butevenso,by1978directgovernmentgrantsaccountedformorethanhalfofthetotalexpendituresonhighereducationbyallinstitutions,govern-mentandprivate.Theincreasedroleofgovernmenthashadmanyofthesameadverseeffectsonhighereducationasonelementaryandsecond-aryeducation.Ithasfosteredanatmospherethatbothdedicatedteachersandseriousstudentsoftenfindinimicaltolearning.ELEMENTARYANDSECONDARYEDUCATION:THEPROBLEMEvenintheearliestyearsoftheRepublic,notonlythecitiesbutalmosteverytownandvillageandmostruraldistrictshadschools.Inmanystatesorlocalities,themaintenanceofa"com-monschool"wasmandatedbylaw.Buttheschoolsweremostlyprivatelyfinancedbyfeespaidbytheparents.Somesupplemen-taryfinancewasgenerallyalsoavailablefromthelocal,county,orstategovernment,bothtopayfeesforchildrenwhoseparentswereregardedasunabletodosoandtosupplementfeespaidbyparents.Thoughschoolingwasneithercompulsorynorfree,itwaspracticallyuniversal(slaves,ofcourse,excepted).Inhisre-portfor1836,thesuperintendentofcommonschoolsoftheStateofNewYorkasserted:"Underanyviewofthesubjectitisreason-abletobelieve,thatinthecommonschools,privateschoolsandacademies,thenumberofchildrenactuallyreceivinginstructionisequaltothewholenumberbetweenfiveandsixteenyearsof What'sWrongwithOurSchools?153age."Conditionsdoubtlessvariedfromstatetostate,butbyallaccountsschoolingwaswidelyavailableto(white)childrenfromfamiliesatalleconomiclevels.Beginninginthe1840s,acampaigndevelopedtoreplacethediverseandlargelyprivatesystembyasystemofso-calledfreeschools,i.e.,schoolsinwhichparentsandotherspaidthecostindirectlybytaxesratherthandirectlybyfees.AccordingtoE.G.West,whohasstudiedextensivelythedevelopmentofgovernment'sroleinschooling,thiscampaignwasnotledbydissatisfiedparents,but"mainlybyteachersandgovernment"officials.}ThemostfamouscrusaderforfreeschoolswasHoraceMann,"thefatherofAmericanpubliceducation,"asheistermedintheEncyclopaediaBritannicaarticleonhislife'MannwasthefirstsecretaryoftheMassachusettsStateBoardofEducationes-tablishedin1837,andforthenexttwelveyearsheconductedanenergeticcampaignforaschoolsystempaidforbygovernmentandcontrolledbyprofessionaleducators.Hismainargumentswerethateducationwassoimportantthatgovernmenthadadutytoprovideeducationtoeverychild,thatschoolsshouldbesecularandincludechildrenofallreligious,social,andethnicbackgrounds,andthatuniversal,freeschoolingwouldenablechildrentoovercomethehandicapsofthepovertyoftheirpar-ents."InhissecretarialreportstotheMassachusettsBoardofEducation,Mannproclaimedrepetitively...thateducationwasagoodpublicinvestmentandincreasedoutput.""Thoughtheargumentswereallpitchedintermsofthepublicinterest,muchofthesupportofteachersandadministratorsforthepublicschoolmovementderivedfromanarrowself-interest.Theyex-pectedtoenjoygreatercertaintyofemployment,greaterassur-ancethattheirsalarieswouldbepaid,andagreaterdegreeofcontrolifgovernmentratherthanparentsweretheimmediatepaymaster."Despitevastdifficultiesandvigorousopposition...themainoutlinesof"thekindofsystemurgedbyMann"wereachievedbythemiddleofthe19thcentury."Eversince,mostchildrenhaveattendedgovernmentschools.Afewhavecon-tinuedtoattendso-calledprivateschools,mostlyschoolsoperatedbytheCatholicChurchandotherreligiousdenominations.TheUnitedStateswasnotuniqueinmovingfromamostly 154FREETOCHOOSE:APersonalStatementprivatetoamostlygovernmentalsystemofschools.Indeed,oneauthorityhasdescribed"thegradualacceptanceoftheviewthateducationoughttobearesponsibilityofthestate"asthe"mostsignificant"ofthegeneraltrendsofthenineteenthcentury"thatwerestillinfluencingeducationinallwesterncountriesinthesecondhalfofthe20thcentury."Interestinglyenough,thistrendbeganinPrussiain1808,andinFrance,underNapoleon,aboutthesametime.BritainwasevenlaterthantheUnitedStates."Winderthespelloflaissezfaire[it]hesitatedalongtimebeforeallowingthestatetointerveneineducationalaffairs,"butfinally,in1870,asystemofgovernmentschoolswasestablished,thoughelementaryeducationwasnotmadecompulsoryuntil1880,andfeeswerenotgenerallyabolisheduntil1891.°InBritain,asintheUnitedStates,schoolingwasalmostuniversalbeforethegov-ernmenttookitover.ProfessorWesthasmaintainedpersuasivelythatthegovernmenttakeoverinBritain,asintheUnitedStates,resultedfrompressurebyteachers,administrators,andwell-mean-ingintellectuals,ratherthanparents.Heconcludesthatthegov-10ernmenttakeoverreducedthequalityanddiversityofschooling.Educationisstillanotherexample,likeSocialSecurity,ofthecommonelementinauthoritarianandsocialistphilosophies.Aris-tocraticandauthoritarianPrussiaandImperialFrancewerethepioneersinstatecontrolofeducation.Socialisticallyinclinedin-tellectualsintheUnitedStates,Britain,andlaterRepublicanFrancewerethemajorsupportersofstatecontrolintheircountries.TheestablishmentoftheschoolsystemintheUnitedStatesasanislandofsocialisminafreemarketseareflectedonlytoaveryminorextenttheearlyemergenceamongintellectualsofadistrustofthemarketandofvoluntaryexchange.Mostly,itsimplyre-flectedtheimportancethatwasattachedbythecommunitytotheidealofequalityofopportunity.TheabilityofHoraceMannandhisassociatestotapthatdeepsentimentenabledthemtosucceedintheircrusade.Needlesstosay,thepublicschoolsystemwasnotviewedas"socialist"butsimplyas"American."Themostimportantfactordetermininghowthesystemoperatedwasitsdecentralizedpoliti-calstructure.TheU.S.Constitutionnarrowlylimitedthepowers What'sWrongwithOurSchools?155ofthefederalgovernment,sothatitplayednosignificantrole.Thestatesmostlyleftcontrolofschoolstothelocalcommunity,thetown,thesmallcity,orasubdivisionofalargecity.Closemonitoringofthepoliticalauthoritiesrunningtheschoolsystembyparentswasapartialsubstituteforcompetitionandassuredthatanywidelyshareddesiresofparentswereimplemented.BeforetheGreatDepressionthesituationwasalreadychang-ing.Schooldistrictswereconsolidated,educationaldistrictsen-larged,andmoreandmorepowerwasgrantedtoprofessionaleducators.Afterthedepression,whenthepublicjoinedthein-tellectualsinanunbridledfaithinthevirtuesofgovernment,andespeciallyofcentralgovernment,thedeclineoftheone-roomschoolandthelocalschoolboardbecamearout.Powershiftedrapidlyfromthelocalcommunitytobroaderentitiesthecity,thecounty,thestate,andmorerecently,thefederalgovernment.In1920localfundsmadeup83percentofallrevenuesofpublicschools,federalgrantslessthan1percent.By1940thelocalsharehadfallento68percent.Currentlyitislessthanone-half.Thestateprovidedmostoftherestofthemoney:16percentin1920,30percentin1940,andcurrentlymorethan40percent.Thefederalgovernment'sshareisstillsmallbutgrowingrapidly:fromlessthan2percentin1940toroughly8percentcurrently.Asprofessionaleducatorshavetakenover,controlbyparentshasweakened.Inaddition,thefunctionassignedtoschoolshaschanged.TheyarestillexpectedtoteachthethreeR'sandtotransmitcommonvalues.Inaddition,however,schoolsarenowregardedasmeansofpromotingsocialmobility,racialintegration,andotherobjectivesonlydistantlyrelatedtotheirfundamentaltask.InChapter4wereferredtotheTheoryofBureaucraticDis-placementthatDr.MaxGammonhaddevelopedafterstudyingtheBritishNationalHealthService:inhiswords,in"abureau-craticsystem...increaseinexpenditurewillbematchedbyfallinproduction....Suchsystemswillactratherlike`blackholes'intheeconomicuniverse,simultaneouslysuckinginre-sources,andshrinkingintermsof`emitted'production."11Histheoryappliesinfullforcetotheeffectoftheincreasingbureaucratizationandcentralizationofthepublicschoolsystem 156FREETOCHOOSE:APersonalStatementintheUnitedStates.Inthefiveyearsfromschoolyear197172toschoolyear197677,totalprofessionalstaffinallU.S.publicschoolswentup8percent,costperpupilwentup58percentindollars(11percentaftercorrectionforinflation).lnputclearlyup.Thenumberofstudentswentdown4percent,thenumberofschoolswentdown4percent.Andwesuspectthatfewreaderswilldemurfromthepropositionthatthequalityofschoolingwentdownevenmoredrasticallythanthequantity.Thatiscertainlythestorytoldbythedeclininggradesrecordedonstandardizedexaminations.Outputclearlydown.Isthedeclineinoutputperunitofinputduetoincreasinglybureaucraticandcentralizedorganization?Assomeevidence,thenumberofschooldistrictswentdownby17percentintheseven-yearperiodfrom197071to197778continuingthelonger-termtrendtogreatercentralization.Astobureaucratization,forasomewhatearlierfive-yearperiodforwhichdataareavailable(196869to197374),whenthenumberofstudentswentup1percent,thetotalprofessionalstaffwentup15percent,and'teachers14percent,butsupervisorswentup44percent.'-Theprobleminschoolingisnotmeresize,notsimplythatschooldistrictshavebecomelarger,andthat,ontheaverage,eachschoolhasmorestudents.Afterall,inindustry,sizehasoftenprovedasourceofgreaterefficiency,lowercost,andimprovedquality.IndustrialdevelopmentintheUnitedStatesgainedagreatdealfromtheintroductionofmassproduction,fromwhatecono-mistscallthe"economiesofscale."Whyshouldschoolingbedifferent?Itisn't.Thedifferenceisnotbetweenschoolingandotherac-tivitiesbutbetweenarrangementsunderwhichtheconsumerisfreetochooseandarrangementsunderwhichtheproducerisinthesaddlesotheconsumerhaslittletosay.Iftheconsumerisfreetochoose,anenterprisecangrowinsizeonlyifitproducesanitemthattheconsumerprefersbecauseofeitheritsqualityoritsprice.Andsizealonewillnotenableanyenterprisetoimposeaproductontheconsumerthattheconsumerdoesnotconsiderisworthitsprice.ThelargesizeofGeneralMotorshasnotpre-venteditfromflourishing.ThelargesizeofW.T.Grant&Co. What'sWrongwithOurSchools?157didnotsaveitfrombankruptcy.Whentheconsumerisfreetochoose,sizewillsurviveonlyifitisefficient.Inpoliticalarrangementssizegenerallydoesaffectconsumers'freedomtochoose.Insmallcommunitiestheindividualcitizenfeelsthathehas,andindeeddoeshave,morecontroloverwhatthepoliticalauthoritiesdothaninlargecommunities.Hemaynothavethesamefreedomtochoosethathehasindecidingwhethertobuysomethingornot,butatleasthehasaconsiderableopportunitytoaffectwhathappens.Inaddition,whentherearemanysmallcommunities,theindividualcanchoosewheretolive.Ofcourse,thatisacomplexchoice,involvingmanyelements.Nonetheless,itdoesmeanthatlocalgovernmentsmustprovidetheircitizenswithservicestheyregardasworththetaxestheypayoreitherbereplacedorsufferalossoftaxpayers.Thesituationisverydifferentwhenpowerisinthehandsofacentralgovernment.Theindividualcitizenfeelsthathehas,andindeeddoeshave,littlecontroloverthedistantandimpersonalpoliticalauthorities.Thepossibilityofmovingtoanothercom-munity,thoughitmaystillbepresent,isfarmorelimited.Inschooling,theparentandchildaretheconsumers,theteacherandschooladministratortheproducers.Centralizationinschoolinghasmeantlargersizeunits,areductionintheabilityofconsumerstochoose,andanincreaseinthepowerofpro-ducers.Teachers,administrators,andunionofficialsarenodif-ferentfromtherestofus.Theymaybeparents,too,sincerelydesiringafineschoolsystem.However,theirinterestsasteachers,asadministrators,asunionofficialsaredifferentfromtheirin-terestsasparentsandfromtheinterestsoftheparentswhosechildrentheyteach.Theirinterestsmaybeservedbygreatercentralizationandbureaucratizationeveniftheinterestsoftheparentsarenotindeed,onewayinwhichthoseinterestsareservedispreciselybyreducingthepowerofparents.Thesamephenomenonispresentwhenevergovernmentbu-reaucracytakesoverattheexpenseofconsumerchoice:whetherinthepostoffice,ingarbagecollection,orinthemanyexamplesinotherchapters.Inschooling,thoseofuswhoareintheupper-incomeclassesretainourfreedomtochoose.Wecansendourchildrentoprivate 158FREETOCHOOSE:APersonalStatementschools,ineffectpayingtwicefortheirschoolingonceintaxestosupportthepublicschoolsystem,onceinschoolfees.Orwecanchoosewheretoliveonthebasisofthequalityofthepublicschoolsystem.Excellentpublicschoolstendtobeconcentratedinthewealthiersuburbsofthelargercities,whereparentalcontrolremainsveryreal."Thesituationisworstintheinnercitiesofthelargermetro-polisesNewYork,Chicago,LosAngeles,Boston.Thepeoplewholiveintheseareascanpaytwicefortheirchildren'sschoolingonlywithgreatdifficultythoughasurprisingnumberdosobysendingtheirchildrentoparochialschools.Theycannotaffordtomovetotheareaswithgoodpublicschools.Theironlyrecourseistotrytoinfluencethepoliticalauthoritieswhoareinchargeofthepublicschools,usuallyadifficultifnothopelesstask,andoneforwhichtheyarenotwellqualified.Theresidentsoftheinnercitiesareprobablymoredisadvantagedinrespectofthelevelofschoolingtheycangetfortheirchildrenthaninanyotherareaoflifewiththepossibleexceptionofcrimeprotectionan-other"service"thatisprovidedbygovernment.Thetragedy,andirony,isthatasystemdedicatedtoenablingallchildrentoacquireacommonlanguageandthevaluesofU.S.citizenship,togivingallchildrenequaleducationalopportunity,shouldinpracticeexacerbatethestratificationofsocietyandpro-videhighlyunequaleducationalopportunity.Expendituresonschoolingperpupilareoftenashighintheinnercitiesasineventhewealthysuburbs,butthequalityofschoolingisvastlylower.Inthesuburbsalmostallofthemoneygoesforeducation;intheinnercitiesmuchofitmustgotopreservingdiscipline,preventingvandalism,orrepairingitseffects.Theatmosphereinsomeinnercityschoolsismorelikethatofaprisonthanofaplaceoflearn-ing.Theparentsinthesuburbsaregettingfarmorevaluefortheirtaxdollarsthantheparentsintheinnercities.AVOUCHERPLANFORELEMENTARYANDSECONDARYSCHOOLINGSchooling,evenintheinnercities,doesnothavetobethewayitis.Itwasnotthatwaywhenparentshadgreatercontrol.Itisnotthatwaynowwhereparentsstillhavecontrol. What'sWrongwithOurSchools?159ThestrongAmericantraditionofvoluntaryactionhaspro-videdmanyexcellentexamplesthatdemonstratewhatcanbedonewhenparentshavegreaterchoice.Oneexampleattheelementarylevelisaparochialschool,St.JohnChrysostom's,thatwevisitedinoneofthepoorestneighborhoodsinNewYorkCity'sBronx.Itsfundscomeinpartfromavoluntarycharitableorganization,NewYork'sInnerCityScholarshipFund,inpartfromtheCatholicChurch,inpartfromfees.Theyoungstersattheschoolaretherebecausetheirparentschoseit.Almostallarefrompoorfamilies,yettheirparentsareallpayingatleastsomeofthecosts.Thechildrenarewellbehaved,eagertolearn.Theteachersarededicated.Theatmosphereisquietandserene.Thecostperpupilisfarlessthaninpublicschoolsevenafteraccountistakenofthefreeservicesofthoseteacherswhoarenuns.Yetontheaverage,thechildrenaretwogradesaheadoftheirpeersinpublicschool.That'sbecauseteachersandparentsarefreetochoosehowthechildrenshallbetaught.Privatemoneyhasreplacedtaxmoney.Controlhasbeentakenawayfrombu-reaucratsandputbackwhereitbelongs.Anotherexample,thisoneatthesecondarylevel,isinHarlem.Inthe1960sHarlemwasdevastatedbyriots.Manyteenagersdroppedoutofschool.Groupsofconcernedparentsandteachersdecidedtodosomethingaboutit.Theyusedprivatefundstotakeoveremptystoresandtheysetupwhatbecameknownasstore-frontschools.OneofthefirstandmostsuccessfulwascalledHarlemPrep,designedtoappealtoyoungstersforwhomconven-tionaleducationhadfailed.HarlemPrephadinadequatephysicalfacilities.Manyofitsteachersdidnothavetherightpiecesofpapertoqualifyforcertificationtoteachinpublicschools.Butthatdidnotkeepthemfromdoingagoodjob.Thoughmanystudentshadbeenmisfitsanddropouts,theyfoundthesortofteachingtheywantedatHarlemPrep.Theschoolwasphenomenallysuccessful.Manyofitsstudentswenttocollege,includingsomeoftheleadingcolleges.Butun-fortunately,thisstoryhasanunhappyending.Aftertheinitialperiodofcrisishadpassed,theschoolranshortofcash.TheBoardofEducationofferedEdCarpenter(theheadoftheschoolandoneofitsfounders)themoney,providedhewouldconform 160FREETOCHOOSE:APersonalStatementtotheirregulations.Afteralongbattletopreserveindependence,hegavein.Theschoolwastakenoverbybureaucrats."Ifelt,"commentedMr.Carpenter,"thataschoollikeHarlemPrepwouldcertainlydie,andnotprosper,undertherigidbureaucracyofaBoardofEducation....Wehadtoseewhatwasgoingtohap-pen.Ididn'tbelieveitwasgoingtobegood.Iamright.WhathashappenedsincewehavecometotheBoardofEducationisnotallgood.Itisnotallbad,butit'smorebadthangood."Privateventuresofthiskindarevaluable.However,atbesttheyonlyscratchthesurfaceofwhatneedstobedone.Onewaytoachieveamajorimprovement,tobringlearningbackintotheclassroom,especiallyforthecurrentlymostdisad-vantaged,istogiveallparentsgreatercontrolovertheirchil-dren'sschooling,similartothatwhichthoseofusintheupper-incomeclassesnowhave.Parentsgenerallyhavebothgreaterinterestintheirchildren'sschoolingandmoreintimateknowl-edgeoftheircapacitiesandneedsthananyoneelse.Socialreformers,andeducationalreformersinparticular,oftenself-righteouslytakeforgrantedthatparents,especiallythosewhoarepoorandhavelittleeducationthemselves,havelittleinterestintheirchildren'seducationandnocompetencetochooseforthem.Thatisagratuitousinsult.Suchparentshavefrequentlyhadlimitedopportunitytochoose.However,U.S.historyhasamplydemonstratedthat,giventheopportunity,theyhaveoftenbeenwillingtosacrificeagreatdeal,andhavedonesowisely,fortheirchildren'swelfare.Nodoubt,someparentslackinterestintheirchildren'sschool-ingorthecapacityanddesiretochoosewisely.However,theyareinasmallminority.Inanyevent,ourpresentsystemunfortunatelydoeslittletohelptheirchildren.Onesimpleandeffectivewaytoassureparentsgreaterfreedomtochoose,whileatthesametimeretainingpresentsourcesoffinance,isavoucherplan.Supposeyourchildattendsapublicelementaryorsecondaryschool.Ontheaverage,countrywide,itcostthetaxpayeryouandmeabout$2,000peryearin1978foreverychildenrolled.Ifyouwithdrawyourchildfromapublicschoolandsendhimtoaprivateschool,yousavetaxpayersabout$2,000peryearbutyougetnopartofthatsavingexceptasit What'sWrongwithOurSchools?161ispassedontoalltaxpayers,inwhichcaseitwouldamounttoatmostafewcentsoffyourtaxbill.Youhavetopayprivatetuitioninadditiontotaxesastrongincentivetokeepyourchildinapublicschool.Suppose,however,thegovernmentsaidtoyou:"Ifyourelieveusoftheexpenseofschoolingyourchild,youwillbegivenavoucher,apieceofpaperredeemableforadesignatedsumofmoney,if,andonlyif,itisusedtopaythecostofschoolingyourchildatanapprovedschool."Thesumofmoneymightbe$2,000,oritmightbealessersum,say$1,500or$1,000,inordertodividethesavingbetweenyouandtheothertaxpayers.Butwhetherthefullamountorthelesseramount,itwouldremoveatleastapartofthefinancialpenaltythatnowlimitsthefreedom4ofparentstochoose.'ThevoucherplanembodiesexactlythesameprincipleastheGIbillsthatprovideforeducationalbenefitstomilitaryveterans.Theveterangetsavouchergoodonlyforeducationalexpenseandheiscompletelyfreetochoosetheschoolatwhichheusesit,providedthatitsatisfiescertainstandards.Parentscould,andshould,bepermittedtousethevouchersnotonlyatprivateschoolsbutalsoatotherpublicschoolsandnotonlyatschoolsintheirowndistrict,city,orstate,butatanyschoolthatiswillingtoaccepttheirchild.Thatwouldbothgiveeveryparentagreateropportunitytochooseandatthesametimerequirepublicschoolstofinancethemselvesbychargingtuition(wholly,ifthevouchercorrespondedtothefullcost;atleastpartly,ifitdidnot).Thepublicschoolswouldthenhavetocompetebothwithoneanotherandwithprivateschools.Thisplanwouldrelievenooneoftheburdenoftaxationtopayforschooling.Itwouldsimplygiveparentsawiderchoiceastotheforminwhichtheirchildrengettheschoolingthatthecom-munityhasobligateditselftoprovide.Theplanwouldalsonotaffectthepresentstandardsimposedonprivateschoolsinorderforattendanceatthemtosatisfythecompulsoryattendancelaws.Weregardthevoucherplanasapartialsolutionbecauseitaffectsneitherthefinancingofschoolingnorthecompulsoryat-tendancelaws.Wefavorgoingmuchfarther.Offhand,itwouldappearthatthewealthierasocietyandthemoreevenlydistributed 162FREETOCHOOSE:APersonalStatementisincomewithinit,thelessreasonthereisforgovernmenttofinanceschooling.Theparentsbearmostofthecostinanyevent,andthecostforequalqualityisundoubtedlyhigherwhentheybearthecostindirectlythroughtaxesthanwhentheypayforschoolingdirectlyunlessschoolingisverydifferentfromothergovernmentactivities.Yetinpractice,governmentfinancinghasaccountedforalargerandlargershareoftotaleducationalex-pensesasaverageincomeintheUnitedStateshasrisenandin-comehasbecomemoreevenlydistributed.Weconjecturethatonereasonisthegovernmentoperationofschools,sothatthedesireofparentstospendmoreonschoolingastheirincomesrosefoundthepathofleastresistancetobeanincreaseintheamountspentongovernmentschools.Onead-vantageofavoucherplanisthatitwouldencourageagradualmovetowardgreaterdirectparentalfinancing.Thedesireofparentstospendmoreonschoolingcouldreadilytaketheformofaddingtotheamountprovidedbythevoucher.Publicfinancingforhardshipcasesmightremain,butthatisafardifferentmatterthanhavingthegovernmentfinanceaschoolsystemfor90per-centofthechildrengoingtoschoolbecause5or10percentofthemmightbehardshipcases.Thecompulsoryattendancelawsarethejustificationforgov-ernmentcontroloverthestandardsofprivateschools.Butitisfarfromclearthatthereisanyjustificationforthecompulsoryat-tendancelawsthemselves.Ourownviewsonthishavechangedovertime.Whenwefirstwroteextensivelyaquarterofacenturyagoonthissubject,weacceptedtheneedforsuchlawsonthegroundthat"astabledemocraticsocietyisimpossiblewithoutaminimumdegreeofliteracyandknowledgeonthepartofmost"citizens.Wecontinuetobelievethat,butresearchthathasbeendoneintheinterimonthehistoryofschoolingintheUnitedStates,theUnitedKingdom,andothercountrieshaspersuadedusthatcompulsoryattendanceatschoolsisnotnecessarytoachievethatminimumstandardofliteracyandknowledge.Asalreadynoted,suchresearchhasshownthatschoolingwaswell-nighuni-versalintheUnitedStatesbeforeattendancewasrequired.IntheUnitedKingdom,schoolingwaswell-nighuniversalbeforeeithercompulsoryattendanceorgovernmentfinancingofschoolingex- What'sWrongwithOurSchools?163isted.Likemostlaws,compulsoryattendancelawshavecostsaswellasbenefits.Wenolongerbelievethebenefitsjustifythecosts.Werealizethattheseviewsonfinancingandattendancelawswillappeartomostreaderstobeextreme.Thatiswhyweonlystatethemheretokeeptherecordstraightwithoutseekingtosupportthematlength.Instead,wereturntothevoucherPlanamuchmoremoderatedeparturefrompresentpractice.Currently,theonlywidelyavailablealternativetoalocalpub-licschoolisaparochialschool.Onlychurcheshavebeeninapositiontosubsidizeschoolingonalargescaleandonlysubsi-dizedschoolingcancompetewith"free"schooling.(Trysellingaproductthatsomeoneelseisgivingaway!)Thevoucherplanwouldproduceamuchwiderrangeofalternativesunlessitwassabotagedbyexcessivelyrigidstandardsfor"approval."Thechoiceamongpublicschoolsthemselveswouldbegreatlyin-creased.Thesizeofapublicschoolwouldbedeterminedbythenumberofcustomersitattracted,notbypoliticallydefinedgeo-graphicalboundariesorbypupilassignment.Parentswhoor-ganizednonprofitschools,asafewfamilieshave,wouldbeassuredoffundstopaythecosts.VoluntaryorganizationsrangingfromvegetarianstoBoyScoutstotheYMCAcouldsetupschoolsandtrytoattractcustomers.Andmostimportant,newsortsofprivateschoolscouldarisetotapthevastnewmarket.Letusconsiderbrieflysomepossibleproblemswiththevoucherplanandsomeobjectionsthathavebeenraisedtoit.(1)Thechurch-stateissue.Ifparentscouldusetheirvoucherstopaytuitionatparochialschools,wouldthatviolatetheFirstAmendment?Whetheritdoesornot,isitdesirabletoadoptapolicythatmightstrengthentheroleofreligiousinstitutionsinschooling?TheSupremeCourthasgenerallyruledagainststatelawspro-vidingassistancetoparentswhosendtheirchildrentoparochialschools,althoughithasneverhadoccasiontoruleonafull-fledgedvoucherplancoveringbothpublicandnonpublicschools.Howeveritmightruleonsuchaplan,itseemsclearthattheCourtwouldacceptaplanthatexcludedchurch-connectedschoolsbutappliedtoallotherprivateandpublicschools.Suchare- 164FREETOCHOOSE:APersonalStatementstrictedplanwouldbefarsuperiortothepresentsystem,andmightnotbemuchinferiortoawhollyunrestrictedplan.Schoolsnowconnectedwithchurchescouldqualifybysubdividingthem-selvesintotwoparts:asecularpartreorganizedasanindependentschooleligibleforvouchers,andareligiouspartreorganizedasanafter-schoolorSundayactivitypaidfordirectlybyparentsorchurchfunds.Theconstitutionalissuewillhavetobesettledbythecourts.Butitisworthemphasizingthatvoucherswouldgotoparents,nottoschools.UndertheGIbills,veteranshavebeenfreetoat-tendCatholicorothercollegesand,sofarasweknow,noFirstAmendmentissuehaseverbeenraised.RecipientsofSocialSe-curityandwelfarepaymentsarefreetobuyfoodatchurchba-zaarsandeventocontributetothecollectionplatefromtheirgovernmentsubsidies,withnoFirstAmendmentquestionbeingasked.Indeed,webelievethatthepenaltythatisnowimposedonparentswhodonotsendtheirchildrentopublicschoolsviolatesthespiritoftheFirstAmendment,whateverlawyersandjudgesmaydecideabouttheletter.Publicschoolsteachreligion,toonotaformal,theisticreligion,butasetofvaluesandbeliefsthatconstituteareligioninallbutname.Thepresentarrangementsabridgethereligiousfreedomofparentswhodonotacceptthereligiontaughtbythepublicschoolsyetareforcedtopaytohavetheirchildrenindoctrinatedwithit,andtopaystillmoretohavetheirchildrenescapeindoctrination.(2)Financialcost.Asecondobjectiontothevoucherplanisthatitwouldraisethetotalcosttotaxpayersofschoolingbe-causeofthecostofvouchersgivenfortheroughly10percentofchildrenwhonowattendparochialandotherprivateschools.Thatisa"problem"onlytothosewhodisregardthepresentdis-criminationagainstparentswhosendtheirchildrentononpublicschools.Universalvoucherswouldendtheinequityofusingtaxfundstoschoolsomechildrenbutnotothers.Inanyevent,thereisasimpleandstraightforwardsolution:lettheamountofthevoucherbeenoughlessthanthecurrentcostperpublicschoolchildtokeeptotalpublicexpendituresthesame.Thesmalleramountspentinaprivatecompetitiveschoolwould What'sWrongwithOurSchools?165verylikelyprovideahigherqualityofschoolingthanthelargeramountnowspentingovernmentschools.Witnessthedrasticallylowercostperchildinparochialschools.(Thefactthatelite,luxuryschoolschargehightuitionisnocounterargument,anymorethanthe$12.25chargedbythe"21"ClubforitsHamburgerTwenty-Onein1979meantthatMcDonald'scouldnotsellahamburgerprofitablyfor45centsandaBigMacfor$1.05.)(3)Thepossibilityoffraud.Howcanonemakesurethatthevoucherisspentforschooling,notdivertedtobeerforpapaandclothesformama?Theansweristhatthevoucherwouldhavetobespentinanapprovedschoolorteachingestablishmentandcouldberedeemedforcashonlybysuchschools.Thatwouldnotpreventallfraudperhapsintheformsof"kickbacks"toparentsbutitshouldkeepfraudtoatolerablelevel.(4)Theracialissue.Voucherplanswereadoptedforatimeinanumberofsouthernstatestoavoidintegration.Theywereruledunconstitutional.Discriminationunderavoucherplancanbepreventedatleastaseasilyasinpublicschoolsbyredeemingvouchersonlyfromschoolsthatdonotdiscriminate.Amoredifficultproblemhastroubledsomestudentsofvouchers.Thatisthepossibilitythatvoluntarychoicewithvouchersmightincreasera-cialandclassseparationinschoolsandthusexacerbateracialcon-flictandfosteranincreasinglysegregatedandhierarchicalsociety.Webelievethatthevoucherplanwouldhavepreciselytheop-positeeffect;itwouldmoderateracialconflictandpromoteasocietyinwhichblacksandwhitescooperateinjointobjectives,whilerespectingeachother'sseparaterightsandinterests.Muchobjectiontoforcedintegrationreflectsnotracismbutmoreorlesswell-foundedfearsaboutthephysicalsafetyofchildrenandthequalityoftheirschooling.Integrationhasbeenmostsuccessfulwhenithasresultedfromchoice,notcoercion.Nonpublicschools,parochialandother,haveoftenbeenintheforefrontofthemovetowardintegration.Violenceofthekindthathasbeenrisinginpublicschoolsispossibleonlybecausethevictimsarecompelledtoattendtheschoolsthattheydo.Givethemeffectivefreedomtochooseandstudentsblackandwhite,poorandrich,NorthandSouthwoulddesertschoolsthatcouldnotmaintainorder.Disciplineis 166FREETOCHOOSE:APersonalStatementseldomaprobleminprivateschoolsthattrainstudentsasradioandtelevisiontechnicians,typistsandsecretaries,orformyriadotherspecialties.Letschoolsspecialize,asprivateschoolswould,andcommoninterestwouldovercomebiasofcolorandleadtomoreintegrationthannowoccurs.Theintegrationwouldbereal,notmerelyonpaper.Thevoucherschemewouldeliminatetheforcedbusingthatalargemajorityofbothblacksandwhitesobjectto.Busingwouldoccur,andmightindeedincrease,butitwouldbevoluntaryjustasthebusingofchildrentomusicanddanceclassesistoday.Thefailureofblackleaderstoespousevouchershaslongpuz-zledus.Theirconstituentswouldbenefitmost.Itwouldgivethemcontrolovertheschoolingoftheirchildren,eliminatedominationbyboththecity-widepoliticiansand,evenmoreimportant,theentrenchededucationalbureaucracy.Blackleadersfrequentlysendtheirownchildrentoprivateschools.Whydotheynothelpotherstodothesame?Ourtentativeansweristhatvoucherswouldalsofreetheblackmanfromdominationbyhisownpoliticalleaders,whocurrentlyseecontroloverschoolingasasourceofpoliticalpatronageandpower.However,astheeducationalopportunitiesopentothemassofblackchildrenhavecontinuedtodeteriorate,anincreasingnum-berofblackeducators,columnists,andothercommunitylead-ershavestartedtosupportvouchers.TheCongressofRacialEqualityhasmadethesupportofvouchersamajorplankinitsagenda.(5)Theeconomicclassissue.Thequestionthathasperhapsdividedstudentsofvouchersmorethananyotheristheirlikelyeffectonthesocialandeconomicclassstructure.Somehavear-guedthatthegreatvalueofthepublicschoolhasbeenasamelt-ingpot,inwhichrichandpoor,native-andforeign-born,blackandwhitehavelearnedtolivetogether.Thatimagewasandislargelytrueforsmallcommunities,butalmostentirelyfalseforlargecities.There,thepublicschoolhasfosteredresidentialstrati-fication,bytyingthekindandcostofschoolingtoresidentiallocation.Itisnoaccidentthatmostofthecountry'soutstandingpublicschoolsareinhigh-incomeenclaves. 'WhatsWrongwithOurSchools?167Mostchildrenwouldstillprobablyattendaneighborhoodele-mentaryschoolunderavoucherplanindeed,perhapsmorethannowdobecausetheplanwouldendforcedbusing.However,be-causethevoucherplanwouldtendtomakeresidentialareasmoreheterogeneous,thelocalschoolsservinganycommunitymightwellbelesshomogeneousthantheyarenow.Secondaryschoolswouldalmostsurelybelessstratified.Schoolsdefinedbycommoninterestsonestressing,say,thearts;another,thesciences;an-other,foreignlanguageswouldattractstudentsfromawidevarietyofresidentialareas.Nodoubtself-selectionwouldstillleavealargeclasselementinthecompositionofthestudentbodies,butthatelementwouldbelessthanitistoday.Onefeatureofthevoucherplanthathasarousedparticularconcernisthepossibilitythatparentscouldandwould"addon"tothevouchers.Ifthevoucherwerefor,say,$1,500,aparentcouldaddanother$500toitandsendhischildtoaschoolcharg-ing$2,000tuition.Somefearthattheresultmightbeevenwiderdifferencesineducationalopportunitiesthannowexistbecauselow-incomeparentswouldnotaddtotheamountofthevoucherwhilemiddle-incomeandupper-incomeparentswouldsupplementitextensively.Thisfearhasledseveralsupportersofvoucherplanstopropose1ethat"add-ons"beprohibited.CoonsandSugarmanwritethatthefreedomtoaddonprivatedollarsmakestheFriedmanmodelunac-ceptabletomany,includingourselves....Familiesunabletoaddextradollarswouldpatronizethoseschoolsthatchargednotuitionabovethevoucher,whilethewealthierwouldbefreetodistributethemselvesamongthemoreexpensiveschools.Whatistodaymerelyapersonalchoiceofthewealthy,securedentirelywithprivatefunds,wouldbecomeaninvidiousprivilegeassistedbygovernment....Thisoffendsafundamentalvaluecommitmentthatanychoiceplanmustsecureequalfamilyopportunitytoattendanyparticipatingschool.Evenunderachoiceplanwhichallowedtuitionadd-ons,poorfam-iliesmightbebetteroffthantheyaretoday.Friedmanhasarguedasmuch.Nevertheless,howevermuchitimprovedtheireducation,con-sciousgovernmentfinanceofeconomicsegregationexceedsourtol-erance.IftheFriedmanschemeweretheonlypoliticallyviableex-17perimentwithchoice,wewouldnotbeenthusiastic. 168FREETOCHOOSE:APersonalStatementThisviewseemstousanexampleofthekindofegalitarianismdiscussedintheprecedingchapter:lettingparentsspendmoneyonriotouslivingbuttryingtopreventthemfromspendingmoneyonimprovingtheschoolingoftheirchildren.Itisparticularlyre-markablecomingfromCoonsandSugarman,whoelsewheresay,"Acommitmenttoequalityatthedeliberateexpenseofthede-velopmentofindividualchildrenseemstousthefinalcorruption1ofwhateverisgoodintheegalitarianinstinct""asentimentwithwhichweheartilyagree.Inourjudgmenttheverypoorwouldbenefitthemostfromthevoucherplan.Howcanonecon-ceivablyjustifyobjectingtoaplan,"howevermuchitimproved[the]education"ofthepoor,inordertoavoid"governmentfi-nanceof"whattheauthorscall"economicsegregation,"evenifitcouldbedemonstratedtohavethateffect?Andofcourse,itcannotbedemonstratedtohavethateffect.Onthecontrary,wearepersuadedonthebasisofconsiderablestudythatitwouldhavepreciselytheoppositeeffectthoughwemustaccompanythatstatementwiththequalificationthat"economicsegregation"issovagueatermthatitisbynomeansclearwhatitmeans.Theegalitarianreligionissostrongthatsomeproponentsofrestrictedvouchersareunwillingtoapproveevenexperimentswithunrestrictedvouchers.Yettoourknowledge,nonehaseverofferedanythingotherthanunsupportedassertionstosupportthefearthatanunrestrictedvouchersystemwouldfoster"economicsegregation."Thisviewalsoseemstousanotherexampleofthetendencyofintellectualstodenigrateparentswhoarepoor.Eventheverypoorestcananddoscrapeupafewextradollarstoimprovethequalityoftheirchildren'sschooling,althoughtheycannotre-placethewholeofthepresentcostofpublicschooling.Wesus-pectthatadd-onswouldbeaboutasfrequentamongthepoorasamongtherest,thoughperhapsofsmalleramounts.Asalreadynoted,ourownviewisthatanunrestrictedvoucherwouldbethemosteffectivewaytoreformaneducationalsystemthatnowhelpstoshapealifeofmisery,poverty,andcrimeformanychildrenoftheinnercity;thatitwouldunderminethefoundationsofmuchofsucheconomicsegregationasexiststoday.Wecannotpresentthefullbasisforourbeliefhere.Butperhaps What'sWrongwithOurSchools?169wecanrenderourviewplausiblebysimplyrecallinganotherfacetofanearlierjudgment:isthereanycategoryofgoodsandservicesotherthanprotectionagainstcrimetheavailabilityofwhichcurrentlydiffersmorewidelyamongeconomicgroupsthanthequalityofschooling?Arethesupermarketsavailabletodiffer-enteconomicgroupsanythinglikesodivergentinqualityastheschools?Voucherswouldimprovethequalityoftheschoolingavailabletotherichhardlyatall;tothemiddleclass,moderately;tothelower-incomeclass,enormously.Surelythebenefittothepoormorethancompensatesforthefactthatsomerichormiddle-incomeparentswouldavoidpayingtwiceforschoolingtheirchil-dren.(6)Doubtaboutnewschools.Isthisnotallapipedream?Privateschoolsnowarealmostalleitherparochialschoolsoreliteacademies.Willtheeffectofthevoucherplansimplybetosubsi-dizethese,whileleavingthebulkoftheslumdwellersininferiorpublicschools?Whatreasonistheretosupposethatalternativeswillreallyarise?Thereasonisthatamarketwoulddevelopwhereitdoesnotexisttoday.Cities,states,andthefederalgovernmenttodayspendcloseto$100billionayearonelementaryandsecondaryschools.Thatsumisathirdlargerthanthetotalamountspentannuallyinrestaurantsandbarsforfoodandliquor.Thesmallersumsurelyprovidesanamplevarietyofrestaurantsandbarsforpeo-pleineveryclassandplace.Thelargersum,orevenafractionofit,wouldprovideanamplevarietyofschools.Itwouldopenavastmarketthatcouldattractmanyentrants,bothfrompublicschoolsandfromotheroccupations.Inthecourseoftalkingtovariousgroupsaboutvouchers,wehavebeenimpressedbythenumberofpersonswhosaidsomethinglike,"Ihavealwayswantedtoteach[orrunaschool]butIcouldn'tstandtheeducationalbureaucracy,redtape,andgeneralossificationofthepublicschools.Underyourplan,I'dliketotrymyhandatstartingaschool."Manyofthenewschoolswouldbeestablishedbynonprofitgroups.Otherswouldbeestablishedforprofit.Thereisnowayofpredictingtheultimatecompositionoftheschoolindustry.Thatwouldbedeterminedbycompetition.Theonepredictionthat 170FREETOCHOOSE:APersonalStatementcanbemadeisthatonlythoseschoolsthatsatisfytheircustomerswillsurvivejustasonlythoserestaurantsandbarsthatsatisfytheircustomerssurvive.Competitionwouldseetothat.(7)Theimpactonpublicschools.Itisessentialtoseparatetherhetoricoftheschoolbureaucracyfromtherealproblemsthatwouldberaised.TheNationalEducationAssociationandtheAmericanFederationofTeachersclaimthatvoucherswouldde-stroythepublicschoolsystem,which,accordingtothem,hasbeenthefoundationandcornerstoneofourdemocracy.Theirclaimsareneveraccompaniedbyanyevidencethatthepublicschoolsystemtodayachievestheresultsclaimedforitwhatevermayhavebeentrueinearliertimes.Nordothespokesmenfortheseorganizationseverexplainwhy,ifthepublicschoolsystemisdoingsuchasplendidjob,itneedstofearcompetitionfromnongovernmental,competitiveschoolsor,ifitisn't,whyanyoneshouldobjecttoits"destruction."Thethreattopublicschoolsarisesfromtheirdefects,nottheiraccomplishments.Insmall,closelyknitcommunitieswherepub-licschools,particularlyelementaryschools,arenowreasonablysatisfactory,noteventhemostcomprehensivevoucherplanwouldhavemucheffect.Thepublicschoolswouldremaindominant,perhapssomewhatimprovedbythethreatofpotentialcompeti-tion.Butelsewhere,andparticularlyintheurbanslumswherethepublicschoolsaredoingsuchapoorjob,mostparentswouldun-doubtedlytrytosendtheirchildrentononpublicschools.Thatwouldraisesometransitionaldifficulties.Theparentswhoaremostconcernedabouttheirchildren'swelfarearelikelytobethefirsttotransfertheirchildren.Eveniftheirchildrenarenosmarterthanthosewhoremain,theywillbemorehighlymoti-vatedtolearnandwillhavemorefavorablehomebackgrounds.Thepossibilityexiststhatsomepublicschoolswouldbeleftwith"thedregs,"becomingevenpoorerinqualitythantheyarenow.Astheprivatemarkettookover,thequalityofallschoolingwouldrisesomuchthateventheworst,whileitmightberela-tivelyloweronthescale,wouldbebetterinabsolutequality.AndasHarlemPrepandsimilarexperimentshavedemonstrated,manypupilswhoareamong"thedregs"wouldperformwellinschoolsthatevokedtheirenthusiasminsteadofhostilityorapathy. What'sWrongwithOurSchools?171AsAdamSmithputittwocenturiesago,Nodisciplineiseverrequisitetoforceattendanceuponlectureswhicharereallyworththeattending....Forceandrestraintmay,nodoubt,beinsomedegreerequisiteinordertoobligechildren...toattendtothosepartsofeducationwhichitisthoughtneces-saryforthemtoacquireduringthatearlyperiodoflife;butaftertwelveorthirteenyearsofage,providedthemasterdoeshisduty,forceorrestraintcanscarceeverbenecessarytocarryonanypartofeducation....Thosepartsofeducation,itistobeobserved,fortheteachingofwhichtherearenopublicinstitutions,aregenerallythebesttaught."THEOBSTACLESTOAVOUCHERPLANSincewefirstproposedthevoucherplanaquarter-centuryagoasapracticalsolutiontothedefectsofthepublicschoolsystem,supporthasgrown.Anumberofnationalorganizationsfavorittoday.''°Since1968theFederalOfficeofEconomicOpportunityandthentheFederalInstituteofEducationencouragedandfi-nancedstudiesofvoucherplansandofferedtohelpfinanceex-perimentalvoucherplans.In1978aconstitutionalamendmentwasontheballotinMichigantomandateavoucherplan.In1979amovementwasunderwayinCaliforniatoqualifyacon-stitutionalamendmentmandatingavoucherplanforthe1980ballot.Anonprofitinstitutehasrecentlybeenestablishedtoex-tAtthefederallevel,billsprovidingploreeducationalvouchers."foralimitedcreditagainsttaxesfortuitionpaidtononpublicschoolshaveseveraltimescomeclosetopassing.Whiletheyarenotavoucherplanproper,theyareapartialvariant,partialbothbecauseofthelimittothesizeofthecreditandbecauseofthedifficultyofincludingpersonswithnoorlowtaxliability.Theperceivedself-interestoftheeducationalbureaucracyisthekeyobstacletotheintroductionofmarketcompetitioninschooling.Thisinterestgroup,which,asProfessorEdwinG.Westdemonstrated,playedakeyroleintheestablishmentofpublicschoolinginboththeUnitedStatesandGreatBritain,hasada-mantlyopposedeveryattempttostudy,explore,orexperimentwithvoucherplans. 172FREETOCHOOSE:APersonalStatementKennethB.Clark,ablackeducatorandpsychologist,summeduptheattitudeoftheschoolbureaucracy:...itdoesnotseemlikelythatthechangesnecessaryforincreasedefficiencyofoururbanpublicschoolswillcomeaboutbecausetheyshould....Whatismostimportantinunderstandingtheabilityoftheeducationalestablishmenttoresistchangeisthefactthatpublicschoolsystemsareprotectedpublicmonopolieswithonlyminimalcompetitionfromprivateandparochialschools.FewcriticsoftheAmericanurbanpublicschoolsevensevereonessuchasmyselfdaretoquestionthegivensofthepresentorganizationofpubliceducation....Nordarethecriticsquestiontherelevanceofthecriteriaandstandardsforselectingsuperintendents,principals,andteachers,ortherelevanceofallofthesetotheobjectivesofpubliceducationproducingaliterateandinformedpublictocarryonthebusinessofdemocracyandtothegoalofproducinghumanbeingswithsocialsensitivityanddignityandcreativityandarespectforthehumanityofothers.Amonopolyneednotgenuinelyconcernitselfwiththesematters.Aslongaslocalschoolsystemscanbeassuredofstateaidandin-creasingfederalaidwithouttheaccountabilitywhichinevitablycomeswithaggressivecompetition,itwouldbesentimental,wishfulthinkingtoexpectanysignificantincreaseintheefficiencyofourpublicschools.Iftherearenoalternativestothepresentsystemshortofpresentprivateandparochialschools,whichareapproachingtheirlimitofexpansionthenthepossibilitiesofimprovementinpublic22educationareIimited.Thevalidityofthisassessmentwassubsequentlydemonstratedbythereactionoftheeducationalestablishmenttothefederalgovernment'soffertofinanceexperimentsinvouchers.Promisinginitiativesweredevelopedinaconsiderablenumberofcom-munities.OnlyoneatAlumRock,Californiasucceeded.Itwasseverelyhobbled.Thecaseweknowbest,frompersonalex-perience,wasinNewHampshire,whereWilliamP.Bittenbender,thenchairmanoftheStateBoardofEducation,wasdedicatedtoconductinganexperiment.Theconditionsseemedexcellent,fundsweregrantedbythefederalgovernment,detailedplansweredrawnup,experimentalcommunitieswereselected,pre-liminaryagreementfromparentsandadministratorswasobtained.Whenallseemedreadytogo,onecommunityafteranotherwaspersuadedbythelocalsuperintendentofschoolsorotherleading What'sWrongwithOurSchools?173figuresintheeducationalestablishmenttowithdrawfromtheproposedexperiment,andthewholeventurecollapsed.TheAlumRockexperimentwastheonlyoneactuallytobecarriedout,anditwashardlyapropertestofvouchers.Itwaslimitedtoafewpublicschoolsandallowednoadditiontogov-ernmentfundsfromeitherparentsorothers.Anumberofso-calledmini-schoolsweresetup,eachwithadifferentcurriculum.Forthreeyears,parentscouldchoosewhichtheirchildrenwould23attend.AsDonAyers,whowasinchargeoftheexperiment,said,"Probablythemostsignificantthingthathappenedwasthattheteachersforthefirsttimehadsomepowerandtheywereabletobuildthecurriculumtofittheneedsofthechildrenastheysawit.ThestateandlocalschoolboarddidnotdictatethekindofcurriculumthatwasusedinMcCollamSchool.Theparentsbecamemoreinvolvedintheschool.Theyattendedmoremeet-ings.Alsotheyhadapowertopulltheirchildoutofthatpar-ticularmini-schooliftheychoseanothermini-school."Despitethelimitedscopeofthatexperiment,givingparentsgreaterchoicehadamajoreffectoneducationquality.Intermsoftestscores,McCollamSchoolwentfromthirteenthtosecondplaceamongtheschoolsinitsdistrict.Buttheexperimentisnowover,endedbytheeducationalestablishmentthesamefatethatbefellHarlemPrep.ThesameresistanceispresentinGreatBritain,whereanex-tremelyeffectivegroupcalledFEVER(FriendsoftheEduca-tionVoucherExperimentinRepresentativeRegions)havetriedforfouryearstointroduceanexperimentinatowninthecountyofKent,England.Thegoverningauthoritieshavebeenfavorable,buttheeducationalestablishmenthasbeenadamantlyopposed.TheattitudeoftheprofessionaleducatorstowardvouchersiswellexpressedbyDennisGee,headmasterofaschoolinAshford,Kent,andsecretaryofthelocalteachers'union:"Weseethisasabarrierbetweenusandtheparentthisstickylittlepieceofpaper[i.e.,thevoucher]intheirhandcominginandunderduressyouwilldothisorelse.Wemakeourjudgmentbecausewebelieveit'sinthebestinterestofeveryWillieandeverylittleJohnnythatwe'vegotandnotbecausesomeone'sgoingtosay 174FREETOCHOOSE:APersonalStatement`ifyoudon'tdoit,wewilldothat.'It'sthissortofphilosophyofthemarketplacethatweobjectto."Inotherwords,Mr.Geeobjectstogivingthecustomer,inthiscasetheparent,anythingtosayaboutthekindofschoolinghischildgets.Instead,hewantsthebureaucratstodecide."Weareanswerable,"saysMr.Gee,toparentsthroughourgoverningbodies,throughtheinspectoratetotheKentCountyCouncil,andthroughHerMajesty'sinspectoratetotheSecretaryofState.Thesearepeople,professionals,whoareabletomakeprofessionaljudgments.I'mnotsurethatparentsknowwhatisbesteducationallyfortheirchildren.Theyknowwhat'sbestforthemtoeat.Theyknowthebestenvironmenttheycanprovideathome.Butwe'vebeentrainedtoascertaintheproblemsofchildren,todetecttheirweaknesses,toputrightthosethingsthatneedputtingright,andwewanttodothisfreely,withthecooperationofparentsandnotunderunduestrains.Needlesstosay,atleastsomeparentsviewthingsverydiffer-ently.AlocalelectricalworkerandhiswifeinKenthadtoengageinayear-longdisputewiththebureaucracytogettheirsonintotheschoolthattheythoughtwasbestsuitedtohisneeds.SaidMauriceWalton,Asthepresentsystemstands,Ithinkweparentshavenofreedomofchoicewhatever.Theyaretoldwhatisgoodforthembytheteachers.Theyaretoldthattheteachersaredoingagreatjob,andthey'vejustgotnosayatall.Ifthevouchersystemwereintroduced,IthinkitwouldbringteachersandparentstogetherIthinkcloser.Theparentthatisworriedabouthischildwouldremovehischildfromtheschoolthatwasn'tgivingagoodserviceandtakeittoonethatwas....Ifaschoolwasgoingtocrumblebecauseit'sgotnothingbutvandalism,it'sgenerallyslackondiscipline,andthechildrenaren'tlearningwell,that'sagoodthingfrommypointofview.Icanunderstandtheteacherssayingit'sagunatmyhead,butthey'vegotthesamegunattheparents'headatthemoment.Theparentgoesuptotheteacherandsays,well,I'mnotsatisfiedwithwhatyou'redoing,andtheteachercansay,welltough.Youcan'ttakehimaway,youcan'tmovehim,youcan'tdowhatyoulike,sogoawayandstopbotheringme.Thatcanbetheattitudeofsometeacherstoday,andoftenis.Butnowthatthepositionsarebeingreversed[withvouchers]andtherolesarechanged,Icanonlysaytoughontheteachers.Letthempulltheirsocksupandgiveusabetterdealandletusparticipatemore. What'sWrongwithOurSchools?175Despitetheunrelentingoppositionoftheeducationalestablish-ment,webelievethatvouchersortheirequivalentwillbein-troducedinsomeformorothersoon.Wearemoreoptimisticinthisareathaninwelfarebecauseeducationtouchessomanyofussodeeply.Wearewillingtomakefargreatereffortstoim-provetheschoolingofourchildrenthantoeliminatewasteandinequityinthedistributionofrelief.Discontentwithschoolinghasbeenrising.Sofaraswecansee,greaterparentalchoiceistheonlyalternativethatisavailabletoreducethatdiscontent.Voucherskeepbeingrejectedandkeepemergingwithmoreandmoresupport.HIGHEREDUCATION:THEPROBLEMSTheproblemsofhighereducationinAmericatoday,likethoseinelementaryandsecondaryeducation,aredual:qualityandequity.Butinbothrespectstheabsenceofcompulsoryattendancealterstheproblemgreatly.Nooneisrequiredbylawtoattendaninstitutionofhighereducation.Asaresult,studentshaveawiderangeofchoiceaboutwhatcollegeoruniversitytoattendiftheychoosetocontinuetheireducation.Awiderangeofchoiceeasestheproblemofquality,butexacerbatestheproblemofequity.Quality.Sincenopersonattendsacollegeoruniversityagainsthiswill(orperhapshisparents'),noinstitutioncanexistthatdoesnotmeet,atleasttoaminimalextent,thedemandsofitsstudents.Thereremainsaverydifferentproblem.Atgovernmentinstitu-tionsatwhichtuitionfeesarelow,studentsaresecond-classcus-tomers.Theyareobjectsofcharitypartlysupportedattheex-penseofthetaxpayer.Thisfeatureaffectsstudents,faculty,andadministrators.Lowtuitionfeesmeanthatwhilecityorstatecollegesanduniversitiesattractmanyseriousstudentsinterestedingettinganeducation,theyalsoattractmanyyoungmenandwomenwhocomebecausefeesarelow,residentialhousingandfoodaresubsidized,andaboveall,manyotheryoungpeoplearethere.Forthem,collegeisapleasantinterludebetweenhighschool 176FREETOCHOOSE:APersonalStatementandgoingtowork.Attendingclasses,takingexaminations,get-tingpassinggradesthesearethepricetheyarepayingfortheotheradvantages,nottheprimaryreasontheyareatschool.Oneresultisahighdropoutrate.Forexample,attheUniver-sityofCaliforniainLosAngeles,oneofthebestregardedstateuniversitiesinthecountry,onlyabouthalfofthosewhoenrollcompletetheundergraduatecourseandthisisahighcomple-tionrateforgovernmentinstitutionsofhighereducation.Somewhodropouttransfertootherinstitutions,butthataltersthepictureonlyindetail.Anotherresultisanatmosphereintheclassroomthatisoftendepressingratherthaninspiring.Ofcourse,thesituationisbynomeansuniform.Studentscanchoosecoursesandteachersac-cordingtotheirinterest.Ineveryschool,seriousstudentsandteachersfindawaytogettogetherandtoachievetheirobjec-tives.Butagain,thatisonlyaminoroffsettothewasteofstu-dents'timeandtaxpayers'money.Therearegoodteachersincityandstatecollegesanduniversi-tiesaswellasinterestedstudents.Buttherewardsforfacultyandadministratorsattheprestigiousgovernmentinstitutionsarenotforgoodundergraduateteaching.Facultymembersad-vanceasaresultofresearchandpublication;administratorsad-vancebyattractinglargerappropriationsfromthestatelegisla-ture.Asaresult,eventhemostfamousstateuniversitiestheUniversityofCaliforniaatLosAngelesoratBerkeley,theUni-versityofWisconsin,ortheUniversityofMichiganarenotnotedforundergraduateteaching.Theirreputationisforgraduatework,research,andathleticteamsthatiswherethepayoffsare.Thesituationisverydifferentatprivateinstitutions.Studentsatsuchinstitutionspayhighfeesthatcovermuchifnotmostofthecostoftheirschooling.Themoneycomesfromparents,fromthestudents'ownearnings,fromloans,orfromscholarshipas-sistance.Theimportantthingisthatthestudentsaretheprimarycustomers;theyarepayingforwhattheyget,andtheywanttogettheirmoney'sworth.Thecollegeissellingschoolingandthestudentsarebuyingschooling.Asinmostprivatemarkets,bothsideshaveastrongincentivetoserveoneanother.Ifthecollegedoesn'tprovidethe 'WhatsWrongwithOurSchools?177kindofschoolingitsstudentswant,theycangoelsewhere.Thestudentswanttogetfullvaluefortheirmoney.Asoneunder-graduateatDartmouthCollege,aprestigiousprivatecollege,remarked,"Whenyouseeeachlecturecostingthirty-fivedollarsandyouthinkoftheotherthingsyoucanbedoingwiththethirty-fivedollars,you'remakingverysurethatyou'regoingtogotothatlecture."Oneresultisthatthefractionofstudentswhoenrollatprivateinstitutionswhocompletetheundergraduatecourseisfarhigherthanatgovernmentinstitutions95percentatDartmouthcom-paredto50percentatUCLA.TheDartmouthpercentageisprob-ablyhighforprivateinstitutions,astheUCLApercentageisforgovernmentinstitutions,butthatdifferenceisnotuntypical.Inonerespectthispictureofprivatecollegesanduniversitiesisoversimplified.Inadditiontoschooling,theyproduceandselltwootherproducts:monumentsandresearch.Privateindividualsandfoundationshavedonatedmostofthebuildingsandfacilitiesatprivatecollegesanduniversities,andhaveendowedprofessor-shipsandscholarships.Muchoftheresearchisfinancedoutofincomefromendowmentsoroutofspecialgrantsfromthefed-eralgovernmentorothersourcesforparticularpurposes.Thedonorshavecontributedoutofadesiretopromotesomethingtheyregardasdesirable.Inaddition,namedbuildings,professor-ships,andscholarshipsalsomemorializeanindividual,whichiswhywerefertothemasmonuments.Thecombinationofthesellingofschoolingandmonumentsexemplifiesthemuchunderappreciatedingenuityofvoluntaryco-operationthroughthemarketinharnessingself-interesttobroadersocialobjectives.HenryM.Levin,discussingthefinancingofhighereducation,writes,"[IitisdoubtfulwhetherthemarketwouldsupportaClassicsdepartmentormanyoftheteachingpro-gramsintheartsandhumanitiesthatpromoteknowledgeandculturaloutcomeswhicharebelievedwidelytoaffectthegeneralqualityoflifeinoursociety.Theonlywaytheseactivitieswouldbesustainedisbydirectsocialsubsidies,"bywhichhemeansgovernmentgrants."Mr.Levinisclearlywrong.Themarketbroadlyinterpretedhassupportedsocialactivitiesinprivateinstitutions.Anditispreciselybecausetheyprovidegeneralbene- 178FREETOCHOOSE:APersonalStatementfitstosociety,ratherthanservingtheimmediateself-interestoftheprovidersoffunds,thattheyareattractivetodonors.SupposeMrs.Xwantstohonorherhusband,Mr.X.Wouldshe,orany-oneelse,regarditasmuchofanhonortohavetheABCManu-facturingenterprise(whichmaybeMr.X'srealmonumentandcontributiontosocialwelfare)nameanewlybuiltfactoryforhim?Ontheotherhand,ifMrs.XfinancesalibraryorotherbuildingnamedforMr.Xatauniversity,oranamedprofessor-shiporscholarship,thatwillberegardedasarealtributetoMr.X.Itwillbesoregardedpreciselybecauseitrendersapublicservice.Studentsparticipateinthejointventureofproducingteaching,monuments,andresearchintwoways.Theyarecustomers,buttheyarealsoemployees.Byfacilitatingthesaleofmonumentsandresearch,theycontributetothefundsavailableforteaching,therebyearning,asitwere,partoftheirway.Thisisanotherexampleofhowcomplexandsubtlearethewaysandpotentiali-tiesofvoluntarycooperation.Manynominallygovernmentinstitutionsofhigherlearningareinfactmixed.Theychargetuitionandsosellschoolingtostu-dents.Theyacceptgiftsforbuildingsandthelikeandsosellmonuments.Theyacceptcontractsfromgovernmentagenciesorfromprivateenterprisestoengageinresearch.Manystateuniver-sitieshavelargeprivateendowmentstheUniversityofCaliforniaatBerkeley,theUniversityofMichigan,theUniversityofWis-consin,tonameonlyafew.Ourimpressionisthattheeducationalperformanceoftheinstitutionhasingeneralbeenmoresatisfac-tory,thelargertheroleofthemarket.Equity.Twojustificationsaregenerallyofferedforusingtaxmoneytofinancehighereducation.One,suggestedabovebyMr.Levin,isthathighereducationyields"socialbenefits"overandabovethebenefitsthataccruetothestudentsthemselves;thesecondisthatgovernmentfinanceisneededtopromote"equaleducationalopportunity."(i)Socialbenefits.Whenwefirststartedwritingabouthighereducation,wehadagooddealofsympathyforthefirstjustifica-tion.Wenolongerdo.Intheinterimwehavetriedtoinducethepeoplewhomakethisargumenttobespecificaboutthealleged What'sWrongwithOurSchools?179socialbenefits.Theanswerisalmostalwayssimplybadeconomics.Wearetoldthatthenationbenefitsbyhavingmorehighlyskilledandtrainedpeople,thatinvestmentinprovidingsuchskillsisessentialforeconomicgrowth,thatmoretrainedpeopleraisetheproductivityoftherestofus.Thesestatementsarecorrect.Butnoneisavalidreasonforsubsidizinghighereduca-tion.Eachstatementwouldbeequallycorrectifmadeaboutphysicalcapital(i.e.,machines,factorybuildings,etc.),yethardlyanyonewouldconcludethattaxmoneyshouldbeusedtosubsidizethecapitalinvestmentofGeneralMotorsorGeneralElectric.Ifhighereducationimprovestheeconomicproductivityofindividuals,theycancapturethatimprovementthroughhigherearnings,sotheyhaveaprivateincentivetogetthetraining.AdamSmith'sinvisiblehandmakestheirprivateinterestservethesocialinterest.Itisagainstthesocialinteresttochangetheirprivateinterestbysubsidizingschooling.Theextrastudentsthosewhowillonlygotocollegeifitissubsidizedarepreciselytheoneswhojudgethatthebenefitstheyreceivearelessthanthecosts.Otherwisetheywouldbewillingtopaythecoststhem-selves.Occasionallytheanswerisgoodeconomicsbutissupportedmorebyassertionthanbyevidence.ThemostrecentexampleisinthereportsofaspecialCommissiononHigherEducationestablishedbytheCarnegieFoundation.Inoneofitsfinalreports,HigherEducation:WhoPays?WhoBenefits?WhoShouldPay?,thecommissionsummarizesthesupposed"socialbenefits."Itslistcontainstheinvalideconomicargumentsdiscussedinthepreced-ingparagraphthatis,ittreatsbenefitsaccruingtothepersonswhogettheeducationasiftheywerebenefitstothirdparties.Butitslistalsoincludessomeallegedadvantagesthat,iftheydidoccur,wouldaccruetopersonsotherthanthosewhoreceivetheeducation,andthereforemightjustifyasubsidy:"generalad-vancementofknowledge...;greaterpoliticaleffectivenessofademocraticsociety...;greatersocialeffectivenessofsocietythroughtheresultantbetterunderstandingandmutualtoleranceamongindividualsandgroups;themoreeffectivepreservationandextensionoftheculturalheritage."26TheCarnegieCommissionisalmostuniqueinatleastpaying 180FREETOCHOOSE:APersonalStatementsomelipservicetopossible"negativeresultsofhighereducation"givingasexamples,however,only"theindividualfrustrationsresultingfromthecurrentsurplusofPh.D.'s(whichisnotasocialbutanindividualeffect)andthepublicunhappinesswithpast26outbreaksofcampusdisruption."Notehowselectiveandbiasedarethelistsofbenefitsand"negativeresults."IncountrieslikeIndia,aclassofuniversitygraduateswhocannotfindemploy-menttheyregardassuitedtotheireducationhasbeenasourceofgreatsocialunrestandpoliticalinstability.IntheUnitedStates"publicunhappiness"washardlytheonly,oreventhemajor,negativeeffectof"campusdisruption."Farmoreim-portantweretheadverseeffectsonthegovernanceoftheuniver-sities,onthe"politicaleffectivenessofademocraticsociety,"onthe"socialeffectivenessofsocietythrough...betterunder-standingandmutualtolerance"allcitedbythecommission,withoutqualification,associalbenefitsofhighereducation.Thereportisuniquealsoinrecognizingthat"withoutanypublicsubsidy,someofthesocialbenefitsofhighereducationwouldcomeassideeffectsofprivatelyfinancededucationinany27Buthereagainthisissimplylipservice.Althoughthecase."commissionsponsorednumerousandexpensivespecialstudies,itdidnotundertakeanyseriousattempttoidentifytheallegedsocialeffectsinsuchawayastopermitevenaroughquantita-tiveestimateoftheirimportanceoroftheextenttowhichtheycouldbeachievedwithoutpublicsubsidy.Asaresult,itofferednoevidencethatsocialeffectsareonbalancepositiveornegative,letalonethatanynetpositiveeffectsaresufficientlylargetojustifythemanybillionsofdollarsoftaxpayers'moneybeingspentonhighereducation.Thecommissioncontenteditselfwithconcludingthat"nopreciseorevenimprecisemethodsexisttoassesstheindi-vidualandsocietalbenefitsasagainsttheprivateandpubliccosts."Butthatdidnotpreventitfromrecommendingfirmlyandunambiguouslyanincreaseinthealreadymassivegovernmentsubsidizationofhighereducation.Inourjudgmentthisisspecialpleading,pureandsimple.TheCarnegieCommissionwasheadedbyClarkKerr,formerChan-cellorandPresidentoftheUniversityofCalifornia,Berkeley.Oftheeighteenmembersofthecommission,includingKerr,nine What'sWrongwithOurSchools?181eitherwereorhadbeenheadsofhighereducationalinstitutions,andfiveotherswereprofessionallyassociatedwithinstitutionsofhighereducation.Theremainingfourhadallservedontheboardoftrusteesorregentsofuniversities.Theacademiccom-munityhasnodifficultyrecognizingandsneeringatspecialplead-ingwhenbusinessmenmarchtoWashingtonunderthebanneroffreeenterprisetodemandtariffs,quotas,andotherspecialbenefits.Whatwouldtheacademicworldsayaboutasteelindustrycommission,fourteenofwhoseeighteenmemberswerefromthesteelindustry,whichrecommendedamajorexpansioningovernmentsubsidiestothesteelindustry?Yetwehaveheardnothingfromtheacademicworldaboutthecomparablerecom-mendationoftheCarnegieCommission.(ii)Equaleducationalopportunity.Thepromotionof"equaleducationalopportunity"isthemajorjustificationthatisgen-erallyofferedforusingtaxmoneytofinancehighereducation.InthewordsoftheCarnegieCommission,"Wehavefavored...[a]largerpublic...shareofmonetaryoutlaysforeducationonatemporarybasisinordertomakepossiblegreaterequalityofeducationalopportunity."28InthewordsoftheparentCarnegieFoundation,"Highereducationis...amajoravenuetogreaterequalityofopportunity,increasinglyfavoredbythosewhoseoriginsareinlow-incomefamiliesandbythosewhoarewomen2andmembersofminoritygroups.""Theobjectiveisadmirable.Thestatementoffactiscorrect.Butthereisamissinglinkbetweentheoneandtheother.Hastheobjectivebeenpromotedorretardedbygovernmentsubsidy?Hashighereducationbeena"majoravenuetogreaterequalityofopportunity"becauseofordespitegovernmentsubsidy?OnesimplestatisticfromtheCarnegieCommission'sownreportillustratestheproblemofinterpretation:20percentofcol-legestudentsfromfamilieswithincomesbelow$5,000in1971attendedprivateinstitutions;17percentfromfamilieswithin-comesbetween$5,000and$10,000;25percentfromfamilieswithincomesover$10,000.Inotherwords,theprivateinstitu-tionsprovidedmoreopportunityforyoungmenandwomenattheverybottomaswellasthetopoftheincomescalethandidthegovernmentinstitutions.3°Andthisisjustthetipoftheiceberg.Personsfrommiddle- 182FREETOCHOOSE:APersonalStatementandupper-incomefamiliesaretwoorthreetimesaslikelytoattendcollegeaspersonsfromlower-incomegroups,andtheygotoschoolformoreyearsatthemoreexpensiveinstitutions(four-yearcollegesanduniversitiesratherthantwo-yearjuniorcolleges).Asaresult,studentfromhigher-incomefamiliesbenefit3tthemostfromthesubsidies.Somepersonsfrompoorfamiliesdobenefitfromthegovern-mentsubsidy.Ingeneral,theyaretheonesamongthepoorwhoarebetteroff.Theyhavehumanqualitiesandskillsthatwillenablethemtoprofitfromhighereducation,skillsthatwouldalsohaveenabledthemtoearnahigherincomewithoutacollegeeducation.Inanyevent,theyaredestinedtobeamongthebetteroffinthecommunity.Twodetailedstudies,oneforFlorida,oneforCalifornia,underlinetheextenttowhichgovernmentspendingonhighereducationtransfersincomefromlow-tohigh-incomegroups.TheFloridastudycomparedthetotalbenefitspersonsineachoffourincomeclassesreceivedin196768fromgovernmentexpendituresonhighereducationwiththecoststheyincurredintheformoftaxes.Onlythetopincomeclassgotanetgain;itgotback60percentmorethanitpaid.Thebottomtwoclassespaid40percentmorethantheygotback,themiddleclassnearly20percentmore.'"TheCaliforniastudy,for1964,isjustasstriking,thoughthekeyresultsarepresentedsomewhatdifferently,intermsoffamilieswithandwithoutchildreninCaliforniapublichighereducation.Familieswithchildreninpublichighereducationreceivedanetbenefitvaryingfrom1.5percentto6.6percentoftheiraverageincome,thelargestbenefitgoingtothosewhohadchildrenattheUniversityofCaliforniaandwhoalsohadthehighestaver-ageincome.Familieswithoutchildreninpublichighereducationhadthelowestaverageincomeandincurredanetcostof8.233percentoftheirincome.Thefactsarenotindispute.EventheCarnegieCommissionadmitstheperverseredistributiveeffectofgovernmentexpendi-turesonhighereducationalthoughonemustreadtheirreportswithgreatcare,andindeedbetweenthelines,tospottheadmis-sioninsuchcommentsas,"This`middleclass'generally... What'sWrongwithOurSchools?183doesquitewellintheproportionofpublicsubsidiesthatitre-ceives.Greaterequitycanbeachievedthroughareasonablere-distributionofsubsidies."'"Itsmajorsolutionismoreofthesame:stillgreatergovernmentspendingonhighereducation.Weknowofnogovernmentprogramthatseemstoussoin-equitableinitseffects,soclearanexampleofDirector'sLaw,asthefinancingofhighereducation.Inthisareathoseofuswhoareinthemiddle-andupper-incomeclasseshaveconnedthepoorintosubsidizingusonthegrandscaleyetwenotonlyhavenodecentshame,weboasttothetreetopsofourselflessnessandpublic-spiritedness.HIGHEREDUCATION:THESOLUTIONItiseminentlydesirablethateveryyoungmanandwoman,regardlessofhisorherparents'income,socialposition,residence,orrace,havetheopportunitytogethighereducationprovidedthatheorsheiswillingtopayforiteithercurrentlyoroutofthehigherincometheschoolingwillenablehimorhertoearn.Thereisastrongcaseforprovidingloanfundssufficienttoas-sureopportunitytoall.Thereisastrongcasefordisseminatinginformationabouttheavailabilityofsuchfundsandforurgingthelessprivilegedtotakeadvantageoftheopportunity.Thereisnocaseforsubsidizingpersonswhogethighereducationattheexpenseofthosewhodonot.Insofarasgovernmentsoperateinstitutionsofhighereducation,theyshouldchargestudentsfeescorrespondingtothefullcostoftheeducationalandotherser-vicestheyprovidetothem.Howeverdesirableitmaybetoeliminatetaxpayersubsidiza-tionofhighereducation,thatdoesnotcurrentlyseempoliticallyfeasible.Accordingly,weshallsupplementourdiscussionofanalternativetogovernmentfinancewithalessradicalreformavoucherplanforhighereducation.Alternativetogovernmentfinance.Fixed-moneyloanstofinancehigherschoolinghavethedefectthatthereiswidediver-sityintheearningsofcollegegraduates.Somewilldoverywell.Payingbackafixed-dollarloanwouldbenogreatproblemforthem.Otherswillendwithonlymodestincomes.Theywould 184FREETOCHOOSE:APersonalStatementfindafixeddebtaheavyburden.Expenditureoneducationisacapitalinvestmentinariskyenterprise,asitwere,likeinvest-mentinanewlyformedsmallbusiness.Themostsatisfactorymethodoffinancingsuchenterprisesisnotthroughafixed-dollarloanbutthroughequityinvestment"buying"ashareintheenterpriseandreceivingasareturnashareoftheprofits.Foreducation,thecounterpartwouldbeto"buy"ashareinanindividual'searningprospects,toadvancehimthefundsneededtofinancehistrainingonconditionthatheagreetopaytheinvestoraspecifiedfractionofhisfutureearnings.Inthiswayaninvestorcouldrecoupmorethanhisinitialinvestmentfromrelativelysuccessfulindividuals,whichwouldcompensateforthefailuretodosofromtheunsuccessful.Thoughthereseemsnolegalobstacletoprivatecontractsonthisbasis,theyhavenotbecomecommon,primarily,weconjecture,becauseofthedif-ficulyandcostsofenforcingthemoverthelongperiodinvolved.Aquarter-centuryago(1955),oneofuspublishedaplanfor"equity"financingofhighereducationthroughagovernmentbodythatcouldoffertofinanceorhelpfinancethetrainingofanyindividualwhocouldmeetminimumqualitystandards.Itwouldmakeavailablealimitedsumperyearforaspecifiednumberofyears,providedthefundswerespentonsecuringtrainingatarecognizedinstitution.Theindividualinreturnwouldagreetopaytothegovernmentineachfutureyearaspecifiedpercentageofhisearningsinexcessofaspecifiedsumforeach$1,000thathereceivedfromthegovernment.Thispaymentcouldeasilybecombinedwiththepaymentofincometaxandsoinvolveaminimumofadditionaladministrativeexpense.Thebasesumshouldbesetequaltoestimatedaverageearningswith-outthespecializedtraining;thefractionofearningspaidshouldbecalculatedsoastomakethewholeprojectself-financing.Inthisway,theindividualswhoreceivedthetrainingwouldineffectbearthewholecost.Theamountinvestedcouldthenbedeterminedbyindi-35vidualchoice.Morerecently(1967),apanelappointedbyPresidentJohnsonandheadedbyProfessorJerroldR.ZachariasofMITrecom-mendedtheadoptionofaspecificversionofthisplanundertheappealingtitle"EducationalOpportunityBank"andmadeanextensiveanddetailedstudyofitsfeasibilityandofthetermsthat What'sWrongwithOurSchools?18536wouldberequiredinorderforittobeself-supporting.NoreaderofthisbookwillbesurprisedtolearnthattheproposalwasmetbyablastfromtheAssociationofStateUniversitiesandLandGrantCollegesafineexampleofwhatAdamSmithreferredtoas"thepassionateconfidenceofinterestedfalse-hood."37In1970,asrecommendation13outofthirteenrecommenda-tionsforthefinancingofhighereducation,theCarnegieCom-missionproposedtheestablishmentofaNationalStudentLoanBankthatwouldmakelong-termloanswithrepaymentpartlycontingentuponcurrentearnings."UnliketheEducationalOp-portunityBank,"saysthecommission,"...weseetheNa-tionalStudentLoanBankasameansofprovidingsupplementaryfundingforstudents,notasawayoffinancingtotaleducationalcosts."38Morerecentlystill,someuniversities,includingYaleUniver-sity,haveconsideredoradoptedcontingent-repaymentplansad-ministeredbytheuniversityitself.Soasparkofliferemains.Avoucherplanforhighereducation.Insofarasanytaxmoneyisspenttosubsidizehighereducation,theleastbadwaytodosoisbyavoucherarrangementlikethatdiscussedearlierforelementaryandsecondaryschools.Haveallgovernmentschoolschargefeescoveringthefullcostoftheeducationalservicestheyprovideandsocompeteonequaltermswithnongovernmentschools.Dividethetotalamountoftaxestobespentannuallyonhighereducationbythenumberofstudentsitisdesiredtosubsidizeperyear.Givethatnumberofstudentsvouchersequaltotheresultingsum.Permitthevoucherstobeusedatanyeducationalinstitutionofthestu-dent'schoice,providedonlythattheschoolingisofakindthatitisdesiredtosubsidize.Ifthenumberofstudentsrequestingvouchersisgreaterthanthenumberavailable,rationthevouchersbywhatevercriteriathecommunityfindsmostacceptable:com-petitiveexaminations,athleticability,familyincome,oranyofmyriadotherpossiblestandards.Theresultingsystemwouldfol-lowinbroadoutlinetheGIbillsprovidingfortheeducationofveterans,exceptthattheGIbillswereopen-ended;theirbenefitswereavailabletoallveterans. 186FREETOCHOOSE:APersonalStatementAswewrotewhenwefirstproposedthisplan:Theadoptionofsucharrangementswouldmakeformoreeffectivecompetitionamongvarioustypesofschoolsandforamoreefficientutilizationoftheirresources.Itwouldeliminatethepressurefordirectgovernmentassistancetoprivatecollegesanduniversitiesandthuspreservetheirfullindependenceanddiversityatthesametimeasitenabledthemtogrowrelativetostateinstitutions.Itmightalsohavetheancillaryadvantageofcausingscrutinyofthepurposesforwhichsubsidiesaregranted.Thesubsidizationofinstitutionsratherthanofpeoplehasledtoanindiscriminatesubsidizationofallactivi-tiesappropriateforsuchinstitutions,ratherthanoftheactivitiesappropriateforthestatetosubsidize.Evencursoryexaminationsug-geststhatwhilethetwoclassesofactivitiesoverlap,theyarefarfromidentical.Theequityargumentforthealternative[voucher]arrangementis...clear....ThestateofOhio,forexample,saystoitscitizens:"Ifyouhaveayoungsterwhowantstogotocollege,weshallauto-maticallygivehimorherasizablefour-yearscholarship,providedthatheorshecansatisfyratherminimaleducationrequirements,andprovidedfurtherthatheorsheissmartenoughtochoosetogototheUniversityofOhio[orsomeotherstate-supportedinstitution].Ifyouryoungsterwantstogo,oryouwanthimorhertogo,toOberlinCollege,orWesternReserveUniversity,letalonetoYale,Harvard,Northwestern,Beloit,ortheUniversityofChicago,notapennyforhim."Howcansuchaprogrambejustified?Woulditnotbefarmoreequitable,andpromoteahigherstandardofscholarship,todevotesuchmoneyasthestateofOhiowishedtospendonhighereducationtoscholarshipstenableatanycollegeoruniversityandtorequiretheUniversityofOhiotocompeteonequaltermswithothercollegesanduniversities?s°Sincewefirstmadethisproposal,anumberofstateshaveadoptedalimitedprogramgoingpartwayinitsdirectionbygivingscholarshipstenableatprivatecollegesanduniversities,thoughonlythoseinthestateinquestion.Ontheotherhand,anexcellentprogramofRegentsscholarshipsinNewYorkState,verymuchinthesamespirit,wasemasculatedbyGovernorNelsonRocke-feller'sgrandioseplansforaStateUniversityofNewYorkmod-eledaftertheUniversityofCalifornia.Anotherimportantdevelopmentinhighereducationhasbeenamajorexpansioninthefederalgovernment'sinvolvementinfinancing,andevenmoreinregulatingbothgovernmentand 'WhatsWrongwithOurSchools?187nongovernmentinstitutions.Theinterventionhasinlargemeasurebeenpartofthegreatlyexpandedfederalactivitytofosterso-called"affirmativeaction,"inthenameofgreatercivilrights.Thisinterventionhasarousedgreatconcernamongfacultyandad-ministratorsatcollegesanduniversities,andmuchoppositionbythemtotheactivitiesoffederalbureaucrats.Thewholeepisodewouldbeamatterofpoeticjusticeifitwerenotsoseriousforthefutureofhighereducation.Theaca-demiccommunityhasbeenintheforefrontoftheproponentsofsuchinterventionwhendirectedatothersegmentsofsociety.Theyhavediscoveredthedefectsofinterventionitscostliness,itsinterferencewiththeprimarymissionoftheinstitutions,anditscounterproductivenessinitsowntermsonlywhenthesemea-suresweredirectedatthem.Theyhavenowbecomethevictimsbothoftheirownearlierprofessionsoffaithandoftheirself-interestincontinuingtofeedatthefederaltrough.CONCLUSIONInlinewithcommonpractice,wehaveused"education"and"schooling"assynonymous.Buttheidentificationofthetwotermsisanothercaseofusingpersuasiveterminology.Inamorecarefuluseoftheterms,notall"schooling"is"education,"andnotall"education"is"schooling."Manyhighlyschooledpeopleareun-educated,andmanyhighly"educated"peopleareunschooled.AlexanderHamiltonwasoneofthemosttruly"educated,"literate,andscholarlyofourfoundingfathers,yethehadonlythreeorfouryearsofformalschooling.Examplescouldbemul-tipliedmanyfold,andnodoubteveryreaderknowshighlyschooledpeoplewhomheregardsasuneducatedandunschooledpeoplewhomheconsiderslearned.Webelievethatthegrowingrolethatgovernmenthasplayedinfinancingandadministeringschoolinghaslednotonlytoenor-mouswasteoftaxpayers'moneybutalsotoafarpoorereduca-tionalsystemthanwouldhavedevelopedhadvoluntarycoopera-tioncontinuedtoplayalargerrole.Fewinstitutionsinoursocietyareinamoreunsatisfactorystatethanschools.Fewgeneratemorediscontentorcandomoreto 188FREETOCHOOSE:APersonalStatementundermineourliberty.Theeducationalestablishmentisupinarmsindefenseofitsexistingpowersandprivileges.Itissup-portedbymanypublic-spiritedcitizenswhoshareacollectivistoutlook.Butitisalsounderattack.Decliningtestscoresthrough-outthecountry;increasingproblemsofcrime,violence,anddis-orderaturbanschools;oppositiononthepartoftheoverwhelm-ingmajorityofbothwhitesandblackstocompulsorybusing;restivenessonthepartofmanycollegeanduniversityteachersandadministratorsundertheheavyhandofHEWbureaucratsallthisisproducingabacklashagainstthetrendtowardcen-tralization,bureaucratization,andsocializationofschooling.Wehavetriedinthischaptertooutlineanumberofconstruc-tivesuggestions:theintroductionofavouchersystemforele-mentaryandsecondaryeducationthatwouldgiveparentsatallincomelevelsfreedomtochoosetheschoolstheirchildrenattend;acontingent-loanfinancingsystemforhighereducationtocom-bineequalityofopportunitywiththeeliminationofthepresentscandalousimpositionoftaxesonthepoortopayforthehighereducationofthewell-to-do;or,alternatively,avoucherplanforhighereducationthatwouldbothimprovethequalityofinstitu-tionsofhighereducationandpromotegreaterequityinthedis-tributionofsuchtaxpayerfundsasareusedtosubsidizehighereducation.Theseproposalsarevisionarybuttheyarenotimpracticable.Theobstaclesareinthestrengthofvestedinterestsandpreju-dices,notinthefeasibilityofadministeringtheproposals.Thereareforerunners,comparableprogramsinoperationinthiscoun-tryandelsewhereonasmallerscale.Thereispublicsupportforthem.Weshallnotachievethematonce.Butinsofaraswemakeprogresstowardthemoralternativeprogramsdirectedatthesameobjectivewecanstrengthenthefoundationsofourfree-domandgivefullermeaningtoequalityofeducationaloppor-tunity. CHAPTER7WhoProtectstheConsumer?"Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebaker,thatweexpectourdinner,butfromtheirregardtotheirowninterest.Weaddressourselves,nottotheirhumanitybuttotheirself-love,andnevertalktothemofourownneces-sitiesbutoftheiradvantages.Nobodybutabeggarchusestodependchieflyuponthebenevolenceofhisfellowcitizens."AdamSmith,TheWealthofNations,vol.I,p.16WecannotindeeddependonbenevolenceforourdinnerbutcanwedependwhollyonAdamSmith'sinvisiblehand?Alonglineofeconomists,philosophers,reformers,andsocialcriticshavesaidno.Self-lovewillleadsellerstodeceivetheircustomers.Theywilltakeadvantageoftheircustomers'innocenceandignorancetooverchargethemandpassoffonthemshoddyproducts.Theywillcajolecustomerstobuygoodstheydonotwant.Inaddition,thecriticshavepointedout,ifyouleaveittothemarket,theout-comemayaffectpeopleotherthanthosedirectlyinvolved.Itmayaffecttheairwebreathe,thewaterwedrink,thesafetyofthefoodsweeat.Themarketmust,itissaid,besupplementedbyotherarrangementsinordertoprotecttheconsumerfromhim-selfandfromavaricioussellers,andtoprotectallofusfromthespilloverneighborhoodeffectsofmarkettransactions.Thesecriticismsoftheinvisiblehandarevalid,aswenotedinChapter1.Thequestioniswhetherthearrangementsthathavebeenrecommendedoradoptedtomeetthem,tosupplementthemarket,arewelldevisedforthatpurpose,orwhether,assooftenhappens,thecuremaynotbeworsethanthedisease.Thisquestionisparticularlyrelevanttoday.AmovementlaunchedlessthantwodecadesagobyaseriesofeventsthepublicationofRachelCarson'sSilentSpring,SenatorEstesKefauver'sinvestigationofthedrugindustry,andRalphNader'sattackontheGeneralMotorsCorvairas"unsafeatanyspeed"hasledtoamajorchangeinboththeextentandthecharacterof189 190FREETOCHOOSE:APersonalStatementgovernmentinvolvementinthemarketplaceinthenameofpro-tectingtheconsumer.FromtheArmyCorpsofEngineersin1824totheInterstateCommerceCommissionin1887totheFederalRailroadAd-ministrationin1966,theagenciesestablishedbythefederalgov-ernmenttoregulateorsuperviseeconomicactivityvariedinscope,importance,andpurpose,butalmostalldealtwithasinglein-dustryandhadwell-definedpowerswithrespecttothatindustry.FromatleasttheICCon,protectionoftheconsumerprimarilyhispocketbookwasoneobjectiveproclaimedbythereformers.ThepaceofinterventionquickenedgreatlyaftertheNewDealhalfofthethirty-twoagenciesinexistencein1966werecreatedafterFDR'selectionin1932.Yetinterventionremainedfairlymoderateandcontinuedinthesingle-industrymold.TheFederalRegister,establishedin1936torecordalltheregulations,hear-ings,andothermattersconnectedwiththeregulatoryagencies,grew,atfirstratherslowly,thenmorerapidly.Threevolumes,containing2,599pagesandtakingsixinchesofshelfspace,sufficedfor1936;twelvevolumes,containing10,528pagesandtakingtwenty-sixinchesofshelfspace,for1956;andthirteenvolumes,containing16,850pagesandtakingthirty-sixinchesofshelfspace,for1966.Thenaveritableexplosioningovernmentregulatoryactivityoccurred.Nofewerthantwenty-onenewagencieswereestablishedinthenextdecade.Insteadofbeingconcernedwithspecificin-dustries,theycoveredthewaterfront:theenvironment,thepro-ductionanddistributionofenergy,productsafety,occupationalsafety,andsoon.Inadditiontoconcernwiththeconsumer'spocketbook,withprotectinghimfromexploitationbysellers,recentagenciesareprimarilyconcernedwiththingslikethecon-sumer'ssafetyandwell-being,withprotectinghimnotonlyfromsellersbutalsofromhimself.'Governmentexpendituresonbotholderandneweragenciesskyrocketedfromlessthan$1billionin1970toroughly$5billionestimatedfor1979.Pricesingeneralroughlydoubled,buttheseexpendituresmorethanquintupled.Thenumberofgovern-mentbureaucratsemployedinregulatoryactivitiestripled,goingfrom28,000in1970to81,000in1979;thenumberofpagesin WhoProtectstheConsumer?191theFederalRegister,from17,660in1970to36,487in1978,taking127inchesofshelfspaceaveritableten-footshelf.Duringthesamedecade,economicgrowthintheUnitedStatessloweddrastically.From1949to1969,outputperman-hourofallpersonsemployedinprivatebusinessasimpleandcompre-hensivemeasureofproductivityrosemorethan3percentayear;inthenextdecade,lessthanhalfasfast;andbytheendofthedecadeproductivitywasactuallydeclining.Whylinkthesetwodevelopments?Onehastodowithassuringoursafety,protectingourhealth,preservingcleanairandwater;theother,withhoweffectivelyweorganizeoureconomy.Whyshouldthesetwogoodthingsconflict?Theansweristhatwhatevertheannouncedobjectives,allofthemovementsinthepasttwodecadestheconsumermovement,theecologymovement,theback-to-the-landmovement,thehippiemovement,theorganic-foodmovement,theprotect-the-wildernessmovement,thezero-population-growthmovement,the"smallisbeautiful"movement,theantinuclearmovementhavehadonethingincommon.Allhavebeenantigrowth.Theyhavebeenopposedtonewdevelopments,toindustrialinnovation,totheincreaseduseofnaturalresources.Agenciesestablishedinre-sponsetothesemovementshaveimposedheavycostsonindustryafterindustrytomeetincreasinglydetailedandextensivegovern-mentrequirements.Theyhavepreventedsomeproductsfrombeingproducedorsold;theyhaverequiredcapitaltobeinvestedfornonproductivepurposesinwaysspecifiedbygovernmentbureaucrats.Theresultshavebeenfar-reachingandthreatentobeevenmoreso.AsEdwardTeller,thegreatnuclearphysicist,onceputit,"Ittookuseighteenmonthstobuildthefirstnuclearpowergenerator;itnowtakestwelveyears;that'sprogress."Thedirectcostofregulationtothetaxpayeristheleastpartofitstotalcost.The$5billionayearspentbythegovernmentisswampedbythecoststoindustryandconsumerofcomplyingwiththeregulations.Conservativeestimatesputthatcostatsomethinglike$100bil-lionayear.Andthatdoesn'tcountthecosttotheconsumerofrestrictedchoiceandhigherpricesfortheproductsthatareavailable. 192FREETOCHOOSE:APersonalStatementThisrevolutionintheroleofgovernmenthasbeenaccom-panied,andlargelyproduced,byanachievementinpublicper-suasionthatmusthavefewrivals.Askyourselfwhatproductsarecurrentlyleastsatisfactoryandhaveshowntheleastimprovementovertime.Postalservice,elementaryandsecondaryschooling,railroadpassengertransportwouldsurelybehighonthelist.Askyourselfwhichproductsaremostsatisfactoryandhaveim-provedthemost.Householdappliances,televisionandradiosets,hi-fiequipment,computers,and,wewouldadd,supermarketsandshoppingcenterswouldsurelycomehighonthatlist.Theshoddyproductsareallproducedbygovernmentorgov-ernment-regulatedindustries.Theoutstandingproductsareallproducedbyprivateenterprisewithlittleornogovernmentin-volvement.Yetthepublicoralargepartofithasbeenper-suadedthatprivateenterprisesproduceshoddyproducts,thatweneedevervigilantgovernmentemployeestokeepbusinessfromfoistingoffunsafe,meretriciousproductsatoutrageouspricesonignorant,unsuspecting,vulnerablecustomers.Thatpublicrela-tionscampaignhassucceededsowellthatweareintheprocessofturningovertothekindofpeoplewhobringusourpostalservicethefarmorecriticaltaskofproducinganddistributingenergy.RalphNader'sattackontheCorvair,themostdramaticsingleepisodeinthecampaigntodiscredittheproductsofprivatein-dustry,exemplifiesnotonlytheeffectivenessofthatcampaignbutalsohowmisleadingithasbeen.SometenyearsafterNadercastigatedtheCorvairasunsafeatanyspeed,oneoftheagenciesthatwassetupinresponsetothesubsequentpublicoutcryfinallygotaroundtotestingtheCorvairthatstartedthewholething.TheyspentayearandahalfcomparingtheperformanceoftheCorvairwiththeperformanceofothercomparablevehicles,andtheyconcluded,"The196063Corvaircomparedfavorablywiththeothercontemporaryvehiclesusedinthetests."'NowadaysCorvairfanclubsexistthroughoutthecountry.Corvairshavebecomecollectors'items.Buttomostpeople,eventhewellin-formed,theCorvairisstill"unsafeatanyspeed."Therailroadindustryandtheautomobileindustryofferanexcellentillustrationofthedifferencebetweenagovernmentally WhoProtectstheConsumer?193regulatedindustryprotectedfromcompetitionandaprivatein-dustrysubjectedtothefullrigorsofcompetition.Bothindustriesservethesamemarketandultimatelyprovidethesameservice,transportation.Oneindustryisbackwardandinefficientanddis-playslittleinnovation.Themajorexceptionwasthereplacementofthesteamenginebythediesel.Thefreightcarsbeingpulledbythedieselstodayarehardlydistinguishablefromthosethatwerepulledbythesteamenginesofanearlierera.Passengerserviceisslowerandlesssatisfactorytodaythanitwasfiftyyearsago.Therailroadsarelosingmoneyandareintheprocessofbeingtakenoverbythegovernment.Theautomobileindustry,ontheotherhand,spurredbycompetitionfromhomeandabroadandfreetoinnovate,hasmadetremendousstrides,introducingoneinnovationafteranother,sothatthecarsoffiftyyearsagoaremuseumpieces.Theconsumershavebenefitedandsohavetheworkersandstockholdersintheautomobileindustry.Impressiveandtragic,becausetheautomobileindustryisnowrapidlybeingconvertedintoagovernmentallyregulatedindustry.Wecanseethedevelopmentsthathobbledrailroadsoccurringbeforeourveryeyestoautomobiles.Governmentinterventioninthemarketplaceissubjecttolawsofitsown,notlegislatedlaws,butscientificlaws.Itobeysforcesandgoesindirectionsthatmayhavelittlerelationshiptothein-tentionsordesiresofitsinitiatorsorsupporters.Wehavealreadyexaminedthisprocessinconnectionwithwelfareactivity.Itispresentequallywhengovernmentintervenesinthemarketplace,whethertoprotectconsumersagainsthighpricesorshoddygoods,topromotetheirsafety,ortopreservetheenvironment.Everyactofinterventionestablishespositionsofpower.Howthatpowerwillbeusedandforwhatpurposesdependsfarmoreonthepeoplewhoareinthebestpositiontogetcontrolofthatpowerandwhattheirpurposesarethanontheaimsandobjectivesoftheinitialsponsorsoftheintervention.TheInterstateCommerceCommission,datingfrom1887,wasthefirstagencyestablishedlargelythroughapoliticalcrusadeledbyself-proclaimedrepresentativesoftheconsumertheRalphNadersoftheday.Ithasgonethroughseverallifecyclesandhasbeenexhaustivelystudiedandanalyzed.Itprovidesanexcellent 194FREETOCHOOSE:APersonalStatementexampletoillustratethenaturalhistoryofgovernmentinterven-tioninthemarketplace.TheFoodandDrugAdministration,initiallyestablishedin1906inresponsetotheoutcrythatfollowedUptonSinclair'snovelTheJungle,whichexposedunsanitaryconditionsintheChicagoslaughteringandmeat-packinghouses,hasalsogonethroughseverallifecycles.Asidefromitsintrinsicinterest,itservesassomethingofabridgebetweentheearlierspecific-industrytypeofregulationandthemorerecentfunctionalorcross-industrytypeofregulationbecauseofthechangethatoccurredinitsactivitiesafterthe1962Kefauveramendments.TheConsumerProductsSafetyCommission,theNationalHighwayTrafficSafetyAdministration,theEnvironmentalPro-tectionAgency,allexemplifythemorerecenttypeofregulatoryagencycuttingacrossindustryandrelativelyunconcernedwiththeconsumer'spocketbook.Afullanalysisofthemisfarbeyondourscope,butwediscussbrieflyhowtheyexemplifythesametendenciesthatarepresentinICCandFDA,andtheproblemstheyraiseforthefuture.Thoughinterventioninenergybybothstateandfederalgov-ernmentsisoflongstanding,therewasaquantumjumpaftertheOPECembargoin1973andsubsequentquadruplingofthepriceofcrudeoil.If,asweshallargue,wecannotdependongovernmentinter-ventiontoprotectusasconsumers,whatcanwedependon?Whatdevicesdoesthemarketdevelopforthatpurpose?Andhowcantheybeimproved?THEINTERSTATECOMMERCECOMMISSIONTheCivilWarwasfollowedbyanunprecedentedexpansionoftherailroadssymbolizedbythedrivingoftheGoldenSpikeatPromontoryPoint,Utah,onMay10,1869,tomarkthejoiningoftheUnionPacificandCentralPacificrailroads,completingthefirsttranscontinentalline.Soontherewasasecond,third,andevenfourthtranscontinentalroute.In1865railroadsalreadyoperated35,000milesoftrack;tenyearslater,closeto75,000;andby1885,over125,000.By1890thereweremorethan1,000 WhoProtectstheConsumer?195separaterailroads.Thecountrywasliterallycrisscrossedwithrailroadsgoingtoeveryremotehamletandcoveringthenationfromcoasttocoast.ThemilesoftrackintheUnitedStatesex-ceededthatinalltherestoftheworldcombined.Competitionwasfierce.Asaresult,freightandpassengerrateswerelow,supposedlythelowestintheworld.Railroadmen,ofcourse,complainedof"cutthroatcompetition."Everytimetheeconomyfaltered,inoneofitsperiodicslumps,railroadswentbankruptandweretakenoverbyothersorsimplywentoutofbusiness.Whentheeconomyrevived,anothersurgeofrailroadconstructionfollowed.Therailroadmenofthetimetriedtoimprovetheirpositionbyjoiningtogether,formingpools,agreeingtofixratesatprofitablelevelsandtodividethemarket.Totheirdismay,theagreementswerealwaysbreakingdown.Solongastherestofthemembersofapoolkeptuptheirrates,anyonemembercouldbenefitbycuttinghisratesandtakingbusinessawayfromtheothers.Ofcourse,hewouldnotcutratesopenly;hewoulddosoindeviouswaystokeeptheothermembersofthepoolinthedarkaslongaspossible.Hencesuchpracticesaroseassecretrebatestofavoredshippersanddiscriminatorypricingbetweenregionsorcom-modities.Soonerorlaterthepricecuttingwouldbecomeknownandthepoolwouldcollapse.Competitionwasfiercestbetweendistant,populouspointssuchasNewYorkandChicago.Shippersandpassengerscouldchooseamonganumberofalternateroutesoperatedbydifferentrail-roadsandalsoamongthecanalsthathadearliercoveredtheland.Ontheotherhand,betweenshortersegmentsofanyoneoftheseroutes,forexample,betweenHarrisburgandPittsburgh,theremightbeonlyonerailroad.Thatrailroadwouldhavesomethingofamonopolyposition,subjectonlytocompetitionfromalter-nativemeansoftransport,suchascanalsorrivers.Naturally,itwouldtakefulladvantageofitsmonopolypositionwhereveritcouldandchargeallthatthetrafficwouldbear.Oneresultwasthatthesumofthefareschargedfortheshorthaulsorevenforoneshorthaulwassometimeslargerthanthetotalsumchargedforthelonghaulbetweenthetwodistantpoints.Ofcourse,noneoftheconsumerscomplainedaboutthelow 196FREETOCHOOSE:APersonalStatementpricesforthelonghaul,buttheycertainlydidcomplainaboutthehigherpricesfortheshorthauls.Similarly,thefavoredshipperswhogotrebatesinthesecretrate-cuttingwarsdidnotcomplain,butthosewhofailedtogetrebateswereloudintheircomplaintsabout"discriminatorypricing."Therailroadswerethemajorenterprisesoftheday.Highlyvisible,highlycompetitive,linkedwithWallStreetandthefinan-cialEast,theywereasteadysourceofstoriesoffinancialmanipu-lationandskulduggeryinhighplaces.Theybecameanaturaltarget,particularlyforthefarmersoftheMiddleWest.The"Grangemovement,whicharoseinthe1870s,attackedthemo-nopolisticrailroads."TheywerejoinedbytheGreenbackparty,theFarmers'Alliance,andsoonandon,allagitating,frequentlywithsuccess,atthestatehouseforgovernmentcontroloffreightratesandpractices.ThePopulistparty,throughwhichWilliamJenningsBryanrosetofame,callednotmerelyforregulationoftherailroadsbutforoutrightgovernmentownershipandopera-tion.'Thecartoonistsofthetimehadafielddaydepictingtherailroadsasoctopusesstranglingthecountryandexercisingtre-mendouspoliticalinfluencewhichindeedtheydid.Asthecampaignagainsttherailroadsmounted,somefar-sightedrailroadmenrecognizedthattheycouldturnittotheiradvantage,thattheycouldusethefederalgovernmenttoenforcetheirprice-fixingandmarket-sharingagreementsandtoprotectthemselvesfromstateandlocalgovernments.Theyjoinedthere-formersinsupportinggovernmentregulation.TheoutcomewastheestablishmentoftheInterstateCommerceCommissionin1887.Ittookaboutadecadetogetthecommissioninfulloperation.Bythattimethereformershadmovedontotheirnextcrusade.Therailroadswereonlyoneoftheirconcerns.Theyhadachievedtheirobjective,andtheyhadnooverpoweringinteresttoleadthemtodomorethancastanoccasionalglanceatwhattheICCwasdoing.Fortherailroadmenthesituationwasentirelydif-ferent.Therailroadsweretheirbusiness,theiroverridingconcern.Theywerepreparedtospendtwenty-fourhoursadayonit.AndwhoelsehadtheexpertisetostaffandruntheICC?Theysoonlearnedhowtousethecommissiontotheirownadvantage. WhoProtectstheConsumer?197ThefirstcommissionerwasThomasCooley,alawyerwhohadrepresentedtherailroadsformanyyears.HeandhisassociatessoughtgreaterregulatorypowerfromCongress,andthatpowerwasgranted.AsPresidentCleveland'sAttorneyGeneral,RichardJ.Olney,putitinalettertorailroadtycoonCharlesE.Perkins,presidentoftheBurlington&QuincyRailroad,onlyahalf-dozenyearsaftertheestablishmentoftheICC:TheCommission,asitsfunctionshavenowbeenlimitedbythecourts,is,orcanbemade,ofgreatusetotherailroads.ItsatisfiesthepopularclamorforaGovernmentsupervisionofrailroads,atthesametimethatthatsupervisionisalmostentirelynominal.Further,theoldersuchacommissiongetstobe,themoreinclineditwillbefoundtotakethebusinessandrailroadviewofthings.Itthusbe-comesasortofbarrierbetweentherailroadcorporationsandthepeopleandasortofprotectionagainsthastyandcrudelegislationhostiletorailroadinterests....Thepartofwisdomisnottodestroy4theCommission,buttoutilizeit.Thecommissionsolvedthelong-haul/short-haulproblem.Asyouwillnotbesurprisedtolearn,itdidsomostlybyraisingthelong-haulratestoequalthesumoftheshort-haulrates.Everybodyexceptthecustomerwashappy.Astimepassed,thecommission'spowerswereincreasedanditcametoexercisecloserandclosercontrolovereveryaspectoftherailroadbusiness.Inaddition,powershiftedfromdirectrepresentativesoftherailroadstothegrowingICCbureaucracy.However,thatwasnothreattotherailroads.Manyofthebureau-cratsweredrawnfromtherailroadindustry,theirday-to-daybusinesstendedtobewithrailroadpeople,andtheirchiefhopeofalucrativefuturecareerwaswithrailroads.Therealthreattotherailroadsaroseinthe1920s,whentrucksemergedaslong-distancehaulers.TheartificiallyhighfreightratesmaintainedbytheICCforrailroadsenabledthetruckingindustrytogrowbyleapsandbounds.Itwasunregulatedandhighlycompetitive.Anybodywithenoughcapitaltobuyatruckcouldgointothebusiness.Theprincipalargumentusedagainsttherailroadsinthecampaignforgovernmentregulationthattheyweremonopoliesthathadtobecontrolledtokeepthemfromexploitingthepublichadnovaliditywhatsoeverfortrucking. 198FREETOCHOOSE:APersonalStatementItwouldbehardtofindanindustrythatcameclosertosatisfyingtherequirementsforwhattheeconomistscall"perfect"com-petition.Butthatdidnotstoptherailroadsfromagitatingtohavelong-distancetruckingbroughtunderthecontroloftheInterstateCommerceCommission.Andtheysucceeded.TheMotorCarrierActof1935gavetheICCjurisdictionovertruckerstoprotecttherailroads,nottheconsumers.Therailroadstorywasrepeatedfortrucking.Itwascartelized,rateswerefixed,routesassigned.Asthetruckingindustrygrew,therepresentativesofthetruckerscametohavemoreandmoreinfluenceonthecommissionandgraduallycametoreplacerail-roadrepresentativesasthedominantforce.TheICCbecameasmuchanagencydevotedtoprotectingthetruckingindustryfromtherailroadsandthenonregulatedtrucksastoprotectingtherail-roadsagainstthetrucks.Withitall,therewasanoverlayofsimplyprotectingitsownbureaucracy.Inordertooperateasaninterstatepubliccarrier,atruckingcompanymusthaveacertificateofpublicconvenienceandneces-sityissuedbytheICC.Outofsome89,000initialapplicationsforsuchcertificatesafterthepassageoftheMotorCarrierActof1935,theICCapprovedonlyabout27,000."Sincethattime...thecommissionhasbeenveryreluctanttograntnewcompetitiveauthority.Moreover,mergersandfailuresofexistingtruckingfirmshavereducedthenumberofsuchfirmsfromover25,000in1939to14,648in1974.Atthesametime,thetonsshippedbyregulatedtrucksinintercityservicehaveincreasedfrom25.5mil-lionin1938to698.1millionin1972:a27-foldincrease."5Thecertificatescanbeboughtandsold."Thegrowthintraffic,thedeclineinnumberoffirms,andthediscouragementofratecompetitionbyratebureausandICCpracticeshaveincreasedthevalueofcertificatesconsiderably."ThomasMooreestimatesthattheiraggregatevaluein1972wasbetween$2and$3billion6avaluethatcorrespondssolelytoagovernment-grantedmonopolyposition.Itconstituteswealthforthepeoplewhoownthecertifi-cates,butforthesocietyasawholeitisameasureofthelossfromgovernmentintervention,notameasureofproductivecapac-ity.EverystudyshowsthattheeliminationofICCregulationof WhoProtectstheConsumer?199truckingwoulddrasticallyreducecoststoshippersMooreesti-matesbyperhapsasmuchasthree-quarters.AtruckingcompanyinOhio,DaytonAirFreight,offersaspe-cificexample.IthasanICClicensethatgivesitexclusivepermis-siontocarryfreightfromDaytontoDetroit.ToserveotherroutesithashadtobuyrightsfromICClicenseholders,includingonewhodoesn'townasingletruck.Ithaspaidasmuchas$100,000ayearfortheprivilege.Theownersofthefirmhavebeentryingtogettheirlicenseextendedtocovermoreroutes,sofarwithoutsuccess.Asoneoftheircustomers,MalcolmRichards,putit,"QuitefranklyIdon'tknowwhytheICCissittingonitshandsdoingnothing.Thisisthethirdtimetomyknowledgethatwehavesup-portedtheapplicationofDaytonAirFreighttohelpussavemoney,helpfreeenterprise,helpthecountrysaveenergy....Itallcomesdowntotheconsumer'sultimatelygoingtopayforallthis."OneoftheownersofDaytonAirFreight,TedHacker,adds:"AsfarasI'mconcerned,thereisnofreeenterpriseininterstatecommerce.Itnolongerexistsinthiscountry.Youhavetopaythepriceandyouhavetopaythepriceverydearly.Andthatnotonlymeansthatwehavetopaytheprice,itmeanstheconsumerispayingtheprice."Butthiscommenthastobetakenwitharealgrainofsaltinlightofacommentbyanotherowner,HerschelWimmer:"IhavenoargumentwiththepeoplewhoalreadyhaveICCpermitsex-ceptingforthefactthisisabigcountryandsincetheinceptionoftheICCin1936,therehavebeenfewentrantsintothebusiness.Theydonotallownewentrantstocomeintothebusinessandcompetewiththosewhoarealreadyin."Weconjecturethatthisreflectsareactionwehaveencounteredrepeatedlyamongrailroadmenandtruckers:giveusacertificateorgrantusawaiveroftherules,yes;abolishtheissuanceofcertificatesorthesystemofgovernmentregulation,no.Inviewofthevestedintereststhathavegrownup,thatreactionisentirelyunderstandable.Toreturntorailroads,theultimateeffectsofgovernmentinter-ventionarenotyetover.Theincreasinglyrigidrulesprevented 200FREETOCHOOSE:APersonalStatementrailroadsfromadjustingeffectivelytotheemergenceofauto-mobiles,buses,andplanesasanalternativetorailroadsforlong-distancepassengertraffic.Theyonceagainturnedtothegovern-ment,thistimebythenationalizationofpassengertrafficintheformofAmtrak.Thesameprocessisoccurringinfreight.MuchoftherailroadfreighttrackageintheNortheasthasineffectbeennationalizedthroughthecreationofConrailfollowingthedra-maticbankruptcyoftheNewYorkCentralRailroad.Thatisverylikelytheprospectfortherestoftherailroadindustryaswell.Airtravelrepeatedtherailroadandtruckingstory.WhentheCivilAeronauticsBoardwasestablishedin1938,itassumedcon-trolovernineteendomestictrunklinecarriers.Todaythereareevenfewer,despitetheenormousgrowthinairtravel,anddespitenumerousapplicationsfor"certificatesofpublicconvenienceandnecessity."Theairlinestorydoesdifferinoneimportantrespect.ForavarietyofreasonsnotleastthesuccessfulpricecuttingacrosstheAtlanticbyFreddieLaker,theenterprisingBritishownerofamajorinternationalairline,andthepersonalityandabilityofAlfredKahn,formerchairmanoftheCABtherehasrecentlybeenconsiderablederegulationofairfares,bothad-ministrativelyandlegislatively.Thisisthefirstmajormoveinanyareaawayfromgovernmentcontrolandtowardgreaterfreedom.Itsdramaticsuccesslowerfaresyethigherearningsfortheair-lineshasencouragedamovementtowardsomemeasureofderegulationofsurfacetransportation.However,powerfulforces,particularlyinthetruckingindustry,areorganizingoppositiontosuchderegulation,soasyetitisonlyafainthope.Oneironicechoofthelong-haul/short-haulissuerecentlyaroseintheairindustry.Inthiscasethediscrepancywastheoppositeofthatinrailstheshort-haulfarewasthelower.ThecaseoccurredinCalifornia,whichisalargeenoughstatetosupportseveralmajorairlinesthatflysolelywithinthestateandasaresultwerenotsubjecttoCABcontrol.CompetitionontheroutebetweenSanFranciscoandLosAngelesproducedanintrastatefarethatwasmuchlowerthanthefarethattheCABpermittedinterstatelinestochargeforthesametrip.TheironyisthatacomplaintwasfiledbeforetheCABaboutthediscrepancyin1971byRalphNader,self-proclaimedde- WhoProtectstheConsumer?201fenderoftheconsumer.ItsohappensthatoneofNader'ssub-sidiarieshadpublishedanexcellentanalysisoftheICC,stressing,amongotherthings,howthelong-haul/short-hauldiscriminationwasresolved.Nadercouldhardlyhavebeenunderanyillusionsabouthowtheairlinecasewouldberesolved.Asanystudentofregulationwouldhavepredicted,theCABruling,laterupheldbytheSupremeCourt,requiredintrastatecompaniestoraisetheirfarestomatchthosepermittedbyCAB.Fortunately,therulingwasinabeyancebecauseoflegaltechnicalitiesandmayberen-deredirrelevantbythederegulationofairfares.TheICCillustrateswhatmightbecalledthenaturalhistoryofgovernmentintervention.Arealorfanciedevilleadstodemandstodosomethingaboutit.Apoliticalcoalitionformsconsistingofsincere,high-mindedreformersandequallysincereinterestedparties.Theincompatibleobjectivesofthemembersofthecoali-tion(e.g.,lowpricestoconsumersandhighpricestoproducers)areglossedoverbyfinerhetoricabout"thepublicinterest,""faircompetition,"andthelike.ThecoalitionsucceedsingettingCon-gress(orastatelegislature)topassalaw.Thepreambletothelawpayslipservicetotherhetoricandthebodyofthelawgrantspowertogovernmentofficialsto"dosomething."Thehigh-mindedreformersexperienceaglowoftriumphandturntheirattentiontonewcauses.Theinterestedpartiesgotoworktomakesurethatthepowerisusedfortheirbenefit.Theygenerallysucceed.Successbreedsitsproblems,whicharemetbybroadeningthescopeofintervention.Bureaucracytakesitstollsothateventheinitialspecialinterestsnolongerbenefit.Intheendtheeffectsarepreciselytheoppositeoftheobjectivesofthereformersandgen-erallydonotevenachievetheobjectivesofthespecialinterests.Yettheactivityissofirmlyestablishedandsomanyvestedinter-estsareconnectedwithitthatrepealoftheinitiallegislationisnearlyinconceivable.Instead,newgovernmentlegislationiscalledfortocopewiththeproblemsproducedbytheearlierlegislationandanewcyclebegins.TheICCrevealsclearlyeachofthesestepsfromthecuriouscoalitionresponsibleforitsestablishmenttothebeginningofasecondcyclebytheestablishmentofAmtrak,whoseonlyexcuseforexistenceisthatitislargelyfreefromICCregulationandcan 202FREETOCHOOSE:APersonalStatementthereforedowhatICCwillnotpermittheindividualrailroadstodo.Therhetoric,ofcourse,wasthatthepurposeofAmtrakwasimprovedrailpassengertransportation.Itwassupportedbyrail-roadsbecauseitwouldpermitmuchthen-existingpassengerser-vicetobeeliminated.Theexcellentandprofitablepassengerserviceofthe1930shaddeterioratedandbecomeunprofitableasaresultofthecompetitionoftheairplaneandtheprivatecar.YetICCwouldnotpermittherailroadstocurtailtheservice.Amtrakisnowbothcurtailingitandsubsidizingwhatremains.IftheICChadneverbeenestablishedandmarketforceshadbeenpermittedtooperate,theUnitedStateswouldtodayhaveafarmoresatisfactorytransportationsystem.Therailroadindustrywouldbeleanerbutmoreefficientasaresultofgreatertech-nologicalinnovationunderthespurofcompetitionandthemorerapidadjustmentofroutestothechangingdemandsoftraffic.Passengertrainsmightservefewercommunitiesbutthefacilitiesandequipmentwouldbefarbetterthantheyarenow,andtheservicemoreconvenientandrapid.Similarly,therewouldbemoretruckingfirmsthoughtheremightbefewertrucksbecauseofgreaterefficiencyandlesswasteinsuchformsastheemptyreturntripsandroundaboutroutesthatICCregulationsnowmandate.Costswouldbelowerandservicebetter.ThereaderwhohashadoccasiontouseanICC-licensedcompanytomovehispersonalbelongingswillhavenodifficultyinacceptingthatjudgment.Thoughwedonotspeakfrompersonalexperience,wesuspectthatthisisalsotrueforcommercialshippers.Thewholeshapeofthetransportationindustrymightberadi-callydifferent,involvingperhapsmuchgreateruseofcombinedmodesoftransport.Oneofthefewprofitableprivaterailroadoperationsinrecentyearshasbeenaservicetransportingpeopleplustheirautomobilesinthesametrain.Piggybackoperationwoulddoubtlesshavebeenintroducedmuchsoonerthanitwas,andmanyothercombinationsmighthaveemerged.Amajorargumentforlettingmarketforcesworkistheverydifficultyofimaginingwhattheoutcomewouldbe.Theonethingthatiscertainisthatnoservicewouldsurvivethatusersdidnotvaluehighlyenoughtopayforandtopayforatpricesthatyieldedthepersonsprovidingtheserviceamoreadequate WhoProtectstheConsumer?203incomethanalternativeactivitiesopentothem.Neithertheusersnortheproducerswouldbeabletoputtheirhandsinany-bodyelse'spockettomaintainaservicethatdidnotsatisfythiscondition.FOODANDDRUGADMINISTRATIONBycontrastwiththeICC,thesecondmajorforayofthefederalgovernmentintoconsumerprotectiontheFoodandDrugActof1906didnotarisefromprotestsoverhighprices,butfromcon-cernaboutthecleanlinessoffood.Itwastheeraofthemuck-raker,ofinvestigativejournalism.UptonSinclairhadbeensentbyasocialistnewspapertoChicagotoinvestigateconditionsinthestockyards.Theresultwashisfamousnovel,TheJungle,whichhewrotetocreatesympathyfortheworkers,butwhichdidfarmoretoarouseindignationattheunsanitaryconditionsunderwhichmeatwasprocessed.AsSinclairsaidatthetime,"Iaimedatthepublic'sheartandbyaccidenthititinthestomach."LongbeforeTheJungleappearedandcrystallizedpublicsenti-mentinfavoroflegislation,suchorganizationsastheWomen'sChristianTemperanceUnionandtheNationalTemperanceSo-cietyhadformedtheNationalPureFoodandDrugCongress(1898)tocampaignforlegislationtoeliminatethemedicalnostrumsofthedaymostlyheavilylacedwithalcoholandsoenablingspiritstobepurchasedandconsumedintheguiseofmedicine,whichexplainstheinvolvementofthetemperancegroups.Here,too,specialinterestsjoinedthereformers.Themeatpackers"learnedveryearlyinthehistoryoftheindustrythatitwasnottotheirprofittopoisontheircustomers,especiallyinacompetitivemarketinwhichtheconsumercouldgoelsewhere."TheywereespeciallyconcernedbyrestrictionsontheimportationofU.S.meatimposedbyEuropeancountries,usingasanexcusetheallegationthatthemeatwasdiseased.Theyeagerlyseizedtheopportunitytohavethegovernmentcertifythatthemeatwasdisease-freeandatthesametimepayfortheinspection.'Anotherspecialinterestcomponentwasprovidedbythephar-macistsandphysiciansthroughtheirprofessionalassociations,thoughtheirinvolvementwasmorecomplexandlesssingle- 204FREETOCHOOSE:APersonalStatementmindedlyeconomicthanthatofthemeatpackersoroftherail-roadsintheestablishmentoftheICC.Theireconomicinterestwasclear:patentmedicinesandnostrums,solddirectlytotheconsumerbytravelingmedicinemenandinotherways,competedwiththeirservices.Beyondthis,theyhadaprofessionalinterestinthekindsofdrugsandmedicinesavailableandwerekeenlyawareofthedangerstothepublicfromuselessmedicinesprom-isingmiraculouscuresforeverythingfromcancertoleprosy.Publicspiritandself-interestcoincided.The1906actwaslargelylimitedtotheinspectionoffoodsandthelabelingofpatentmedicines,though,morebyaccidentthandesign,italsosubjectedprescriptiondrugstocontrol,apowerwhichwasnotuseduntilmuchlater.Theregulatoryauthority,fromwhichthepresentFoodandDrugAdministrationdeveloped,wasplacedintheDepartmentofAgriculture.Untilthepastfifteenyearsorso,neithertheinitialagencynortheFDAhadmucheffectonthedrugindustry.Fewimportantnewdrugsweredevelopeduntilsulfanilamideappearedinmid-1937.ThatwasfollowedbytheElixirSulfa-nilamidedisaster,whichoccurredasaresultofachemist'seffortstomakesulfanilamideavailabletopatientswhowereunabletotakecapsules.Thecombinationofthesolventheusedandsulfa-nilamideproveddeadly.Bytheendofthetragedy"ahundredandeightpeopleweredeadahundredandsevenpatients,whohadtakenthe`elixir,'andthechemistwhohadkilledhimself."8"Manufacturersthemselveslearnedfromthe...experiencetheliabilitylossesthatcouldbesufferedfromthemarketingofsuchdrugsandinstitutedpremarketingsafetyteststoavoidarepeti-stion."Theyalsorealizedthatgovernmentprotectionmightbevaluabletothem.TheresultwastheFood,Drug,andCosmeticActof1938,whichextendedthegovernment'scontroloverad-vertisingandlabelingandrequiredallnewdrugstobeapprovedforsafetybytheFDAbeforetheycouldbesoldininterstatecom-merce.Approvalhadtobegrantedorwithheldwithin180days.Acozysymbioticrelationdevelopedbetweenthepharmaceu-ticalindustryandtheFDAuntilanothertragedyoccurred,thethalidomideepisodeof1961-62.ThalidomidehadbeenkeptofftheU.S.marketbytheFDAundertheprovisionsofthe1938act,thoughlimitedamountsofthedrughavebeendistributedbyphy- WhoProtectstheConsumer?205siciansforexperimentalpurposes.ThislimiteddistributionendedwhenreportssurfacedaboutdeformedbabiesborntoEuropeanmotherswhohadtakenthalidomideduringpregnancy.Thesub-sequentuproarsweptintolawin1962amendmentsthathaddevelopedoutofSenatorKefauver'sinvestigationsofthedrugindustrytheprioryear.Thetragedyalsochangedradicallythethrustoftheamendments.Kefauverhadbeenconcernedprimarilywithchargesthatdrugsofdubiousvaluewerebeingsoldatundulyhighpricesthestandardcomplaintaboutconsumerexploitationbymonopolisticbusiness.Asenacted,theamendmentsdealtmorewithqualitythanprice.They"addedaproof-of-efficacyrequire-menttotheproof-of-safetyrequirementofthe1938law,andtheyremovedthetimeconstraintontheF.D.A.'sdispositionofaNewDrugApplication.NonewdrugmaynowbemarketedunlessanduntiltheF.D.A.determinesthatthereissubstantialevidencenotonlythatthedrugissafe,asrequiredunderthe1938law,butthatitiseffectiveinitsintendeduse."ioThe1962amendmentscoincidedwiththeseriesofeventsthatproducedanexplosioningovernmentinterventionandachangeinitsdirection:thethalidomidetragedy,RachelCarson'sSilentSpring,whichlaunchedtheenvironmentalmovement,andthecontroversyaboutRalphNader'sUnsafeatAnySpeed.TheFDAparticipatedinthechangedroleofgovernmentandbecamefarmoreactivistthanithadeverbeenbefore.Thebanningofcycla-matesandthethreattobansaccharinhavereceivedmostpublicattention,buttheyarebynomeansthemostimportantactionsoftheFDA.Noonecandisagreewiththeobjectivesofthelegislationthatculminatedinthe1962amendments.Ofcourseitisdesirablethatthepublicbeprotectedfromunsafeanduselessdrugs.However,itisalsodesirablethatnewdrugdevelopmentshouldbestimu-lated,andthatnewdrugsshouldbemadeavailabletothosewhocanbenefitfromthemassoonaspossible.Asissooftenthecase,onegoodobjectiveconflictswithothergoodobjectives.Safetyandcautioninonedirectioncanmeandeathinanother.ThecrucialquestionsarewhetherFDAregulationhasbeeneffectiveinreconcilingtheseobjectivesandwhethertheremaynotbebetterwaysofdoingso.Thesequestionshavebeenstudiedingreatdetail.Bynow,considerableevidencehasaccumulatedthat 206FREETOCHOOSE:APersonalStatementindicatesthatFDAregulationiscounterproductive,thatithasdonemoreharmbyretardingprogressintheproductionanddis-tributionofvaluabledrugsthanithasdonegoodbypreventingthedistributionofharmfulorineffectivedrugs.Theeffectontherateofinnovationofnewdrugsisdramatic:thenumberof"newchemicalentities"introducedeachyearhasfallenbymorethan50percentsince1962.Equallyimportant,itnowtakesmuchlongerforanewdrugtobeapprovedand,partlyasaresult,thecostofdevelopinganewdrughasbeenmultipliedmanyfold.Accordingtooneestimateforthe1950sandearly1960s,itthencostabouthalfamilliondollarsandtookabouttwenty-fivemonthstodevelopanewdrugandbringittomarket.Allowingforinflationsincethenwouldraisethecosttoalittleover$1million.By1978,"it[was]costing$54millionandabouteightyearsofefforttobringadrugtomarket"ahundred-foldincreaseincostandquadruplingoftime,comparedwithadoublingofpricesingeneral."Asaresult,drugcompaniescannolongeraffordtodevelopnewdrugsintheUnitedStatesforpatientswithrarediseases.Increasingly,theymustrelyondrugswithhighvolumesales.TheUnitedStates,longaleaderinthedevelopmentofnewdrugs,israpidlytakingabackseat.AndwecannotevenbenefitfullyfromdevelopmentsabroadbecausetheFDAtypicallydoesnotacceptevidencefromabroadasproofofeffectiveness.Theultimateoutcomemaywellbethesameasinpassengerrailtraffic,thenationalizationofthedevelopmentofnewdrugs.Theso-called"druglag"thathasresultedismanifestedintherelativeavailabilityofdrugsintheUnitedStatesandothercoun-tries.AcarefulstudybyDr.WilliamWardelloftheCenterfortheStudyofDrugDevelopmentoftheUniversityofRochesterdemonstrates,forexample,thatmanymoredrugsareavailableinGreatBritainthatarenotavailableintheUnitedStatesthanconversely,andthatthoseavailableinbothcountrieswereontheaverageonthemarketsoonerinGreatBritain.SaidDr.Wardellin1978,Ifyouexaminethetherapeuticsignificanceofdrugsthathaven'tarrivedintheU.S.butareavailablesomewhereintherestofthe WhoProtectstheConsumer?207world,suchasinBritain,youcancomeacrossnumerousexampleswherethepatienthassuffered.Forexample,thereareoneortwodrugscalledBetablockers,whichitnowappearscanpreventdeathafteraheartattackwecallthissecondarypreventionofcoronarydeathaftermyocardialinfarctionwhich,ifavailablehere,couldbesavingabouttenthousandlivesayearintheUnitedStates.Inthetenyearsafterthe1962amendments,nodrugwasapprovedforhyper-tensionthat'sforthecontrolofbloodpressureintheUnitedStates,whereasseveralwereapprovedinBritain.Intheentirecardio-vasculararea,onlyonedrugwasapprovedinthefiveyearperiodfrom'67to'72.AndthiscanbecorrelatedwithknownorganizationalproblemsatF.D.A....Theimplicationsforthepatientarethattherapeuticdecisionsthatusedtobethepreserveofthedoctorandthepatientareincreasinglybeingmadeatanationallevel,bycommitteesofexperts,andthesecommitteesandtheagencyforwhichtheyareactingtheF.D.A.arehighlyskewedtowardsavoidingriskssothere'satendencyforustohavedrugsthataresaferbutnottohavedrugsthatareeffective.NowI'veheardsomeremarkablestatementsfromsomeofthesead-visorycommitteeswhereinconsideringdrugsonehasseenthestate-ment"therearenotenoughpatientswithadiseaseofthisseveritytowarrantmarketingthisdrugforgeneraluse."Nowthat'sfineifwhatyouaretryingtodoisminimizedrugtoxicityforthewholepopu-lation,butifyouhappentobeoneofthose"notenoughpatients,"andyouhaveadiseasethatisofhighseverityoradiseasethat'sveryrare,thenthat'sjusttoughluckforyou.Grantedallthis,maythesecostsnotbejustifiedbythead-vantageofkeepingdangerousdrugsoffthemarket,ofpreventingaseriesofthalidomidedisasters?Themostcarefulempiricalstudyofthisquestionthathasbeenmade,bySamPeltzman,concludesthattheevidenceisunambiguous:thattheharmdonehasgreatlyoutweighedthegood.Heexplainshisconclusionpartlybynotingthat"thepenaltiesimposedbythemarketplaceonsellersofineffectivedrugsbefore1962seemstohavebeensufficienttohave12leftlittleroomforimprovementbyaregulatoryagency."Afterall,themanufacturersofthalidomideendeduppayingmanytensofmillionsofdollarsindamagessurelyastrongincentivetoavoidanysimilarepisodes.Ofcourse,mistakeswillstillhappenthethalidomidetragedywasonebutsowilltheyundergovern-mentregulation.Theevidenceconfirmswhatgeneralreasoningstronglysug- 208FREETOCHOOSE:APersonalStatementgests.ItisnoaccidentthattheFDA,despitethebestofintentions,operatestodiscouragethedevelopmentandpreventthemarketingofnewandpotentiallyusefuldrugs.PutyourselfinthepositionofanFDAofficialchargedwithapprovingordisapprovinganewdrug.Youcanmaketwoverydifferentmistakes:1.Approveadrugthatturnsouttohaveunanticipatedsideeffectsresultinginthedeathorseriousimpairmentofasizablenumberofpersons.2.Refuseapprovalofadrugthatiscapableofsavingmanylivesorrelievinggreatdistressandthathasnountowardsideeffects.Ifyoumakethefirstmistakeapproveathalidomideyournamewillbespreadoverthefrontpageofeverynewspaper.Youwillbeindeepdisgrace.Ifyoumakethesecondmistake,whowillknowit?Thepharmaceuticalfirmpromotingthenewdrug,whichwillbedismissedasanexampleofgreedybusinessmenwithheartsofstone,andafewdisgruntledchemistsandphysi-ciansinvolvedindevelopingandtestingthenewproduct.Thepeoplewhoselivesmighthavebeensavedwillnotbearoundtoprotest.Theirfamilieswillhavenowayofknowingthattheir"lovedoneslosttheirlivesbecauseofthe"cautionofanunknownFDAofficial.InviewofthecontrastbetweentheabusepouredontheEuro-peandrugcompaniesthatsoldthalidomideandthefameandacclaimthatcametothewomanwhoheldupapprovalofthalid-omideintheUnitedStates(Dr.FrancesO.Kelsey,givenagoldmedalforDistinguishedGovernmentServicebyJohnF.Ken-nedy),isthereanydoubtwhichmistakeyouwillbemoreanxioustoavoid?Withthebestwillintheworld,youorI,ifwewereinthatposition,wouldbeledtorejectorpostponeapprovalofmanyagooddruginordertoavoidevenaremotepossibilityofapprovingadrugthatwillhavenewsworthysideeffects.Thisinevitablebiasisreinforcedbythereactionofthephar-maceuticalindustry.Thebiasleadstoundulystringentstandards.Gettingapprovalbecomesmoreexpensive,time-consuming,andrisky.Researchonnewdrugsbecomeslessprofitable.Eachcom-panyhaslesstofearfromtheresearcheffortsofitscompetitors. WhoProtectstheConsumer?209Existingfirmsandexistingdrugsareprotectedfromcompetition.Newentryisdiscouraged.Researchthatisdonewillbeconcen-tratedontheleastcontroversial,whichmeansleastinnovative,ofthenewpossibilities.WhenoneofussuggestedinaNewsweekcolumn(January8,1973)thatforthesereasonstheFDAshouldbeabolished,thecolumnevokedlettersfrompersonsinpharmaceuticalworkoffer-ingtalesofwoetoconfirmtheallegationthattheFDAwasfrus-tratingdrugdevelopment.Butmostalsosaidsomethinglike,"Incontrasttoyouropinion,IdonotbelievethattheFDAshouldbeabolishedbutIdobelievethatitspowershouldbe"changedinsuchandsuchaway.Asubsequentcolumn,entitled"BarkingCats"(February19,1973),replied:Whatwouldyouthinkofsomeonewhosaid,"Iwouldliketohaveacatprovideditbarked"?YetyourstatementthatyoufavoranFDAprovideditbehavesasyoubelievedesirableispreciselyequivalent.Thebiologicallawsthatspecifythecharacteristicsofcatsarenomorerigidthanthepoliticallawsthatspecifythebehaviorofgovernmentalagenciesoncetheyareestablished.ThewaytheFDAnowbehaves,andtheadverseconsequences,arenotanaccident,notaresultofsomeeasilycorrectedhumanmistake,butaconsequenceofitscon-stitutioninpreciselythesamewaythatameowisrelatedtotheconstitutionofacat.Asanaturalscientist,yourecognizethatyoucannotassigncharacteristicsatwilltochemicalandbiologicalenti-ties,cannotdemandthatcatsbarkorwaterburn.Whydoyousup-posethesituationisdifferentinthesocialsciences?Theerrorofsupposingthatthebehaviorofsocialorganismscanbeshapedatwilliswidespread.Itisthefundamentalerrorofmostso-calledreformers.Itexplainswhytheysooftenfeelthatthefaultliesintheman,notthe"system";thatthewaytosolveproblemsisto"turntherascalsout"andputwell-meaningpeopleincharge.Itexplainswhytheirreforms,whenostensiblyachieved,sooftengoastray.TheharmdonebytheFDAdoesnotresultfromdefectsinthepeopleinchargeunlessitbeadefecttobehuman.Manyhavebeenableanddevotedcivilservants.However,social,politi-cal,andeconomicpressuresdeterminethebehaviorofthepeoplesupposedlyinchargeofagovernmentagencytoafargreater 210FREETOCHOOSE:APersonalStatementextentthantheydetermineitsbehavior.Nodoubtthereareex-ceptions,buttheyarerarealmostasrareasbarkingcats.Thatdoesnotmeanthateffectivereformisimpossible.Butitrequirestakingaccountofthepoliticallawsgoverningthebe-haviorofgovernmentagencies,notsimplyberatingofficialsforinefficiencyandwasteorquestioningtheirmotivesandurgingthemtodobetter.TheFDAdidfarlessharmthanitdoesnowbeforetheKefauveramendmentsalteredthepressuresandin-centivesofthecivilservants.CONSUMERPRODUCTSSAFETYCOMMISSIONTheConsumerProductsSafetyCommissionexemplifiesthechangeinregulatoryactivityinthepastdecadeorso.Itcutsacrossindustries.Itsmainconcernisnotwithpriceorcostbutwithsafety.Ithaswidediscretionaryauthorityandoperatesunderonlythemostgeneralofmandates.ActivatedonMay14,1973,"[t]heCommissionisspecificallymandatedtoprotectthepublicagainstunreasonablerisksofin-juryfromconsumerproducts,toassistconsumersinevaluatingthesafetyoftheseproducts,todevelopstandardsforconsumerproducts,tominimizeconflictsofthesestandardsattheFederal,stateandlocallevel,andtopromoteresearchandinvestigationintothecausesandpreventionofproduct-relateddeaths,illnesses,"13andinjuries.Itsauthoritycovers"anyarticleorcomponentpartproducedordistributed(i)forsaletoaconsumer...or(ii)forthepersonaluse,consumptionorenjoymentofaconsumer"exceptfor"tobaccoandtobaccoproducts;motorvehiclesandmotorvehicleequipment;drugs;food;aircraftandaircraftcomponents;certainboats;andcertainotheritems"almostallcoveredbysuchotherregulatoryagenciesastheBureauofAlcohol,TobaccoandFirearms,theNationalHighwayTrafficSafetyAdministra-tion,theFDA,theFederalAviationAdministration,andthe14CoastGuard.AlthoughtheCPSCisinitsearlystages,itislikelytobecomeamajoragencythatwillhavefar-reachingeffectsontheprod-uctsandservicesweshallbeabletobuy.Ithasconductedtests WhoProtectstheConsumer?211andissuedstandardsonproductsvaryingfrombookmatchestobicycles,fromchildren'stoycapgunstotelevisionreceivers,fromrefusebinstominiatureChristmastreelights.Theobjectiveofsaferproductsisobviouslyagoodone,butatwhatcostandbywhatstandards?"Unreasonablerisk"ishardlyascientifictermcapableofobjectivespecification.Whatdecibellevelofnoisefromacapgunisan"unreasonablerisk"toachild's(oradult's)hearing?Thespectacleoftrained,highlypaid"experts"withearmuffsshootingcapgunsaspartoftheprocessoftryingtoanswerthatquestionishardlycalculatedtoinstillconfidenceinthetaxpayerthathismoneyisbeingspentsensibly.A"safer"bicyclemaybeslower,heavier,andcostlierthanaless"safe"bicycle.BywhatcriteriacantheCPSCbu-reaucrats,inissuingtheirstandards,decidehowmuchspeedtosacrifice,howmuchweighttoadd,howmuchextracosttoim-poseinordertoachievehowmuchextrasafety?Do"safer"standardsproducemoresafety?Ordotheyonlyencouragelessattentionandcarebytheuser?Mostbicycleandsimilaraccidentsare,afterall,causedbyhumancarelessnessorerror.Mostofthesequestionsdonotadmitofobjectiveanswersyettheymustbeansweredimplicitlyinthecourseofdevisingandissuingstandards.Theanswerswillreflectpartlythearbitraryjudgmentsofthecivilservantsinvolved,occasionallythejudg-mentofconsumersorconsumerorganizationsthathappentohaveaspecialinterestintheiteminquestion,butmostlytheinfluenceofthemakersoftheproducts.Inthemain,theyaretheonlyoneswhohavesufficientinterestandexpertisetocommentknowledgeablyonproposedstandards.Indeed,muchofthefor-mulationofstandardshassimplybeenturnedovertotradeasso-ciations.Youmaybesurethosestandardswillbeformulatedintheinterestofthemembersoftheassociation,withasharpeyetoprotectingthemselvesfromcompetition,bothfrompossiblenewproducersathomeandfromforeignproducers.Theresultwillbetostrengthenthecompetitivepositionofexistingdomesticmanufacturersandtomakeinnovationandthedevelopmentofnewandimprovedproductsmoreexpensiveanddifficult.Whenproductsenterthemarketplaceintheusualcourseofevents,thereisanopportunityforexperiment,fortrialanderror. 212FREETOCHOOSE:APersonalStatementNodoubt,shoddyproductsareproduced,mistakesaremade,un-suspecteddefectsturnup.Butmistakesusuallytendtobeonasmallscalethoughsomearemajor,asintherecentcaseoftheFirestone500radialtireandcanbecorrectedgradually.Con-sumerscanexperimentforthemselves,decidewhatfeaturestheylikeandwhatfeaturestheydonotlike.WhenthegovernmentstepsinthroughCPSC,thesituationisdifferent.Manydecisionsmustbemadebeforetheproducthasbeensubjectedtoextensivetrialanderrorinactualuse.Thestandardscannotbeadjustedtodifferentneedsandtastes.Theymustapplyuniformlytoall.Consumerswillinevitablybedeniedtheopportunitytoexperimentwitharangeofalternatives.Mis-takeswillstillbemade,andwhentheyare,theyarealmostsuretobemajor.TwoexamplesfromtheCPSCillustratetheproblem.InAugust1973,onlythreemonthsafterstartingoperation,it"bannedcertainbrandsofaerosolsprayadhesivesasanimmi-nenthazard.Itsdecisionwasbasedprimarilyonthepreliminaryfindingsofoneacademicresearcherwhoclaimedthattheycouldcausebirthdefects.Aftermorethoroughresearchfailedtocorro-boratetheinitialreport,thecommissionliftedthebaninMarch1974."18Thatpromptadmissionoferrorismostcommendableandmostunusualforagovernmentagency.Yetitdidnotpreventharm."Itseemsthatatleastninepregnantwomenwhohad'usedthesprayadhesivesreactedtothenewsofthecommissionsinitialdecisionbyundergoingabortions.Theydecidednottocarrythroughtheirpregnanciesforfearofproducingbabieswith1Bbirthdefects."AfarmoreseriousexampleistheepisodewithrespecttoTris.Thecommission,whenestablished,wasassignedresponsibilityforadministeringthe"FlammableFabricsAct,"datingbackto1953,whichwasintendedtoreducedeathandinjuriesfromtheaccidentalburningofproducts,fabrics,orrelatedmaterials.Astandardforchildren'ssleepwearthathadbeenissuedin1971bythepredecessoragencywasstrengthenedbytheCPSCinmid-1973.Atthetimethecheapestwaytomeetthisstandardwasbyimpregnatingtheclothwithaflame-retardantchemical WhoProtectstheConsumer?213Tris.Soon,somethinglike99percentofallchildren'ssleepwearproducedandsoldintheUnitedStateswasimpregnatedwithTris.LateritwasdiscoveredthatTriswasapotentcarcinogen.OnApril8,1977,thecommissionbanneditsuseinchildren'sapparelandprovidedforwithdrawalofTris-treatedgarmentsfromthemarketandtheirreturnbyconsumers.Needlesstosay,inits1977AnnualReportthecommissionmadeavirtueofthecorrectionofadangeroussituationthathadarisensolelyasaresultofitsownearlieractions,withoutac-knowledgingitsownroleinthedevelopmentoftheproblem.Theinitialrequirementsexposedmillionsofchildrentothedangerofdevelopingcancer.BoththeinitialrequirementsandthesubsequentbanningofTrisimposedheavycostsonthepro-ducersofchildren'ssleepwear,whichmeant,ultimately,ontheircustomers.Theyweretaxed,asitwere,comingandgoing.Thisexampleisinstructiveinshowingthedifferencebetweenacross-the-boardregulationandtheoperationofthemarket.Hadthemarketbeenallowedtooperate,somemanufacturersnodoubtwouldhaveusedTrisinordertotrytoenhancetheappealoftheirsleepwearbybeingabletoclaimflameresistance,butTriswouldhavebeenintroducedgradually.Therewouldhave'beentimefortheinformationaboutTrisscarcinogenicqualitiestohavebeendiscoveredandtoleadtoitswithdrawalbeforeitwasusedonamassivescale.ENVIRONMENTTheenvironmentalmovementisresponsibleforoneofthemostrapidlygrowingareasoffederalintervention.TheEnvironmentalProtectionAgency,establishedin1970"toprotectandenhancethephysicalenvironment,"hasbeengrantedincreasingpowerandauthority.Itsbudgethasmultipliedsevenfoldfrom1970to1978andisnowmorethanhalfabilliondollars.Ithasastaffof17about7,000.Ithasimposedcostsonindustryandlocalandstategovernmentstomeetitsstandardsthattotalinthetensofbillionsofdollarsayear.Somethingbetweenatenthandaquarteroftotalnetinvestmentinnewcapitalequipmentbybusinessnowgoesforantipollutionpurposes.Andthisdoesnot 214FREETOCHOOSE:APersonalStatementcountthecostsofrequirementsimposedbyotheragencies,suchasthosedesignedtocontrolemissionsofmotorvehicles,orthecostsofland-useplanningorwildernesspreservationorahostofotherfederal,state,andlocalgovernmentactivitiesundertakeninthenameofprotectingtheenvironment.Thepreservationoftheenvironmentandtheavoidanceofun-duepollutionarerealproblemsandtheyareproblemsconcerningwhichthegovernmenthasanimportantroletoplay.Whenallthecostsandbenefitsofanyaction,andthepeoplehurtorbenefited,arereadilyidentifiable,themarketprovidesanex-cellentmeansforassuringthatonlythoseactionsareunder-takenforwhichthebenefitsexceedthecostsforallparticipants.Butwhenthecostsandbenefitsorthepeopleaffectedcannotbeidentified,thereisamarketfailureofthekinddiscussedinChap-ter1asarisingfrom"third-party"orneighborhoodeffects.Totakeasimpleexample,ifsomeoneupstreamcontaminatesariver,heis,ineffect,exchangingbadwaterforgoodwaterwithpeopledownstream.Theremaywellbetermsonwhichthepeopledownstreamwouldbewillingtomaketheexchange.Theproblemisthatitisn'tfeasibletomakethattransactionthesubjectofavoluntaryexchange,toidentifyjustwhogotthebadwaterthataparticularpersonupstreamwasresponsiblefor,andtorequirethathispermissionbeobtained.Governmentisonemeansthroughwhichwecantrytocom-pensatefor"marketfailure,"trytouseourresourcesmoreeffec-tivelytoproducetheamountofcleanair,water,andlandthatwearewillingtopayfor.Unfortunately,theveryfactorsthatproducethemarketfailurealsomakeitdifficultforgovernmenttoachieveasatisfactorysolution.Generally,itisnoeasierforgovernmenttoidentifythespecificpersonswhoarehurtandbenefitedthanformarketparticipants,noeasierforgovernmenttoassesstheamountofharmorbenefittoeach.Attemptstousegovernmenttocorrectmarketfailurehaveoftensimplysubsti-tutedgovernmentfailureformarketfailure.Publicdiscussionoftheenvironmentalissueisfrequentlychar-acterizedmorebyemotionthanreason.Muchofitproceedsasiftheissueispollutionversusnopollution,asifitweredesirableandpossibletohaveaworldwithoutpollution.Thatisclearly WhoProtectstheConsumer?215nonsense.Noonewhocontemplatestheproblemseriouslywillregardzeropollutionaseitheradesirableorapossiblestateofaffairs.Wecouldhavezeropollutionfromautomobiles,forex-ample,bysimplyabolishingallautomobiles.Thatwouldalsomakethekindofagriculturalandindustrialproductivitywenowenjoyimpossible,andsocondemnmostofustoadrasticallylowerstandardofliving,perhapsmanyeventodeath.Onesourceofatmosphericpollutionisthecarbondioxidethatweallexhale.Wecouldstopthatverysimply.Butthecostwouldclearlyex-ceedthegain.Itcostssomethingtohavecleanair,justasitcostssomethingtohaveothergoodthingswewant.Ourresourcesarelimitedandwemustweighthegainsfromreducingpollutionagainstthecosts.Moreover,"pollution"isnotanobjectivephenomenon.Oneperson'spollutionmaybeanother'spleasure.Tosomeofusrockmusicisnoisepollution;toothersofusitispleasure.Therealproblemisnot"eliminatingpollution,"buttryingtoestablisharrangementsthatwillyieldthe"right"amountofpol-lution:anamountsuchthatthegainfromreducingpollutionabitmorejustbalancesthesacrificeoftheothergoodthingshouses,shoes,coats,andsoonthatwouldhavetobegivenupinordertoreducethepollution.Ifwegofartherthanthat,wesacrificemorethanwegain.Anotherobstacletorationalanalysisoftheenvironmentalissueisthetendencytoposeitintermsofgoodoreviltoproceedasifbad,maliciouspeoplearepouringpollutantsintotheatmo-sphereoutoftheblacknessoftheirhearts,thattheproblemisoneofmotives,thatifonlythoseofuswhoarenoblewouldriseinourwrathtosubduetheevilmen,allwouldbewell.Itisalwaysmucheasiertocallotherpeoplenamesthantoengageinhardintellectualanalysis.Inthecaseofpollution,thedevilblamedistypically"busi-ness,"theenterprisesthatproducegoodsandservices.Infact,thepeopleresponsibleforpollutionareconsumers,notproducers.Theycreate,asitwere,ademandforpollution.Peoplewhouseelectricityareresponsibleforthesmokethatcomesoutofthestacksofthegeneratingplants.Ifwewanttohavetheelectricitywithlesspollution,weshallhavetopay,directlyorindirectly,a 216FREETOCHOOSE:APersonalStatementhighenoughpricefortheelectricitytocovertheextracosts.Ultimately,thecostofgettingcleanerair,water,andalltherestmustbebornebytheconsumer.Thereisnooneelsetopayforit.Businessisonlyanintermediary,awayofcoordinatingtheac-tivitiesofpeopleasconsumersandproducers.Theproblemofcontrollingpollutionandprotectingtheen-vironmentisgreatlycomplicatedbythetendencyforthegainsandlossesderivedfromdoingsotofallondifferentpeople.Thepeople,forexample,whogainfromthegreateravailabilityofwildernessareas,orfromtheimprovementoftherecreationalqualityoflakesorrivers,orfromthecleanerairinthecities,aregenerallynotthesamepeopleasthosewhowouldlosefromtheresultinghighercostsoffoodorsteelorchemicals.Typically,wesuspect,thepeoplewhowouldbenefitmostfromthereductionofpollutionarebetteroff,financiallyandeducationally,thanthepeoplewhowouldbenefitmostfromthelowercostofthingsthatwouldresultfrompermittingmorepollution.Thelattermightprefercheaperelectricitytocleanerair.Director'sLawisnotabsentfromthepollutionarea.Thesameapproachhasgenerallybeenadoptedintheattempttocontrolpollutionasinregulatingrailroadsandtrucks,con-trollingfoodanddrugs,andpromotingthesafetyofproducts.Establishagovernmentregulatoryagencythathasdiscretionarypowertoissuerulesandordersspecifyingactionsthatprivateenterprisesorindividualsorstatesandlocalcommunitiesmusttake.Seektoenforcetheseregulationsbysanctionsimposedbytheagencyorbycourts.Thissystemprovidesnoeffectivemechanismtoassurethebal-ancingofcostsandbenefits.Byputtingthewholeissueintermsofenforceableorders,itcreatesasituationsuggestiveofcrimeandpunishment,notofbuyingandselling;ofrightandwrong,notofmoreorless.Moreover,ithasthesamedefectsasthiskindofregulationinotherareas.Thepersonsoragenciesregulatedhaveastronginterestinspendingresources,nottoachievethedesiredobjectives,buttogetfavorablerulings,toinfluencethebureaucrats.Andtheself-interestoftheregulatorsinitsturnbearsonlythemostdistantrelationtothebasicobjective.Asalwaysinthebureaucraticprocess,diffusedandwidelyspread WhoProtectstheConsumer?217interestsgetshortshrift;theconcentratedintereststakeover.Inthepastthesehavegenerallybeenthebusinessenterprises,andparticularlythelargeandimportantones.Morerecentlytheyhavebeenjoinedbytheself-styled,highlyorganized"publicinterest"groupsthatprofesstospeakforaconstituencythatmaybeutterlyunawareoftheirexistence.Mosteconomistsagreethatafarbetterwaytocontrolpollutionthanthepresentmethodofspecificregulationandsupervisionistointroducemarketdisciplinebyimposingeffluentcharges.Forexample,insteadofrequiringfirmstoerectspecifickindsofwastedisposalplantsortoachieveaspecifiedlevelofwaterqualityinwaterdischargedintoalakeorriver,imposeataxofaspecifiedamountperunitofeffluentdischarged.Thatway,thefirmwouldhaveanincentivetousethecheapestwaytokeepdowntheeffluent.Equallyimportant,thatwaytherewouldbeobjectiveevidenceofthecostsofreducingpollution.Ifasmalltaxledtoalargereduction,thatwouldbeaclearindicationthatthereislittletogainfrompermittingthedischarge.Ontheotherhand,ifevenahightaxleftmuchdischarge,thatwouldindicatethereverse,butalsowouldprovidesubstantialsumstocompen-satethelosersorundothedamage.Thetaxrateitselfcouldbevariedasexperienceyieldedinformationoncostsandgains.Likeregulations,aneffluentchargeautomaticallyputsthecostontheusersoftheproductsresponsibleforthepollution.Thoseproductsforwhichitisexpensivetoreducepollutionwouldgoupinpricecomparedtothoseforwhichitischeap,justasnowthoseproductsonwhichregulationsimposeheavycostsgoupinpricerelativetoothers.Theoutputoftheformerwouldgodown,ofthelatterup.Thedifferencebetweentheeffluentchargeandtheregulationsisthattheeffluentchargewouldcontrolpol-lutionmoreeffectivelyatlowercost,andimposefewerburdensonnonpollutingactivities.InanexcellentarticleA.MyrickFreemanIIIandRobertH.Havemanwrite,"Itisnotentirelyfacetioustosuggestthatthereasonaneconomic-incentiveapproachhasnotbeentriedinthiscountryisthatitwouldwork."Astheysay,"Establishmentofapollution-chargesysteminconjunctionwithenvironmentalqualitystandardswouldresolve 218FREETOCHOOSE:APersonalStatementmostofthepoliticalconflictovertheenvironment.Anditwoulddosoinahighlyvisibleway,sothatthosewhowouldbehurtbysuchapolicycouldseewhatwashappening.Itistheopen-nessandexplicitnessofsuchchoicesthatpolicymakersseekto18avoid."Thisisaverybrieftreatmentofanextremelyimportantandfar-reachingproblem.Butperhapsitissufficienttosuggestthatthedifficultiesthathaveplaguedgovernmentregulationinareaswheregovernmenthasnoplacewhatsoeverasinfixingpricesandallocatingroutesintrucking,railtravel,andairtravelalsoariseinareaswheregovernmenthasaroletoplay.Perhapsalsoitmayleadtoasecondlookattheperformanceofmarketmechanismsinareaswheretheyadmittedlyoperateimperfectly.Theimperfectmarketmay,afterall,doaswellorbetterthantheimperfectgovernment.Inpollution,suchalookwouldbringmanysurprises.Ifwelooknotatrhetoricbutatreality,theairisingeneralfarcleanerandthewatersafertodaythanonehundredyearsago.Theairiscleanerandthewatersaferintheadvancedcountriesoftheworldtodaythaninthebackwardcountries.Industrial-izationhasraisednewproblems,butithasalsoprovidedthemeanstosolvepriorproblems.Thedevelopmentoftheauto-mobiledidaddtooneformofpollutionbutitlargelyendedafarlessattractiveform.DEPARTMENTOFENERGYTheembargooftheUnitedStatesinstitutedbytheOPECcartelin1973usheredinaseriesofenergycrisesandoccasionallonglinesatgasolinestationsthathaveplagueduseversince.Govern-menthasreactedbyestablishingonebureaucraticorganizationafteranothertocontrolandregulateenergyproductionanduse,terminatingintheestablishmentofaDepartmentofEnergyin1977.Governmentofficials,newspaperreports,andTVcommenta-torsregularlyattributetheenergycrisistoarapaciousoilindus-try,orwastefulconsumers,orbadweather,orArabsheikhs.Butnoneoftheseisresponsible.Afterall,theoilindustryhasbeenaroundforalongtime WhoProtectstheConsumer?219andhasalwaysbeenrapacious.Consumershavenotsuddenlybecomewasteful.Wehavehadhardwintersbefore.Arabsheikhshavedesiredwealthasfarbackashumanmemoryruns.Thesubtleandsophisticatedpeoplewhofillthenewspapercolumnsandtheairwaveswithsuchsillyexplanationsseemnevertohaveaskedthemselvestheobviousquestion:whyisitthatforacenturyandmorebefore1971,therewerenoenergycrises,nogasolineshortages,noproblemsaboutfueloilexceptduringWorldWarII?Therehasbeenanenergycrisisbecausegovernmentcreatedone.Ofcourse,governmenthasnotdonesodeliberately.Presi-dentsNixon,Ford,orCarterneversentamessagetoCongressaskingittolegislateanenergycrisisandlonggasolinelines.ButhewhosaysAmustsayB.EversincePresidentNixonfrozewagesandpricesonAugust15,1971,thegovernmenthasim-posedmaximumpricesoncrudeoil,gasolineatretail,andotherpetroleumproducts.Unfortunately,thequadruplingofcrudeoilpricesbytheOPECcartelin1973preventedthosemaximumpricesfrombeingabolishedwhenallotherswere.Maximumle-galpricesforpetroleumproductsthatisthekeyelementcom-monbothtoWorldWarIIandtheperiodsince1971.Economistsmaynotknowmuch.Butweknowonethingverywell:howtoproducesurplusesandshortages.Doyouwantasurplus?Havethegovernmentlegislateaminimumpricethatisabovethepricethatwouldotherwiseprevail.Thatiswhatwehavedoneatonetimeoranothertoproducesurplusesofwheat,ofsugar,ofbutter,ofmanyothercommodities.Doyouwantashortage?Havethegovernmentlegislateamaximumpricethatisbelowthepricethatwouldotherwisepre-vail.ThatiswhatNewYorkCityand,morerecently,othercitieshavedoneforrentaldwellings,andthatiswhytheyallsufferorwillsoonsufferfromhousingshortages.ThatiswhythereweresomanyshortagesduringWorldWarII.Thatiswhythereisanenergycrisisandagasolineshortage.Thereisonesimplewaytoendtheenergycrisisandgasolineshortagestomorrowandwemeantomorrowandnotsixmonthsfromnow,notsixyearsfromnow.Eliminateallcontrolsonthepricesofcrudeoilandotherpetroleumproducts.Othermisguidedpoliciesofgovernmentandthemonopolistic 220FREETOCHOOSE:APersonalStatementbehavioroftheOPECcartelmightkeeppetroleumproductsex-pensive,buttheywouldnotproducethedisorganization,chaos,andconfusionthatwenowconfront.Perhapssurprisingly,thissolutionwouldreducethecostofgasolinetotheconsumerthetruecost.Pricesatthepumpmightgoupafewcentsagallon,butthecostofgasolineincludesthetimeandgasolinewastedstandinginlineandhuntingforagasstationwithgas,plustheannualbudgetoftheDepartmentofEnergy,whichamountedto$10.8billionin1979,ortoaround9centspergallonofgasoline.Whyhasthissimpleandfoolproofsolutionnotbeenadopted?Sofaraswecansee,fortwobasicreasonsonegeneral,theotherspecific.Tothedespairofeveryeconomist,itseemsalmostimpossibleformostpeopleotherthantrainedeconomiststocomprehendhowapricesystemworks.ReportersandTVcom-mentatorsseemespeciallyresistanttotheelementaryprinciplestheysupposedlyimbibedinfreshmaneconomics.Second,remov-ingpricecontrolswouldrevealthattheemperorisnakeditwouldshowhowuseless,indeedharmful,aretheactivitiesofthe20,000employeesoftheDepartmentofEnergy.ItmightevenoccurtosomeonehowmuchbetteroffwewerebeforewehadaDepartmentofEnergy.ButwhatabouttheclaimbyPresidentCarterthatthegovern-mentmustinstituteamassiveprogramtoproducesyntheticfuelsorelsethenationwillrunoutofenergyby1990?That,too,isamyth.Agovernmentprogramseemsthesolutiononlybecausegovernmenthasbeenblockingateveryturntheeffectivefreemarketsolution.WepayOPECnationsaround$20abarrelforoilunderlong-termcontractsandevenmoreonthespotmarket(themarketforimmediatedelivery),butthegovernmentforcesdomesticproducerstoselloilforaslittleas$5.94abarrel.Governmenttaxesthedomesticproductionofoiltosubsidizeoilimportedfromabroad.WepaymorethantwiceasmuchforimportedliquefiednaturalgasfromAlgeriaasthegovernmentpermitsdo-mesticproducersofnaturalgastocharge.Governmentimposesstringentenvironmentalrequirementsonbothusersandpro-ducersofenergywithlittleornoregardtotheeconomiccosts WhoProtectstheConsumer?221involved.Complicatedrulesandredtapeaddgreatlytothetimerequiredtobuildpowerplantswhethernuclear,oil,orcoal,andtobringintoproductionourabundantsupplyofcoalandmultiplythecost.Thesecounterproductivegovernmentpolicieshavestifleddomesticproductionofenergyandhavemadeusmoredependentthaneveronforeignoildespite,asPresidentCarterputit,"thedangerofdependingonathinlineofoiltankersstretchinghalfwayaroundtheworld."Inmid-1979,PresidentCarterproposedamassivegovernmentprogramstretchingoveradecadeandcosting$88billiontopro-ducesyntheticfuel.Doesitreallymakesensetocommitthetax-payerstospending,directlyorindirectly,$40ormoreforabarrelofoilfromshalewhileprohibitingtheownersofdomesticwellsfromreceivingmorethan$5.94forsomecategoriesofoil?Or,asEdwardJ.MitchellputitinaWallStreetJournalarticle(August27,1979),"Wemaywellquestion...howspending$88billiontoobtainamodestamountof$40perbarrelsyn-theticoilin1990`protects'usfrom$20perbarrelOPECoileithertodayorin1990."Fuelfromshale,tarsands,andsoon,makessenseifandonlyifthatwaytoproduceenergyischeaperthanalternativesac-countbeingtakenofallcosts.Themosteffectivemechanismtodeterminewhetheritischeaperisthemarket.Ifitischeaper,itwillbeintheself-interestofprivateenterprisestoexploitthesealternativesprovidedtheyreapthebenefitsandbearthecost.Privateenterprisescancountonreapingthebenefitsonlyiftheyareconfidentthatfuturepriceswillnotbecontrolled.Other-wise,theyareaskedtoengageinaheads-you-win,tails-I-losegamble.Thatisthepresentsituation.Ifthepricerises,controlsand"windfalltaxes"loom;ifthepricefalls,theyholdthebag.ThatprospectemasculatesthefreemarketandmakesPresidentCarter'ssocialistpolicytheonlyalternative.Privateenterpriseswillbearallthecostonlyiftheyarere-quiredtopayforenvironmentaldamage.Thewaytodothatistoimposeeffluentchargesnottohaveonegovernmentagencyimposearbitrarystandardsandthensetupanothertocutthroughthefirst'sredtape.Thethreatofpricecontrolandregulationistheonlyimportant 222FREETOCHOOSE:APersonalStatementobstacletothedevelopmentofalternativefuelsbyprivateenter-prise.Itisarguedthattherisksaretoogreatandthecapitalcoststooheavy.Thatissimplywrong.Risktakingistheessenceofprivateenterprise.Risksarenoteliminatedbyimposingthemonthetaxpayerinsteadofonthecapitalist.AndtheAlaskapipelineshowsthatprivatemarketscanraisemassivesumsforpromisingprojects.Thecapitalresourcesofthenationarenotincreasedbyusingthetaxcollectorratherthanthestockmarkettomobilizethem.Thebottomlineisthatcomewhatmay,wethepeopleshallpayfortheenergyweconsume.Andweshallpayfarlessintotal,andhavefarmoreenergy,ifwepaydirectlyandareleftfreetochooseforourselveshowtouseenergythanifwepayin-directlythroughtaxesandinflationandaretoldbygovernmentbureaucratshowtouseenergy.THEMARKETPerfectionisnotofthisworld.Therewillalwaysbeshoddyprod-ucts,quacks,conartists.Butonthewhole,marketcompetition,whenitispermittedtowork,protectstheconsumerbetterthandothealternativegovernmentmechanismsthathavebeenin-creasinglysuperimposedonthemarket.AsAdamSmithsaidinthequotationwithwhichwebeganthischapter,competitiondoesnotprotecttheconsumerbecausebusinessmenaremoresoft-heartedthanthebureaucratsorbe-causetheyaremorealtruisticorgenerous,orevenbecausetheyaremorecompetent,butonlybecauseitisintheself-interestofthebusinessmantoservetheconsumer.Ifonestorekeeperoffersyougoodsoflowerqualityorofhigherpricethananother,you'renotgoingtocontinuetopatron-izehisstore.Ifhebuysgoodstosellthatdon'tserveyourneeds,you'renotgoingtobuythem.Themerchantsthereforesearchoutallovertheworldtheproductsthatmightmeetyourneedsandmightappealtoyou.Andtheystandbackofthembecauseiftheydon't,they'regoingtogooutofbusiness.Whenyouenterastore,nooneforcesyoutobuy.Youarefreetodosoorgoelsewhere.Thatisthebasicdifferencebetweenthemarketanda WhoProtectstheConsumer?223politicalagency.Youarefreetochoose.Thereisnopolicemantotakethemoneyoutofyourpockettopayforsomethingyoudonotwantortomakeyoudosomethingyoudonotwanttodo.But,theadvocateofgovernmentregulationwillsay,supposetheFDAweren'tthere,whatwouldpreventbusinessfromdis-tributingadulteratedordangerousproducts?ItwouldbeaveryexpensivethingtodoastheexamplesofElixirSulfanilamideandthalidomideandnumerouslesspublicizedincidentsindicate.Itisverypoorbusinesspracticenotawaytodevelopaloyalandfaithfulclientele.Ofcourse,mistakesandaccidentsoccurbutastheTriscaseillustrates,governmentregulationdoesn'tpreventthem.Thedifferenceisthataprivatefirmthatmakesaseriousblundermaygooutofbusiness.Agovernmentagencyislikelytogetabiggerbudget.Caseswillarisewhereadverseeffectsdevelopthatcouldnothavebeenforeseenbutgovernmenthasnobettermeansofpre-dictingsuchdevelopmentsthanprivateenterprise.Theonlywaytopreventallsuchdevelopmentswouldbetostopprogress,whichwouldalsoeliminatethepossibilityofunforeseenfavorabledevelopments.But,theadvocateofgovernmentregulationwillsay,withouttheConsumerProductsSafetyCommission,howcanthecon-sumerjudgethequalityofcomplexproducts?Themarket'sansweristhathedoesnothavetobeabletojudgeforhimself.Hehasotherbasesforchoosing.Oneistheuseofamiddleman.Thechiefeconomicfunctionofadepartmentstore,forexample,istomonitorqualityonourbehalf.Noneofusisanexpertonalloftheitemswebuy,eventhemosttrivial,likeshirts,ties,orshoes.Ifwebuyanitemthatturnsouttobedefective,wearemorelikelytoreturnittotheretailerfromwhomweboughtitthantothemanufacturer.Theretailerisinafarbetterpositiontojudgequalitythanweare.Sears,RoebuckandMontgomeryWard,likedepartmentstores,areeffectiveconsumertestingandcertifyingagenciesaswellasdistributors.Anothermarketdeviceisthebrandname.Itisintheself-interestofGeneralElectricorGeneralMotorsorWestinghouseorRolls-Roycetogetareputationforproducingdependable,reliableproducts.Thatisthesourceoftheir"goodwill,"which 224FREETOCHOOSE:APersonalStatementmaywellcontributemoretotheirvalueasafirmthanthefac-toriesandplantstheyown.Stillanotherdeviceistheprivatetestingorganization.Suchtestinglaboratoriesarecommoninindustryandserveanex-tremelyimportantroleincertifyingthequalityofavastarrayofproducts.FortheconsumerthereareprivateorganizationslikeConsumers'Research,startedin1928,andstillinbusinessre-portingevaluationsofawiderangeofconsumerproductsinitsmonthlyConsumers'Researchmagazine;andConsumersUnion,foundedin1935,whichpublishesConsumerReports.BothConsumers'ResearchandConsumersUnionhavebeenhighlysuccessfulenoughsotomaintainsizablestaffsofengi-neersandothertrainedtestingandclericalpersonnel.Yetafternearlyhalfacentury,theyhavebeenabletoattractatmost1or2percentofthepotentialclientele.ConsumersUnion,thelargerofthetwo,hasabout2millionmembers.Theirexistenceisamarketresponsetoconsumerdemand.Theirsmallsizeandthefailureofothersuchagenciestospringupdemonstratesthatonlyasmallminorityofconsumersdemandandarewillingtopayforsuchaservice.Itmustbethatmostconsumersaregettingtheguidancetheywantandarewillingtopayforinsomeotherway.Whatabouttheclaimthatconsumerscanbeledbythenosebyadvertising?Ouransweristhattheycan'tasnumerousex-pensiveadvertisingfiascostestify.OneofthegreatestdudsofalltimewastheEdselautomobile,introducedbyFordMotorCom-panyandpromotedbyamajoradvertisingcampaign.Morebasically,advertisingisacostofdoingbusiness,andthebusiness-manwantstogetthemostforhismoney.Isitnotmoresensibletotrytoappealtotherealwantsordesiresofconsumersthantotrytomanufactureartificialwantsordesires?Surelyitwillgen-erallybecheapertosellthemsomethingthatmeetswantstheyalreadyhavethantocreateanartificialwant.Afavoriteexamplehasbeentheallegedlyartificiallycreateddesireforautomobilemodelchanges.YetFordwasunabletomakeasuccessoftheEdseldespiteanenormouslyexpensivead-vertisingcampaign.TherealwayshavebeencarsavailablethatdidnotmakefrequentmodelchangestheSuperbaintheUnitedStates(thepassengercounterpartoftheCheckercab),andmany WhoProtectstheConsumer?225foreigncars.Theywereneverabletoattractmorethanasmallfractionofthetotalcustom.Ifthatwaswhatconsumersreallywanted,thecompaniesthatofferedthatoptionwouldhaveprospered,andtheotherswouldhavefollowedsuit.Therealobjectionofmostcriticsofadvertisingisnotthatadvertisingmanipulatestastesbutthatthepublicatlargehasmeretricioustastesthatis,tastesthatdonotagreewiththecritics'.Inanyevent,youcannotbeatsomethingwithnothing.Onemustalwayscomparealternatives:therealwiththereal.Ifbusinessadvertisingismisleading,isnoadvertising,orgovern-mentcontrolofadvertising,preferable?Atleastwithprivatebusinessthereiscompetition.Oneadvertisercandisputeanother.Thatismoredifficultwithgovernment.Government,too,en-gagesinadvertising.Ithasthousandsofpublicrelationsagentstopresentitsproductinthemostfavorablelight.Thatadvertisingisoftenmoremisleadingthananythingputoutbyprivateenter-prises.ConsideronlytheadvertisingtheTreasuryusestosellitssavingsbonds:"UnitedStatesSavingsBonds...Whatagreatwaytosave!"astheslogangoesonaslipproducedbytheU.S.TreasuryDepartmentanddistributedbybankstotheircus-tomers.Yetanyonewhohasboughtgovernmentsavingsbondsoverthepastdecadeandmorehasbeentakentothecleaners.Theamounthereceivedonmaturitywouldbuylessingoodsandservicesthantheamounthepaidforthebond,andhehashadtopaytaxesonthemislabeled"interest."Andallthisbecauseofinflationproducedbythegovernmentthatsoldhimthebonds!YettheTreasurycontinuestoadvertisethebondsas"buildingpersonalsecurity,"asa"giftthatkeepsongrowing,"toquotefurtherfromthesameslip.Whataboutthedangerofmonopolythatledtotheantitrustlaws?Thatisarealdanger.ThemosteffectivewaytocounteritisnotthroughabiggerantitrustdivisionattheDepartmentofJusticeoralargerbudgetfortheFederalTradeCommission,butthroughremovingexistingbarrierstointernationaltrade.Thatwouldpermitcompetitionfromallovertheworldtobeevenmoreeffectivethanitisnowinunderminingmonopolyathome.FreddieLakerofBritainneedednohelpfromtheDepart-mentofJusticetocracktheairlinecartel.JapaneseandGerman 226FREETOCHOOSE:APersonalStatementautomobilemanufacturersforcedAmericanmanufacturerstoin-troducesmallercars.Thegreatdangertotheconsumerismonopolywhetherpri-vateorgovernmental.Hismosteffectiveprotectionisfreecom-petitionathomeandfreetradethroughouttheworld.Theconsumerisprotectedfrombeingexploitedbyonesellerbytheexistenceofanothersellerfromwhomhecanbuyandwhoiseagertoselltohim.AlternativesourcesofsupplyprotecttheconsumerfarmoreeffectivelythanalltheRalphNadersoftheworld.CONCLUSION"Thereignoftearsisover.Theslumswillbeonlyamemory.Wewillturnourprisonsintofactoriesandourjailsintostorehousesandcorncribs.Menwillwalkuprightnow,womenwillsmile,andthechildrenwilllaugh.Hellwillbeforeverforrent."19ThatishowBillySunday,notedevangelistandleadingcru-saderagainstDemonRum,greetedtheonsetofProhibitionin1920,enactedinaburstofmoralrighteousnessattheendoftheFirstWorldWar.Thatepisodeisastarkreminderofwherethepresentburstofmoralrighteousness,thepresentdrivetoprotectusfromourselves,canlead.Prohibitionwasimposedforourowngood.Alcoholisadangeroussubstance.MorelivesarelosteachyearfromalcoholthanfromallthedangeroussubstancestheFDAcontrolsputtogether.ButwheredidProhibitionlead?Newprisonsandjailshadtobebuilttohousethecriminalsspawnedbyconvertingthedrinkingofspiritsintoacrimeagainstthestate.AlCapone,BugsMoranbecamenotoriousfortheirexploitsmurder,extortion,hijacking,bootlegging.Whoweretheircustomers?Whoboughttheliquortheypurveyedillegally?Respectablecitizenswhowouldneverthemselveshaveapprovedof,orengagedin,theactivitiesthatAlCaponeandhisfellowgangstersmadeinfamous.Theysimplywantedadrink.Inordertohaveadrink,theyhadtobreakthelaw.Prohibitiondidn'tstopdrinking.Itdidconvertalotofotherwiselaw-obedientcitizensintolawbreakers.Itdidconferanauraofglamourand WhoProtectstheConsumer?227excitementtodrinkingthatattractedmanyyoungpersons.Itdidsuppressmanyofthedisciplinaryforcesofthemarketthatordi-narilyprotecttheconsumerfromshoddy,adulterated,anddanger-ousproducts.Itdidcorrupttheminionsofthelawandcreateadecadentmoralclimate.Itdidnotstoptheconsumptionofalcohol.Weareasyetalongwayfromthattoday,withtheprohibitionofcyclamates,DDT,andlaetrile.Butthatisthedirectioninwhichweareheaded.SomethingofagraymarketalreadyexistsindrugsthatareprohibitedbytheFDA;citizensalreadygotoCanadaorMexicotobuydrugstheycannotlegallybuyintheUnitedStatesjustaspeopledidduringProhibitiontogetalegaldrink.Manyaconscientiousphysicianfeelshimselfinadilemma,caughtbetweenwhatheregardsasthewelfareofhispatientandstrictobediencetothelaw.Ifwecontinueonthispath,thereisnodoubtwhereitwillend.Ifthegovernmenthastheresponsibilityofprotectingusfromdangeroussubstances,thelogicsurelycallsforprohibitingalcoholandtobacco.Ifitisappropriateforthegovernmenttoprotectusfromusingdangerousbicyclesandcapguns,thelogiccallsforprohibitingstillmoredangerousactivitiessuchashang-gliding,motorcycling,andskiing.Eventhepeoplewhoadministertheregulatoryagenciesareappalledatthisprospectandwithdrawfromit.Asfortherestofus,thereactionofthepublictothemoreextremeattemptstocontrolourbehaviortotherequirementofaninterlocksystemonautomobilesortheproposedbanofsaccharinisampleevi-dencethatwewantnopartofit.Insofarasthegovernmenthasinformationnotgenerallyavailableaboutthemeritsordemeritsoftheitemsweingestortheactivitiesweengagein,letitgiveustheinformation.Butletitleaveusfreetochoosewhatchanceswewanttotakewithourownlives. CHAPTER8WhoProtectstheWorker?OverthepasttwocenturiestheconditionoftheordinaryworkerintheUnitedStatesandothereconomicallyadvancedsocietieshasimprovedenormously.Hardlyanyworkertodayengagesinthekindofbackbreakinglaborthatwascommonacenturyorsoagoandthatisstillcommonovermostoftheglobe.Workingconditionsarebetter;hoursofworkareshorter;vacationsandotherfringebenefitsaretakenforgranted.Earningsarefarhigher,enablingtheordinaryfamilytoachievealeveloflivingthatonlytheaffluentfewcouldearlierenjoy.IfGallupweretoconductapollasking:"Whataccountsfortheimprovementinthelotoftheworker?"themostpopularanswerwouldverylikelybe"laborunions,"andthenext,"gov-ernment"thoughperhaps"noone"or"don'tknow"or"noopinion"wouldbeatboth.YetthehistoryoftheUnitedStatesandotherWesterncountriesoverthepasttwocenturiesdemon-stratesthattheseanswersarewrong.Duringmostoftheperiod,unionswereoflittleimportanceintheUnitedStates.Aslateas1900,only3percentofallworkersweremembersofunions.Eventodayfewerthanoneworkerinfourisamemberofaunion.Unionswereclearlynotamajorrea-sonfortheimprovementinthelotoftheworkerintheUnitedStates.Similarly,untiltheNewDeal,regulationofandinterventionineconomicarrangementsbygovernment,andespeciallycen-tralgovernment,wereminimal.Governmentplayedanessentialrolebyprovidingaframeworkforafreemarket.Butdirectgov-ernmentactionwasclearlynotthereasonfortheimprovementinthelotoftheworker.Asto"noone"accountingfortheimprovement,theverylotoftheworkertodaybeliesthatanswer.228 WhoProtectstheWorker?229LABORUNIONSOneofthemostegregiousmisusesoflanguageistheuseof"labor"asifitweresynonymouswith"laborunions"asinreportsthat"laboropposes"suchandsuchaproposedlaworthatthelegislativeprogramof"labor"issuchandsuch.Thatisadoubleerror.Inthefirstplace,morethanthreeoutoffourwork-ersintheUnitedStatesarenotmembersoflaborunions.EveninGreatBritain,wherelaborunionshavelongbeenfarstrongerthanintheUnitedStates,mostworkersarenotmembersoflaborunions.Inthesecondplace,itisanerrortoidentifytheinterestsofa"laborunion"withtheinterestsofitsmembers.Thereisaconnection,andacloseconnection,formostunionsmostofthetime.However,thereareenoughcasesofunionofficialsactingtobenefitthemselvesattheexpenseoftheirmembers,bothinlegalwaysandbymisuseandmisappropriationofunionfunds,towarnagainsttheautomaticequatingoftheinterestsof"laborunions"withtheinterestsof"laborunionmembers,"letalonewiththeinterestsoflaborasawhole.Thismisuseoflanguageisbothacauseandaneffectofagen-eraltendencytooverestimatetheinfluenceandroleoflaborunions.Unionactionsarevisibleandnewsworthy.Theyoftengeneratefront-pageheadlinesandfull-scalecoverageonthenightlyTVprograms."Thehigglingandbargainingofthemar-ket"asAdamSmithtermeditwherebythewagesofmostworkersintheUnitedStatesaredeterminedisfarlessvisible,drawslessattention,anditsimportanceisasaresultgreatlyun-derestimated.Themisuseoflanguagecontributesalsotothebeliefthatlaborunionsareaproductofmodernindustrialdevelopment.Theyarenothingofthekind.Onthecontrary,theyareathrowbacktoapreindustrialperiod,totheguildsthatwerethecharacteristicformoforganizationofbothmerchantsandcraftsmeninthecitiesandcity-statesthatgrewoutofthefeudalperiod.Indeed,themodernlaborunioncanbetracedbackevenfurther,nearly2,500yearstoanagreementreachedamongmedicalmeninGreece. 230FREETOCHOOSE:APersonalStatementHippocrates,universallyregardedasthefatherofmodernmedicine,wasbornaround460B.C.ontheislandofCos,oneoftheGreekislandsonlyafewmilesawayfromthecoastofAsiaMinor.Atthetimeitwasathrivingisland,andalreadyamedicalcenter.AfterstudyingmedicineonCos,Hippocratestraveledwidely,developingagreatreputationasaphysician,particularlyforhisabilitytoendplaguesandepidemics.Afteratimehere-turnedtoCos,whereheestablished,ortookchargeof,amedicalschoolandhealingcenter.Hetaughtallwhowishedtolearnsolongastheypaidthefees.Hiscenterbecamefamousthrough-outtheGreekworld,attractingstudents,patients,andphysiciansfromfarandwide.WhenHippocratesdiedattheageof104,orsolegendhasit,Coswasfullofmedicalpeople,hisstudentsanddisciples.Com-petitionforpatientswasfierceand,notsurprisingly,aconcertedmovementapparentlydevelopedtodosomethingaboutitinmodernterminology,to"rationalize"thedisciplineinordertoeliminate"unfaircompetition."Accordingly,sometwentyyearsorsoafterHippocratesdiedagain,aslegendhasitthemedicalpeoplegottogetherandconstructedacodeofconduct.TheynamedittheHippocraticOathaftertheiroldteacherandmaster.Thereafter,ontheislandofCosandincreasinglythroughouttherestoftheworld,everynewlytrainedphysician,beforehecouldstartpractice,wasre-quiredtosubscribetothatoath.ThatcustomcontinuestodayaspartofthegraduationceremonyofmostmedicalschoolsintheUnitedStates.Likemostprofessionalcodes,businesstradeagreements,andlaborunioncontracts,theHippocraticOathwasfulloffineidealsforprotectingthepatient:"Iwillusemypowertohelpthesicktothebestofmyabilityandjudgment....WheneverIgointoahouse,Iwillgotohelpthesickandneverwiththeintentionofdoingharmorinjury...."andsoon.Butitalsocontainsafewsleepers.Considerthisone:"Iwillhandonprecepts,lecturesandallotherlearningtomysons,tothoseofmyteachersandtothosepupilsdulyapprenticedandsworn,andtononeothers."Todaywewouldcallthatthepreludetoaclosedshop. WhoProtectstheWorker?231Orlistentothisonereferringtopatientssufferingfromtheagonizingdiseaseofkidneyorbladderstones:"Iwillnotcut,evenforthestone,butIwillleavesuchprocedurestothepracti-1tionersofthatcraft,"anicemarket-sharingagreementbetweenphysiciansandsurgeons.Hippocrates,weconjecture,mustturninhisgravewhenanewclassofmedicalmentakesthatoath.Heissupposedtohavetaughteveryonewhodemonstratedtheinterestandpaidhistui-tion.Hewouldpresumablyhaveobjectedstronglytothekindofrestrictivepracticesthatphysiciansallovertheworldhaveadoptedfromthattimetothisinordertoprotectthemselvesagainstcompetition.TheAmericanMedicalAssociationisseldomregardedasalaborunion.Anditismuchmorethantheordinarylaborunion.Itrendersimportantservicestoitsmembersandtothemedicalprofessionasawhole.However,itisalsoalaborunion,andinourjudgmenthasbeenoneofthemostsuccessfulunionsinthecountry.Fordecadesitkeptdownthenumberofphysicians,keptupthecostsofmedicalcare,andpreventedcompetitionwith"dulyapprenticedandsworn"physiciansbypeoplefromoutsidetheprofessionall,ofcourse,inthenameofhelpingthepatient.Atthispointinthisbook,ithardlyneedsrepeatingthattheleadersofmedicinehavebeensincereintheirbeliefthatrestrict-ingentryintomedicinewouldhelpthepatient.Bythistimewearefamiliarwiththecapacitythatallofushavetobelievethatwhatisinourinterestisinthesocialinterest.Asgovernmenthascometoplayalargerroleinmedicine,andtofinancealargershareofmedicalcosts,thepoweroftheAmeri-canMedicalAssociationhasdeclined.Anothermonopolisticgroup,governmentbureaucrats,hasbeenreplacingit.Webelievethatthisresulthasbeenbroughtonpartlybytheactionsoforganizedmedicineitself.Thesedevelopmentsinmedicineareimportantandmayhavefar-reachingimplicationsforthekindandcostofhealthcarethatwillbeavailabletousinthefuture.However,thischapterisaboutlabor,notmedicine,soweshallreferonlytothoseaspectsofmedicaleconomicsthatillustrateprinciplesapplicabletoalllaborunionactivity.Weshallputtoonesideotherimportant, 232FREETOCHOOSE:APersonalStatementandfascinating,questionsaboutcurrentdevelopmentsintheorganizationofhealthcare.WhoBenefits?PhysiciansareamongthemosthighlypaidworkersintheUnitedStates.Thatstatusisnotexceptionalforpersonswhohavebenefitedfromlaborunions.Despitetheimageoftenconveyedthatlaborunionsprotectlow-paidworkersagainstexploitationbyemployers,therealityisverydifferent.Theunionsthathavebeenmostsuccessfulinvariablycoverworkerswhoareinoccupa-tionsthatrequireskillandwouldberelativelyhighlypaidwithorwithoutunions.Theseunionssimplymakehighpaystillhigher.Forexample,airlinepilotsintheUnitedStatesreceivedanannualsalary,forathree-dayweek,thataveraged$50,000ayearin1976andhasrisenconsiderablysince.InastudyentitledTheAirlinePilots,GeorgeHopkinswrites,"Today'sincrediblyhighpilotsalariesresultlessfromtheresponsibilitypilotsbearorthetechnicalskilltheypossessthanfromtheprotectedpositionthey2haveachievedthroughaunion."TheoldesttraditionalunionsintheUnitedStatesarethecraftunionscarpenters,plumbers,plasterers,andthelikeagainworkerswhoarehighlyskilledandhighlypaid.Morerecently,thefastestgrowingunionsandindeedalmosttheonlyonesthathavegrownatallareunionsofgovernmentworkers,includingschoolteachers,policemen,sanitationworkers,andeveryothervarietyofgovernmentemployee.ThemunicipalunionsinNewYorkCityhavedemonstratedtheirstrengthbyhelpingtobringthatcitytothevergeofbankruptcy.SchoolteachersandmunicipalemployeesillustrateageneralprinciplethatisclearlyexemplifiedinGreatBritain.Theirunionsdonotdealdirectlywiththetaxpayerswhopaytheirmembers'salaries.Theydealwithgovernmentofficials.Theloosertheconnectionbetweentaxpayersandtheofficialstheunionsdealwith,thegreaterthetendencyforofficialsandtheunionstogangupattheexpenseofthetaxpayeranotherex-ampleofwhathappenswhensomepeoplespendotherpeople's WhoProtectstheWorker?233moneyonstillotherpeople.ThatiswhymunicipalunionsarestrongerinlargecitiessuchasNewYorkthaninsmallcities,whyunionsofschoolteachershavebecomemorepowerfulascontrolovertheconductofschoolsandovereducationalexpenditureshasbecomemorecentralized,furtherremovedfromthelocalcommunity.InGreatBritainthegovernmenthasnationalizedmanymoreindustriesthanintheUnitedStatesincludingcoalmining,publicutilities,telephones,hospitals.AndlaborunionsinBritainhavegenerallybeenstrongest,andlaborproblemsmostserious,inthenationalizedindustries.ThesameprincipleisreflectedinthestrengthoftheU.S.postalunions.Giventhatmembersofstrongunionsarehighlypaid,theobviousquestionis:aretheyhighlypaidbecausetheirunionsarestrong,oraretheirunionsstrongbecausetheyarehighlypaid?Defendersoftheunionsclaimthatthehighpayoftheirmembersisatributetothestrengthofunionorganization,andthatifonlyallworkersweremembersofunions,allworkerswouldbehighlypaid.Thesituationis,however,muchmorecomplex.Unionsofhighlyskilledworkershaveunquestionablybeenabletoraisethewagesoftheirmembers;however,peoplewhowouldinanyeventbehighlypaidareinafavorablepositiontoformstrongunions.Moreover,theabilityofunionstoraisethewagesofsomeworkersdoesnotmeanthatuniversalunionismcouldraisethewagesofallworkers.Onthecontrary,andthisisafunda-mentalsourceofmisunderstanding,thegainsthatstrongunionswinfortheirmembersareprimarilyattheexpenseofotherworkers.Thekeytounderstandingthesituationisthemostelementaryprincipleofeconomics:thelawofdemandthehigherthepriceofanything,thelessofitpeoplewillbewillingtobuy.Makelaborofanykindmoreexpensiveandthenumberofjobsofthatkindwillbefewer.Makecarpentersmoreexpensive,andfewerhousesthanotherwisewillbebuilt,andthosehousesthatarebuiltwilltendtousematerialsandmethodsrequiringlesscarpentry.Raisethewageofairlinepilots,andairtravelwillbecomemoreexpensive.Fewerpeoplewillfly,andtherewillbefewerjobsfor 234FREETOCHOOSE:APersonalStatementairlinepilots.Alternatively,reducethenumberofcarpentersorpilots,andtheywillcommandhigherwages.Keepdownthenum-berofphysicians,andtheywillbeabletochargehigherfees.Asuccessfulunionreducesthenumberofjobsavailableofthekinditcontrols.Asaresult,somepeoplewhowouldliketogetsuchjobsattheunionwagecannotdoso.Theyareforcedtolookelsewhere.Agreatersupplyofworkersforotherjobsdrivesdownthewagespaidforthosejobs.Universalunionizationwouldnotalterthesituation.Itcouldmeanhigherwagesforthepersonswhogetjobs,alongwithmoreunemploymentforothers.Morelikely,itwouldmeanstrongunionsandweakunions,withmem-bersofthestrongunionsgettinghigherwages,astheydonow,attheexpenseofmembersofweakunions.Unionleadersalwaystalkaboutgettinghigherwagesattheexpenseofprofits.Thatisimpossible:profitssimplyaren'tbigenough.About80percentofthetotalnationalincomeoftheUnitedStatescurrentlygoestopaythewages,salaries,andfringebenefitsofworkers.Morethanhalfoftherestgoestopayrentandinterestonloans.Corporateprofitswhichiswhatunionleadersalwayspointtototallessthan10percentofnationalincome.Andthatisbeforetaxes.Aftertaxes,corporateprofitsaresomethinglike6percentofthenationalincome.Thathardlyprovidesmuchleewaytofinancehigherwages,evenifallprofitswereabsorbed.Andthatwouldkillthegoosethatlaysthegoldeneggs.Thesmallmarginofprofitprovidestheincentiveforinvestmentinfactoriesandmachines,andfordevel-opingnewproductsandmethods.Thisinvestment,theseinno-vations,have,overtheyears,raisedtheproductivityoftheworkerandprovidedthewherewithalforhigherandhigherwages.Higherwagestoonegroupofworkersmustcomeprimarilyfromotherworkers.Nearlythirtyyearsagooneofusestimatedthatontheaverageabout10to15percentoftheworkersinthiscountryhadbeenablethroughunionsortheirequivalent,suchastheAmericanMedicalAssociation,toraisetheirwages10to15percentabovewhattheyotherwisewouldhavebeen,atthecostofreducingthewagesearnedbytheother85to90percentbysome4percentbelowwhattheyotherwisewouldhavebeen. WhoProtectstheWorker?235Morerecentstudiesindicatethatthisremainsroughlytheorderofmagnitudeoftheeffectofunions.'Higherwagesforhigh-paidworkers,lowerwagesforlow-paidworkers.Allofus,includingthehighlyunionized,haveindirectlybeenharmedasconsumersbytheeffectofhighunionwagesonthepricesofconsumergoods.Housesareunnecessarilyexpensiveforeveryone,includingthecarpenters.Workershavebeenpre-ventedbyunionsfromusingtheirskillstoproducethemosthighlyvalueditems;theyhavebeenforcedtoresorttoactivitieswheretheirproductivityisless.Thetotalbasketofgoodsavail-abletoallofusissmallerthanitwouldhavebeen.TheSourceofUnionPowerHowcanunionsraisethewagesoftheirmembers?Whatisthebasicsourceoftheirpower?Theansweris:theabilitytokeepdownthenumberofjobsavailable,orequivalently,tokeepdownthenumberofpersonsavailableforaclassofjobs.Unionshavebeenabletokeepdownthenumberofjobsbyenforcingahighwagerate,generallywithassistancefromgovernment.Theyhavebeenabletokeepdownthenumberofpersonsavailable,pri-marilythroughlicensure,againwithgovernmentaid.Theyhaveoccasionallygainedpowerbycolludingwithemployerstoenforceamonopolyoftheproducttheirmembershelptoproduce.Enforcingahighwagerate.If,somehoworother,aunioncanassurethatnocontractorwillpaylessthan,say,$15anhourforaplumberoracarpenter,thatwillreducethenumberofjobsthatwillbeoffered.Ofcourse,itwillalsoincreasethenumberofpersonswhowouldliketogetjobs.Supposeforthemomentthatthehighwageratecanbeen-forced.Theremustthenbesomewaytorationthelimitednum-beroflucrativejobsamongthepersonsseekingthem.Numerousdeviceshavebeenadopted:nepotismtokeepthejobsinthefamily;seniorityandapprenticeshiprules;featherbeddingtospreadtheworkaround;andsimplecorruption.Thestakesarehigh,sothedevicesusedareasensitivematterinunionaffairs.Someunionswillnotpermitseniorityprovisionstobediscussedinopenmeetingsbecausethatalwaysleadstofistfights.Kick- 236FREETOCHOOSE:APersonalStatementbackstounionofficialstosecurepreferenceforjobsareacom-monformofcorruption.Theheavilycriticizedracialdiscrimina-tionbyunionsisstillanotherdeviceforrationingjobs.Ifthereisasurplusofapplicantsforalimitednumberofjobstoberationed,anydevicetoselecttheoneswhogetthejobsisboundtobearbitrary.Appealstoprejudiceandsimilarirrationalcon-siderationsoftenhavegreatsupportamongthe"ins"asawayofdecidingwhomtokeepout.Racialandreligiousdiscrimina-tionhaveenteredalsointoadmissionstomedicalschoolsandforthesamereason:asurplusofacceptableapplicantsandtheneedtorationplacesamongthem.Toreturntothewagerate,howcanaunionenforceahighwagerate?Onewayisviolenceorthethreatofviolence:threat-eningtodestroythepropertyofemployers,ortobeatthemupiftheyemploynonunionworkersoriftheypayunionmemberslessthantheunion-specifiedrate;ortobeatupworkers,ordestroytheirproperty,iftheyagreetoworkforalowerwage.Thatisthereasonunionwagearrangementsandnegotiationshavesooftenbeenaccompaniedbyviolence.Aneasierwayistogetthegovernmenttohelp.ThatisthereasonunionheadquartersareclusteredaroundCapitolHillinWashington,whytheydevotesomuchmoneyandattentiontopolitics.Inhisstudyoftheairlinepilots'union,Hopkinsnotesthat"theunionsecuredenoughfederalprotectivelegislationtomake4theprofessionalairlinepilotspracticallyawardofthestate."AmajorformofgovernmentassistancetoconstructionunionsistheDavis-BaconAct,afederallawthatrequiresallcontractorswhoworkonacontractinexcessof$2,000towhichtheU.S.governmentortheDistrictofColumbiaisapartytopaywageratesnolessthanthose"prevailingforthecorrespondingclassesoflaborersandmechanics"intheneighborhoodinquestion,as"determinedbytheSecretaryofLabor."Inpracticethe"pre-vailing"rateshavebeenruledtobeunionwageratesin"anoverwhelmingproportionofwagedeterminations...regard-5lessofareaortypeofconstruction."Thereachoftheacthasbeenextendedbytheincorporationofitsprevailingwagerequire-mentinnumerousotherlawsforfederallyassistedprojects,andbysimilarlawsinthirty-fivestates(asof1971)coveringstate WhoProtectstheWorker?237constructionexpenditures.'Theeffectoftheseactsisthatthegovernmentenforcesunionwageratesformuchofconstructionactivity.Eventheuseofviolenceimplicitlyinvolvesgovernmentsup-port.Agenerallyfavorablepublicattitudetowardlaborunionshasledtheauthoritiestotoleratebehaviorinthecourseoflabordisputesthattheywouldnevertolerateunderothercircum-stances.Ifsomeone'scargetsoverturnedinthecourseofalabordispute,orifplant,store,orhomewindowsgetsmashed,orifpeopleevengetbeatenupandseriouslyinjured,theperpetratorsarelesslikelytopayafine,letalonegotojail,thanifthesameincidentoccurredunderothercircumstances.Anothersetofgovernmentmeasuresenforcingwageratesareminimumwagelaws.Theselawsaredefendedasawaytohelplow-incomepeople.Infact,theyhurtlow-incomepeople.ThesourceofpressureforthemisdemonstratedbythepeoplewhotestifybeforeCongressinfavorofahigherminimumwage.Theyarenotrepresentativesofthepoorpeople.Theyaremostlyrepresentativesoforganizedlabor,oftheAFL-CIOandotherlabororganizations.Nomemberoftheirunionsworksforawageanywhereclosetothelegalminimum.Despitealltherhetoricabouthelpingthepoor,theyfavoraneverhighermini-mumwageasawaytoprotectthemembersoftheirunionsfromcompetition.Theminimumwagelawrequiresemployerstodiscriminateagainstpersonswithlowskills.Noonedescribesitthatway,butthatisinfactwhatitis.Takeapoorlyeducatedteenagerwithlittleskillwhoseservicesareworth,say,only$2.00anhour.Heorshemightbeeagertoworkforthatwageinordertoacquiregreaterskillsthatwouldpermitabetterjob.Thelawsaysthatsuchapersonmaybehiredonlyiftheemployeriswillingtopayhimorher(in1979)$2.90anhour.Unlessanemployeriswill-ingtoadd90centsincharitytothe$2.00thattheperson'sservicesareworth,theteenagerwillnotbeemployed.Ithasal-waysbeenamysterytouswhyayoungpersonisbetteroffunem-ployedfromajobthatwouldpay$2.90anhourthanemployedatajobthatdoespay$2.00anhour.Thehighrateofunemploymentamongteenagers,andespe- 238FREETOCHOOSE:APersonalStatementciallyblackteenagers,isbothascandalandaserioussourceofsocialunrest.Yetitislargelyaresultofminimumwagelaws.AttheendofWorldWarIItheminimumwagewas40centsanhour.Wartimeinflationhadmadethatsolowinrealtermsastobeunimportant.Theminimumwagewasthenraisedsharplyto75centsin1950,to$1.00in1956.Intheearlyfiftiestheunem-ploymentrateforteenagersaveraged10percentcomparedwithabout4percentforallworkersmoderatelyhigher,asonewouldexpectforagroupjustenteringthelaborforce.Theunemploy-mentratesforwhiteandblackteenagerswereroughlyequal.Afterminimumwagerateswereraisedsharply,theunemploy-mentrateshotupforbothwhiteandblackteenagers.Evenmoresignificant,anunemploymentgapopenedbetweentheratesforwhiteandblackteenagers.Currently,theunemploymentraterunsaround15to20percentforwhiteteenagers;35to45per-centforblackteenagers.'Weregardtheminimumwagerateasoneofthemost,ifnotthemost,antiblacklawsonthestatutebooks.Thegovernmentfirstprovidesschoolsinwhichmanyyoungpeople,disproportionatelyblack,areeducatedsopoorlythattheydonothavetheskillsthatwouldenablethemtogetgoodwages.Itthenpenalizesthemasecondtimebypreventingthemfromofferingtoworkforlowwagesasameansofinduc-ingemployerstogivethemon-the-jobtraining.Allthisisinthenameofhelpingthepoor.Restrictingnumbers.Analternativetoenforcingawagerateistorestrictdirectlythenumberwhomaypursueanoccupation.Thattechniqueisparticularlyattractivewhentherearemanyemployerssothatenforcingawagerateisdifficult.Medicineisanexcellentexample,sincemuchoftheactivityoforganizedmedicinehasbeendirectedtowardrestrictingthenumberofphy-siciansinpractice.Successinrestrictingnumbers,asinenforcingawagerate,generallyrequirestheassistanceofthegovernment.Inmedicinethekeyhasbeenthelicensureofphysiciansthatis,therequire-mentthatinorderforanyindividualto"practicemedicine,"hemustbelicensedbythestate.Needlesstosay,onlyphysiciansarelikelytoberegardedascompetenttojudgethequalificationsofpotentialphysicians,solicensingboardsinthevariousstates WhoProtectstheWorker?239(intheUnitedStateslicensureisunderthejurisdictionofthestate,notthefederalgovernment)aretypicallycomposedwhollyofphysiciansordominatedbyphysicians,whointurnhavegen-erallybeenmembersoftheAMA.Theboards,orthestatelegislatures,havespecifiedconditionsforthegrantingoflicensesthatineffectgivetheAMAthepowertoinfluencethenumberofpersonsadmittedtopractice.Theyhaverequiredlengthytraining,almostalwaysgraduationfroman"approved"school,generallyinternshipinan"approved"hos-pital.Bynoaccident,thelistof"approved"schoolsandhospitalsisgenerallyidenticalwiththelistissuedbytheCouncilonMedicalEducationandHospitalsoftheAmericanMedicalAsso-ciation.Noschoolcanbeestablishedor,ifestablished,longcon-tinueunlessitcangettheapprovaloftheAMACouncilonMedi-calEducation.Thathasattimesrequiredlimitingthenumberofpersonsadmittedinaccordancewiththecouncil'sadvice.Strikingevidenceofthepoweroforganizedmedicinetorestrictentrywasprovidedduringthedepressionofthe1930swhentheeconomicpressurewasparticularlygreat.DespiteafloodofhighlytrainedrefugeesfromGermanyandAustriaatthetimecentersofadvancedmedicinethenumberofforeign-trainedphysiciansadmittedtopracticeintheUnitedStatesinthefiveyearsafterHitlercametopowerwasnolargerthaninthepre-cedingfiveyears.'Licensureiswidelyusedtorestrictentry,particularlyforoccu-pationslikemedicinethathavemanyindividualpractitionersdealingwithalargenumberofindividualcustomers.Asinmedi-cine,theboardsthatadministerthelicensureprovisionsarecom-posedprimarilyofmembersoftheoccupationlicensedwhethertheybedentists,lawyers,cosmetologists,airlinepilots,plumbers,ormorticians.Thereisnooccupationsoremotethatanattempthasnotbeenmadetorestrictitspracticebylicensure.AccordingtothechairmanoftheFederalTradeCommission:"Atarecentsessionofonestatelegislature,occupationalgroupsadvancedbillstolicensethemselvesasauctioneers,well-diggers,homeim-provementcontractors,petgroomers,electrologists,sexthera-pists,dataprocessors,appraisers,andTVrepairers.Hawaiilicensestattooartists.NewHampshirelicenseslightning-rodsales- 240FREETOCHOOSE:APersonalStatementmen."'Thejustificationofferedisalwaysthesame:toprotecttheconsumer.However,thereasonisdemonstratedbyobservingwholobbiesatthestatelegislaturefortheimpositionorstrength-eningoflicensure.Thelobbyistsareinvariablyrepresentativesoftheoccupationinquestionratherthanofthecustomers.Trueenough,plumberspresumablyknowbetterthananyoneelsewhattheircustomersneedtobeprotectedagainst.However,itishardtoregardaltruisticconcernfortheircustomersastheprimarymotivebehindtheirdeterminedeffortstogetlegalpowertode-cidewhomaybeaplumber.Toreinforcetherestrictiononnumbers,organizedoccupa-tionalgroupspersistentlystrivetohavethepracticeoftheiroccupationlegallydefinedasbroadlyaspossibleinordertoin-creasethedemandfortheservicesoflicensedpractitioners.Oneeffectofrestrictingentryintooccupationsthroughlicen-sureistocreatenewdisciplines:inmedicine,osteopathyandchiropracticareexamples.Eachofthese,inturn,hasresortedtolicensuretotrytorestrictitsnumbers.TheAMAhasengagedinextensivelitigationchargingchiropractorsandosteopathswiththeunlicensedpracticeofmedicine,inanattempttorestrictthemtoasnarrowanareaaspossible.Chiropractorsandosteopathsinturnchargeotherpractitionerswiththeunlicensedpracticeofchiropracticandosteopathy.Arecentdevelopmentinhealthcare,arisingpartlyoutofnew,sophisticatedportableequipment,hasbeenthedevelopmentofservicesinvariouscommunitiestobringpromptaidinemergen-cies.Theseservicesaresometimesorganizedbythecityoracityagency,sometimesbyastrictlyprivateenterprise,andaremannedprimarilybyparamedicsratherthanlicensedphysicians.JoeDolphin,theownerofonesuchprivateenterpriseorgani-zationattachedtoafiredepartmentinsouthernCalifornia,de-scribeditseffectivenessasfollows:InonedistrictofCaliforniathatweserve,whichisacountywhichispopulatedtotheextentoffivehundredandeightythousandpeople,beforetheintroductionofparamedics,lessthanonepercentofthepatientsthatsufferedacardiacarrestwheretheirheartstoppedlivedthroughtheirhospitalstayandwerereleasedfromthehospital.Withtheintroductionofparamedics,justinthefirstsixmonthsofopera- WhoProtectstheWorker?241tion,twenty-threepercentofthepeoplewhoseheartstopsaresuc-cessfullyresurrectedandarereleasedfromthehospitalandgobacktoproductiveworkinsociety.Wethinkthat'sprettyamazing.Wethinkthefactsspeakforthem-selves.However,relatingthattothemedicalcommunityissometimesverydifficult.Theyhaveideasoftheirown.Moregenerally,jurisdictionaldisputeswhatactivitiesarereservedtowhatoccupationareamongthemostfrequentsourcesoflaborstoppages.Anamusingexamplewasareporterforaradiostationwhocametointerviewoneofus.Heempha-sizedthattheinterviewhadtobeshortenoughtofitononesideofthecassetteinhiscassetterecorder.Turningoverthecassettewasreservedtoamemberoftheelectricians'union.If,hesaid,heturneditoverhimself,thecassettewouldbeerasedwhenhereturnedtothestation,andtheinterviewlost.Exactlythesamebehaviorasthemedicalprofession'soppositiontoparamedics,andmotivatedbythesameobjective:toincreasethedemandfortheservicesofaparticulargroup.Collusionbetweenunionsandemployers.Unionshavesome-timesgainedpowerbyhelpingbusinessenterprisescombinetofixpricesorsharemarkets,activitiesthatareillegalforbusinessundertheantitrustlaws.Themostimportanthistoricalcasewasincoalmininginthe1930s.ThetwoGuffeycoalactswereattemptstoprovidelegalsupportforaprice-fixingcartelofcoalmineoperators.When,inthemid-thirties,thefirstoftheactswasdeclaredunconstitutional,JohnL.LewisandtheUnitedMineWorkersthatheheadedsteppedintothebreach.Bycallingstrikesorworkstoppageswhenevertheamountofcoalabovethegroundgotsolargeastothreatentoforcedownprices,Lewiscontrolledoutputandthere-bypriceswiththeunspokencooperationoftheindustry.Asthevice-presidentofacoalcompanyputitin1938,"They[theUnitedMineWorkers]havedonealottostabilizethebitumi-nouscoalindustryandhaveendeavoredtohaveitoperateonaprofitablebasis,infactthoughonedislikestoadmitittheiref-fortsalongthatlinehaveinthemain...beenabitmoreefficacious...thantheendeavorsofcoaloperatorsthem-selves."10 242FREETOCHOOSE:APersonalStatementThegainsweredividedbetweentheoperatorsandtheminers.Theminersweregrantedhighwagerates,whichofcoursemeantgreatermechanizationandfewerminersemployed.Lewisrecog-nizedthiseffectexplicitlyandwasmorethanpreparedtoacceptitregardinghigherwagesforminersemployedasamplecom-pensationforareductioninthenumberemployed,providedthoseemployedwereallmembersofhisunion.Theminers'unioncouldplaythisrolebecauseunionsareexemptfromtheShermanAnti-TrustAct.Unionsthathavetakenadvantageofthisexemptionarebetterinterpretedasenterprisessellingtheservicesofcartelizinganindustrythanaslabororgani-zations.TheTeamsters'Unionisperhapsthemostnotable.Thereisastory,perhapsapocryphal,aboutDavidBeck,theheadoftheTeamsters'UnionbeforeJamesHoffa(bothofwhomultimatelywenttojail).WhenBeckwasnegotiatingwithbrew-eriesinthestateofWashingtonaboutwagesfordriversofbrewerytrucks,hewastoldthatthewageshewasaskingwerenotfeasiblebecause"easternbeer"wouldundercutlocalbeer.Heaskedwhatthepriceofeasternbeerwouldhavetobetoper-mitthewagehedemanded.Afigure,Xdollarsacase,wasnamed,andhesupposedlyreplied,"Fromnowon,easternbeerwillbeXdollarsacase."Laborunionscanandoftendoprovideusefulservicesfortheirmembersnegotiatingthetermsoftheiremployment,rep-resentingthemwithrespecttogrievances,givingthemafeelingofbelongingandparticipatinginagroupactivity,amongothers.Asbelieversinfreedom,wefavorthefullestopportunityforvoluntaryorganizationoflaborunionstoperformwhateverservicestheirmemberswish,andarewillingtopayfor,pro-videdtheyrespecttherightsofothersandrefrainfromusingforce.However,unionsandcomparablegroupssuchastheprofes-sionalassociationshavenotreliedonstrictlyvoluntaryactivitiesandmembershipwithrespecttotheirmajorproclaimedobjec-tiveimprovingthewagesoftheirmembers.Theyhavesuc-ceededingettinggovernmenttograntthemspecialprivilegesandimmunities,whichhaveenabledthemtobenefitsomeoftheirmembersandofficialsattheexpenseofotherworkersandall WhoProtectstheWorker?243consumers.Inthemain,thepersonsbenefitedhavehaddecidedlyhigherincomesthanthepersonsharmed.GOVERNMENTInadditiontoprotectingunionmembers,governmenthasadoptedahostoflawsintendedtoprotectworkersingeneral:lawsthatprovideforworkmen'scompensation,prohibitchildlabor,setminimumwagesandmaximumhoursoflabor,establishcom-missionstoassurefairemploymentpractices,promoteaffirmativeaction,establishthefederalOfficeofSafetyandHealthAdminis-trationtoregulateemploymentpractices,andotherstoonumer-oustolist.Somemeasureshavehadafavorableeffectonconditionsofwork.Most,likeworkmen'scompensationandchildlaborlaws,simplyembodiedinlawpracticesthathadalreadybecomecom-monintheprivatemarket,perhapsextendingthemsomewhattofringeareas.Others,youwillnotbesurprisedtolearn,havebeenamixedblessing.Theyhaveprovidedasourceofpowerforparticularunionsoremployers,andasourceofjobsforbureau-crats,whilereducingtheopportunitiesandincomesoftheordi-naryworker.OSHAisaprimeexampleabureaucraticnight-marethathasproducedanoutpouringofcomplaintsonallsides.Asarecentjokehasit:HowmanyAmericansdoesittaketoscrewinalightbulb?Answer:Five;onetoscrewinthebulb,fourtofillouttheenvironmentalimpactandOSHAreports.Governmentdoesprotectoneclassofworkersverywell,namely,thoseemployedbygovernment.MontgomeryCounty,Maryland,ahalf-hour'sdrivefromWashington,D.C.,isthehomeofmanyseniorcivilservants.ItalsohasthehighestaveragefamilyincomeofanycountyintheUnitedStates.OneoutofeveryfouremployedpersonsinMont-gomeryCountyworksforthefederalgovernment.Theyhavejobsecurityandsalarieslinkedtothecostofliving.Atretire-menttheyreceivecivilservicepensionsalsolinkedtothecostoflivingandindependentofSocialSecurity.ManymanagetoqualifyforSocialSecurityaswell,becomingwhatareknownasdoubledippers. 244FREETOCHOOSE:APersonalStatementMany,perhapsmost,oftheirneighborsinMontgomeryCountyalsohavesomeconnectionwiththefederalgovernmentascon-gressmen,lobbyists,topexecutivesofcorporationswithgovern-mentcontracts.LikeotherbedroomcommunitiesaroundWash-ington,MontgomeryCountyhasbeengrowingrapidly.Govern-menthasbecomeahighlydependablegrowthindustryinrecentdecades.Allcivilservants,evenatlowlevels,arewellprotectedbythegovernment.Accordingtomoststudies,theirsalariesaveragehigherthancomparableprivatesalariesandareprotectedagainstinflation.Theygetgenerousfringebenefitsandhaveanalmostincredibledegreeofjobsecurity.AsaWallStreetJournalstoryputit:Asthe[CivilService]regulationshaveballoonedtofill21volumessomefivefeetthick,governmentmanagershavefounditincreasinglydifficulttofireemployees.Atthesametime,promotionsandmeritpayraiseshavebecomealmostautomatic.Theresultisabureaucracynearlydevoidofincentivesandlargelybeyondanyone'scontrol....Oftheonemillionpeopleeligiblelastyearformeritraises,only600didn'treceivethem.Almostnooneisfired;lessthan1%offed-1eralworkerslosttheirjobslastyear.)Tociteonespecificcase,inJanuary1975atypistintheEn-vironmentalProtectionAgencywassoconsistentlylateforworkthathersupervisordemandedshebefired.Ittooknineteenmonthstodoitandittakesatwenty-one-foot-longsheettolistthestepsthathadtobegonethroughtosatisfyalltherulesandallthemanagementandunionagreements.Theprocessinvolvedtheemployee'ssupervisor,thesuper-visor'sdeputydirectoranddirector,thedirectorofpersonneloperations,theagency'sbranchchief,anemployeerelationsspecialist,asecondemployeerelationsspecialist,aspecialofficeofinvestigations,andthedirectoroftheofficeofinvestigations.Needlesstosay,thisveritabletelephonedirectoryofofficialswaspaidforwithtaxpayers'money.Atstateandlocallevelsthesituationvariesfromplacetoplace.InmanystatesandinlargecitiessuchasNewYork,Chicago,andSanFrancisco,thesituationiseitherthesameasormoreextremethaninthefederalgovernment.NewYorkCity WhoProtectstheWorker?245wasbroughttoitspresentstateofvirtualbankruptcylargelybyrapidincreasesinthewagesofmunicipalemployeesand,perhapsevenmore,bythegrantingofgenerouspensionsatearlyretire-mentages.Instateswithbigcities,representativesofpublicem-ployeesareoftenthemajorspecialinterestgroupinthestatelegislature.NOONETwoclassesofworkersarenotprotectedbyanyone:workerswhohaveonlyonepossibleemployer,andworkerswhohavenopos-sibleemployer.Theindividualswhoeffectivelyhaveonlyonepossibleem-ployertendtobehighlypaidpeoplewhoseskillsaresorareandvaluablethatonlyoneemployerisbigenoughorwellenoughsituatedtotakefulladvantageofthem.Thestandardtextbookexamplewhenwestudiedeconomicsinthe1930swasthegreatbaseballheroBabeRuth.The"SultanofSwat,"asthehomerunkingwasnicknamed,wasbyfarthemostpopularbaseballplayerofhistime.Hecouldfillanystadiumineitherofthemajorleagues.TheNewYorkYankeeshappenedtohavethelargeststadiumofanybaseballclub,soitcouldaffordtopayhimmorethananyotherclub.Asaresult,theYankeeswereeffectivelyhisonlypossibleemployer.Thatdoesn'tmean,ofcourse,thatBabeRuthdidn'tsucceedincom-mandingahighsalary,butitdidmeanthathehadnoonetoprotecthim;hehadtobargainwiththeYankees,usingthethreatofnotplayingforthemashisonlyweapon.Individualswhohavenochoiceamongemployersaremostlythevictimsofgovernmentmeasures.Oneclasshasalreadybeenmentioned:thosewhoarerenderedunemployedbylegalmini-mumwages.Asnotedearlier,manyofthemaredoublevictimsofgovernmentmeasures:poorschoolingplushighminimumwagesthatpreventthemfromgettingon-the-jobtraining.Personsonrelieforpublicassistanceareinasomewhatsimilarposition.Itistotheiradvantagetotakeemploymentonlyiftheycanearnenoughtomakeupforthelossoftheirwelfareorotherpublicassistance.Theremaybenoemployertowhomtheirser- 246FREETOCHOOSE:APersonalStatementvicesareworththatmuch.ThatistruealsoofpersonsonSocialSecurityandlessthanseventy-twoyearsold.TheylosetheirSocialSecuritybenefitsiftheyearnmorethanamodestamount.Thatisthemajorreasonwhythefractionofpersonsoversixty-fiveyearsoldwhoareinthelaborforcehasdecreasedsosharplyinrecentdecades:formales,from45percentin1950to20per-centin1977.OTHEREMPLOYERSThemostreliableandeffectiveprotectionformostworkersisprovidedbytheexistenceofmanyemployers.Aswehaveseen,apersonwhohasonlyonepossibleemployerhaslittleornoprotection.Theemployerswhoprotectaworkerarethosewhowouldliketohirehim.Theirdemandforhisservicesmakesitintheself-interestofhisownemployertopayhimthefullvalueofhiswork.Ifhisownemployerdoesn't,someoneelsemaybereadytodoso.Competitionforhisservicesthatistheworker'srealprotection.Ofcourse,competitionbyotheremployersissometimesstrong,sometimesweak.Thereismuchfrictionandignoranceaboutop-portunities.Itmaybecostlyforemployerstolocatedesirableem-ployees,andforemployeestolocatedesirableemployers.Thisisanimperfectworld,socompetitiondoesnotprovidecompleteprotection.However,competitionisthebest,or,whatisthesamething,theleastbad,protectionforthelargestnumberofworkersthathasyetbeenfoundordevised.Theroleofcompetitionisafeatureofthefreemarketthatwehaveencounteredtimeandagain.Aworkerisprotectedfromhisemployerbytheexistenceofotheremployersforwhomhecangotowork.Anemployerisprotectedfromexploitationbyhisemployeesbytheexistenceofotherworkerswhomhecanhire.Theconsumerisprotectedfromexploitationbyagivensellerbytheexistenceofothersellersfromwhomhecanbuy.Whydowehavepoorpostalservice?Poorlong-distancetrainservice?Poorschools?Becauseineachcasethereisessentiallyonlyoneplacewecangettheservice. WhoProtectstheWorker?247CONCLUSIONWhenunionsgethigherwagesfortheirmembersbyrestrictingentryintoanoccupation,thosehigherwagesareattheexpenseofotherworkerswhofindtheiropportunitiesreduced.Whengovernmentpaysitsemployeeshigherwages,thosehigherwagesareattheexpenseofthetaxpayer.Butwhenworkersgethigherwagesandbetterworkingconditionsthroughthefreemarket,whentheygetraisesbyfirmscompetingwithoneanotherforthebestworkers,byworkerscompetingwithoneanotherforthebestjobs,thosehigherwagesareatnobody'sexpense.Theycanonlycomefromhigherproductivity,greatercapitalinvestment,morewidelydiffusedskills.Thewholepieisbiggerthere'smorefortheworker,butthere'salsomorefortheemployer,theinvestor,theconsumer,andeventhetaxcollector.That'sthewayafreemarketsystemdistributesthefruitsofeconomicprogressamongallthepeople.That'sthesecretoftheenormousimprovementintheconditionsoftheworkingpersonoverthepasttwocenturies. CHAPTER9TheCureforInflationComparetworectanglesofpaperofaboutthesamesize.OneismostlygreenonthebacksideandhasapictureofAbrahamLincolnonthefrontside,whichalsohasthenumber5oneachofitscornersandsomeprinting.Youcanexchangethispieceofpaperforsomequantityoffood,clothing,orothergoods.Peoplewillwillinglymakethetrade.Theotherpieceofpaper,perhapscutfromaglossymagazine,mayalsohaveapicture,somenumbers,andsomeprintingonitsface.Itmayalsobecoloredgreenonitsback.Yetitisfitonlytolightthefire.Whencethedifference?Theprintingonthe$5billgivesnoanswer.Itsimplysays,"FEDERALRESERVENOTE/THEUNITEDSTATESOFAMERICA/FIVEDOLLARS""and,insmallerprint,THISNOTEISLEGALTENDERFORALLDEBTS,PUBLICANDPRIVATE."Untilnotverymanyyearsago,thewords"WILLPROMISETOPAY"wereincludedbetween""THEUNITEDSTATESOFAMERICAand""FIVEDOLLARS.Thatseemedtoexplainthedifferencebe-tweenthetwopiecesofpaper.ButitmeantonlythatifyouhadgonetoaFederalReserveBankandaskedatellertoredeemthepromise,hewouldhavegivenyoufiveidenticalpiecesofpaperexceptthatthenumberltooktheplaceofthenumber5andGeorgeWashington'spicturetheplaceofAbrahamLincoln's.Ifyouhadthenaskedthetellertopaythe$1promisedbyoneofthesepiecesofpaper,hewouldhavegivenyoucoinswhich,ifyouhadmeltedthemdown(despiteitsbeingillegaltodoso),wouldhavesoldforlessthan$1asmetal.Thepresentwordingisatleastmorecandidifequallyunrevealing.Thelegal-tenderqualitymeansthatthegovernmentwillacceptthepiecesofpaperindischargeofdebtsandtaxesduetoitself,andthatthecourtswillregardthemasdischargingdebtsstatedindollars.Whyshouldtheyalsobeacceptedbyprivatepersonsinprivatetrans-actionsinexchangeforgoodsandservices?248 TheCureforlnflation249Theshortansweristhateachpersonacceptsthembecauseheisconfidentthatotherswill.Thepiecesofgreenpaperhavevaluebecauseeverybodythinkstheyhavevalue.Everybodythinkstheyhavevaluebecauseinhisexperiencetheyhavehadvalue.TheUnitedStatescouldnotoperateatmorethanasmallfractionofitspresentlevelofproductivitywithoutacommonandwidelyacceptedmediumofexchange(oratmostasmallnumberofsuchmedia);yettheexistenceofacommonandwidelyacceptedmediumofexchangerestsonaconventionthatowesitsexistencetothemutualacceptanceofwhat,fromonepointofview,isafiction.Theconventionorthefictionisnofragilething.Onthecon-trary,thevalueofhavingacommonmoneyissogreatthatpeoplewillsticktothefictionevenunderextremeprovocationwhence,asweshallsee,comespartofthegainthatissuersofthemoneycanderivefrominflationandhencethetemptationtoinflate.Butneitheristhefictionindestructible:thephrase"notworthaContinental"isareminderofhowthatfictionwasde-stroyedfortheContinentalcurrencyissuedinexcessiveamountbytheU.S.ContinentalCongresstofinancetheAmericanRevo-lution.Thoughthevalueofmoneyrestsonafiction,moneyservesanextraordinarilyusefuleconomicfunction.Yetitisalsoaveil.The"real"forcesthatdeterminethewealthofanationarethecapacitiesofitscitizens,theirindustryandingenuity,there-sourcesattheircommand,theirmodeofeconomicandpoliticalorganization,andthelike.AsJohnStuartMillwrotemorethanacenturyago:"Therecannot,inshort,beintrinsicallyamoreinsignificantthing,intheeconomyofsociety,thanmoney;exceptinthecharacterofacontrivanceforsparingtimeandlabour.Itisamachinefordoingquicklyandcommodiously,whatwouldbedone,thoughlessquicklyandcommodiously,withoutit:andlikemanyotherkindsofmachinery,itonlyexertsadistinctandindependentinfluenceofitsownwhenitgetsoutoforder."1Perfectlytrue,asadescriptionoftheroleofmoney,providedwerecognizethatsocietypossesseshardlyanyothercontrivancethatcandomoredamagewhenitgetsoutoforder.Wehavealreadydiscussedoneexample:theGreatDepression, 250FREETOCHOOSE:APersonalStatementwhenmoneygotoutoforderthroughtoosharpareductioninitsquantity.Thischapterdiscussestheoppositeandmorecom-monwayinwhichmoneyhasgottenoutoforderthroughtoosharpanincreaseinquantity.VARIETIESOFMONEYAnamazingvarietyofitemshasbeenusedasmoneyatonetimeoranother.Theword"pecuniary"comesfromtheLatinpecus,meaning"cattle,"oneofthemanythingsthathavebeenusedasmoney.Othersincludesalt,silk,furs,driedfish,evenfeathers,and,onthePacificislandofYap,stones.Cowrieshellsandbeadshavebeenthemostwidelyusedformsofprimitivemoney.Metalsgold,silver,copper,iron,tinhavebeenthemostwidelyusedformsamongmoreadvancedeconomiesbeforethevictoryofpaperandthebookkeeper'spen.Theonethingalltheitemsusedasmoneyhavehadincommonistheiracceptance,intheparticularplaceandtime,inreturnforothergoodsandservicesinthefaiththatotherswouldlikewiseacceptthem.The"wampum"thattheearlysettlersofAmericausedintradewithIndianswasaformofshell,analogoustothecowrieshellsusedinAfricaandAsia.AmostinterestingandinstructivemoneyusedintheAmericancolonieswasthetobaccomoneyofVir-ginia,Maryland,andNorthCarolina:"ThefirstlawpassedbythefirstGeneralAssemblyofVirginia,July31,1619[twelveyearsafterCaptainJohnSmithlandedandestablishedatJames-townthefirstpermanentsettlementintheNewWorld],wasinreferencetotobacco.Itfixedthepriceofthatstaple`atthreeshillingsthebeste,andthesecondsorteat18d.thepounde.'..Tobaccowasalreadythelocalcurrency."2Atvariousperiodstobaccowasdeclaredtheonlylegalcur-rency.ItremainedabasicmoneyofVirginiaanditsneighboringcoloniesforclosetotwocenturies,untilwellaftertheAmericanRevolution.Itwasthemoneythatthecolonistsusedtobuyfood,clothing,topaytaxeseventopayforabride:"TheRev.Mr.Weems,aVirginianwriter,intimatesthatitwouldhavedoneaman'sheartgoodtoseethegallantyoungVirginianshastening TheCureforlnflation251tothewatersidewhenavesselarrivedfromLondon,eachcarry-ingabundleofthebesttobaccounderhisarm,andtakingbackwithhimabeautifulandvirtuousyoungwife.'Andanotherwriter,quotingthispassage,goesontoremark,"Theymusthavebeenstalwart,aswellasgallant,tohastenwitharolloftobaccoweighing100to150poundsunderthearm."Asmoneygoes,sotobaccowent.TheoriginalpricesetonitintermsofEnglishmoneywashigherthanthecostofgrowingit,soplanterssettowithawillandproducedmoreandmore.Inthiscase,themoneysupplygrewliterallyaswellasfiguratively.Asalwayshappenswhenthequantityofmoneyincreasesmorerapidlythanthequantityofgoodsandservicesavailableforpur-chase,therewasinflation.Pricesofotherthingsintermsoftobaccorosedrastically.Beforetheinflationendedabouthalfacenturylater,pricesintermsoftobaccohadrisenfortyfold.Thegrowersoftobaccoweremostunhappyabouttheinflation.Higherpricesofotherthingsintermsoftobaccomeantthatto-baccowouldcommandlessofthoseotherthings.Thepriceofmoneyintermsofgoodsisthereciprocalofthepriceofgoodsintermsofmoney.Naturally,tobaccogrowersturnedtogovern-mentforhelp.Onelawafteranotherwaspassedprohibitingcertainclassesofpeoplefromgrowingtobacco;providingfordestroyingpartofthecrop;prohibitingtheplantingoftobaccoforoneyear.Alltonoavail.Finally,peopletookmattersintotheirownhands,bandedtogether,andwentaroundthecountry-sidedestroyingtobaccoplants:"Theevilreachedsuchpropor-tionsthatinApril,1684,theAssemblypassedalawdeclaringthatthesemalefactorshadpassedbeyondtheboundsofriot,andthattheiraimwasthesubversionofthegovernment.Itwasen-actedthatifanypersonstothenumberofeightormoreshouldgoaboutdestroyingtobaccoplants,theyshouldbeadjudgedtraitorsandsufferdeath."6Thetobaccocurrencyvividlyillustratesoneoftheoldestlawsineconomics:Gresham'sLaw,"Badmoneydrivesoutgood."Thegroweroftobacco,whohadtopaytaxesorotherobligationsfixedintermsoftobacco,understandablyusedthepoorestqualitytobaccotodischargeobligationsandretainedthebestqualityforexportinreturnfor"hard"money,i.e.,Britishsterling.Asare- 252FREETOCHOOSE:APersonalStatementsuit,onlypoorqualitytobaccotendedtocirculateasmoney.Everydeviceofhumaningenuitywasusedtomaketobaccoap-pearhigherinqualitythanitwas:"Marylandin1698founditnecessarytolegislateagainstthefraudofpackingtrashinhogs-headsthatcontainedgoodtobaccoontop.Virginiaadopteda8similarmeasurein1705,butapparentlyitdidnotofferrelief."Thequalityproblemwassomewhatalleviatedwhen"[i]n1727tobacconoteswerelegalized.Thesewereinthenatureofcertifi-catesofdepositissuedbytheinspectors.Theyweredeclaredbylawcurrentandpayableforalltobaccodebtswithintheware-housedistrictwheretheywereissued."'Despitenumerousabusesofthesystem,"[s]uchreceiptsperformedtheofficeofcurrency8righttotheeveofthe19thcentury."Thatwasnotthelastuseoftobaccoasmoney.DuringWorldWarIIcigaretteswerewidelyusedasamediumofexchangeinGermanandJapaneseprisoncamps.AfterWorldWarIIciga-retteswerewidelyusedasmoneyinGermanyduringtheperiodwhentheoccupationauthoritiesenforcedceilingsonpricesinlegalcurrencythatwerewellbelowthelevelsthatwouldhaveclearedthemarket.Theresultwastodestroytheusefulnessofthelegalmoney.Peopleresortedtobarterandtotheuseofcigarettesasamediumofexchangeforsmalltransactions,andcognacforlargeonesbyalloddsthemostliquidcurrencyofwhichwehaverecord.LudwigErhard'smonetaryreformendedthatinstructiveanddestructiveepisode.9ThegeneralprinciplesillustratedbytobaccomoneyinVir-giniaremainrelevantinthemodernera,thoughpapermoneyissuedbygovernmentandbookkeepingentriescalleddepositshavereplacedcommoditiesorwarehousereceiptsforcommodi-tiesasthebasicmoneyofthesociety.Itremainsastruenowasitwasthenthatamorerapidincreaseinthequantityofmoneythaninthequantityofgoodsandser-vicesavailableforpurchasewillproduceinflation,raisingpricesintermsofthatmoney.Itdoesnotmatterwhythequantityofmoneyincreases.InVirginiathequantityoftobaccomoneygrewandproducedaninflationofpricesintermsoftobaccobecausethecostofproducingtobaccointermsoflaborandotherre-sourcesfelldrastically.InEuropeintheMiddleAges,silverand TheCureforInflation253goldwerethedominantmoney,andinflationofpricesintermsofgoldandsilveroccurredbecausepreciousmetalsfromMexicoandSouthAmericafloodedEuropeviaSpain.Inthemid-nine-teenthcenturyinflationofpricesintermsofgoldoccurredaroundtheworldbecauseofgolddiscoveriesinCaliforniaandAustralia;later,fromthe1890sto1914,becauseofthesuccessfulcom-mercialapplicationofthecyanideprocesstotheextractionofgoldfromlow-gradeore,primarilyinSouthAfrica.Today,whenthecommonlyacceptedmediaofexchangehavenorelationtoanycommodity,thequantityofmoneyisdeter-minedineverymajorcountrybygovernment.Governmentandthegovernmentaloneisresponsibleforanyrapidincreaseinthequantityofmoney.Thatveryfacthasbeenthemajorsourceofconfusionaboutthecauseandthecureofinflation.THEPROXIMATECAUSEOFINFLATIONInflationisadisease,adangerousandsometimesfataldisease,adiseasethatifnotcheckedintimecandestroyasociety.Ex-amplesabound.HyperinflationsinRussiaandGermanyafterWorldWarIwhenpricessometimesdoubledandmorethandoubledfromonedaytothenextpreparedthegroundforcommunismintheonecountryandnazismintheother.ThehyperinflationinChinaafterWorldWarIIeasedChairmanMao'sdefeatofChiangKai-shek.InflationinBrazil,whereitreachedabout100percentayearin1954,broughtmilitarygovernment.AfarmoreextremeinflationcontributedtotheoverthrowofAllendeinChilein1973andofIsabelPeroninArgentinain1976,followedinbothcountriesbytheassumptionofpowerbyamilitaryjunta.Nogovernmentiswillingtoacceptresponsibilityforproducinginflation,eveninlessvirulentdegree.Governmentofficialsalwaysfindsomeexcusegreedybusinessmen,graspingtradeunions,spendthriftconsumers,Arabsheikhs,badweather,oranythingelsethatseemsevenremotelyplausible.Nodoubt,businessmenaregreedy,tradeunionsaregrasping,consumersarespendthrifts,Arabsheikhshaveraisedthepriceofoil,andweatherisoftenbad.Allthesecanproducehighpricesforindividualitems;they 254FREETOCHOOSE:APersonalStatementcannotproducerisingpricesforgoodsingeneral.Theycancausetemporaryupsordownsintherateofinflation.Buttheycannotproducecontinuinginflationforoneverysimplereason:noneoftheallegedculpritspossessesaprintingpressonwhichitcanturnoutthosepiecesofpaperwecarryinourpockets;nonecanlegallyauthorizeabookkeepertomakeentriesonledgersthataretheequivalentofthosepiecesofpaper.Inflationisnotacapitalistphenomenon.Yugoslavia,acom-munistcountry,hasexperiencedoneofthemostrapidratesofinflationofanycountryinEurope;Switzerland,abastionofcapitalism,oneofthelowest.Neitherisinflationacommunistphenomenon.ChinahadlittleinflationunderMao;Italy,theUnitedKingdom,Japan,theUnitedStatesalllargelycapitalistcountrieshaveexperiencedsubstantialinflationinthepastdecade.Inthemodernworld,inflationisaprintingpressphe-nomenon.Therecognitionthatsubstantialinflationisalwaysandevery-whereamonetaryphenomenonisonlythebeginningofanunder-standingofthecauseandcureofinflation.Themorebasicques-tionis,whydomoderngovernmentsincreasethequantityofmoneytoorapidly?Whydotheyproduceinflationwhentheyunderstanditspotentialforharm?Beforeturningtothatquestion,itisworthdwellingabitlongeronthepropositionthatinflationisamonetaryphenomenon.De-spitetheimportanceofthatproposition,despitetheextensivehistoricalevidencesupportingit,itisstillwidelydeniedinlargepartbecauseofthesmokescreenwithwhichgovernmentstrytoconcealtheirownresponsibilityforinflation.Ifthequantityofgoodsandservicesavailableforpurchaseoutput,forshortweretoincreaseasrapidlyasthequantityofmoney,priceswouldtendtobestable.Pricesmightevenfallgraduallyashigherincomesledpeopletowanttoholdalargerfractionoftheirwealthintheformofmoney.Inflationoccurswhenthequantityofmoneyrisesappreciablymorerapidlythanoutput,andthemorerapidtheriseinthequantityofmoneyperunitofoutput,thegreatertherateofinflation.Thereisprobablynootherpropositionineconomicsthatisaswellestablishedasthisone. TheCureforlnflation255Outputislimitedbythephysicalandhumanresourcesavail-ableandbytheimprovementinknowledgeandcapacitytousethem.Atbest,outputcangrowonlyfairlyslowly.Overthepastcentury,outputintheUnitedStatesgrewattheaveragerateofabout3percentperyear.EvenattheheightoftherapidgrowthofJapanafterWorldWarII,outputgrewabout10percentperyear.Thequantityofcommoditymoneyissubjecttosimilarphysicallimits,though,astheexamplesoftobacco,preciousmetalsfromtheNewWorld,andgoldinthenineteenthcenturyillustrate,commoditymoneyhasattimesgrownfarmorerapidlythanoutputingeneral.Modernformsofmoneypaperandbookkeepingentriesaresubjecttonophysicallimits.Thenominalquantity,thatis,thenumberofdollars,pounds,marks,orothermonetaryunits,cangrowatanyrate,andattimeshasgrownatfantasticrates.DuringtheGermanhyperinflationafterWorldWarI,forex-ample,hand-to-handmoneygrewattheaveragerateofmorethan300percentamonthformorethanayear,andsodidprices.DuringtheHungarianhyperinflationafterWorldWarII,hand-to-handmoneyroseattheaveragerateofmorethan12,000per-centpermonthforayear,andpricesattheevenhigherrateofnearly20,000percentamonth.''DuringthefarmoremoderateinflationintheUnitedStatesfrom1969to1979,thequantityofmoneyroseattheaveragerateof9percentperyearandpricesattheaveragerateof7per-centperyear.Thedifferenceoftwopercentagepointsreflectsthe2.8percentaveragerateofgrowthofoutputoverthesamedecade.Astheseexamplesshow,whathappenstothequantityofmoneytendstodwarfwhathappenstooutput;henceourrefer-encetoinflationasamonetaryphenomenon,withoutaddinganyqualificationaboutoutput.Theseexamplesalsoshowthatthereisnotapreciseone-to-onecorrespondencebetweentherateofmonetarygrowthandtherateofinflation.However,toourknowledgethereisnoexampleinhistoryofasubstantialinfla-tionthatlastedformorethanabrieftimethatwasnotaccom-paniedbyaroughlycorrespondinglyrapidincreaseinthequantityofmoney;andnoexampleofarapidincreaseinthequantityof 256FREETOCHOOSE:APersonalStatementmoneythatwasnotaccompaniedbyaroughlycorrespondinglysubstantialinflation.Afewcharts(Figures15)showthepersistenceofthisrelationinrecentyears.Thesolidlineoneachchartisthequantityofmoneyperunitofoutputforthecountryinquestion,yearbyyearfrom1964through1977.Theotherlineistheconsumerpriceindex.Inordertomakethetwoseriescomparable,bothhavebeenexpressedaspercentagesoftheiraveragevaluesovertheperiodasawhole(19641977=100forbothlines).Thetwolinesneces-sarilyhavethesameaveragelevel,butthereisnothinginthearithmeticthatrequiresthetwolinestobethesameforanysingleyear.ThetwolinesfortheUnitedStatesonFigure1arealmostin-distinguishable.Astheremainingfiguresshow,thatisnotspecialtotheUnitedStates.ThoughthetwolinesdiffermoreforsomeoftheothercountriesthantheydofortheUnitedStates,foreverycountrythetwolinesareremarkablysimilar.Thedifferentcountriesexperiencedverydifferentratesofmonetarygrowth.Ineverycase,thatdifferencewasmatchedbyadifferentrateofinflation.Brazilisthemostextreme(Figure5).Itexperiencedmorerapidmonetarygrowththananyoftheothers,andalsomorerapidinflation.Whichcauseswhich?Doesthequantityofmoneygrowrapidlybecausepricesincreaserapidly,orviceversa?Oneclueisthatonmostofthechartsthenumberplottedforthequantityofmoneyisforayearendingsixmonthsearlierthantheyeartowhichthematchingpriceindexcorresponds.Moredecisiveevi-denceisprovidedbyexaminationoftheinstitutionalarrange-mentsthatdeterminethequantityofmoneyinthesecountriesandbyalargenumberofhistoricalepisodesinwhichitiscrystalclearwhichiscauseandwhichiseffect.OnedramaticexamplecomesfromtheAmericanCivilWar.TheSouthfinancedthewarlargelybytheprintingpress,intheprocessproducinganinflationthataveraged10percentamonthfromOctober1861toMarch1864.Inanattempttostemtheinflation,theConfederacyenactedamonetaryreform:"InMay,1864,thecurrencyreformtookhold,andthestockofmoneywasreduced.Dramatically,thegeneralpriceindexdropped...in Figure1.MONEYANDPRICESUNITEDSTATES(1964-1977)1964-1977-100 Figure2.MONEYANDPRICES1964-1977GERMANY(1964-1977)=100 Figure3.MONEYANDPRICESJAPAN(1964-1977)1964-1977=100 Figure4.MONEYANDPRICESUNITEDKINGDOM(1964-1977)1964-1977=100 Figure5.MONEYANDPRICESBRAZIL(1964-1977) 262FREETOCHOOSE:APersonalStatementspiteofinvadingUnionarmies,theimpendingmilitarydefeat,thereductioninforeigntrade,thedisorganizedgovernment,andthelowmoraleoftheConfederatearmy.Reducingthestockofmoneyhadamoresignificanteffectonpricesthanthesepowerfulforces.""Thesechartsdisposeofmanywidelyheldexplanationsofinfla-tion.Unionsareafavoritewhippingboy.Theyareaccusedofusingtheirmonopolypowertoforceupwages,whichdriveupcosts,whichdriveupprices.ButthenhowisitthatthechartsforJapan,whereunionsareoftrivialimportance,andforBrazil,wheretheyexistonlyatthesufferanceandundertheclosecon-trolofthegovernment,showthesamerelationasthechartsfortheUnitedKingdom,whereunionsarestrongerthaninanyoftheothernations,andforGermanyandtheUnitedStates,whereunionshaveconsiderablestrength?Unionsmayprovideusefulservicesfortheirmembers.Theymayalsodoagreatdealofharmbylimitingemploymentopportunitiesforothers,buttheydonotproduceinflation.Wageincreasesinexcessofincreasesinpro-ductivityarearesultofinflation,ratherthanacause.Similarly,businessmendonotcauseinflation.Theriseinthepricestheychargeisaresultorreflectionofotherforces.Business-menaresurelynomoregreedyincountriesthathaveexperiencedmuchinflationthanincountriesthathaveexperiencedlittle,nomoregreedyatoneperiodthananother.Whythenisinflationsomuchgreaterinsomeplacesandatsometimesthaninotherplacesandatothertimes?Anotherfavoriteexplanationofinflation,particularlyamonggovernmentofficialsseekingtoshiftblame,isthatitisimportedfromabroad.Thatexplanationwasoftencorrectwhenthecur-renciesofthemajorcountrieswerelinkedthroughagoldstand-ard.Inflationwasthenaninternationalphenomenonbecausemanycountriesusedthesamecommodityasmoneyandanythingthatmadethequantityofthatcommoditymoneygrowmorerapidlyaffectedthemall.Butitclearlyisnotcorrectforrecentyears.Ifitwere,howcouldtheratesofinflationbesodifferentindifferentcountries?JapanandtheUnitedKingdomexperiencedinflationattherateof30percentormoreayearintheearly1970s,wheninflationintheUnitedStateswasaround10percent TheCureforlnflation263andinGermanyunder5percent.Inflationisaworldwidephe-nomenoninthesensethatitoccursinmanycountriesatthesametimejustashighgovermentspendingandlargegovernmentdeficitsareworldwidephenomena.Butinflationisnotaninter-nationalphenomenoninthesensethateachcountryseparatelylackstheabilitytocontrolitsowninflationjustashighgovern-mentspendingandlargegovernmentdeficitsarenotproducedbyforcesoutsideeachcountry'scontrol.Lowproductivityisanotherfavoriteexplanationforinflation.YetconsiderBrazil.Ithasexperiencedoneofthemostrapidratesofgrowthinoutputintheworldandalsooneofthehighestratesofinflation.Trueenough,whatmattersforinflationisthequan-tityofmoneyperunitofoutput,butaswehavenoted,asaprac-ticalmatter,changesinoutputaredwarfedbychangesinthequantityofmoney.Nothingismoreimportantforthelong-runeconomicwelfareofacountrythanimprovingproductivity.Ifproductivitygrowsat3.5percentperyear,outputdoublesintwentyyears;at5percentperyear,infourteenyearsquiteadifference.Butproductivityisabitplayerforinflation;moneyiscenterstage.WhataboutArabsheikhsandOPEC?Theyhaveimposedheavycostsonus.Thesharpriseinthepriceofoilloweredthequantityofgoodsandservicesthatwasavailableforustousebecausewehadtoexportmoreabroadtopayforoil.Thereduc-tioninoutputraisedthepricelevel.Butthatwasaonce-for-alleffect.Itdidnotproduceanylonger-lastingeffectontherateofinflationfromthathigherpricelevel.Inthefiveyearsafterthe1973oilshock,inflationinbothGermanyandJapandeclined,inGermanyfromabout7percentayeartolessthan5percent;inJapanfromover30percenttolessthan5percent.IntheUnitedStatesinflationpeakedayearaftertheoilshockatabout12per-cent,declinedto5percentin1976,andthenrosetoover13percentin1979.Cantheseverydifferentexperiencesbeexplainedbyanoilshockthatwascommontoallcountries?GermanyandJapanare100percentdependentonimportedoil,yettheyhavedonebetteratcuttinginflationthantheUnitedStates,whichisonly50percentdependent,orthantheUnitedKingdom,whichhasbecomeamajorproducerofoil. 264FREETOCHOOSE:APersonalStatementWereturntoourbasicproposition.Inflationisprimarilyamonetaryphenomenon,producedbyamorerapidincreaseinthequantityofmoneythaninoutput.Thebehaviorofthequantityofmoneyistheseniorpartner;ofoutput,thejuniorpartner.Manyphenomenacanproducetemporaryfluctuationsintherateofinflation,buttheycanhavelastingeffectsonlyinsofarastheyaffecttherateofmonetarygrowth.WHYTHEEXCESSIVEMONETARYGROWTH?Thepropositionthatinflationisamonetaryphenomenonisim-portant,yetitisonlythebeginningofananswertothecausesofandcuresforinflation.Itisimportantbecauseitguidesthesearchforbasiccausesandlimitspossiblecures.Butitisonlythebegin-ningofananswerbecausethedeeperquestioniswhyexcessivemonetarygrowthoccurs.Whateverwastruefortobaccomoneyormoneylinkedtosilverandgold,withtoday'spapermoney,excessivemonetarygrowth,andhenceinflation,isproducedbygovernments.IntheUnitedStatestheacceleratedmonetarygrowthduringthepastfifteenyearsorsohasoccurredforthreerelatedreasons:first,therapidgrowthingovernmentspending;second,thegov-ernment'sfullemploymentpolicy;third,amistakenpolicypur-suedbytheFederalReserveSystem.Highergovernmentspendingwillnotleadtomorerapidmone-tarygrowthandinflationifadditionalspendingisfinancedeitherbytaxesorbyborrowingfromthepublic.Inthatcase,govern-menthasmoretospend,thepublichasless.Highergovernmentspendingismatchedbylowerprivatespendingforconsumptionandinvestment.However,taxingandborrowingfromthepublicarepoliticallyunattractivewaystofinanceadditionalgovernmentspending.Manyofuswelcometheadditionalgovernmentspend-ing;fewofuswelcomeadditionaltaxes.Governmentborrowingfromthepublicdivertsfundsfromprivateusesbyraisinginterestrates,makingitbothmoreexpensiveandmoredifficultforindi-vidualstogetmortgagesonnewhomesandforbusinessestobor-rowmoney.Theonlyotherwaytofinancehighergovernmentspendingis TheCureforlnflation265byincreasingthequantityofmoney.AswenotedinChapter3,theU.S.governmentcandothatbyhavingtheU.S.TreasuryonebranchofthegovernmentsellbondstotheFederalReserveSystemanotherbranchofthegovernment.TheFederalReservepaysforthebondseitherwithfreshlyprintedFederalReserveNotesorbyenteringadepositonitsbookstothecreditoftheU.S.Treasury.TheTreasurycanthenpayitsbillswitheitherthecashoracheckdrawnonitsaccountattheFed.Whentheaddi-tionalhigh-poweredmoneyisdepositedincommercialbanksbyitsinitialrecipients,itservesasreservesforthemandasthebasisforamuchlargeradditiontothequantityofmoney.FinancinggovernmentspendingbyincreasingthequantityofmoneyisoftenextremelyattractivetoboththePresidentandmembersofCongress.Itenablesthemtoincreasegovernmentspending,providinggoodiesfortheirconstituents,withouthavingtovotefortaxestopayforthem,andwithouthavingtoborrowfromthepublic.AsecondsourceofhighermonetarygrowthintheUnitedStatesinrecentyearshasbeentheattempttoproducefullem-ployment.Theobjective,asforsomanygovernmentprograms,isadmirable,buttheresultshavenotbeen."Fullemployment"isamuchmorecomplexandambiguousconceptthanitappearstobeonthesurface.Inadynamicworld,inwhichnewproductsemergeandoldonesdisappear,demandshiftsfromoneproducttoanother,innovationaltersmethodsofproduction,andsoonwithoutend,itisdesirabletohaveagooddealoflabormobility.Peoplechangefromonejobtoanotherandoftenareidleforatimeinbetween.Somepeopleleaveajobtheydonotlikebeforetheyhavefoundanother.Youngpeopleenteringthelaborforcetaketimetofindjobsandexperimentwithdifferentkindsofjobs.Inaddition,obstaclestothefreeoperationofthelabormarkettradeunionrestrictions,minimumwages,andthelikeincreasethedifficultyofmatchingworkerandjob.Underthesecircum-stances,whataveragenumberofpersonsemployedcorrespondstofullemployment?Aswithspendingandtaxes,thereishere,too,anasymmetry.Measuresthatcanberepresentedasaddingtoemploymentarepoliticallyattractive.Measuresthatcanberepresentedasadding 266FREETOCHOOSE:APersonalStatementtounemploymentarepoliticallyunattractive.Theresultistoimpartabiastogovernmentpolicyinthedirectionofadoptingundulyambitioustargetsoffullemployment.Therelationtoinflationistwofold.First,governmentspendingcanberepresentedasaddingtoemployment,governmenttaxesasaddingtounemploymentbyreducingprivatespending.Hence,thefullemploymentpolicyreinforcesthetendencyforgovern-menttoincreasespendingandlowertaxes,andtofinanceanyresultingdeficitbyincreasingthequantityofmoneyratherthanbytaxesorborrowingfromthepublic.Second,theFederalRe-serveSystemcanincreasethequantityofmoneyinwaysotherthanfinancinggovernmentspending.Itcandosobybuyingout-standinggovernmentbonds,payingforthemwithnewlycreatedhigh-poweredmoney.Thatenablesthebankstomakealargervolumeofprivateloans,whichcanalsoberepresentedasaddingtoemployment.Underpressuretopromotefullemployment,theFed'smonetarypolicyhashadthesameinflationarybiasasthegovernment'sfiscalpolicy.Thesepolicieshavenotsucceededinproducingfullemploy-mentbuttheyhaveproducedinflation.AsPrimeMinisterJamesCallaghanputitinacourageoustalktoaBritishLabourpartyconferenceinSeptember1976:"Weusedtothinkthatyoucouldjustspendyourwayoutofarecessionandincreaseemploymentbycuttingtaxesandboostinggovernmentspending.Itellyou,inallcandor,thatthatoptionnolongerexists;andthatinsofarasiteverdidexist,itonlyworkedbyinjectingbiggerdosesofinflationintotheeconomyfollowedbyhigherlevelsofunemploy-mentasthenextstep.Thatisthehistoryofthepasttwentyyears."ThethirdsourceofhighermonetarygrowthintheUnitedStatesinrecentyearshasbeenamistakenpolicybytheFederalReserveSystem.NotonlyhastheFed'spolicyhadaninflationarybiasbecauseofpressurestopromotefullemployment,butthatbiashasbeenexacerbatedbyitsattempttopursuetwoincom-patibleobjectives.TheFedhasthepowertocontrolthequantityofmoneyanditgiveslipservicetothatobjective.ButlikeDemetriusinShakespeare'sAMidsummerNight'sDream,whoshunsHelena,whoisinlovewithhim,topursueHermia,wholovesanother,theFedhasgivenitsheartnottocontrollingthequantityofmoneybuttocontrollinginterestrates,somethingthat TheCureforlnflation267itdoesnothavethepowertodo.Theresulthasbeenfailureonbothfronts:wideswingsinbothmoneyandinterestrates.Theseswings,too,havehadaninflationarybias.Withmemoriesofitsdisastrousmistakefrom1929to1933,theFedhasbeenmuchprompterincorrectingaswingtowardalowrateofmonetarygrowththanincorrectingaswingtowardahighrateofmonetarygrowth.Theendresultofhighergovernmentspending,thefullemploy-'mentpolicy,andtheFedsobsessionwithinterestrateshasbeenarollercoasteralongarisingpath.Inflationhasrisenandthenfallen.Eachrisehascarriedinflationtoahigherlevelthantheprecedingpeak.Eachfallhasleftinflationaboveitsprecedingtrough.Allthetime,governmentspendinghasbeenrisingasafractionofincome;governmenttaxreceipts,too,havebeenrisingasafractionofincome,butnotquiteasfastasspending,sothedeficit,too,hasbeenrisingasafractionofincome.ThesedevelopmentsarenotuniquetotheUnitedStatesortorecentdecades.Sincetimeimmemorial,sovereignswhetherkings,emperors,orparliamentshavebeentemptedtoresorttoincreasingthequantityofmoneytoacquireresourcestowagewars,constructmonuments,orforotherpurposes.Theyhaveoftensuccumbedtothetemptation.Whenevertheyhave,infla-tionfollowedclosebehind.NearlytwothousandyearsagotheRomanEmperorDiocletianinflatedby"debasing"thecoinagethatis,replacingsilvercoinsbylook-alikesthathadlessandlesssilverandmoreandmoreofaworthlessalloyuntiltheybecame"nomorethanbasemetal2washedoverwithsilver."'Moderngovernmentsdosobyprint-ingpapermoneyandmakingentriesonbooksbuttheancientmethodhasnotentirelydisappeared.Theoncefull-bodiedsilvercoinsoftheUnitedStatesarenowcoppercoinswashedover,notevenwithsilver,butwithnickel.Andasmall-sizeSusanB.Anthonydollarcoinhasbeenintroducedtoreplacewhatwasonceafull-bodiedsilvercoin.GOVERNMENTREVENUEFROMINFLATIONFinancinggovernmentspendingbyincreasingthequantityofmoneylookslikemagic,likegettingsomethingfornothing.To 268FREETOCHOOSE:APersonalStatementtakeasimpleexample,governmentbuildsaroad,payingfortheexpensesincurredwithnewlyprintedFederalReserveNotes.Itlooksasifeverybodyisbetteroff.Theworkerswhobuildtheroadgettheirpayandcanbuyfood,clothing,andhousingwithit.Nobodyhaspaidhighertaxes.Yetthereisnowaroadwheretherewasnonebefore.Whohaspaidforit?Theansweristhatallholdersofmoneyhavepaidfortheroad.Theextramoneyraisespriceswhenitisusedtoinducetheworkerstobuildtheroadinsteadofengageinsomeotherpro-ductiveactivity.Thosehigherpricesaremaintainedastheextramoneycirculatesinthespendingstreamfromtheworkerstothesellersofwhattheybuy,fromthosesellerstoothers,andsoon.Thehigherpricesmeanthatthemoneypeoplepreviouslyheldwillnowbuylessthanitwouldhavebefore.Inordertohaveonhandanamountofmoneythatcanbuyasmuchasbefore,theywillhavetorefrainfromspendingalloftheirincomeandusepartofittoaddtotheirmoneybalances.Theextramoneyprintedisequivalenttoataxonmoneybal-ances.Iftheextramoneyraisespricesby1percent,theneveryholderofmoneyhasineffectpaidataxequalto1percentofhismoneyholdings.Theextrapiecesofpaperhenowmusthold(orbookentrieshemustmake)inordertohavethesamepurchasingpowerintheformofmoneyasbeforeareindistinguishablefromtheotherpiecesofpaperinhispocketorsafedepositbox(orfrombookentries),buttheyareineffectreceiptsfortaxespaid.Thephysicalcounterparttothesetaxesisthegoodsandservicesthatcouldhavebeenproducedbytheresourcesthatbuilttheroad.Thepeoplewhospentlessthantheirincomeinordertomaintainthepurchasingpoweroftheirmoneybalanceshavegivenupthesegoodsandservicesinorderthatthegovernmentcouldgettheresourcestobuildtheroad.YoucanseewhyJohnMaynardKeynes,indiscussingtheinfla-tionsafterWorldWarI,wrote:"Thereisnosubtler,nosurermeansofoverturningtheexistingbasisofsocietythantodebauchthecurrency.Theprocessengagesallthehiddenforcesofeco-nomiclawonthesideofdestruction,anddoesitinamanner3whichnotonemaninamillionisabletodiagnose."'Theadditionalcurrencyprintedandtheadditionaldeposits TheCureforInflation269enteredonthebooksoftheFederalReserveBankcorrespondtoonlypartoftherevenuethatgovernmentgetsfrominflation.Inflationalsoyieldsrevenueindirectlybyautomaticallyraisingeffectivetaxrates.Aspeople'sdollarincomesgoupwithinflation,theincomeispushedintohigherbracketsandtaxedatahigherrate.Corporateincomeisartificiallyinflatedbyinadequateallow-ancefordepreciationandothercosts.Ontheaverage,ifincomerisesby10percentsimplytomatcha10percentinflation,federaltaxrevenuetendstogoupbymorethan15percentsothetax-payerhastorunfasterandfastertostayinthesameplace.ThatprocesshasenabledthePresident,Congress,stategovernorsandlegislaturestoposeastaxcutterswhenalltheyhavedoneistokeeptaxesfromgoingupasmuchastheyotherwisewouldhavegoneup.Eachyear,thereistalkof"cuttingtaxes."Yettherehasbeennoreductionintaxes.Onthecontrary,taxescorrectlymea-suredhavegoneupatthefederallevelfrom22percentofna-tionalincomein1964to25percentin1978;atthestateandlocallevelfrom11percentin1964to15percentin1978.Stillathirdwayinflationyieldsrevenuetothegovernmentisbypayingofforrepudiating,ifyouwillpartofthegovern-ment'sdebt.Governmentborrowsindollarsandpaysbackindollars.Butthankstoinflation,thedollarsitpaysbackcanbuylessthanthedollarsitborrowed.Thatwouldnotbeanetgaintothegovernmentifintheinterimithadpaidahighenoughinterestrateonthedebttocompensatethelenderforinflation.Butforthemostpartitdidnot.Savingsbondsaretheclearestexample.Sup-poseyouhadboughtasavingsbondinDecember1968,hadheldittoDecember1978,andthencasheditin.Youwouldhavepaid$37.50in1968foraten-yearbondwithafacevalueof$50andyouwouldhavereceived$64.74whenyoucasheditin1978(becausethegovernmentraisedtheinterestrateintheinterimtomakesomeallowanceforinflation).By1978ittook$70tobuyasmuchas$37.50wouldhaveboughtin1968.Yetnotonlywouldyouhavegottenbackonly$64.74,youwouldhavehadtopayincometaxonthe$27.24differencebetweenwhatyoureceivedandwhatyoupaid.Youwouldhaveendeduppayingforthedubiousprivilegeoflendingtoyourgovernment.Payingoffthedebtbyinflationhasmeantthatalthoughthe 270FREETOCHOOSE:APersonalStatementfederalgovernmenthasrunlargedeficitsyearafteryearanditsdebtintermsofdollarshasgoneup,thedebthasgoneupfarlessintermsofpurchasingpowerandhasactuallyfallenasaper-centageofthenationalincome.Inthedecadefrom1968through1978,thefederalgovernmenthadacumulativedeficitofmorethan$260billion,yetthedebtamountedto30percentofna-tionalincomein1968,to28percentin1978.THECUREFORINFLATIONThecureforinflationissimpletostatebuthardtoimplement.Justasanexcessiveincreaseinthequantityofmoneyistheoneandonlyimportantcauseofinflation,soareductionintherateofmonetarygrowthistheoneandonlycureforinflation.Theproblemisnotoneofknowingwhattodo.Thatiseasyenough.Governmentmustincreasethequantityofmoneylessrapidly.Theproblemistohavethepoliticalwilltotakethemeasuresneces-sary.Oncetheinflationarydiseaseisinanadvancedstate,thecuretakesalongtimeandhaspainfulsideeffects.Twomedicalanalogiessuggesttheproblem.OneisaboutayoungmanwhohadBuerger'sdisease,adiseasethatinterruptsthebloodsupplyandcanleadtogangrene.Theyoungmanwaslosingfingersandtoes.Thecurewassimpletostate:stopsmoking.Theyoungmandidnothavethewilltodoso;hisaddictiontotobaccowassimplytoogreat.Hisdiseasewasinonesensecurable,inanothernot.Amoreinstructiveanalogyisbetweeninflationandalcoholism.Whenthealcoholicstartsdrinking,thegoodeffectscomefirst;thebadeffectsonlycomethenextmorningwhenhewakesupwithahangoverandoftencannotresisteasingthehangoverbytaking"thehairofthedogthatbithim."Theparallelwithinflationisexact.Whenacountrystartsonaninflationaryepisode,theinitialeffectsseemgood.Theincreasedquantityofmoneyenableswhoeverhasaccesstoitnowadays,primarilygovernmentstospendmorewithoutanybodyelsehavingtospendless.Jobsbecomemoreplentiful,businessisbrisk,almosteverybodyishappyatfirst.Thosearethegoodeffects.Butthentheincreasedspendingstartstoraiseprices;workersfindthattheirwages,evenifhigherindollars,willbuyless;busi- TheCureforlnflation271nessmenfindthattheircostshaverisen,sothattheextrasalesarenotasprofitableastheyanticipated,unlesstheycanraisetheirpricesevenfaster.Thebadeffectsstarttoemerge:higherprices,lessbuoyantdemand,inflationcombinedwithstagnation.Aswiththealcoholic,thetemptationistoincreasethequantityofmoneystillfaster,whichproducestherollercoasterwehavebeenon.Inbothcases,ittakesalargerandlargeramountofalcoholormoneytogivethealcoholicortheeconomythesame"kick."Theparallelbetweenalcoholismandinflationcarriesovertothecure.Thecureforalcoholismissimpletostate:stopdrinking.Itishardtotakebecause,thistime,thebadeffectscomefirst,thegoodeffectscomelater.Thealcoholicwhogoesonthewagonsuffersseverewithdrawalpainsbeforeheemergesinthehappylandofnolongerhavinganalmostirresistibledesireforanotherdrink.Soalsowithinflation.Theinitialsideeffectsofaslowerrateofmonetarygrowtharepainful:lowereconomicgrowth,temporarilyhighunemployment,without,foratime,muchreduc-tionofinflation.Thebenefitsappearonlyafteroneortwoyearsorso,intheformoflowerinflation,ahealthiereconomy,thepotentialforrapidnoninflationarygrowth.Painfulsideeffectsareonereasonwhyitisdifficultforanalcoholicoraninflationarynationtoenditsaddiction.Butthereisanotherreason,which,atleastintheearlierstageofthedisease,maybeevenmoreimportant:thelackofarealdesiretoendtheaddiction.Thedrinkerenjoyshisliquor;hefindsithardtoacceptthathereallyisanalcoholic;heisnotsurehewantstotakethecure.Theinflationarynationisinthesameposition.Itistemptingtobelievethatinflationisatemporaryandmildmatterproducedbyunusualandextraneouscircumstances,andthatitwillgoawayofitsownaccordsomethingthatneverhappens.Moreover,manyofusenjoyinflation.Wewouldnaturallyliketoseethepricesofthethingswebuygodown,oratleaststopgoingup.Butwearemorethanhappytoseethepricesofthethingswesellgoupwhethergoodsweproduce,ourlaborservices,orhousesorotheritemsweown.FarmerscomplainaboutinflationbutcongregateinWashingtontolobbyforhigherpricesfortheirproducts.Mostoftherestofusdothesameinonewayoranother.Onereasoninflationissodestructiveisbecausesomepeople 272FREETOCHOOSE:APersonalStatementbenefitgreatlywhileotherpeoplesuffer;societyisdividedintowinnersandlosers.Thewinnersregardthegoodthingsthathappentothemasthenaturalresultoftheirownforesight,prudence,andinitiative.Theyregardthebadthings,theriseinthepricesofthethingstheybuy,asproducedbyforcesoutsidetheircontrol.Almosteveryonewillsaythatheisagainstinflation;whathegenerallymeansisthatheisagainstthebadthingsthathavehappenedtohim.Totakeaspecificexample,almosteverypersonwhohasownedahomeduringthepasttwodecadeshasbenefitedfrominflation.Thevalueofhishomehasrisensharply.Ifhehadamortgage,theinterestratewasgenerallybelowtherateofinflation.Asaresultthepaymentscalled"interest,"aswellasthosecalled"prin-cipal,"haveineffectbeenpayingoffthemortgage.Totakeasimpleexample,supposeboththeinterestrateandinflationratewere7percentinoneyear.Ifyouhada$10,000mortgageonwhichyoupaidonlyinterest,ayearlaterthemortgagewouldcorrespondtothesamebuyingpoweras$9,300wouldhaveayearearlier.Inrealtermsyouwouldowe$700lessjusttheamountyoupaidasinterest.Inrealtermsyouwouldhavepaidnothingfortheuseofthe$10,000.(Indeed,becausetheinterestisde-ductibleincomputingyourincometax,youwouldactuallybene-fit.Youwouldhavebeenpaidforborrowing.)Thewaythiseffectbecomesapparenttothehomeowneristhathisequityinthehousegoesuprapidly.Thecounterpartisalosstothesmallsaverswhoprovidedthefundsthatenabledsavingsandloanassociations,mutualsavingsbanks,andotherinstitutionstofinancemortgageloans.Thesmallsavershadnogoodalternativebecausegovern-mentlimitsnarrowlythemaximuminterestratethatsuchinstitu-tionscanpaytotheirdepositorssupposedlytoprotectthedepositors.Justashighgovernmentspendingisonereasonforexcessivemonetarygrowth,solowergovernmentspendingisoneelementthatcancontributetoreducingmonetarygrowth.Here,too,wetendtobeschizophrenic.Wewouldallliketoseegovernmentspendinggodown,provideditisnotspendingthatbenefitsus.Wewouldallliketoseedeficitsreduced,provideditisthroughtaxesimposedonothers. TheCureforInflation273Asinflationaccelerates,however,soonerorlateritdoessomuchdamagetothefabricofsociety,createssomuchinjusticeandsuffering,thatarealpublicwilldevelopstodosomethingaboutinflation.Thelevelofinflationatwhichthatoccursde-pendscriticallyonthecountryinquestionanditshistory.InGermanyitcameatalowlevelofinflationbecauseofGermany'sterribleexperiencesafterWorldWarIandII;itcameatamuchhigherlevelofinflationintheUnitedKingdomandJapan;ithasnotyetcomeintheUnitedStates.SIDEEFFECTSOFACUREWereadoverandoveragainthathigherunemploymentandslowgrowtharecuresforinflation,thatthealternativeswemustfacearemoreinflationorhigherunemployment,thatthepowersthatbearereconciledto,orarepositivelypromoting,slowergrowthandhigherunemploymentinordertocureinflation.Yetoverthepastseveraldecades,thegrowthoftheU.S.economyhasslowed,theaveragelevelofunemploymenthasrisen,andatthesametime,therateofinflationhasmovedhigherandhigher.Wehavehadbothmoreinflationandmoreunemployment.Othercountrieshavehadthesameexperience.Howcome?Theansweristhatslowgrowthandhighunemploymentarenotcuresforinflation.Theyaresideeffectsofasuccessfulcure.Manypoliciesthatimpedeeconomicgrowthandaddtounem-ploymentmay,atthesametime,increasetherateofinflation.Thathasbeentrueofsomeofthepolicieswehaveadoptedsporadicpriceandwagecontrol,increasinggovernmentinter-ventionintobusiness,allaccompaniedbyhigherandhighergov-ernmentspending,andarapidincreaseinthequantityofmoney.Anothermedicalexamplewillperhapsmakeclearthediffer-encebetweenacureandasideeffect.Youhaveacuteappendi-citis.Yourphysicianrecommendsanappendectomybutwarnsyouthataftertheoperationyouwillbeconfinedtobedforaninterval.Yourefusetheoperationbuttaketoyourbedfortheindicatedintervalasalesspainfulcure.Silly,yes,butfaithfulineverydetailtotheconfusionbetweenunemploymentasasideeffectandasacure. 274FREETOCHOOSE:APersonalStatementThesideeffectsofacureforinflationarepainfulsoitisimportanttounderstandwhytheyoccurandtoseekmeanstomitigatethem.ThebasicreasonwhythesideeffectsoccurhasalreadybeenpointedoutinChapter1.Theyoccurbecausevariableratesofmonetarygrowthintroducestaticintotheinfor-mationtransmittedbythepricesystem,staticthatistranslatedintoinappropriateresponsesbytheeconomicactors,whichittakestimetoovercome.Consider,first,whathappenswheninflationarymonetarygrowthstarts.Thehigherspendingfinancedbythenewlycreatedmoneyisnodifferenttothesellerofgoodsorlabororotherservicesfromanyotherspending.Thesellerofpencils,forexam-ple,findsthathecansellmorepencilsattheformerprice.Hedoessoinitiallywithoutchanginghisprice.Heordersmorepen-cilsfromthewholesaler,thewholesalerfromthemanufacturer,andsoondowntheline.lfthedemandforpencilshadincreasedattheexpenseofsomeothersegmentofdemand,sayattheex-penseofthedemandforball-pointpens,ratherthanasaresultofinflationarymonetarygrowth,theincreasedflowofordersdownthepencilchannelwouldbeaccompaniedbyadecreasedflowdowntheball-pointpenchannel.Pencilsandlaterthematerialsusedtomakethemwouldtendtoriseinprice;pensandthema-terialsusedtomakethemwouldtendtofallinprice;buttherewouldbenoreasonforpricesontheaveragetochange.Thesituationiswhollydifferentwhentheincreaseddemandforpencilshasitsorigininnewlycreatedmoney.Thedemandforpencilsandpensandmostotherthingscanthengoupsi-multaneously.Thereismorespending(indollars)intotal.How-ever,thesellerofpencilsdoesnotknowthis.Heproceedsasbefore,initiallyholdingthepriceatwhichhesellsconstant,con-tenttosellmoreuntil,ashebelieves,hewillbeabletorestock.Butnowtheincreasedflowofordersdownthepencilchannelisaccompaniedbyanincreasedflowdownthepenchannel,anddownmanyotherchannels.Astheincreasedflowofordersgen-eratesagreaterdemandforlaborandmaterialstoproducemore,theinitialreactionofworkersandproducersofmaterialswillbelikethatoftheretailerstoworklongerandproducemoreandalsochargemoreinthebeliefthatthedemandforwhattheyhave TheCureforlnflation275beenprovidinghasgoneup.Butthistimethereisnooffset,therearenodeclinesindemandroughlymatchingtheincreasesinde-mand,nodeclinesinpricesmatchingtheincreases.Ofcourse,thiswillnotatfirstbeobvious.Inadynamicworlddemandsareal-waysshifting,somepricesgoingup,somegoingdown.Thegen-eralsignalofincreasingdemandwillbeconfusedwiththespecificsignalsreflectingchangesinrelativedemands.Thatiswhytheinitialsideeffectoffastermonetarygrowthisanappearanceofprosperityandgreateremployment.Butsoonerorlaterthesignalwillgetthrough.Asitdoes,workers,manufacturers,retailerswilldiscoverthattheyhavebeenfooled.Theyreactedtohigherdemandforthesmallnumberofthingstheysellinthemistakenbeliefthatthehigherdemandwasspecialtothemandhencewouldnotmuchaffectthepricesofthemanythingstheybuy.Whentheydiscovertheirmistake,theyraisewagesandpricesstillhighernotonlytorespondtohigherdemandbutalsotoallowfortherisesinthepricesofthethingstheybuy.Weareoffonaprice-wagespiralthatisitselfaneffectofinflation,notacause.Ifmonetarygrowthdoesnotspeedupfurther,theinitialstimulustoemploymentandoutputwillbereplacedbytheopposite;bothwilltendtogodowninresponsetothehigherwagesandprices.Ahangoverwillsuc-ceedtheinitialeuphoria.Ittakestimeforthesereactionstooccur.OntheaverageoverthepastcenturyandmoreintheUnitedStates,theUnitedKingdom,andsomeotherWesterncountries,roughlysixtoninemonthshaveelapsedbeforeincreasedmonetarygrowthhasworkeditswaythroughtheeconomyandproducedincreasedeconomicgrowthandemployment.Anothertwelvetoeighteenmonthshaveelapsedbeforetheincreasedmonetarygrowthhasaffectedthepricelevelappreciablyandinflationhasoccurredorspeededup.Thetimedelayshavebeenthislongforthesecoun-triesbecause,wartimeaside,theywerelongsparedwidelyvary-ingratesofmonetarygrowthandinflation.OntheeveofWorldWarIIwholesalepricesintheUnitedKingdomaveragedroughlythesameastwohundredyearsearlier,andintheUnitedStates,asonehundredyearsearlier.ThepostWorldWarIIinflationisanewphenomenoninthesecountries.Theyhaveexperienced 276FREETOCHOOSE:APersonalStatementmanyupsanddownsbutnotalongmovementinthesamedi-rection.ManycountriesinSouthAmericahavehadalesshappyheri-tage.Theyexperiencemuchshortertimedelaysamountingatmosttoafewmonths.IftheUnitedStatesdoesnotcureitsre-centpropensitytoindulgeinwidelyvaryingratesofinflation,thetimedelayswillshortenhereaswell.Thesequenceofeventsthatfollowsaslowingofmonetarygrowthisthesameasthatjustoutlinedexceptintheoppositedirection.Theinitialreductioninspendingisinterpretedasareductionindemandforspecificproducts,whichafteranin-tervalleadstoareductioninoutputandemployment.Afteran-otherintervalinflationslows,whichinturnisaccompaniedbyanexpansioninemploymentandoutput.Thealcoholicisthroughhisworstwithdrawalpainsandontheroadtocontentedabsti-nence.Alloftheseadjustmentsaresetinmotionbychangesintheratesofmonetarygrowthandinflation.Ifmonetarygrowthwerehighandsteady,sothat,letussay,pricestendedtoriseyearafteryearby10percent,theeconomycouldadjusttoit.Everybodywouldcometoanticipatea10percentinflation;wageswouldriseby10percentayearmorethantheyotherwisewould;interestrateswouldbe10percentagepointshigherthanotherwiseinordertocompensatethelenderforinflation;taxrateswouldbeadjustedforinflation,andsoonandon.Suchaninflationwoulddonogreatharm,butneitherwoulditserveanyfunction.Itwouldsimplyintroduceunnecessarycom-plexitiesinarrangements.Moreimportant,suchasituation,ifiteverdeveloped,wouldprobablynotbestable.Ifitwerepoliticallyprofitableandfeasibletogeneratea10percentinflation,thetemptationwouldbegreat,whenandifinflationeversettledthere,tomaketheinflation11or12or15percent.Zeroinflationisapoliticallyfeasibleobjective;a10percentinflationisnot.Thatistheverdictofexperience.MITIGATINGTHESIDEEFFECTSWeknownoexampleinhistoryinwhichaninflationhasbeenendedwithoutaninterimperiodofsloweconomicgrowthand TheCureforlnflation277higherthanusualunemployment.Thatisthebasisinexperienceforourjudgmentthatthereisnowaytoavoidsideeffectsofacureforinflation.However,itispossibletomitigatethosesideeffects,tomakethemmilder.Themostimportantdeviceformitigatingthesideeffectsistoslowinflationgraduallybutsteadilybyapolicyannouncedinadvanceandadheredtosoitbecomescredible.Thereasonforgradualnessandadvanceannouncementistogivepeopletimetoreadjusttheirarrangementsandtoinducethemtodoso.Manypeoplehaveenteredintolong-termcon-tractsforemployment,tolendorborrowmoney,toengageinproductionorconstructiononthebasisofanticipationsaboutthelikelyrateofinflation.Theselong-termcontractsmakeitdifficulttoreduceinflationrapidlyandmeanthattryingtodosowillimposeheavycostsonmanypeople.Giventime,thesecon-tractswillbecompletedorrenewedorrenegotiated,andcanthenbeadjustedtothenewsituation.Oneotherdevicehasprovedeffectiveinmitigatingthead-versesideeffectsofcuringinflationincludinganautomaticad-justmentforinflationinlonger-termcontracts,whatareknownasescalatorclauses.Themostcommonexampleisthecost-of-livingadjustmentclausethatisincludedinmanywagecontracts.Suchacontractspecifiesthatthehourlywageshallincreaseby,say,2percentplustherateofinflationorplusafractionoftherateofinflation.Inthatway,ifinflationislow,thewageincreaseindollarsislow;ifinflationishigh,thewageincreaseindollarsishigh;butineithercasethewagehasthesamepurchasingpower.Anotherexampleisforcontractsfortherentalofproperty.Insteadofbeingstatedasafixednumberofdollars,therentalcontractmayspecifythattherentshallbeadjustedfromyeartoyearbytherateofinflation.Rentalcontractsforretailstoresoftenspecifytherentasapercentageofthegrossreceiptsofthestore.Suchcontractshavenoexplicitescalatorclausebutimplicitlytheydo,sincethestore'sreceiptswilltendtorisewithinflation.Stillanotherexampleisforaloan.Aloanistypicallyforafixeddollarsumforafixedperiodatafixedannualrateofin-terest,say,$1,000foroneyearat10percent.Analternativeis 278FREETOCHOOSE:APersonalStatementtospecifytherateofinterestnotat10percentbut,say,2percentplustherateofinflation,sothatifinflationturnsouttobe5per-cent,theinterestratewillbe7percent;ifinflationturnsouttobe10percent,theinterestratewillbe12percent.Analternativethatisroughlyequivalentistospecifytheamounttoberepaidnotasafixednumberofdollarsbutasanumberofdollarsad-justedforinflation.Inoursimpleexampletheborrowerwouldowe$1,000increasedbytherateofinflationplusinterestat2percent.Ifinflationturnedouttobe5percent,hewouldowe$1,050;if10percent,$1,100;inbothcasesplusinterestat2percent.Exceptforwagecontracts,escalatorclauseshavenotbeencom-monintheUnitedStates.However,theyarespreading,especiallyintheformofvariableinterestmortgages.Andtheyhavebeencommoninjustaboutallcountriesthathaveexperiencedbothhighandvariableratesofinflationoveranyextensiveperiod.Suchescalatorclausesreducethetimedelaybetweenslowingdownmonetarygrowthandthesubsequentadjustmentofwagesandprices.Inthatwaytheyshortenthetransitionperiodandreducetheinterimsideeffects.However,usefulthoughtheyare,-escalatorclausesarefarfromapanacea.Itisimpossibletoescalateallcontracts(consider,forexample,papermoney),andcostlytoescalatemany.Amajoradvantageofusingmoneyispreciselytheabilitytocarryontransactionscheaplyandefficiently,anduniversalescalatorclausesreducethisadvantage.Farbettertohavenoinflationandnoescalatorclauses.Thatiswhyweadvocateresorttoescalatorclausesintheprivateeconomyonlyasadeviceforeasingthesideeffectsofcuringinflation,notasapermanentmeasure.Escalatorclausesarehighlydesirableasapermanentmeasureinthefederalgovernmentsector.SocialSecurityandotherre-tirementbenefits,salariesoffederalemployees,includingthesalariesofmembersofCongress,andmanyotheritemsofgovern-mentspendingarenowautomaticallyadjustedforinflation.How-ever,therearetwoglaringandinexcusablegaps:incometaxesandgovernmentborrowing.Adjustingthepersonalandcorporatetaxstructureforinflationsothata10percentpricerisewouldraisetaxesindollarsby10percent,not,asitdoesnow,bysome-thingover15percentontheaveragewouldeliminatetheim- TheCureforInflation279positionofhighertaxeswithouttheirhavingbeenvoted.Itwouldendthistaxationwithoutrepresentation.Bysodoing,itwouldalsoreducetheincentiveforthegovernmenttoinflate,sincetherevenuefrominflationwouldbereduced.Thecaseforinflation-proofinggovernmentborrowingisequallystrong.TheU.S.governmenthasitselfproducedtheinflationthathasmadethepurchaseoflong-termgovernmentbondssuchapoorinvestmentinrecentyears.Fairnessandhonestytowardcitizensonthepartoftheirgovernmentrequireintroducinges-calatorclausesintolong-termgovernmentborrowing.Priceandwagecontrolsaresometimesproposedasacureforinflation.Recently,asithasbecomeclearthatcontrolsarenotacure,theyhavebeenurgedasadeviceformitigatingthesideeffectsofacure.Itisclaimedthattheywillservethisfunctionbypersuadingthepublicthatthegovernmentisseriousinattack-inginflation.That,inturn,isexpectedtolowertheanticipationsoffutureinflationthatarebuiltintothetermsoflong-termcontracts.Priceandwagecontrolsarecounterproductiveforthispurpose.Theydistortthepricestructure,whichreducestheefficiencywithwhichthesystemworks.Theresultingloweroutputaddstotheadversesideeffectsofacureforinflationratherthanreducingthem.Priceandwagecontrolswastelabor,bothbecauseofthedistortionsinthepricestructureandbecauseoftheimmenseamountoflaborthatgoesintoconstructing,enforcing,andevad-ingthepriceandwagecontrols.Theseeffectsarethesamewhethercontrolsarecompulsoryorarelabeled"voluntary."Inpractice,priceandwagecontrolshavealmostalwaysbeenusedasasubstituteformonetaryandfiscalrestraint,ratherthanasacomplementtothem.Thisexperiencehasledparticipantsinthemarkettoregardtheimpositionofpriceandwagecontrolsasasignalthatinflationisheadingup,notdown.Ithasthereforeledthemtoraisetheirinflationexpectationsratherthantolowerthem.Priceandwagecontrolsoftenseemeffectiveforabriefperiodaftertheyareimposed.Quotedprices,thepricesthatenterintoindexnumbers,arekeptdownbecausethereareindirectwaysofraisingpricesandwagesloweringthequalityofitemsproduced,eliminatingservices,promotingworkers,andsoon.Butthen,as 280FREETOCHOOSE:APersonalStatementtheeasywaysofavoidingthecontrolsareexhausted,distortionsaccumulate,thepressuressuppressedbythecontrolsreachtheboilingpoint,theadverseeffectsgetworseandworse,andthewholeprogrambreaksdown.Theendresultismoreinflation,notless.Inlightoftheexperienceoffortycenturies,onlytheshorttimeperspectiveofpoliticiansandvoterscanexplaintherepeatedresorttopriceandwagecontrols."ACASESTUDYJapan'srecentexperienceprovidesanalmosttextbookillustrationofhowtocureinflation.AsFigure6shows,thequantityofmoneyinJapanbegangrowingathigherandhigherratesin1971,andbymid-1973,itwasgrowingmorethan25percentayear."Inflationdidnotresponduntilabouttwoyearslater,inearly1973.Thesubsequentdramaticriseininflationproducedafunda-Figure6.INFLATIONFOLLOWSMONEY:THECASEOFJAPANPercentincreasefromsamemonthyearearlierSource:JapaneseEconomicPlanningAgency TheCureforlnflation281mentalchangeinmonetarypolicy.Emphasisshiftedfromtheex-ternalvalueoftheyentheexchangeratetoitsinternalvalueinflation.Monetarygrowthwasreducedsharply,frommorethan25percentayeartobetween10and15percent.Itwaskeptthere,withminorexceptions,forfiveyears.(BecauseofJapan'shighrateofeconomicgrowth,monetarygrowthinthisrangewouldproduceroughlystableprices.ThecomparableratefortheUnitedStatesis3to5percent.)Abouteighteenmonthsaftermonetarygrowthstarteddeclining,inflationfollowedsuit,butittooktwoandahalfyearsbeforein-flationfellbelowdoubledigits.Inflationthenheldroughlycon-stantforabouttwoyearsdespiteamildupturninmonetarygrowth.Inflationthenstartedmovingrapidlytowardzeroinresponsetoanewdeclineinmonetarygrowth.Thenumbersoninflationinthechartareforconsumerprices.Wholesalepricesdidevenbetter.Theyactuallydeclinedaftermid-1977.ThepostwarshiftofworkersinJapanfromlow-pro-ductivitysectorstohigh-productivitysectors,suchasautomobilesandelectronics,hasmeantthatpricesofserviceshaverisensharplyrelativetopricesofcommodities.Asaresult,consumerpriceshaverisenrelativetowholesaleprices.Japanexperiencedlowergrowthandhigherunemploymentafteritslowedmonetarygrowth,particularlyduring1974beforeinflationstartedtorespondappreciablytotheslowermonetarygrowth.Thelowpointwasreachedattheendof1974.Outputthenbeganrecoveringandgrewthereaftermoremodestlythanintheboomyearsofthe1960sbutatahighlyrespectableratenonetheless:morethan5percentperyear.Priceandwagecontrolswerenotimposedatanytimeduringthetaperingdownofinflation.AndthetaperingdownoccurredatthesametimethatJapanwasadjustingtohigherpricesforcrudeoil.CONCLUSIONSFivesimpletruthsembodymostofwhatweknowaboutin-flation:1.Inflationisamonetaryphenomenonarisingfromamore 282FREETOCHOOSE:APersonalStatementrapidincreaseinthequantityofmoneythaninoutput(though,ofcourse,thereasonsfortheincreaseinmoneymaybevarious).2.Intoday'sworldgovernmentdeterminesorcandeterminethequantityofmoney.3.Thereisonlyonecureforinflation:aslowerrateofincreaseinthequantityofmoney.4.Ittakestimemeasuredinyears,notmonthsforinflationtodevelop;ittakestimeforinflationtobecured.5.Unpleasantsideeffectsofthecureareunavoidable.TheUnitedStateshasembarkedonrisingmonetarygrowthfourtimesduringthepasttwentyyears.Eachtimethehighermonetarygrowthhasbeenfollowedfirstbyeconomicexpansion,laterbyinflation.Eachtimetheauthoritieshaveslowedmonetarygrowthinordertosteminflation.Lowermonetarygrowthhasbeenfollowedbyaninflationaryrecession.Laterstill,inflationhasdeclinedandtheeconomyhasimproved.SofarthesequenceisidenticalwithJapan'sexperiencefrom1971to1975.Unfor-tunately,thecrucialdifferenceisthatwehavenotdisplayedthepatienceJapandidbycontinuingmonetaryrestraintlongenough.Instead,wehaveoverreactedtotherecessionbyacceleratingmonetarygrowth,settingoffonanotherroundofinflation,andcondemningourselvestohigherinflationplushigherunemploy-ment.Wehavebeenmisledbyafalsedichotomy:inflationorunem-ployment.Thatoptionisanillusion.Therealoptionisonlywhetherwehavehigherunemploymentasaresultofhigherin-flationorasatemporarysideeffectofcuringinflation. CHAPTER10TheTideIsTurningThefailureofWesterngovernmentstoachievetheirproclaimedobjectiveshasproducedawidespreadreactionagainstbiggovern-ment.InBritainthereactionsweptMargaretThatchertopowerin1979onaplatformpledgingherConservativegovernmenttoreversethesocialistpoliciesthathadbeenfollowedbybothLa-bourandearlierConservativegovernmentseversincetheendofWorldWarII.InSwedenin1976,thereactionledtothedefeatoftheSocialDemocraticpartyaftermorethanfourdecadesofuninterruptedrule.InFrancethereactionledtoadramaticchangeinpolicydesignedtoeliminategovernmentcontrolofpricesandwagesandsharplyreduceotherformsofgovernmentinterven-tion.IntheUnitedStatesthereactionhasbeenmanifestedmostdramaticallyinthetaxrevoltthathassweptthenation,symbo-lizedbythepassageofProposition13inCalifornia,andrealizedinanumberofstatesinconstitutionalamendmentslimitingstatetaxes.Thereactionmayproveshort-livedandbefollowed,afterabriefinterval,byaresumptionofthetrendtowardeverbiggergovernment.Thewidespreadenthusiasmforreducinggovernmenttaxesandotherimpositionsisnotmatchedbyacomparableen-thusiasmforeliminatinggovernmentprogramsexceptprogramsthatbenefitotherpeople.Thereactionagainstbiggovernmenthasbeensparkedbyrampantinflation,whichgovernmentscancontroliftheyfinditpoliticallyprofitabletodoso.Iftheydo,thereactionmightbemutedordisappear.Webelievethatthereactionismorethanaresponsetotransi-toryinflation.Onthecontrary,theinflationitselfispartlyare-sponsetothereaction.Asithasbecomepoliticallylessattractivetovotehighertaxestopayforhigherspending,legislatorshaveresortedtofinancingspendingthroughinflation,ahiddentaxthatcanbeimposedwithouthavingbeenvoted,taxationwithoutrep-283 284FREETOCHOOSE:APersonalStatementresentation.Thatisnomorepopularinthetwentiethcenturythanitwasintheeighteenth.Inaddition,thecontrastbetweentheostensibleobjectivesofgovernmentprogramsandtheiractualresultsacontrastthathasbeenapersistentthemeofearlierchaptersissopervasive,sowidespread,thatevenmanyofthestrongestsupportersofbiggovernmenthavehadtoacknowledgegovernmentfailurethoughtheirsolutionalmostalwaysturnsouttobestillbiggergovern-ment.Atideofopinion,onceitflowsstrongly,tendstosweepoverallobstacles,allcontraryviews.Equally,whenithascrestedandacontrarytidesetsin,thattootendstoflowstrongly.Thetideofopiniontowardeconomicfreedomandlimitedgov-ernmentthatAdamSmithandThomasJeffersondidsomuchtopromoteflowedstronglyuntillateinthenineteenthcentury.Thenthetideofopinionturnedinpartbecausetheverysuccessofeconomicfreedomandlimitedgovernmentinproducingeconomicgrowthandimprovingthewell-beingofthebulkofthepopula-tionrenderedtheevilsthatremained(andofcoursethereweremany)allthemoreprominentandevokedawidespreaddesiretodosomethingaboutthem.ThetidetowardFabiansocialismandNewDealliberalisminturnflowedstrongly,fosteringachangeinthedirectionofBritishpolicyearlyinthetwentiethcentury,andinU.S.policyaftertheGreatDepression.Thattrendhasnowlastedthree-quartersofacenturyinBritain,halfacenturyintheUnitedStates.It,too,iscresting.Itsintel-lectualbasishasbeenerodedasexperiencehasrepeatedlycontra-dictedexpectations.Itssupportersareonthedefensive.Theyhavenosolutionstooffertopresent-dayevilsexceptmoreofthesame.TheycannolongerarouseenthusiasmamongtheyoungwhonowfindtheideasofAdamSmithorKarlMarxfarmoreexcitingthanFabiansocialismorNewDealliberalism.ThoughthetidetowardFabiansocialismandNewDealliber-alismhascrested,thereisasyetnoclearevidencewhetherthetidethatsucceedsitwillbetowardgreaterfreedomandlimitedgovernmentinthespiritofSmithandJeffersonortowardanomnipotentmonolithicgovernmentinthespiritofMarxandMao.Thatvitalmatterhasnotyetbeendeterminedeitherfortheintellectualclimateofopinionorforactualpolicy.Tojudgefrom TheTidelsTurning285thepast,itwillbedeterminedforopinionfirstandpolicywillthenfollowsuit.IMPORTANCEOFINTELLECTUALCLIMATEOFOPINIONTheexampleofIndiaandJapan,discussedinChapter2,exem-plifiestheimportanceoftheintellectualclimateofopinion,whichdeterminestheunthinkingpreconceptionsofmostpeopleandtheirleaders,theirconditionedreflexestoonecourseofactionoranother.TheMeijileaderswhotookchargeofJapanin1867werededicatedprimarilytostrengtheningthepowerandgloryoftheircountry.Theyattachednospecialvaluetoindividualfreedomorpoliticalliberty.Theybelievedinaristocracyandpoliticalcon-trolbyanelite.Yettheyadoptedaliberaleconomicpolicythatledtothewideningofopportunitiesforthemassesand,duringtheearlydecades,greaterpersonalliberty.ThemenwhotookchargeinIndia,ontheotherhand,wereardentlydevotedtopo-liticalfreedom,personalliberty,anddemocracy.Theiraimwasnotonlynationalpowerbutalsoimprovementintheeconomicconditionsofthemasses.Yettheyadoptedacollectivisteconomicpolicythathamstringstheirpeoplewithrestrictionsandcontinuestounderminethelargemeasureofindividualfreedomandpo-liticallibertyencouragedbytheBritish.Thedifferenceinpoliciesreflectsfaithfullythedifferentintel-lectualclimatesofthetwoeras.Inthemid-nineteenthcenturyitwastakenforgrantedthatamoderneconomyshouldbeorganizedthroughfreetradeandprivateenterprise.Itprobablyneveroc-curredtotheJapaneseleaderstofollowanyothercourse.Inthemid-twentiethcentury,itwastakenforgrantedthatamoderneconomyshouldbeorganizedthroughcentralizedcontrolandfive-yearplans.ItprobablyneveroccurredtotheIndianleaderstofollowanyothercourse.ItisaninterestingsidelightthatbothviewscamefromGreatBritain.TheJapaneseadoptedthepoliciesofAdamSmith.TheIndiansadoptedthepoliciesofHaroldLaski.Ourownhistoryisequallystrongevidenceoftheimportanceoftheclimateofopinion.ItshapedtheworkoftheremarkablegroupofmenwhogatheredinIndependenceHallinPhiladelphia 286FREETOCHOOSE:APersonalStatementin1787towriteaconstitutionforthenewnationtheyhadhelpedtocreate.TheyweresteepedinhistoryandweregreatlyinfluencedbythecurrentofopinioninBritainthesamecurrentthatwaslatertoaffectJapanesepolicy.Theyregardedconcentrationofpower,especiallyinthehandsofgovernment,asthegreatdan-gertofreedom.TheydraftedtheConstitutionwiththatinmind.Itwasadocumentintendedtolimitgovernmentpower,tokeeppowerdecentralized,toreservetoindividualscontrolovertheirownlives.ThisthrustisevenclearerintheBillofRights,thefirsttenamendmentstotheConstitution,thaninthebasictext:"Congressshallmakenolawrespectinganestablishmentofre-ligion,orprohibitingthefreeexercisethereof;orabridgingthefreedomofspeech,orofthepress";"therightofthepeopletokeepandbeararmsshallnotbeinfringed";"theenumerationintheConstitution,ofcertainrights,shallnotbeconstruedtodenyordisparageothersretainedbythepeople";"thepowersnotdele-gatedtotheUnitedStatesbytheConstitution,norprohibitedbyittotheStates,arereservedtotheStates,respectively,ortothepeople"(fromAmendmentsI,II,IX,andX).Lateinthenineteenthcenturyandonintotheearlydecadesofthetwentieth,theintellectualclimateofopinionintheUnitedStateslargelyundertheinfluenceofthesameviewsfromBritainthatlateraffectedIndianpolicystartedtochange.Itmovedawayfromabeliefinindividualresponsibilityandrelianceonthemarkettowardabeliefinsocialresponsibilityandrelianceonthegovernment.Bythe1920sastrongminority,ifnotanactualmajority,ofcollegeanduniversityprofessorsactivelyconcernedwithpublicaffairsheldsocialistviews.TheNewRepublicandtheNationweretheleadingintellectualjournalsofopinion.TheSocialistpartyoftheUnitedStates,ledbyNormanThomas,hadbroaderroots,butmuchofitsstrengthwasincollegesanduniversities.InouropiniontheSocialistpartywasthemostinfluentialpo-liticalpartyintheUnitedStatesinthefirstdecadesofthetwenti-ethcentury.Becauseithadnohopeofelectoralsuccessonanationallevel(itdidelectafewlocalofficials,notablyinMil-waukee,Wisconsin),itcouldaffordtobeapartyofprinciple.TheDemocratsandRepublicanscouldnot.Theyhadtobepartiesofexpediencyandcompromise,inordertoholdtogetherwidely TheTidelsTurning287disparatefactionsandinterests.Theyhadtoavoid"extremism,"keeptothemiddleground.TheywerenotexactlyTweedledumandTweedledeebutclosetoit.Nonetheless,inthecourseoftimebothmajorpartiesadoptedthepositionoftheSocialistparty.TheSocialistpartyneverreceivedmorethan6percentofthepopularvoteforPresident(in1912forEugeneDebs).Itgotlessthan1percentin1928andonly2percentin1932(forNormanThomas).Yetalmosteveryeconomicplankinits1928presiden-tialplatformhasbynowbeenenactedintolaw.TherelevantplanksarereproducedinAppendixA.Oncethechangeintheclimateofopinionhadspreadtoawiderpublic,asitdidaftertheGreatDepression,theConstitutionshapedbyaverydifferentclimateofopinionprovedatmostasourceofdelaytothegrowthofgovernmentpower,notanob-stacle.InMr.Dooley'swords,"Nomatterwhetherth'constitutionfollowsth'flagornot,th'supremecourtfollowsth'ilictionre-turns."ThewordsoftheConstitutionwerereinterpretedandgivennewmeaning.Whathadbeenintendedtobebarrierstotheextensionofgovernmentpowerwererenderedineffective.AsRaoulBergerwritesinhisauthoritativeexaminationoftheCourt'sinterpretationofoneamendment,TheFourteenthAmendmentisthecasestudyparexcellenceofwhatJusticeHarlandescribedastheSupremeCourt's"exerciseoftheamendingpower,"itscontinuingrevisionoftheConstitutionundertheguiseofinterpretation....TheCourt,itissafetosay,hasfloutedthewilloftheframersandsubstitutedaninterpretationinflatcontradictionoftheoriginalde-sign....SuchconductimpelsonetoconcludethattheJusticesarebecomeialawuntothemselves.OPINIONANDPOPULARBEHAVIOREvidencethatthetidetowardFabiansocialismandNewDealliberalismhascrestedcomesnotonlyfromthewritingofintel-lectuals,notonlyfromthesentimentsthatpoliticiansexpressonthehustings,butalsofromthewaypeoplebehave.Theirbehaviorisnodoubtinfluencedbyopinion.Initsturn,popularbehavior 288FREETOCHOOSE:APersonalStatementbothreinforcesthatopinionandplaysamajorroleintranslatingitintopolicy.AsA.V.Dicey,withremarkableprescience,wrotemorethansixtyyearsago,"Iftheprogressofsocialisticlegislationbear-rested,thecheckwillbedue,notsomuchtotheinfluenceofanythinkerastosomepatentfactwhichshallcommandpublicatten-tion;such,forinstance,asthatincreaseintheweightoftaxationwhichisapparentlytheusual,ifnottheinvariable,concomitant2ofasocialistpolicy."Inflation,hightaxes,andthepatentineffi-ciency,bureaucracy,andexcessiveregulationstemmingfrombiggovernmentarehavingtheeffectsDiceypredicted.Theyarelead-ingpeopletotakemattersintotheirownhands,totrytofindwaysaroundgovernmentobstacles.PatBrennanbecamesomethingofacelebrityin1978becausesheandherhusbandwentintocompetitionwiththeU.S.PostOffice.TheysetupbusinessinabasementinRochester,NewYork,guaranteeingdeliverythesamedayofparcelsandlettersindowntownRochesteratalowercostthanthePostOfficecharged.Soontheirbusinesswasthriving.Thereisnodoubtthattheywerebreakingthelaw.ThePostOfficetookthemtocourt,andtheylostafteralegalbattlethatwentallthewaytotheSupremeCourt.Localbusinessmenpro-videdfinancialbacking.SaidPatBrennan,Ithinkthere'sgoingtobeaquietrevoltandperhapswe'rethebe-ginningofit....Youseepeoplebuckingthebureaucrats,whenyearsagoyouwouldn'tdreamofdoingthatbecauseyou'dhesquashed....PeoplearedecidingthattheirfatesaretheirownandnotuptosomebodyinWashingtonwhohasnointerestinthemwhatsoever.Soit'snotaquestionofanarchy,butit'saquestionofpeoplerethinkingthepowerofthebureaucratsandrejectingit....Thequestionoffreedomcomesupinanykindofabusinesswhetheryouhavetherighttopursueitandtherighttodecidewhatyou'regoingtodo.Thereisalsothequestionofthefreedomoftheconsumerstoutilizeaservicethattheyfindisinexpensiveandfarsuperior,andaccordingtothefederalgovernmentandthebodyoflawscalledthePrivateExpressStatutes,Idon'thavethefreedomtostartabusinessandtheconsumerdoesnothavethefreedomtouseitwhichseemsverystrangeinacountrylikethisthattheentirecontextofthecountryisbasedonfreedomandfreeenterprise. TheTidelsTurning289PatBrennanisexpressinganaturalhumanresponsetotheattemptbyotherpeopletocontrolherlifewhenshethinksit'snoneoftheirbusiness.Thefirstreactionisresentment;thesecondistoattempttogetaroundobstaclesbylegalmeans;finally,therecomesadeclineinrespectforlawingeneral.Thisfinalconse-quenceisdeplorablebutinevitable.AstrikingexampleiswhathashappenedinGreatBritaininreactiontoconfiscatorytaxes.SaysaBritishauthority,GrahamTurner:Ithinkthatit'sperfectlyfairtosaythatwehavebecomeinthecourseofthelasttenorfifteenyearsanationoffiddlers.Howdotheydoit?Theydoitinacolossalvarietyofways.Let'stakeitrightatthelowestlevel.Takeasmallgrocerinacountryarea,...howdoeshemakemoney?Hefindsoutthatbybuyingthroughregularwholesalershe'salwaysgottouseinvoices,butifhegoestotheCashandCarryandbuyshisgoodsfromthere,...theprofitmarginonthosegoodscanbeuntaxedbecausethetaxin-spectorssimplydon'tknowthathe'shadthosegoods.That'sthewayhedoesit.Thenifyoutakeitatthetopendifyoutakeacompanydirectorwell,thereareallkindsofwaysthattheycandoit.Theybuytheirfoodthroughthecompany,theyhavetheirholidaysonthecompany,theyputtheirwivesascompanydirectorseventhoughtheynevervisitthefactory.Theybuildtheirhousesonthecompanybyaverysimpledeviceofbuildingafactoryatthesametimeasahouse.Itgoesabsolutelyrightthroughtherange,fromtheordinarywork-ing-classpersondoingquitemenialjobs,righttothetopendbusi-nessmen,seniorpoliticians,membersoftheCabinet,membersoftheShadowCabinet--theyalldoit.Ithinkalmosteverybodynowfeelsthatthetaxsystemisbasicallyunfair,andeverybodywhocan,triestofindawayroundthattaxsystem.Nowoncethere'saconsensusthatataxsystemisunfair,thecountryineffectbecomesakindofconspiracyandeverybodyhelpseachothertofiddle.You'venodifficultyfiddlinginthiscountrybecauseotherpeopleactuallywanttohelpyou.Nowfifteenyearsagothatwouldhavebeenquitedifferent.Peoplewouldhavesaid,hey,thisisnotquiteasitshouldbe.Orconsiderthis,fromanarticleintheWallStreetJournalbyMelvynB.Krausson"TheSwedishTaxRevolt"(February1,1979,p.18): 290FREETOCHOOSE:APersonalStatementTheSwedishrevolutionagainstthehighesttaxesintheWestisbasedonindividualinitiative.Insteadofrelyingonpoliticians,ordi-narySwedeshavetakenmattersintotheirownhandsandsimplyrefusetopay.Thiscanhedoneinseveralways,manyofthemlegal....OnewayaSwederefusestopaytaxesisbyworkingless....SwedessailinginStockholm'sbeautifularchipelagovividlyillustratethecountry'squiettaxrevolution.TheSwedesescapetaxbydoing-it-themselves....BarterisanotherwaySwedesresisthightaxes.ToenticeaSwedishdentistoffthetenniscourtandintohisofficeisnoeasymatter.Butalawyerwithatoothachehasachance.Thelawyercanofferlegalservicesinreturnfordentalservices.Barteringsavesthedentisttwotaxes:hisownincometaxplusthetaxonthelawyer'sfees.Thoughbarterissupposedtobeasignofaprimitiveeconomy,highSwedishtaxeshavemadeitapopularwayofdoingbusinessinthewelfarestate,particularlyintheprofessions....ThetaxrevolutioninSwedenisnotarichman'srevolution.Itistakingplaceatallincomelevels....TheSwedishwelfarestateisinadilemma.Itsideologypushesformoreandmoregovernmentspending....Butitscitizensreachasaturationpointafterwhichfurthertaxincreasesareresisted....theonlywaysSwedescanresistthehighertaxesisbyactinginwaysdetrimentaltotheeconomy.Risingpublicexpenditurestherebyun-dercuttheeconomicbaseuponwhichthewelfareeconomydepends.WHYSPECIALINTERESTSPREVAILIfthecrestingofthetidetowardFabiansocialismandNewDealliberalismistobefollowedbyamovetowardafreersocietyandamorelimitedgovernmentratherthantowardatotalitarianso-ciety,thepublicmustnotonlyrecognizethedefectsofthepresentsituationbutalsohowithascomeaboutandwhatwecandoaboutit.Whyaretheresultsofpoliciessooftentheoppositeoftheirostensibleobjectives?Whydospecialinterestsprevailoverthegeneralinterest?Whatdevicescanweusetostopandreversetheprocess?ThePowerinWashingtonWheneverwevisitWashington,D.C.,weareimpressedalloveragainwithhowmuchpowerisconcentratedinthatcity.WalkthehallsofCongress,andthe435membersoftheHouseplus TheTidelsTurning291the100senatorsarehardtofindamongtheir18,000employeesabout65foreachsenatorand27foreachmemberoftheHouse.Inaddition,themorethan15,000registeredlobbyistsoftenaccompaniedbysecretaries,typists,researchers,orrepre-sentativesofthespecialinteresttheyrepresentwalkthesamehallsseekingtoexerciseinfluence.Andthisisbutthetipoftheiceberg.Thefederalgovernmentemployscloseto3millioncivilians(excludingtheuniformedmilitaryforces).Over350,000areinWashingtonandthesur-roundingmetropolitanarea.Countlessothersareindirectlyem-ployedthroughgovernmentcontractswithnominallyprivateor-ganizations,orareemployedbylabororbusinessorganizationsorotherspecialinterestgroupsthatmaintaintheirheadquarters,oratleastanoffice,inWashingtonbecauseitistheseatofgov-ernment.Washingtonisamagnetforlawyers.Manyofthecountry'slargestandmostaffluentfirmsarelocatedthere.Therearesaidtobemorethan7,000lawyersinWashingtonengagedinfederalorregulatorypracticealone.Over160out-of-townlawfirmshaveWashingtonoffices.'ThepowerinWashingtonisnotmonolithicpowerinafewhands,asitisintotalitariancountriesliketheSovietUnionorRedChinaor,closertohome,Cuba.Itisfragmentedintomanybitsandpieces.Everyspecialgrouparoundthecountrytriestogetitshandsonwhateverbitsandpiecesitcan.Theresultisthatthereishardlyanissueonwhichgovernmentisnotonbothsides.Forexample,inonemassivebuildinginWashingtonsomegovernmentemployeesareworkingfull-timetryingtodeviseandimplementplanstospendourmoneytodiscourageusfromsmok-ingcigarettes.Inanothermassivebuilding,perhapsmilesawayfromthefirst,otheremployees,equallydedicated,equallyhard-working,areworkingfull-timespendingourmoneytosubsidizefarmerstogrowtobacco.InonebuildingtheCouncilonWageandPriceStabilityisworkingovertimetryingtopersuade,pressure,hornswogglebusi-nessmentoholddownpricesandworkerstorestraintheirwagedemands.InanotherbuildingsomesubordinateagenciesintheDepartmentofAgricultureareadministeringprogramstokeep 292FREETOCHOOSE:APersonalStatementup,orraise,thepricesofsugar,cotton,andnumerousotheragriculturalproducts.InstillanotherbuildingofficialsoftheDepartmentofLaboraremakingdeterminationsof"prevailingwages"undertheDavis-BaconActthatarepushingupthewageratesofconstructionworkers.CongresssetupaDepartmentofEnergyemploying20,000personstopromotetheconservationofenergy.ItalsosetupanEnvironmentalProtectionAgencyemployingover12,000per-sonstoissueregulationsandorders,mostofwhichrequiretheuseofmoreenergy.Nodoubt,withineachagencytherearesub-groupsworkingatcross-purposes.Thesituationwouldbeludicrousifitwerenotsoserious.Whilemanyoftheseeffectscancelout,theircostsdonot.Eachprogramtakesmoneyfromourpocketsthatwecouldusetobuygoodsandservicestomeetourseparateneeds.Eachofthemusesable,skilledpeoplewhocouldbeengagedinproductiveactivities.Eachonegrindsoutrules,regulations,redtape,formstofillinthatbedevilusall.ConcentratedversusDiffuselnterestsBoththefragmentationofpowerandtheconflictinggovernmentpoliciesarerootedinthepoliticalrealitiesofademocraticsys-temthatoperatesbyenactingdetailedandspecificlegislation.Suchasystemtendstogiveunduepoliticalpowertosmallgroupsthathavehighlyconcentratedinterests,togivegreaterweighttoobvious,direct,andimmediateeffectsofgovernmentactionthantopossiblymoreimportantbutconcealed,indirect,anddelayedeffects,tosetinmotionaprocessthatsacrificesthegeneralinter-esttoservespecialinterests,ratherthantheotherwayaround.Thereis,asitwere,aninvisiblehandinpoliticsthatoperatesinpreciselytheoppositedirectiontoAdamSmith'sinvisiblehand.Individualswhointendonlytopromotethegeneralinterestareledbytheinvisiblepoliticalhandtopromoteaspecialinterestthattheyhadnointentiontopromote.Afewexampleswillclarifythenatureoftheproblem.Con-siderthegovernmentprogramoffavoringthemerchantmarinebysubsidiesforshipbuildingandoperationsandbyrestricting TheTidelsTurning293muchcoastaltraffictoAmerican-flagships.Theestimatedcosttothetaxpayerisabout$600millionayearor$15,000peryearforeachofthe40,000peopleactivelyengagedintheindustry.Shipowners,operators,andtheiremployeeshaveastrongincen-tivetogetandkeepthosemeasures.Theyspendmoneylavishlyforlobbyingandpoliticalcontributions.Ontheotherhand,$600milliondividedbyapopulationofover200millionpersonscomesto$3apersonperyear;$12forafamilyoffour.WhichofuswillvoteagainstacandidateforCongressbecauseheimposedthatcostonus?Howmanyofuswilldeemitworthspendingmoneytodefeatsuchmeasures,orevenspendingtimetobecomeinformedaboutsuchmatters?Asanotherexample,theownersofstockinsteelcompanies,theexecutivesofthesecompanies,thesteelworkersallknowverywellthatanincreaseintheimportationofforeignsteelintotheUnitedStateswillmeanlessmoneyandfewerjobsforthem.Theyclearlyrecognizethatgovernmentactiontokeepoutim-portswillbenefitthem.WorkersinexportindustrieswhowilllosetheirjobsbecausefewerimportsfromJapanmeanfewerex-portstoJapandonotknowthattheirjobsarethreatened.Whentheylosetheirjobs,theydonotknowwhy.Thepurchasersofautomobilesorofkitchenstovesorofotheritemsmadeofsteelmaycomplainaboutthehigherpricestheyhavetopay.Howmanypurchaserswilltracethehigherpricebacktotherestrictiononsteelimportsthatforcesmanufacturerstousehigher-priceddomesticsteelinsteadoflower-pricedforeignsteel?Theyarefarmorelikelytoblame"greedy"manufacturersor"grasping"tradeunionists.Agricultureisanotherexample.FarmersdescendonWash-ingtonintheirtractorstodemonstrateforhigherpricesupports.BeforethechangeintheroleofgovernmentthatmadeitnaturaltoappealtoWashington,theywouldhaveblamedthebadweatherandrepairedtochurches,nottheWhiteHouse,forassistance.Evenforsoindispensableandvisibleaproductasfood,nocon-sumersparadeinWashingtontoprotestthepricesupports.Andthefarmersthemselves,eventhoughagricultureisthemajorexportindustryoftheUnitedStates,donotrecognizetheextenttowhichtheirownproblemsarisefromgovernment'sinterfer- 294FREETOCHOOSE:APersonalStatementencewithforeigntrade.Itneveroccurstothem,forexample,thattheymaybeharmedbyrestrictionsonsteelimports.Ortotakeaverydifferentexample,theU.S.PostOffice.Everymovementtoremovethegovernmentmonopolyoffirst-classmailisvigorouslyopposedbythetradeunionsofpostalworkers.Theyrecognizeveryclearlythatopeningpostalservicetoprivateenterprisemaymeanthelossoftheirjobs.Itpaysthemtotrytopreventthatoutcome.AsthecaseoftheBrennansinRochestersuggests,ifthepostalmonopolywereabolished,avigorousprivateindustrywouldarise,containingthousandsoffirmsandemployingtensofthousandsofworkers.Fewofthepeoplewhomightfindarewardingopportunityinsuchanindustryevenknowthatthepossibilityexists.TheyarecertainlynotinWash-ingtontestifyingtotherelevantcongressionalcommittee.Thebenefitanindividualgetsfromanyoneprogramthathehasaspecialinterestinmaybemorethancanceledbythecoststohimofmanyprogramsthataffecthimlightly.Yetitpayshimtofavortheoneprogram,andnotopposetheothers.Hecanreadilyrecognizethatheandthesmallgroupwiththesamespe-cialinterestcanaffordtospendenoughmoneyandtimetomakeadifferenceinrespectoftheoneprogram.Notpromotingthatprogramwillnotpreventtheothers,whichdohimharm,frombeingadopted.Toachievethat,hewouldhavetobewillingandabletodevoteasmuchefforttoopposingeachofthemashedoestofavoringhisown.Thatisclearlyalosingproposition.Citizensareawareoftaxesbuteventhatawarenessisdiffusedbythehiddennatureofmosttaxes.Corporateandexcisetaxesarepaidforinthepricesofthegoodspeoplebuy,withoutseparateaccounting.Mostincometaxesarewithheldatsource.Inflation,theworstofthehiddentaxes,defieseasyunderstanding.Onlysalestaxes,propertytaxes,andincometaxesinexcessofwith-holdingaredirectlyandpainfullyvisibleandtheyarethetaxesonwhichresentmentcenters.BureaucracyThesmallertheunitofgovernmentandthemorerestrictedthefunctionsassignedgovernment,thelesslikelyitisthatitsactions TheTidelsTurning295willreflectspecialinterestsratherthanthegeneralinterest.TheNewEnglandtownmeetingistheimagethatcomestomind.Thepeoplegovernedknowandcancontrolthepeoplegoverning;eachpersoncanexpresshisviews;theagendaissufficientlysmallthateveryonecanbereasonablywellinformedaboutminoritemsaswellasmajorones.Asthescopeandroleofgovernmentexpandswhetherbycoveringalargerareaandpopulationorbyperformingawidervarietyoffunctionstheconnectionbetweenthepeoplegov-ernedandthepeoplegoverningbecomesattenuated.Itbecomesimpossibleforanylargefractionofthecitizenstobereasonablywellinformedaboutallitemsonthevastlyenlargedgovernmentagenda,and,beyondapoint,evenaboutallmajoritems.Thebureaucracythatisneededtoadministergovernmentgrowsandincreasinglyinterposesitselfbetweenthecitizenryandtherepre-sentativestheychoose.Itbecomesbothavehiclewherebyspecialinterestscanachievetheirobjectivesandanimportantspecialin-terestinitsownrightamajorpartofthenewclassreferredtoinChapter5.CurrentlyintheUnitedStates,anythinglikeeffectivedetailedcontrolofgovernmentbythepublicislimitedtovillages,towns,smallercities,andsuburbanareasandeventhereonlytothosemattersnotmandatedbythestateorfederalgovernment.Inlargecities,states,Washington,wehavegovernmentofthepeo-plenotbythepeoplebutbyalargelyfacelessgroupofbureau-crats.Nofederallegislatorcouldconceivablyevenread,letaloneanalyzeandstudy,allthelawsonwhichhemustvote.Hemustdependonhisnumerousaidesandassistants,oroutsidelobbyists,orfellowlegislators,orsomeothersourceformostofhisdeci-sionsonhowtovote.Theunelectedcongressionalbureaucracyalmostsurelyhasfarmoreinfluencetodayinshapingthedetailedlawsthatarepassedthandoourelectedrepresentatives.Thesituationisevenmoreextremeintheadministrationofgovernmentprograms.Thevastfederalbureaucracyspreadthroughthemanygovernmentdepartmentsandindependentagenciesisliterallyoutofcontroloftheelectedrepresentativesofthepublic.ElectedPresidentsandsenatorsandrepresenta- 296FREETOCHOOSE:APersonalStatementtivescomeandgobutthecivilserviceremains.Higher-levelbureaucratsarepastmastersattheartofusingredtapetodelayanddefeatproposalstheydonotfavor;ofissuingrulesandregula-tionsas"interpretations"oflawsthatinfactsubtly,orsometimescrudely,altertheirthrust;ofdraggingtheirfeetinadministeringthosepartsoflawsofwhichtheydisapprove,whilepressingonwiththosetheyfavor.Morerecently,thefederalcourts,facedwithincreasinglycomplexandfar-reachinglegislation,havedepartedfromtheirtraditionalroleasimpersonalinterpretersofthelawandhavebecomeactiveparticipantsinbothlegislationandadministration.Indoingso,theyhavebecomepartofthebureaucracyratherthananindependentpartofthegovernmentmediatingbetweentheotherbranches.Bureaucratshavenotusurpedpower.Theyhavenotdeliberatelyengagedinanykindofconspiracytosubvertthedemocraticprocess.Powerhasbeenthrustonthem.Itissimplyimpossibletoconductcomplexgovernmentactivitiesinanyotherwaythanbydelegatingresponsibility.Whenthatleadstoconflictsbetweenbureaucratsdelegateddifferentfunctionsas,recently,betweenbureaucratsinstructedtopreserveandimprovetheenvironmentandbureaucratsinstructedtofostertheconservationandproduc-tionofenergytheonlysolutionthatisavailableistogivepowertoanothersetofbureaucratstoresolvetheconflicttocutredtape,itissaid,whentherealproblemisnotredtapebutacon-flictbetweendesirableobjectives.Thehigh-levelbureaucratswhohavebeenassignedthesefunc-tionscannotimaginethatthereportstheywriteorreceive,themeetingstheyattend,thelengthydiscussionstheyholdwithotherimportantpeople,therulesandregulationstheyissuethatallthesearetheproblemratherthanthesolution.Theyinevitablybecomepersuadedthattheyareindispensable,thattheyknowmoreaboutwhatshouldbedonethanuninformedvotersorself-interestedbusinessmen.Thegrowthofthebureaucracyinsizeandpoweraffectseverydetailoftherelationbetweenacitizenandhisgovernment.Ifyouhaveagrievanceorcanseeawayofgaininganadvantagefromagovernmentmeasure,yourfirstrecoursethesedaysis TheTidelsTurning297likelytobetotrytoinfluenceabureaucrattoruleinyourfavor.Youmayappealtoyourelectedrepresentative,butifso,youareperhapsmorelikelytoaskhimtointerveneonyourbehalfwithabureaucratthantoaskhimtosupportaspecificpieceoflegislation.Increasingly,successinbusinessdependsonknowingone'swayaroundWashington,havinginfluencewithlegislatorsandbureaucrats.Whathascometobecalleda"revolvingdoor"hasdevelopedbetweengovernmentandbusiness.ServingatermasacivilservantinWashingtonhasbecomeanapprenticeshipforasuccessfulbusinesscareer.Governmentjobsaresoughtlessasthefirststepinalifetimegovernmentcareerthanforthevalueofcontactsandinsideknowledgetoapossiblefutureemployer.Conflict-of-interestlegislationproliferates,butatbestonlyelim-inatesthemostobviousabuses.Whenaspecialinterestseeksbenefitsthroughhighlyvisiblelegislation,itnotonlymustclotheitsappealintherhetoricofthegeneralinterest,itmustpersuadeasignificantsegmentofdisinterestedpersonsthatitsappealhasmerit.Legislationrecog-nizedasnakedself-interestwillseldombeadoptedasillustratedbytherecentdefeatoffurtherspecialprivilegestothemerchantmarinedespiteendorsementbyPresidentCarterafterreceivingsubstantialcampaignassistancefromtheunionsinvolved.Protect-ingthesteelindustryfromforeigncompetitionispromotedascontributingtonationalsecurityandfullemployment;subsidizingagricultureasassuringareliablesupplyoffood;thepostalmo-nopolyascementingthenationtogether;andsoonwithoutend.Nearlyacenturyago,A.V.Diceyexplainedwhytherhetoricintermsofthegeneralinterestissopersuasive:"Thebeneficialeffectofstateintervention,especiallyintheformoflegislation,isdirect,immediate,andsotospeak,visible,whileitsevileffectsaregradualandindirect,andlieoutofsight....Hencethemajorityofmankindmustalmostofnecessitylookwithunduefavorupongovernmentalintervention."This"naturalbias,"ashetermedit,infavorofgovernmentinterventionisenormouslystrengthenedwhenaspecialinterestseeksbenefitsthroughadministrativeproceduresratherthanlegis-lation.AtruckingcompanythatappealstotheICCforafavor- 298FREETOCHOOSE:APersonalStatementablerulingalsousestherhetoricofthegeneralinterest,butnooneislikelytopressitonthatpoint.Thecompanyneedper-suadenooneexceptthebureaucrats.Oppositionseldomcomesfromdisinterestedpersonsconcernedwiththegeneralinterest.Itcomesfromotherinterestedparties,shippersorothertruckers,whohavetheirownaxestogrind.Thecamouflagewearsverythinindeed.Thegrowthofthebureaucracy,reinforcedbythechangingroleofthecourts,hasmadeamockeryoftheidealexpressedbyJohnAdamsinhisoriginal(1779)draftoftheMassachusettsconstitution:"agovernmentoflawsinsteadofmen."Anyonewhohasbeensubjectedtoathoroughcustomsinspectiononre-turningfromatripabroad,hadhistaxreturnsauditedbytheofficialInternalRevenueService,beensubjecttoinspectionbyanofOSHAoranyofalargenumberoffederalagencies,hadoc-casiontoappealtothebureaucracyforarulingorapermit,orhadtodefendahigherpriceorwagebeforetheCouncilonWageandPriceStabilityisawareofhowfarwehavecomefromaruleoflaw.Thegovernmentofficialissupposedtobeourservant.WhenyousitacrossthedeskfromarepresentativeoftheInternalRevenueServicewhoisauditingyourtaxreturn,whichoneofyouisthemasterandwhichtheservant?Ortouseadifferentillustration.ArecentWallStreetJournalstory(June25,1979)isheadlined:"SEC'sChargesSettledbyaFormerDirector"ofacorporation.Theformerdirector,MauriceG.McGill,isreportedassaying,"'ThequestionwasntwhetherIhadpersonallybenefitedfromthetransactionbutratherwhattheresponsibilitiesofanoutsidedirectorare.Itwouldbeinterestingtotakeittotrialbutmydecisiontosettlewaspurelyeconomic.ThecostoffightingtheSECtocompletionwouldbeenormous."Winorlose,Mr.McGillwouldhavehadtopayhislegalcosts.Winorlose,theSECofficialprosecutingthecasehadlittleatstakeexceptstatusamongfellowbureaucrats.WHATWECANDONeedlesstosay,thoseofuswhowanttohaltandreversethere-centtrendshouldopposeadditionalspecificmeasurestoexpand TheTidelsTurning299furtherthepowerandscopeofgovernment,urgerepealandre-formofexistingmeasures,andtrytoelectlegislatorsandexecu-tiveswhosharethatview.Butthatisnotaneffectivewaytoreversethegrowthofgovernment.Itisdoomedtofailure.Eachofuswoulddefendourownspecialprivilegesandtrytolimitgovernmentatsomeoneelse'sexpense.Wewouldbefightingamany-headedhydrathatwouldgrownewheadsfasterthanwecouldcutoldonesoff.Ourfoundingfathershaveshownusamorepromisingwaytoproceed:bypackagedeals,asitwere.Weshouldadoptself-denyingordinancesthatlimittheobjectiveswetrytopursuethroughpoliticalchannels.Weshouldnotconsidereachcaseonitsmerits,butlaydownbroadruleslimitingwhatgovernmentmaydo.ThemeritofthisapproachiswellillustratedbytheFirstAmendmenttotheConstitution.Manyspecificrestrictionsonfreedomofspeechwouldbeapprovedbyasubstantialmajorityofbothlegislatorsandvoters.AmajoritywouldverylikelyfavorpreventingNazis,Seventh-DayAdventists,Jehovah'sWitnesses,theKuKluxKlan,vegetarians,oralmostanyotherlittlegroupyoumightnamefromspeakingonastreetcorner.ThewisdomoftheFirstAmendmentisthatittreatsthesecasesasabundle.Itadoptsthegeneralprinciplethat"Congressshallmakenolaw...abridgingthefreedomofspeech";nocon-siderationofeachcaseonitsmerits.Amajoritysupporteditthenand,wearepersuaded,amajoritywouldsupportittoday.Eachofusfeelsmoredeeplyaboutnothavingourfreedominterferedwithwhenweareintheminoritythanwedoaboutinterferingwiththefreedomofotherswhenweareinamajorityandamajorityofuswillatonetimeoranotherbeinsomeminority.Weneed,inouropinion,theequivalentoftheFirstAmend-menttolimitgovernmentpowerintheeconomicandsocialareaaneconomicBillofRightstocomplementandreinforcetheoriginalBillofRights.TheincorporationofsuchaBillofRightsintoourConstitu-tionwouldnotinandofitselfreversethetrendtowardbiggergovernmentorpreventitfrombeingresumedanymorethantheoriginalConstitutionhaspreventedbothagrowthandacen- 300FREETOCHOOSE:APersonalStatementtralizationofgovernmentpowerfarbeyondanythingtheframersintendedorenvisioned.Awrittenconstitutionisneithernecessarynorsufficienttodeveloporpreserveafreesociety.AlthoughGreatBritainhasalwayshadonlyan"unwritten"constitution,itdevelopedafreesociety.ManyLatinAmericancountriesthatadoptedwrittenconstitutionscopiedfromtheUnitedStatesCon-stitutionpracticallywordforwordhavenotsucceededinestab-lishingafreesociety.Inorderforawrittenorforthatmatter,unwrittenconstitutiontobeeffectiveitmustbesupportedbythegeneralclimateofopinion,amongboththepublicatlargeanditsleaders.Itmustincorporateprinciplesthattheyhavecometobelieveindeeply,sothatitistakenforgrantedthattheexecu-tive,thelegislature,andthecourtswillbehaveinconformitytotheseprinciples.Aswehaveseen,whenthatclimateofopinionchanges,sowillpolicy.Nonetheless,webelievethattheformulationandadoptionofaneconomicBillofRightswouldbethemosteffectivestepthatcouldbetakentoreversethetrendtowardeverbiggergovern-mentfortworeasons:first,becausetheprocessofformulatingtheamendmentswouldhavegreatvalueinshapingtheclimateofopinion;second,becausetheenactmentofamendmentsisamoredirectandeffectivewayofconvertingthatclimateofopinionintoactualpolicythanourpresentlegislativeprocess.GiventhatthetideofopinioninfavorofNewDealliberalismhascrested,thenationaldebatethatwouldbegeneratedinfor-mulatingsuchaBillofRightswouldhelptoassurethatopinionturneddefinitelytowardfreedomratherthantowardtotalitarian-ism.Itwoulddisseminateabetterunderstandingoftheproblemofbiggovernmentandofpossiblecures.Thepoliticalprocessinvolvedintheadoptionofsuchamend-mentswouldbemoredemocratic,inthesenseofenablingthevaluesofthepublicatlargetodeterminetheoutcome,thanourpresentlegislativeandadministrativestructure.Onissueafterissuethegovernmentofthepeopleactsinwaysthatthebulkofthepeopleoppose.Everypublicopinionpollshowsthatalargemajorityofthepublicopposescompulsorybusingforintegratingschoolsyetbusingnotonlycontinuesbutiscontinuouslyex-panded.Verymuchthesamethingistrueofaffirmativeaction TheTidelsTurning301programsinemploymentandhighereducationandofmanyothermeasuresdirectedatimplementingviewsfavorabletoequalityofoutcome.Sofarasweknow,nopollsterhasaskedthepublic,"Areyougettingyourmoney'sworthforthemorethan40per-centofyourincomebeingspentonyourbehalfbygovernment?"Butisthereanydoubtwhatthepollwouldshow?Forthereasonsoutlinedintheprecedingsection,thespecialinterestsprevailattheexpenseofthegeneralinterest.Thenewclass,enshrinedintheuniversities,thenewsmedia,andespeciallythefederalbureaucracy,hasbecomeoneofthemostpowerfulofthespecialinterests.Thenewclasshasrepeatedlysucceededinimposingitsviews,despitewidespreadpublicobjection,andoftendespitespecificlegislativeenactmentstothecontrary.Theadoptionofamendmentshasthegreatvirtueofbeingdecentralized.Itrequiresseparateactioninthree-quartersofthestates.EventheproposalofnewamendmentscanbypassCon-gress:ArticleVoftheConstitutionprovidesthatthe"Con-gress...ontheapplicationoftheLegislaturesoftwo-thirdsoftheseveralstates,shallcallaconventionforproposingamend-ments."Therecentmovementtocallaconventiontoproposeanamendmentrequiringthefederalbudgettobebalancedwasbackedbythirtystatesbymid-1979.Thepossibilitythatfourmorestatelegislatureswouldjointhemove,makingthenecessarytwo-thirds,hassownconsternationinWashingtonpreciselybe-causeitistheonedevicethatcaneffectivelybypasstheWash-ingtonbureaucracy.TAXANDSPENDINGLIMITATIONSThemovementtoadoptconstitutionalamendmentstolimitgov-ernmentisalreadyunderwayinoneareataxesandspending.Byearly1979fivestateshadalreadyadoptedamendmentstotheirconstitutionsthatlimittheamountoftaxesthatthestatemayimpose,orinsomecasestheamountthatthestatemayspend.Similaramendmentsarepartwaythroughtheadoptionprocessinotherstatesandwerescheduledtobevotedoninstillotherstatesatthe1979election.Activemovementstohavesimilaramendmentsadoptedareunderwayinmorethanhalf 302FREETOCHOOSE:APersonalStatementtheremainingstates.Anationalorganization,theNationalTaxLimitationCommittee(NTLC),withwhichweareconnected,hasservedasaclearinghouseandcoordinatoroftheactivitiesintheseveralstates.Ithadabout250,000membersnationwideinmid-1979,andthenumberwasclimbingrapidly.Onthenationalleveltwoimportantdevelopmentsareunderway.OneisthedrivetogetstatelegislaturestomandateCon-gresstocallanationalconventiontoproposeanamendmenttobalancethebudgetsparkedprimarilybytheNationalTax-payersUnion,whichhadover125,000membersnationwideinmid-1979.Theotherisanamendmenttolimitspendingatthefederallevel,whichwasdraftedunderthesponsorshipoftheNTLC.Thedraftingcommittee,onwhichwebothserved,in-cludedlawyers,economists,politicalscientists,statelegislators,businessmen,andrepresentativesofvariousorganizations.TheamendmentitdraftedhasbeenintroducedintobothhousesofCongress,andtheNTLCisundertakinganationalcampaigninsupportofit.AcopyoftheproposedamendmentiscontainedinAppendixB.Thebasicideabehindboththestateandfederalamendmentsistocorrectthedefectinourpresentstructureunderwhichdemocraticallyelectedrepresentativesvotelargerexpendituresthanamajorityofvotersdeemdesirable.Aswehaveseen,thatoutcomeresultsfromapoliticalbiasinfavorofspecialinterests.Governmentbudgetsaredeterminedbyaddingtogetherexpendituresthatareauthorizedforahostofseparateprograms.Thesmallnumberofpeoplewhohaveaspecialinterestineachspecificprogramspendmoneyandworkhardtogetitpassed;thelargenumberofpeople,eachofwhomwillbeassessedafewdollarstopayfortheprogram,willnotfinditworthwhiletospendmoneyorworktoopposeit,eveniftheymanagetofindoutaboutit.Themajoritydoesrule.Butitisaratherspecialkindofma-jority.Itconsistsofacoalitionofspecialinterestminorities.ThewaytogetelectedtoCongressistocollectgroupsof,say,2or3percentofyourconstituents,eachofwhichisstronglyinterestedinonespecialissuethathardlyconcernstherestofyourcon-stituents.Eachgroupwillbewillingtovoteforyouifyoupromise TheTidelsTurning303tobackitsissueregardlessofwhatyoudoaboutotherissues.Puttogetherenoughsuchgroupsandyouwillhavea51percentmajority.Thatisthekindoflogrollingmajoritythatrulesthecountry.Theproposedamendmentswouldaltertheconditionsunderwhichlegislatorsstateorfederal,asthecasemaybeoperatebylimitingthetotalamounttheyareauthorizedtoappropriate.Theamendmentswouldgivethegovernmentalimitedbudget,specifiedinadvance,thewayeachofushasalimitedbudget.Muchspecialinterestlegislationisundesirable,butitisneverclearlyandunmistakablybad.Onthecontrary,everymeasurewillberepresentedasservingagoodcause.Theproblemisthatthereareaninfinitenumberofgoodcauses.Currently,alegislator""isinaweakpositiontoopposeagoodcause.Ifheobjectsthatitwillraisetaxes,hewillbelabeledareactionarywhoiswillingtosacrificehumanneedforbasemercenaryreasonsafterall,thisgoodcausewillonlyrequireraisingtaxesbyafewcentsordollarsperperson.Thelegislatorisinafarbetterpositionifhecansay,"Yes,yoursisagoodcause,butwehaveafixedbudget.Moremoneyforyourcausemeanslessforothers.Whichoftheseothersshouldbecut?"Theeffectwouldbetorequirethespecialintereststocompetewithoneanotherforabiggershareofafixedpie,insteadoftheirbeingabletocolludewithoneanothertomakethepiebiggerattheexpenseofthetaxpayer.Becausestatesdonothavethepowertoprintmoney,statebudgetscanbelimitedbylimitingtotaltaxesthatmaybeim-posed,andthatisthemethodthathasbeenusedinmostofthestateamendmentsthathavebeenadoptedorproposed.Thefederalgovernmentcanprintmoney,solimitingtaxesisnotaneffectivemethod.Thatiswhyouramendmentisstatedintermsoflimitingtotalspendingbythefederalgovernment,howeverfinanced.Thelimitsoneithertaxesorspendingaremostlyspecifiedintermsofthetotalincomeofthestateornationinsuchawaythatifspendingequaledthelimit,governmentspendingwouldremainconstantasafractionofincome.Thatwouldhaltthetrendtowardeverbiggergovernment,notreverseit.However,thelimitswouldencourageareversalbecause,inmostcases,if 304FREETOCHOOSE:APersonalStatementspendingdidnotequalthelimitinanyyear,thatwouldlowerthelimitsapplicabletofutureyears.Inaddition,theproposedfederalamendmentrequiresareductioninthepercentageifin-flationexceeds3percentayear.OTHERCONSTITUTIONALPROVISIONSAgradualreductioninthefractionofourincomethatgovern-mentspendswouldbeamajorcontributiontoafreerandstrongersociety.Butitwouldbeonlyonesteptowardthatobjective.Manyofthemostdamagingkindsofgovernmentcontrolsoverourlivesdonotinvolvemuchgovernmentspending:forex-ample,tariffs,priceandwagecontrols,licensureofoccupations,regulationofindustry,consumerlegislation.Withrespecttothese,too,themostpromisingapproachisthroughgeneralrulesthatlimitgovernmentpower.Asyet,thedesigningofappropriaterulesofthiskindhasreceivedlittleat-tention.Beforeanyrulescanbetakenseriously,theyneedthekindofthoroughexaminationbypeoplewithdifferentinterestsandknowledgethatthetaxandspendinglimitationamendmentshavereceived.Asafirststepinthisprocess,wesketchafewexamplesofthekindsofamendmentsthatappeartousdesirable.Westressthatthesearehighlytentative,intendedprimarilytostimulatefurtherthoughtandfurtherworkinthislargelyunexploredarea.lnternationalTradeTheConstitutionnowspecifies,"NoStateshall,withoutthecon-sentoftheCongress,layanyimpostsordutiesonimportsorexports,exceptwhatmaybeabsolutelynecessaryforexecutingitsinspectionlaws."Anamendmentcouldspecify:Congressshallnotlayanyimpostsordutiesonimportsorexports,exceptwhatmayheabsolutelynecessaryforexe-cutingitsinspectionlaws.Itisvisionarytosupposethatsuchanamendmentcouldbeenactednow.However,achievingfreetradethroughrepealingindividualtariffsis,ifanything,evenmorevisionary.Andthe TheTidelsTurning305attackonalltariffsconsolidatestheinterestsweallhaveascon-sumerstocounterthespecialinterestweeachhaveasproducers.WageandPriceControlsAsoneofuswrotesomeyearsago,"IftheU.S.eversuc-cumbstocollectivism,togovernmentcontrolovereveryfacetofourlives,itwillnotbebecausethesocialistswinanyargu-ments.Itwillbethroughtheindirectrouteofwageandpricecontrols."5Prices,aswenotedinChapter1,transmitinforma-tionwhichWalterWristonhasquiteproperlytranslatedbydescribingpricesasaformofspeech.Andpricesdeterminedinafreemarketareaformoffreespeech.WeneedheretheexactcounterpartoftheFirstAmendment:Congressshallmakenolawsabridgingthefreedomofsellersofgoodsorlabortopricetheirproductsorservices.OccupationalLicensureFewthingshaveagreatereffectonourlivesthantheoccupa-tionswemayfollow.Wideningfreedomtochooseinthisarearequireslimitingthepowerofstates.ThecounterparthereinourConstitutioniseithertheprovisionsinitstextwhichprohibitcertainactionsbystatesortheFourteenthAmendment.Onesuggestion:NoStateshallmakeorimposeanylawwhichshallabridgetherightofanycitizenoftheUnitedStatestofollowanyoccupationorprofessionofhischoice.APortmanteauFreeTradeAmendmentThethreeprecedingamendmentscouldallbereplacedbyasingleamendmentpatternedaftertheSecondAmendmenttoourConstitution(whichguaranteestherighttokeepandbeararms):Therightofthepeopletobuyandselllegitimategoodsandservicesatmutuallyacceptabletermsshallnotbein-fringedbyCongressoranyoftheStates. 306FREETOCHOOSE:APersonalStatementTaxationBygeneralconsent,thepersonalincometaxissadlyinneedofreform.Itprofessestoadjustthetaxto"abilitytopay,"totaxtherichmoreheavilyandthepoorlessheavilyandtoallowforeachindividual'sspecialcircumstances.Itdoesnosuchthing.Taxratesarehighlygraduatedonpaper,risingfrom14to70percent.Butthelawisriddledwithsomanyloopholes,somanyspecialprivileges,thatthehighratesarealmostpurewindowdressing.Alowflatratelessthan20percentonallincomeabovepersonalexemptionswithnodeductionsexceptforstrictoccupationalexpenseswouldyieldmorerevenuethanthepresentunwieldystructure.Taxpayerswouldbebetteroffbecausetheywouldbesparedthecostsofshelteringincomefromtaxes;theeconomywouldbebetteroffbecausetaxconsiderationswouldplayasmallerroleintheallocationofresources.Theonlyloserswouldbelawyers,accountants,civilservants,andlegislatorswhowouldhavetoturntomoreproductiveactivitiesthanfillingintaxforms,devisingtaxloopholes,andtryingtoclosethem.Thecorporateincometax,too,ishighlydefective.Itisahiddentaxthatthepublicpaysinthepricesitpaysforgoodsandserviceswithoutrealizingit.Itconstitutesdoubletaxationofcorporateincomeoncetothecorporation,oncetothestock-holderwhentheincomeisdistributed.Itpenalizescapitalinvest-mentandtherebyhindersgrowthinproductivity.Itshouldbeabolished.Althoughthereisagreementbetweenleftandrightthatlowerrates,fewerloopholes,andareductioninthedoubletaxationofcorporateincomewouldbedesirable,suchareformcannotbeenactedthroughthelegislativeprocess.Theleftfearthatiftheyacceptedlowerratesandlessgraduationinreturnforeliminatingloopholes,newloopholeswouldsoonemergeandtheyareright.Therightfearthatiftheyacceptedtheeliminationoftheloop-holesinreturnforlowerratesandlessgraduation,steepergradu-ationwouldsoonemergeandtheyareright.Thisisaspeciallyclearcasewhereaconstitutionalamend-mentistheonlyhopeofstrikingabargainthatallsidescanex-pecttobehonored.Theamendmentneededhereistherepealof TheTideIsTurning307thepresentSixteenthAmendmentauthorizingincometaxesanditsreplacementbyonealongthefollowinglines:TheCongressshallhavepowertolayandcollecttaxesonincomesofpersons,fromwhateversourcesderived,with-outapportionmentamongtheseveralStates,andwithoutregardtoanycensusorenumeration,providedthatthesametaxrateisappliedtoallincomeinexcessofoccupationalandbusinessexpensesandapersonalallowanceofafixedamount.Theword"person"shallexcludecorporationsandotherartificialpersons.SoundMoneyWhentheConstitutionwasenacted,thepowergiventoCon-gress"tocoinmoney,regulatethevaluethereof,andofforeigncoin"referredtoacommoditymoney:specifyingthatthedollarshallmeanadefiniteweightingramsofsilverorgold.ThepapermoneyinflationduringtheRevolution,aswellasearlierinvari-ouscolonies,ledtheframerstodenystatesthepowerto"coinmoney;emitbillsofcredit[i.e.,papermoney];makeanythingbutgoldandsilvercoinatenderinpaymentofdebts."TheCon-stitutionissilentonCongress'spowertoauthorizethegovern-menttoissuepapermoney.ItwaswidelybelievedthattheTenthAmendment,providingthatthe"powersnotdelegatedtotheUnitedStatesbytheConstitution...arereservedtotheStatesrespectively,ortothepeople,"madetheissuanceofpapermoneyunconstitutional.DuringtheCivilWar,Congressauthorizedgreenbacksandmadethemalegaltenderforalldebtspublicandprivate.AftertheCivilWar,inthefirstofthefamousgreenbackcases,theSupremeCourtdeclaredtheissuanceofgreenbacksunconstitu-tional.One"fascinatingaspectofthisdecisionisthatitwasde-liveredbyChiefJusticeSalmonP.Chase,whohadbeenSecretaryoftheTreasurywhenthefirstgreenbackswereissued.Notonlydidhenotdisqualifyhimself,butinhiscapacityasChiefJusticeconvictedhimselfofhavingbeenresponsibleforanunconstitu-6tionalactioninhiscapacityasSecretaryoftheTreasury."SubsequentlyanenlargedandreconstitutedCourtreversedthe 308FREETOCHOOSE:APersonalStatementfirstdecisionbyamajorityoffivetofour,affirmingthatmakinggreenbacksalegaltenderwasconstitutional,withChiefJusticeChaseasoneofthedissentingjustices.Itisneitherfeasiblenordesirabletorestoreagold-orsilver-coinstandard,butwedoneedacommitmenttosoundmoney.Thebestarrangementcurrentlywouldbetorequirethemonetaryauthoritiestokeepthepercentagerateofgrowthofthemonetarybasewithinafixedrange.Thisisaparticularlydifficultamend-menttodraftbecauseitissocloselylinkedtotheparticularinsti-tutionalstructure.Oneversionwouldbe:Congressshallhavethepowertoauthorizenon-interest-bearingobligationsofthegovernmentintheformofcur-rencyorbookentries,providedthatthetotaldollaramountoutstandingincreasesbynomorethan5percentperyearandnolessthan3percent.Itmightbedesirabletoincludeaprovisionthattwo-thirdsofeachHouseofCongress,orsomesimilarqualifiedmajority,canwaivethisrequirementincaseofadeclarationofwar,thesuspen-siontoterminateannuallyunlessrenewed.lnflationProtectionIftheprecedingamendmentwereadoptedandstrictlyadheredto,thatwouldendinflationandassurearelativelystablepricelevel.Inthatcase,nofurthermeasureswouldbeneededtopre-ventthegovernmentfromengagingininflationarytaxationwith-outrepresentation.However,thatisabigif.Anamendmentthatwouldremovetheincentiveforgovernmenttoinflatewouldhavebroadsupport.Itmightbeadoptedfarmorereadilythanamoretechnicalandcontroversialsound-moneyamendment.Ineffect,whatisrequiredistheextensionoftheFifthAmendmentprovisionthat"kilopersonshall...bedeprivedoflife,liberty,orprop-erty,withoutdueprocessoflaw;norshallprivatepropertybetakenforpublicusewithoutjustcompensation."Apersonwhosedollarincomejustkeepspacewithinflationyetwhoispushedintoahighertaxbracketisdeprivedofpropertywithoutdueprocess.Therepudiationofpartoftherealvalueof TheTidelsTurning309governmentbondsthroughinflationisthetakingofprivateprop-ertyforpublicusewithoutjustcompensation.Therelevantamendmentwouldspecify:AllcontractsbetweentheU.S.governmentandotherpartiesstatedindollars,andalldollarsumscontainedinfederallaws,shallbeadjustedannuallytoallowforthechangeinthegenerallevelofprices(luringtheprioryear.Likethemonetaryamendment,this,too,isdifficulttodraftpreciselybecauseofitstechnicalcharacter.Congresswouldhavetospecifypreciseprocedures,includingwhatindexnumbershouldbeusedtoapproximate"thegenerallevelofprices."Butitstatesthefundamentalprinciple.ThisishardlyanexhaustivelistwestillhavethreetogotomatchthetenamendmentsintheoriginalBillofRights.Andthesuggestedwordingneedsthescrutinyofexpertsineachareaaswellasconstitutionallegalexperts.Butwetrustthattheseproposalsatleastindicatethepromiseofaconstitutionalapproach.CONCLUSIONThetwoideasofhumanfreedomandeconomicfreedomwork-ingtogethercametotheirgreatestfruitionintheUnitedStates.Thoseideasarestillverymuchwithus.Weareallofusimbuedwiththem.Theyarepartoftheveryfabricofourbeing.Butwehavebeenstrayingfromthem.Wehavebeenforgettingthebasictruththatthegreatestthreattohumanfreedomistheconcentra-tionofpower,whetherinthehandsofgovernmentoranyoneelse.Wehavepersuadedourselvesthatitissafetograntpower,pro-videditisforgoodpurposes.Fortunately,wearewakingup.Weareagainrecognizingthedangersofanovergovernedsociety,comingtounderstandthatgoodobjectivescanbepervertedbybadmeans,thatrelianceonthefreedomofpeopletocontroltheirownlivesinaccordance 310FREETOCHOOSE:APersonalStatementwiththeirownvaluesisthesurestwaytoachievethefullpotentialofagreatsociety.Fortunately,also,weareasapeoplestillfreetochoosewhichwayweshouldgowhethertocontinuealongtheroadwehavebeenfollowingtoeverbiggergovernment,ortocallahaltandchangedirection. APPENDICESAPPENDIXASOCIALISTPLATFORMOF1928HerewiththeeconomicplanksoftheSocialistpartyplatformof1928,alongwithanindicationinparenthesesofhowtheseplankshavefared.Thelistthatfollowsincludeseveryeconomicplank,butnotthefulllanguageofeach.1."Nationalizationofournaturalresources,beginningwiththecoalminesandwatersites,particularlyatBoulderDamandMuscleShoals."(BoulderDam,renamedHooverDam,andMuscleShoalsarenowbothfederalgovernmentprojects.)2."Apubliclyownedgiantpowersystemunderwhichthefederalgovernmentshallcooperatewiththestatesandmunicipalitiesinthedistributionofelectricalenergytothepeopleatcost."(TennesseeVal-leyAuthority.)3."Nationalownershipanddemocraticmanagementofrailroadsandothermeansoftransportationandcommunication."(Railroadpas-sengerserviceiscompletelynationalizedthroughAmtrak.SomefreightserviceisnationalizedthroughConrail.TheFCCcontrolscommunica-tionsbytelephone,telegraph,radio,andtelevision.)4."Anadequatenationalprogramforfloodcontrol,floodrelief,reforestation,irrigation,andreclamation."(Governmentexpendituresforthesepurposesarecurrentlyinthemanybillionsofdollars.)5."Immediategovernmentalreliefoftheunemployedbytheexten-sionofallpublicworksandaprogramoflongrangeplanningofpublicworks..."(Inthe1930s,WPAandPWAwereadirectcounterpart;now,awidevarietyofotherprogramsare.)"Allpersonsthusem-ployedtobeengagedathoursandwagesfixedbybona-fidelaborunions."(TheDavis-BaconandWalsh-HealeyActsrequirecontractorswithgovernmentcontractstopay"prevailingwages,"generallyinter-pretedashighestunionwages.)6."Loanstostatesandmunicipalitieswithoutinterestforthepur-poseofcarryingonpublicworksandthetakingofsuchothermeasuresaswilllessenwidespreadmisery."(Federalgrantsinaidtostatesandlocalmunicipalitiescurrentlytotaltensofbillionsofdollarsayear.)7."Asystemofunemploymentinsurance."(PartofSocialSecuritysystem.)8."Thenation-wideextensionofpublicemploymentagenciesincooperationwithcityfederationsoflabor."(U.S.EmploymentService311 312FREETOCHOOSE:APersonalStatementandaffiliatedstateemploymentservicesadministeranetworkofabout2,500localemploymentoffices.)9."Asystemofhealthandaccidentinsuranceandofoldagepen-sionsaswellasunemploymentinsurance."(PartofSocialSecuritysystem.)"and"Securingtoeveryworkerarest10."Shorteningtheworkdayperiodofnolessthantwodaysineachweek."(Legislatedbywagesandhourslawsthatrequireovertimeformorethanfortyhoursofworkperweek.)11."Enactingofanadequatefederalantichildlaboramendment."(Notachievedasamendment,butessenceincorporatedinvariouslegis-lativeacts.)12."Abolitionofthebrutalexploitationofconvictsunderthecon-tractsystemandsubstitutionofacooperativeorganizationofindustriesinpenitentiariesandworkshopsforthebenefitofconvictsandtheirdependents."(Partlyachieved,partlynot.)13."Increaseoftaxationonhighincomelevels,ofcorporationtaxesandinheritancetaxes,theproceedstobeusedforoldagepen-"sionsandotherformsofsocialinsurance.(In1928,highestpersonalincometaxrate,25percent;in1978,70percent;in1928,corporatetaxrate,12percent;in1978,48percent;in1928,topfederalestatetaxrate,20percent;in1978,70percent.)14."Appropriationbytaxationoftheannualrentalvalueofalllandheldforspeculation."(Notachievedinthisform,butpropertytaxeshaverisendrastically.) APPENDIXBJanuary30,1979Washington,D.C.APROPOSEDCONSTITUTIONALAMENDMENTTOLIMITFEDERALSPENDINGPreparedbytheFederalAmendmentDraftingCommitteeW.C.Stubblebine,ChairmanConvenedbyTheNationalTaxLimitationCommitteeWm.F.Rickenbacker,Chairman;LewisK.Uhler,PresidentSection1.Toprotectthepeopleagainstexcessivegovernmentalburdensandtopromotesoundfiscalandmonetarypolicies,totalout-laysoftheGovernmentoftheUnitedStatesshallbelimited.(a)Totaloutlaysinanyfiscalyearshallnotincreasebyapercent-agegreaterthanthepercentageincreaseinnominalgrossnationalproductinthelastcalendaryearendingpriortothebeginningofsaidfiscalyear.Totaloutlaysshallincludebudgetandoff-budgetoutlays,andexcluderedemptionsofthepublicdebtandemergencyoutlays.(b)Ifinflationforthelastcalendaryearendingpriortothebegin-ningofanyfiscalyearismorethanthreepercent,thepermissiblepercentageincreaseintotaloutlaysforthatfiscalyearshallbereducedbyone-fourthoftheexcessofinflationoverthreepercent.Inflationshallbemeasuredbythedifferencebetweenthepercentageincreaseinnominalgrossnationalproductandthepercentageincreaseinrealgrossnationalproduct.Section2.When,foranyfiscalyear,totalrevenuesreceivedbytheGovernmentoftheUnitedStatesexceedtotaloutlays,thesurplusshallbeusedtoreducethepublicdebtoftheUnitedStatesuntilsuchdebtiseliminated.Section3.FollowingdeclarationofanemergencybythePresident,Congressmayauthorize,byatwo-thirdsvoteofbothHouses,aspeci-fiedamountofemergencyoutlaysinexcessofthelimitforthecurrentfiscalyear.Section4.Thelimitontotaloutlaysmaybechangedbyaspecifiedamountbyathree-fourthsvoteofbothHousesofCongresswhenapprovedbytheLegislaturesofamajorityoftheseveralStates.Thechangeshallbecomeeffectiveforthefiscalyearfollowingapproval.Section5.Foreachofthefirstsixfiscalyearsafterratificationofthisarticle,totalgrantstoStatesandlocalgovernmentsshallnotbea313 314FREETOCHOOSE:APersonalStatementsmallerfractionoftotaloutlaysthaninthethreefiscalyearspriortotheratificationofthisarticle.Thereafter,ifgrantsarelessthanthatfractionoftotaloutlays,thelimitontotaloutlaysshallbedecreasedbyanequivalentamount.Section6.TheGovernmentoftheUnitedStatesshallnotrequire,directlyorindirectly,thatStatesorlocalgovernmentsengageinaddi-tionalorexpandedactivitieswithoutcompensationequaltotheneces-saryadditionalcosts.Section7.ThisarticlemaybeenforcedbyoneormoremembersoftheCongressinanactionbroughtintheUnitedStatesDistrictCourtfortheDistrictofColumbia,andbynootherpersons.TheactionshallnameasdefendanttheTreasureroftheUnitedStates,whoshallhaveauthorityoveroutlaysbyanyunitoragencyoftheGovernmentoftheUnitedStateswhenrequiredbyacourtorderenforcingtheprovisionsofthisarticle.Theorderofthecourtshallnotspecifytheparticularoutlaystobemadeorreduced.Changesinoutlaysnecessarytocomplywiththeorderofthecourtshallbemadenolaterthantheendofthethirdfullfiscalyearfollowingthecourtorder. NOTESINTRODUCTION1.AdamSmith,TheWealthofNations(1776).(AllpagereferencesaretotheeditioneditedbyEdwinCannan,5thed.(London:Methuen&Co.,Ltd.,1930).2.OnLiberty,People'sed.(London:Longmans,Green&Co.,1865),p.6.3.WealthofNations,vol.I,p.325(BookII,Chap.III).CHAPTER11.SeeHedrickSmith,TheRussians(NewYork:QuadrangleBooks/NewYorkTimesBookCo.,1976),andRobertG.Kaiser,Russia:ThePeopleandthePower(NewYork:Atheneum,1976).2.Freeman,December1958.3.WealthofNations,vol.II,pp.184-85.CHAPTER21.WealthofNations,vol.I,pp.422and458.2.SeeGeorgeJ.Stigler,FiveLecturesonEconomicProblems(NewYork:Macmillan,1950),pp.26-34."3.ANewHoliday,"Newsweek,August5,1974,p.56.CHAPTER31.LesterV.Chandler,BenjaminStrong,CentralBanker(Washington,D.C.:BrookingsInstitution,1958),p.465.315 316FREETOCHOOSE:APersonalStatement2.MiltonFriedmanandAnnaJ.Schwartz,AMonetaryHistoryoftheUnitedStates,18671960(Princeton:PrincetonUniversityPress,1963),p.310.3.TheMemoirsofHerbertHoover,vol.III:TheGreatDepression,19291941(NewYork:Macmillan,1952),p.212.4.AnnualReport,1933,pp.1and2021.5.ForafullerdiscussionseeFriedmanandSchwartz,MonetaryHistory,pp.362-419.CHAPTER41.Itisworthquotingthewholesentenceinwhichthesewordsappear,becauseitissuchanaccuratedescriptionofthedirectioninwhichwearemovingaswellasawhollyunintentionalindictmentoftheeffect:"Nomananymorehasanycareforthemorrow,eitherforhimselforhischildren,forthenationguaranteesthenurture,education,andcomfortablemaintenanceofeverycitizenfromthecradletothegrave."EdwardBellamy,LookingBackward(NewYork:ModernLibrary,1917;originaldateofpublication,1887),p.70.2.AnOver-GovernedSociety(NewYork:TheFreePress,1976),p.235.3.A.V.Dicey,LecturesontheRelationbetweenLawandPublicOpinioninEnglandduringtheNineteenthCentury,2ded.(London:Macmil-lan,1914),p.xxxv.4.Ibid.,pp.xxxvixxxvii.5.Ibid.,pp.xxxviixxxix.6.CecilDriver,ToryRadical(NewYork:OxfordUniversityPress,1946).7.QuotedinKenAuletta,TheStreetsWerePavedwithGold(NewYork:RandomHouse,1979),p.255.8.Ibid.,p.253.9.ThesefiguresreferonlytoOASDHIandstateunemploymentinsur-ance;theyexcluderailroadandpublicemployeeretirement,veterans'benefits,andworkmen'scompensation,treatingtheseaspartofcom-pensationundervoluntaryemploymentcontracts.10.SocialSecurityAdministration,YourSocialSecurity,DepartmentofHealth,EducationandWelfarePublicationNo.(SSA)77-10035(June1977),p.24.Theearliestversionofthebookletwehaveseenisfor1969,butweconjecturethatthebookletwasfirstissuedmanyyearsearlier.ThewordswerechangedintheFebruary1978version,bywhichtimethemyththat"trustfunds"playedanimportantparthadbecometransparent.Therevisedversionreads:"Thebasicideaofsocialsecurityisa Notes317simpleone:Duringworkingyears,employees,theiremployers,andself-employedpeoplepaysocialsecuritycontributions.Thismoneyisusedonlytopaybenefitstothemorethan33millionpeoplegettingbenefitsandtopayadministrativecostsoftheprogram.Then,whentoday'sworker'searningsstoporarereducedbecauseofretirement,death,ordisability,benefitswillbepaidtothemfromcontributionsbypeopleincoveredemploymentandself-employmentatthattime.Thesebenefitsareintendedtoreplacepartoftheearningsthefamilyhaslost."Thisiscertainlyafarmoredefensiblestatement,thoughitstilllabels"taxes"as"contributions."Whenwefirstdiscoveredthechange,wethoughtitmightbearesultofaNewsweekcolumnoneofuswrotein1971makingthecriticismsthatfollowinthetextandrepeatedinadebatethesameyearwithWilburJ.Cohen,formerSecretaryofHEW.However,thedelayofsixyearsbeforethechangewasmadeexplodedthatconjecture.11.GeorgeOrwell,NineteenEighty-four(NewYork:HarcourtBrace,1949).12.SocialSecurityAdministration,YourSocialSecurity,DepartmentofHealth,EducationandWelfarePublicationNo.(SSA)79-10035(Jan-uary1979),p.5.Thissentencewaschangedin1973,theword"earn-ing"replacingthewords"nowbuilding."13.J.A.Pechman,H.J.Aaron,andM.K.Taussig,SocialSecurity:Per-spectivesforReform(Washington,D.C.:BrookingsInstitution,1968),p.69.14.JohnA.Brittain,ThePayrollTaxforSocialSecurity(Washington,D.C.:BrookingsInstitution,1972).15.GeorgeJ.Stigler,"Director'sLawofPublicIncomeRedistribution,"JournalofLawandEconomics,vol.13(April1970),p.1.16.SeeMartinAnderson,Welfare(Stanford,Calif.:HooverInstitution,StanfordUniversity,1978),Chap.1,foranexcellentdiscussionofthepovertyestimates.17.Ibid.,p.39.18.Ibid.,p.91;basedonhisearlierbook,TheFederalBulldozer:ACriti-calAnalysisofUrbanRenewal,19491962(Cambridge,Mass.:TheMITPress,1964).19."TheFTCDiscoversHUD,"WallStreetJournal,March21,1979,p.22.20.Fromanunpublishedpaper,"HowtoBeaClinicianinaSocialistCountry,"givenin1976attheUniversityofChicago.21.MaxGammon,HealthandSecurity:ReportonPublicProvisionforMedicalCareinGreatBritain(London:St.Michael'sOrganization,December1976),pp.19,18.22.Theelegantformulationasatwo-by-twotablearoseoutofdiscussionswithEbenWilson,anassociateproducerofourtelevisionprogram.23.However,arecentinnovationisthatfamilieswithoneormorede- 318FREETOCHOOSE:APersonalStatementpendentchildrenmayqualifyforapaymentcalledanearnedincomecredit,whichissimilartoanegativeincometax.24.Thereisaprovisionforaveragingincomeoveranumberofyears.Buttheconditionsarefairlystringent,soapersonwithafluctuatingincomepaysmoretaxthanapersonwithastableincomeaveragingthesameamount.Inaddition,mostpeoplewithfluctuatingincomesdonotbene-fitfromitatall.25.WeproposeditinCapitalismandFreedom(Chicago:UniversityofChicagoPress,1962),Chap.12;forMiltonFriedman'stestimony,seeU.S.Congress,House,CommitteeonWaysandMeans,SocialSecurityandWelfareProposals,Hearings,91stCongress,1stsession,November7,1969,part6,pp.19441958.26.FortheroleofthewelfarebureaucracyindefeatingPresidentNixon'splan,seeDanielP.Moynihan,ThePoliticsofaGuaranteedIncome:TheNixonAdministrationandtheFamilyAssistancePlan(NewYork:RandomHouse,1973).27.Anderson,Welfare.p.135.28.Ibid.,p.135.29.Ibid.,p.142.CHAPTER51.SeeJ.R.Pole,ThePursuitofEqualityinAmericanHistory(BerkeleyandLosAngeles:UniversityofCaliforniaPress,1978),pp.5158.2.AlexisdeTocqueville,DemocracyinAmerica,2vols.,2ded.,trans.HenryReeve,ed.FrancisBowen(Boston:JohnAllyn,Publisher,1863),vol.I,pp.6667.(FirstFrencheditionpublishedin1835.)3.Ibid.,pp.67-68.4.SeeSmith,TheRussians,andKaiser,Russia:ThePeopleandthePower.NickEberstadt,"HasChinaFailed?"TheNewYorkReviewofBooks,April5,1979,p.37,notes,"InChina,...incomedistribu-tionseemsveryroughlytohavebeenthesamesince1953."5.HelenLefkowitzHorowitz,CultureandtheCity(Lexington:Univer-sityPressofKentucky,1976),pp.ixx.6.Ibid.,pp.212and31.7."TheForgottenMan,"inAlbertG.KellerandMauriceR.Davis,eds.,EssaysofWilliamG.Sumner(NewHaven:YaleUniversityPress,1934),vol.I,pp.46696.8.RobertNozick,"WhoWouldChooseSocialism?"Reason,May1978,pp.22-23.9.WealthofNations,vol.I,p.325(BookII,Chap.III).10.SeeSmith,TheRussians,andKaiser,Russia:ThePeopleandthePower. Notes31911.NickEberstadt,"China:HowMuchSuccess,"NewYorkReviewofBooks,May3,1979,pp.40-41.12.JohnStuartMill,ThePrinciplesofPoliticalEconomy(1848),9thed.(London:Longmans,Green&Co.,1886),vol.II,p.332(BookIV,Chap.VI).CHAPTER61.LeonardBillet,TheFreeMarketApproachtoEducationalReform,RandPaperP-6141(SantaMonica,Calif.:TheRandCorporation,1978),pp.27-28.2.FromTheGoodSociety,asquotedbyWallisinAnOver-GovernedSociety,p.viii.3.QuotedbyE.G.West,"ThePoliticalEconomyofAmericanPublicSchoolLegislation,"JournalofLawandEconomics,vol.10(October1967),pp.101-28,quotationfromp.106.4.Ibid.,p.108.5.Notethemisleadingterminology."Public"isequatedwith"govern-"mental,"thoughinothercontexts,asin"publicutilities,"publicli-braries,"andsoon,thatisnotdone.Inschooling,isthereanyrelevant"senseinwhichHarvardCollegeisless"publicthantheUniversityofMassachusetts?6.Ibid.,p.110.7.R.FreemanButts,EncyclopaediaBritannica,vol.7(1970),p.992.8.W.O.L.Smith,EncyclopaediaBritannica,vol.7(1970),p.988.9.Ibid.,pp.988-89.10.E.G.West,EducationandtheState(London:TheInstituteofEco-nomicAffairs,1965).11.Gammon,HealthandSecurity,p.27.12.WeareindebtedtoHerbertLobsenzandCynthiaSavoofMarketDataRetrievalformakingthesedataavailabletousfromtheirEducationDataBank.13.Indeed,manyofthesepublicschoolscanberegardedas,ineffect,taxloopholes.Iftheywereprivate,thetuitionchargeswouldnotbede-ductibleforpurposesofthefederalincometax.Aspublicschoolsfinancedbylocaltaxes,thetaxesaredeductible.14.OneofusfirstproposedthisvoucherplaninMiltonFriedman,"TheRoleofGovernmentinEducation,"inRobertA.Solo,ed.,EconomicsandthePublicInterest(NewBrunswick,N.J.:RutgersUniversityPress,1955).ArevisedversionofthisarticleisChapter6ofCapital-ismandFreedom.15.Ibid.,p.86.16.SeeChristopherJencksandassociates,EducationVouchers:AReport 320FREETOCHOOSE:APersonalStatementonFinancingElementaryEducationbyGrantstoParents(Cambridge,Mass.:CenterfortheStudyofPublicPolicy,December1970);JohnE.CoonsandStephenD.Sugarman,EducationbyChoice:TheCaseforFamilyControl(Berkeley:UniversityofCaliforniaPress,1978).17.CoonsandSugarman,EducationbyChoice,p.191.18.Ibid.,p.130.19.WealthofNations,vol.II,p.253(BookV,Chap.I).20.Forexample,theCitizensforEducationalFreedom,theNationalAsso-ciationforPersonalRightsinEducation.21.EducationVoucherInstitute,incorporatedinMay1979inMichigan.22.KennethB.Clark,"AlternativePublicSchoolSystems,"inthespecialissueonEqualEducationalOpportunityoftheHarvardEducationalReview,vol.38,no.1(Winter1968),pp.100113;passagecitedfrompp.11011.23.DanielWeiler,APublicSchoolVoucherDemonstration:TheFirstYearatAlumRock,RandReportNo.1495(SantaMonica,Calif.:TheRandCorporation,1974).24.HenryM.Levin,"AspectsofaVoucherPlanforHigherEducation,"OccasionalPaper72-7,SchoolofEducation,StanfordUniversity,July1972,p.16.25.CarnegieCommissiononHigherEducation,HigherEducation:WhoPays?WhoBenefits?WhoShouldPay?(McGraw-Hill,June1973),pp.2-3.26.Ibid.,p.4.27.Ibid.,p.4.28.Ibid.,p.15.29.CarnegieFoundationfortheAdvancementofTeaching,MorethanSurvival:ProspectsforHigherEducationinaPeriodofUncertainty(SanFrancisco:JosseyBassPublishers,1975),p.7.30.CarnegieCommission,HigherEducation,p.176.Wehavenotcalcu-latedthepercentagesinthetextfromtheCarnegietablebutfromthesourceitcited,Table14,U.S.CensusReportsSeriesP-20for1971,no.241,p.40.Indoingso,wefoundthattheCarnegiereportpercent-agesareslightlyinerror.Thefigureswegivearesomewhatmisleadingbecausemarriedstu-dentslivingwiththeirspousesareclassifiedbytheirownandtheirspouses'familyincomeratherthanbytheincomeoftheirparents.Ifmarriedstudentsareomitted,theeffectdescribedisevengreater:22percentofstudentsfromfamilieswithincomesoflessthan$5,000at-tendedprivateschools,17percentfromfamilieswithincomesbetween$5,000and$10,000,and25percentfromfamilieswithincomesof$10,000andover.31.AccordingtofiguresfromtheU.S.BureauoftheCensus,ofthosepersonsbetweeneighteenandtwenty-fourwhowereenrolledasunder-graduatesinpubliccollegesin1971,fewerthan14percentcamefrom Notes321familieswithincomesbelow$5,000ayear,althoughmorethan22percentofalleighteen-totwenty-four-year-oldscamefromtheselow-incomefamilies.And57percentofthoseenrolledcamefromfamilieswithincomesabove$10,000ayear,althoughfewerthan40percentofeighteen-totwenty-four-year-oldscamefromthesehigher-incomefamilies.Again,thesefiguresarebiasedbytheinclusionofmarriedstudentswithspousepresent.Only9percentofotherstudentsenrolledinpubliccollegescamefromfamilieswithincomesbelow$5,000,although18percentofallsucheighteen-totwenty-four-year-oldscamefromtheselow-incomefamilies.Nearly65percentofstudentsofothermaritalstatusenrolledcamefromfamilieswithincomesof$10,000ormore,althoughonlyabitover50percentofallsucheighteen-totwenty-four-year-oldsdid.Incidentally,inconnectionwiththisandtheprecedingnote,itisnoteworthythattheCarnegieCommission,inthesummaryreportinwhichitreferstothesefigures,doesnotevenmentionthatitcombinesindiscriminatelythemarriedandunmarriedstudents,eventhoughdo-ingsoclearlybiasestheirresultsinthedirectionofunderstatingthetransferofincomefromlowertohigherincomesthatisinvolvedingovernmentalfinancingofhighereducation.32.DouglasM.Windhammadetwoestimatesfor196768foreachoffourincomeclassesofthedifferencebetweenthedollarvalueofthebenefitsreceivedfrompublichighereducationandthecostincurred.Theestimatesshowingthesmallertransferareasfollows.IncomeClassTotalTotalNetCost()($peryear)BenefitsCostsorGain(+)$03,000$10,419,600$14,259,360$3,839,7603,0005,00020,296,32028,979,1108,682,7905,00010,00070,395,98082,518,78012,122,80010,000andover64,278,49039,603,440+24,675,050DouglasM.Windham,Education,EqualityandIncomeRedistribution(Lexing-ton,Mass.:HeathLexingtonBooks,1970),p.43.33.W.LeeHansenandBurtonA.Weisbrod,Benefits,Costs,andFinanceofPublicHigherEducation(Chicago:MarkomPublishingCo.,1969),p.76,exceptthatline5belowwascalculatedbyus.Notethatthetaxesinline3,unlikethecostsallowedforinFlorida,includealltaxes,notsimplythetaxesgoingtopayforhighereducation. 322FREETOCHOOSE:APersonalStatementFamilieswithoutChildreninFamilieswithChildreninCaliforniaCaliforniaPublicHigherEducationPublicAllHigherJuniorStateUniv.ofFamiliesEducationTotalCollegeCollegeCalif.1.Averagefamilyincome$8,000$7,900$9,560$8,800$10,000$12,0002.Averagehighereducationsub-sidyperyear08807201,4001,7003.Averagetotalstateandlocaltaxespaid6206507406807709104.Nettransfer(line2line3)650+140+40+630+7905.Nettransferaspercentofaver-.ageincome8.2%+1.5+0.5+6.3+6.634.CarnegieCommission,HigherEducation,p.7.35.OriginallypublishedinMiltonFriedman,"TheRoleofGovernmentinEducation,"andreprintedinslightlyrevisedforminCapitalismandFreedom;quotationfromp.105ofthelatter.36.EducationalOpportunityBank,aReportofthePanelonEducationalInnovationtotheU.S.CommissionerofEducationandtheDirectoroftheNationalScienceFoundation(Washington,D.C.:U.S.Govern-mentPrintingOffice,August1967).SupportingmaterialwaspresentedinK.Shell,F.M.Fisher,D.K.Foley,A.F.Fricdlaender(inassocia-tionwithJ.Behr,S.Fischer,K.Mosenson),"TheEducationalOppor-tunityBank:AnEconomicAnalysisofaContingentRepaymentLoanProgramforHigherEducation,"NationalTaxJournal,March1968,pp.2-45,aswellasinunpublisheddocumentsoftheZachariasPanel.37.Forthestatementoftheassociation,seeNationalAssociationofStateUniversitiesandLandGrantColleges,Proceedings,November12-15,1967,pp.67-68.FortheSmithquotation,WealthofNations,vol.I,p.460(BookIV,ChapIII),wherethereferenceistotradersseekinggovernmentprotectionfromforeigngoods.38.CarnegieCommission,HigherEducation,p.121.39.QuotedfromCapitalismandFreedom,pp.99-100. Notes323CHAPTER71.MarciaB.WallaceandRonaldJ.Penoyer,"DirectoryofFederalReg-ulatoryAgencies,"WorkingPaperNo.36,CenterfortheStudyofAmericanBusiness,WashingtonUniversity,St.Louis,September1978,p.ii.2.Evaluationofthe19601963CorvairHandlingandStability(Wash-ington,D.C.:U.S.DepartmentofTransportation,NationalHighwayTrafficSafetyAdministration,July1972),p.2.3.SeeMaryBennettPeterson,TheRegulatedConsumer(LosAngeles:NashPublishing,1971),p.164.4.MatthewJosephson,ThePoliticos(NewYork:HarcourtBrace,1938),p.526."5.ThomasGaleMoore,"TheBeneficiariesofTruckingRegulation,JournalofLawandEconomics,vol.21(October1978),p.340.6.Ibid.,pp.340,342.7.GabrielKolko,TheTriumphofConservatism(TheFreePressofGlencoe,1963),quotationfromp.99.8.RichardHarris,TheRealVoice(NewYork:Macmillan,1964),p.183.9.WilliamM.WardellandLouisLasagna,RegulationandDrugDevelop-ment(Washington,D.C.:AmericanEnterpriseInstituteforPublicPolicyResearch,1975),p.8.10.SamPeltzman,RegulationofPharmaceuticalInnovation(Washington,D.C.:AmericanEnterpriseInstituteforPublicPolicyResearch,1974),p.9.11.Estimatesfor1950sandearly1960sfromWardellandLasagna,Regu-lationandDrugDevelopment,p.46;for1978,fromLouisLasagna,"TheUncertainFutureofDrugDevelopment,"DrugIntelligenceandClinicalPharmacy,vol.13(April1979),p.193.12.Peltzman,RegulationofPharmaceuticalInnovation,p.45.13.U.S.ConsumerProductsSafetyCommission,AnnualReport,FiscalYear1977(Washington,D.C.,January1978),p.4.14.WallaceandPenoyer,"DirectoryofFederalRegulatoryAgencies,"p.14.15.MurrayL.Weidenbaum,TheCostsofGovernmentRegulation,Pub-licationNo.12(St.Louis:CenterfortheStudyofAmericanBusiness,WashingtonUniversity,February1977),p.9.16.Ibid.17.WallaceandPenoyer,"DirectoryofFederalRegulatoryAgencies,"p.19. 324FREETOCHOOSE:APersonalStatement18.A.MyrickFreemanIIIandRalphH.Haveman,"CleanRhetoricandDirtyWater,"ThePublicInterest,No.28(Summer1972),p.65.19.HerbertAsbury,TheGreatIllusion,AnInformalHistoryofProhibi-tion(GardenCity,N.Y.:Doubleday,1950),pp.144-45.CHAPTER81.Therearemanyalternativetranslationsoftheoath.ThequotationsinthetextarefromtheversioninJohnChadwickandW.N.Mann,TheMedicalWorksofHippocrates(Oxford:Blackwell,1950),p.9.2.GeorgeE.Hopkins,TheAirlinePilots:AStudyinEliteUnionization(Cambridge:HarvardUniversityPress,1971),p.1.3.MiltonFriedman,"SomeCommentsontheSignificanceofLaborUnionsforEconomicPolicy,"inDavidMcCordWright,ed.,TheIm-pactoftheUnion(NewYork:HarcourtBrace,1951),pp.204-34.AsimilarestimatewasreachedmorethanadecadelateronthebasisofafarmoredetailedandextensivestudybyH.G.Lewis,UnionismandRelativeWagesintheUnitedStates(Chicago:UniversityofChi-cagoPress,1963),p.5.4.Hopkins,TheAirlinePilots,p.2.5.JohnP.Gould,Davis-BaconAct,SpecialAnalysisNo.15(Washing-ton,D.C.:AmericanEnterpriseInstitute,November1971),p.10.6.Ibid.,pp.1,5.7.SeeYaleBrozenandMiltonFriedman,TheMinimumWageRate(Washington,D.C.:TheFreeSocietyAssociation,April1966);FinisWelch,MinimumWages:IssuesandEvidence(Washington,D.C.:AmericanEnterpriseInstitute,1978);andEconomicReportofthePresident,January1979,p.218.8.SeeMiltonFriedmanandSimonKuznets,IncomefromIndependentProfessionalPractice(NewYork:NationalBureauofEconomicRe-search,1945),pp.8-21.9.MichaelPertschuk,"NeedsandIncomes,"Regulation,March/April1979.10.WilliamTaylor,ExecutiveVice-PresidentoftheValleyCampCoalCompany,asquotedinMelvynDubofskyandWarrenVanTine,JohnL.Lewis:ABiography(NewYork:Quadrangle/NewYorkTimesBookCo.,1977),p.377.11.KarenElliottHouse,"BalkyBureaus:CivilServiceRuleBookMay'"BuryCartersBidtoAchieveEfficiency,WallStreetJournal,Septem-ber26,1977,p.1,col.1. Notes325CHAPTER91.JohnStuartMill,PrinciplesofPoliticalEconomy,vol.II,p.9(BookIII,chap.VII).2.AndrewWhite,MoneyandBanking(Boston:Ginn&Co.,1896),pp.4and6.3.RobertChalmers,AHistoryofCurrencyintheBritishColonies(Lon-don:PrintedforH.M.StationeryOfficebyEyre&Spottiswoode,1893),p.6In.,quotingfromastillearlierpublication.4.A.HinstonQuiggin,ASurveyofPrimitiveMoney(London:Methuen,1949),p.316.5.White,MoneyandBanking,pp.9-10.6.C.P.Nettels,TheMoneySupplyoftheAmericanColoniesbefore1720(Madison:UniversityofWisconsin,1934),p.213.7.White,MoneyandBanking,p.10.8.PaulEinzig,PrimitiveMoney,2ded.,rev.andenl.(OxfordandNewYork:PergamonPress,1966),p.281.9.SeeChapter2.10.SeePhillipCagan,"TheMonetaryDynamicsofHyperinflation,"inMiltonFriedman,ed.,StudiesintheQuantityTheoryofMoney(Chi-cago:UniversityofChicagoPress,1956),p.26."11.EugeneM.Lerner,"InflationintheConfederacy,1861-65,inM.Friedman,StudiesintheQuantityTheoryofMoney,p.172.12.ElginGroseclose,MoneyandMan(NewYork:FrederickUngarPub-lishingCo.,1961),p.38.13.JohnMaynardKeynes,TheEconomicConsequencesofthePeace(NewYork:Harcourt,Brace&Howe,1920),p.236.14.RobertL.SchuettingerandEamonF.Butler,FortyCenturiesofWageandPriceControls(Washington,D.C.:HeritageFoundation,1979).15.Thereason:apolicyoftryingtomaintainafixedexchangeratefortheyenintermsofthedollar.Therewasupwardpressureontheyen.Tocounterthispressure,theJapaneseauthoritiesboughtdollarswithnewlycreatedyen,whichaddedtothemoneysupply.Inprinciple,theycouldhaveoffsetthisadditiontothemoneysupplybyothermeasures,buttheydidnotdoso.CHAPTER101.RaoulBerger,GovernmentbyJudiciary(Cambridge:HarvardUniver-sityPress,1977),pp.1,408. 326FREETOCHOOSE:APersonalStatement2.LecturesontheRelationbetweenLawandPublicOpinion(1914ed.),P.302.3."BoomIndustry,"WallStreetJournal,June12,1979,p.1,col.5.4.LecturesontheRelationbetweenLawandPublicOpinion(1914ed.),pp.257-58.5.MiltonFriedman,"MonumentalFolly,"Newsweek,June25,1973.6.FriedmanandSchwartz,MonetaryHistory,p.46. INDEXAdams,John,298Ayers,Don,173Addams,Jane,140Advertising,22425Balanceofpayments,41,43"Affirmativeaction,"187,301Bangladesh,148Africa,60,148BankingActof1935,89AFL-CIO,237Bankingsystem,U.S.,7375,80AgriculturalAdjustmentAdminis-84,92.SeealsoFederalRe-tration(AAA),93serveSystemAgriculture,36,56BankofUnitedStates,8082infreeeconomy,34Banks.SeealsoFederalReservegovernmentinterferencein,4,System;namesofbanks293depositsin,7273,76inUSSR,10fractionalreservesin,73,74Aidtofamilieswithdependentchil-restrictionofpaymentsby,71dren,10872,74,82,84Airlineindustry,200201,225runson,andpanics,7172,73Airlinepilots,232,23334,23675,76,8084Aldrich,NelsonW.,72Beck,David,242Algeria,220Bellamy,Edward,93Allende,Salvador,253Berger,Raoul,287AlumRock(California),schoolBillofRights.SeeConstitution,vouchersusedin,172,173U.S.AmericanFederationofTeachers,Biorck,Dr.Gunnar,113170Bismarck,Ottovon,93,97,99AmericanMedicalAssociation,Bittenbender,WilliamP.,172231,234,23940Blacks,132.Seealso"AffirmativeAmtrak,200,2012action";SlaveryAnderson,Martin,109,12526discriminationagainst,16566,AnimalFarm(Orwell),103,135236Argentina,253educationof,151,16566Aristocracy,9798,154,285teenageunemploymentof,237ArmyCorpsofEngineers,19038,245AssociationofStateUniversitiesBopp,Karl,86andLandGrantColleges,Boston(Massachusetts),158185Brazil,147,253,256,262,263Auletta,Ken,101Brennan,Pat,28889,294Automobileindustry,19293,224Broderick,JosephA.,818226.SeealsoFordMotorBronx(NewYork),11011,159Company;GeneralMotorsBryan,WilliamJennings,196327 328IndexBudget,balancing,3014inU.S.(seeUnitedStates,gov-Bureaucracy,6,96,97,108,114,ernmentcontrolin)11718,144,15557,231,Charity,3637,123,133,13940,288,29498145educational(seeEducators,pro-Chase,SalmonP.,3078fessional)ChiangKai-shek,70,253government,incomeandjobse-Chicago(Illinois),13940,158,244curityof,24345,247Childs,Marquis,100as"newclass,"14142,295,301China,70inregulatoryagencies,190,197,'China,PeoplesRepublicof,3,24,198,201,208,20910,211,53,57,61,70,135,14621617,218,222,243,29848,253,254resistancetochangefrom,125,Churchill,Winston,99170,171175CivilAeronauticsBoard,200specialinterestsand,29598,301CivilianConservationCorpsinUSSR,146(CCC),94welfare,eliminating,121,12223CivilWar,128,131,194,25662,Busing,166,167,188,300307Clark,KennethB.,172California,171,172,173,182,Cleveland,Grover,197200201,283Coalmining,24142Callaghan,James,266Collegesanduniversities,152,175Cambodia,10,13587Canada,11314,227"affirmativeaction"and,187Capital,222,247city-andstate-supported,175accumulationof,124,12783,185,186"human,"21,23equaleducationalopportunityinherited,21,23and,18083,188physical,21,23,24private,17678,180,185,186Capitalismandequality,146-48.problemswith,17583SeealsoVoluntaryexchangequalityof,17578CarnegieCommissiononHighersocialbenefitsofeducationat,Education,17981,18283,17881185studentloansfor,18385,188CarnegieFoundation,139,179,181vouchersystemfor,18586,188Carpenter,Ed,15960ColumbiaUniversity,92Carson,Rachel,189,205Commandsystem,811,14,17,22,Cartels,international,5354,225.2324,97.SeealsoCentralSeealsoOPECeconomicplanningCarter,Jimmy,68,112,124,219,Communes,14243220,221,297Communistcountries,24,53,55,Centraleconomicplanning,810,61,70,253,254.Seealso95,146,285.SeealsoCom-namesofcountriesmandsystemcentraleconomicplanningin,8comparedwithvoluntaryex-10,55,56,57,14647change,5464incomedistributionin,14647 Index329Comparativeadvantage,principleDemocracyinAmerica(Tocque-of,4445ville),130ComprehensiveEmploymentandDepartmentofAgriculture,U.S.,TrainingAct(CETA),111204,29192CongressofRacialEquality,166DepartmentofEducation,U.S.,96Conrail,200DepartmentofEnergy,U.S.,17,Constitution,U.S.,4,29,130,15421822,29255,286,287DepartmentofHealth,Educationamendmentsto,limitingtaxesandWelfare(HEW),96,andspending,3014103,104,127,188BillofRightsof,4,130,16364,DepartmentofHousingandUrban286,299Development,U.S.,109FirstAmendment,16364,DepartmentofJustice,U.S.,225299,305DepartmentofLabor,U.S.,292courtinterpretationof,287DepartmentoftheTreasury,U.S.,proposedamendmentsto,3049225,265replacementofSixteenthAmend-Depressionmentto,3067of192021,78Consumer,protectionof,189227of1930s(seeGreatDepression)Consumercooperatives,100Dicey,A.V.,98,99,288,297ConsumerProductsSafetyCom-Distributionofincome,pricesys-mission,194,21013,223temand,2024ConsumerReports,224Dollar,47,77,8788,24849,307.Consumers'Research,224SeealsoForeignexchangeConsumers'Research,224rates;Money;Monetarypol-ConsumersUnion,224icyCooley,Thomas,197yenand,40,4143,44,47,48Corporations,20,67,234,269,294,Drugindustry,189,20310306Corvair,189,192EastGermany,55,61Cost-of-livingadjustmentstowages,Eastman,George,138277EconomicBillofRights,299301CouncilonWageandPriceStabil-Economicfreedom,17,6469,ity,291,298133,284.SeealsoVoluntaryCourts,federal,296,298.SeealsoexchangeSupremeCourt,U.S.politicalfreedomand,23,7,11,Czechoslovakia,2439,5455,64,6769,14849,285,309DartmouthCollege,177Edison,ThomasAlva,138Davis-BaconAct,236,292Edselautomobile,224DaytonAirFreight,199Education,132,136,15088Debs,EugeneV.,287centralizationandbureaucratiza-DeclarationofIndependence,2,3,tionof,152,15557,1596,128,129,130,13160,188,233Deflation,83,87,88compulsoryattendancelaws,150,Democracy,130-31,162,292161,162-63,175 330lndexEducation(cont.)beforeGod,128,12931inearlyAmerica,150,152libertyvs.,128,131,132,134elementaryandsecondary,151,35,140,14815275ofopportunity,128,13134,ininnercities,151,158,159146,154,158,167,18183,60,166,168,188188obstaclestovoucherplanfor,ofoutcome,128,13443,1671717568problemsof,15258Erhard,Ludwig,56,252voucherplanfor,15871,188Escalatorclauses,27778governmentinterventionin,97,15088passim"Fairness"andequalityofoutcome,higher,152,1758713437problemsandsolutions,175FamilyAssistancePlan,12487Featherbedding,235increasedspendinganddecliningFederalDepositInsuranceCorpo-qualityof,127,151,156ration(FDIC),76localcontrolof,150,152,154FederalInstituteofEducation,17155,157,158FederalOfficeofEconomicOppor-parochialschools,153,158,159,tunity,17116364,165,169FederalRailroadAdministration,universal,15253,154,16263190"EducationalOpportunityBank,"FederalRegister,190,19118485FederalReserveAct,72,75,85Educators,professional,150,153,FederalReserveBankofNew154,155,156,157,15960,York,78,79,81,83,84,166,170,176,1888586,87,88oppositiontochangefrom,170,FederalReserveBankofPhiladel-17175phia,86unionsof,23233FederalReserveBoard,75,78,79,Egypt,5786EmploymentActof1946,94AnnualReportof,1933,85Energyincreasedpowerof,8889governmentcontrolsover,14,17,FederalReserveSystem,71906768,194,21822,296bankfailuresof1930sand,76,OPECand(seeOPEC)8084Engels,Friedrich,99earlyyearsof,7679Environment,194,205,21318,failureof,ascauseofGreatDe-220,221,296pression,5,7990EnvironmentalProtectionAgency,inflationand,264,265,26667,194,213,244,292269Equality,12849onsetofdepressionand,7980capitalismand,14648operationof,7576consequencesofegalitarianpoli-originsof,7176cies,14346FederalTradeCommission,112,forced,142,148225,23940 Index331FEVER(FriendsofEducationdrugsavailablein,2067VoucherExperimentineducationalsystemof,154,162RepresentativeRegions),17363,171,17374FijiIslands,60equalityofoutcomein,134,Florida,18214445FoodandDrugActof1906,203,freetradein,52204gamblingin,141FoodandDrugAdministration,goldstandardabandonedby,83194,20310,223,226,227inflationin,262,263,273,275Food,Drug,andCosmeticActof761938,204,205NationalHealthServiceof,100,1962amendmentsto,205,210113,114Foodstamps,96,108nineteenth-centuryfreemarketFord,GeraldR.,124,219systemin,3,4,35,37,39,Ford,Henry,138,1396364,144FordFoundation,139pressin,69FordMotorCompany,224reactiontobiggovernmentin,Foreignexchangerates,4748,62,283,28987,88.SeealsoDollarresultsofwelfarestatein,100,France,88,95,154,283101,14445Freedom.SeeEconomic,freedom;sociallegislationin,9899,284Politicalfreedomtaxesin,144,289Freeman,A.Myrick,III,21718textileindustryin,6364unionsin,144,229,23233,262Gammon,Dr.Max,114,155GreatDepression,4,155Gee,Dennis,17374governmentspendingafter,5,GeneralMotors,156,189,1927071,92127,284Germany,52,70,93,94,97,252,monetarypolicyand,5,70,79253.SeealsoEastGermany;90,94,24950,267WestGermanyplaceoforiginof,8688inflationin,262,263,273tariffsand,40GIbills,161,164,185Greece,22930Glass,Carter,72Greenbackparty,196Gold,253,255Gresham'sLaw,251Goldstandard,76,77,83,8688,264,307,308Hacker,Ted,199Goldwater,Barry,102Hamilton,Alexander,35,49,50,Governmentcontrol.SeeUnited134,187States,governmentcontrolHarlemPrep,15960,170,173in;Voluntaryexchange,Haveman,RobertH.,21718government'sroleinHayek,Friedrich,6Grant&Co.,W.T.,15657HigherEducation:WhoPays?WhoGreatBritain,5,43,5859,60,Benefits?WhoShouldPay?7677,93,95,229,254,(CommissiononHigherEd-285,286,300ucation),17980CornLawsrepealed,35,39Hitler,Adolf,52,70 332lndexHoffa,Jimmy,242timedelaysin,27576,28082HongKong,34,37,40,41,50,57,Inheritance,136,14460,61Integration,16566freetradein,34,37,39Interestrates,26667,272Hoover,Herbert,83,84,90onU.S.SavingsBonds,269Horowitz,Helen,13940variable,27778HousingInternalRevenueService(IRS),inflationand,272298"middle-income,"111InterstateCommerceCommission,public,96,100,109,11012,11753,190,193203,29899rentalcontractsfor,277Israel,5657"rentsupplements"for,109Italy,148,254subsidiesfor,10912urbanrenewaland,96,11112Jackson,Henry,68variableinterestratesonmort-Japan,40,4143,44,50,57,70,gagesfor,27894,145,252,293.SeealsoHullHouse,140YenHungary,24,255inflationin,254,262,263,273,28081,282Immigration,3536,134,150nineteenth-centuryfreemarketIncentives,economic,121,122,systemin,34,37,39,286127,135,138,179comparedwithIndia'scentralpricesystemand,1820,23,24economicplanning,5764,India,3,54,57,106,146,148,180,285286Jefferson,Thomas,2,4,5,7,129since1947,comparedwithJapan30,131,284afterMeijiRestoration,57Johnson,Lyndon,9664,285Journalists,as"newclass"mem-Indonesia,57bers,14142,301Industrialrevolution,4,14748Jungle,The(Sinclair),194,203Inflation,1718,48,68,70,7778,89,100,101,144,225,288,Kahn,Alfred,200294Kefauver,Estes,189,194,205,210causesof,251,25264,28182Kelsey,Dr.FrancesO.,208ConstitutionalamendmenttoKennedy,EdwardM.,112protectagainst,3089Kennedy,JohnF.,208curefor,27381,282Kent(England),17374casestudyof,28081Kerr,Clark,180mitigatingsideeffectsof,276Keynes,JohnMaynard,7071,84,80268sideeffectsof,27376,282Keynesianeconomicpolicies,70governmentrevenuefrom,26771,9470Kibbutz,143hyper-,253,255Kickbacks,23536reasonsforexcessivemonetaryKnickerbockerTrustCompany,71,growth,2646782 Index333Knight,FrankH.,126Liberty,128,285Korea,41,57equalityvs.,128,131,132,134Krauss,MelvynB.,2899035,140,148Kristol,Irving,141Lincoln,Abraham,64,131Lippmann,Walter,151Laborandlabormarket,1920,LloydGeorge,David,9922847.SeealsoUnemploy-Loans,student,18385,188mentLondonTimes,69freedomtochooseoccupation,LookingBackward(Bellamy),9323841,247,305LosAngeles(California),158governmentand,23637,242,24345McCollamSchool,AlumRockfullemploymentpolicy,264,(California),172,17326566,267,297McGill,MauriceG.,298laborunionsand(seeLaborMalaya,60unions)Malaysia,57otheremployersand,246Mann,Horace,153,154pricesystemand,2122MaoTse-tung,57,253,254,284subsidiesbyforeigngovernmentsMarket,22227.SeealsoEconomicand,46freedom;Voluntaryex-tariffsand,4041,46changeinUSSR,10consumerprotectionthroughLaborunions,22843,247.Seecompetitive,22226alsoTradeunionspowerof,837beneficiariesof,23235,242"Marketfailure,"31,214collusionbetweenemployersand,Marshall,Alfred,2024142MarshallPlan,43,45distinguishedfrom"labor,"229Marx,Karl,99,134,284ofgovernmentemployees,232Maryland,250,25233MassachusettsInstituteofTechnol-governmentsupportof,23637,ogy,184242MassachusettsStateBoardofEdu-inflationand,262cation,153municipal,23233,24445Meany,George,68innationalizedindustries,233Meat-packingindustry,203originsof,22931Medicaid,96,108,112restrictionofnumbersenteringsocialized,100,11215anoccupationby,23841,127,23132,24041.See247alsoPhysicianssourceofpowerof,23542socializedmedicine,100,11215violencethreatenedby,236,237Medicare,96,108,112Laker,Freddie,200,225Merchantmarine,29293,297Laski,Harold,285Mexico,227Lehman,HerbertH.,84Michigan,171Levin,HenryM.,177,178Mill,JohnStuart,2,148,249Lewis,JohnL.,241Mills,OgdenL.,86 334lndexMitchell,EdwardJ.,221NationalMonetaryCommission,72Monetarypolicy,3078NationalPureFoodandDrugCon-FederalReserveSystemand(seegress,203FederalReserveSystem)NationalRecoveryAdministrationforeignexchangeratesand(see(NRA),93Foreignexchangerates)NationalScienceFoundation,68GreatDepressionand,5,70,79Nationalsecurityargumentfortar-90,94,24950,267iffs,46-47,48,297inflationand(seeInflation)NationalStudentLoanBank,185recessionof1907and,7172,NationalTaxLimitationCommit-7374,82,282tee,302Money,24853,303NationalTaxpayersUnion,302constitutionalamendmenttopro-NationalTemperanceSociety,203motesound,3078"Newclass,"14142,295,301inflationandgrowthinsupplyof,NewDeal,90,9294,96,100,105,253,25464,28082109,190,228,284casestudy,28081NewHampshire,17273reductioningrowthrate,270NewYorkCentralRailroad,20073,276,277,281,282NewYorkCity(NewYork),109,reasonsforexcessivegrowth,11011,140,158,159,21926467,282BoardofEducation,15960roleof,247InnerCityScholarshipFund,159varietiesof,25053municipalunionsin,232,233,Monopoly,17,36,49,5354,196,2444524142,294,297resultsofwelfarein,1012freeinternationaltradetocoun-NewYorkClearingHouseAssocia-ter,22526tionofBanks,81,84MontgomeryCounty(Maryland),NewYorkState,101,102,109,2434412526,15253Moore,Thomas,198lotteryandgamblingin,14041MotorCarrierActof1935,198Regentsscholarships,186NewYorkStateSuperintendentofNader,Ralph,189,192,200201,Banks,8182205,226NineteenEighty-four(Orwell),103Napoleon,154Nixon,RichardM.,124,217NationalEducationAssociation,NorthCarolina,250170Nozick,Robert,143NationalFoundationfortheHu-manities,68OldAgeandSurvivorsInsurance,NationalHighwayTrafficSafety93,1037Administration,194OldAgePensionsActof1908,98,NationalInsuranceActof1911,999899Olney,RichardJ.,197Nationalizationofindustries,95,OPEC,14,17,19,49,54,194,23521821,263NationalLaborRelationsBoard,93Orwell,George,103,135 Index335OSHA,243,298Railroadindustry,192-93,194-97,199-200,201-2Panama,60Recession,282Parochialschools,153,158,159,of1907,71-72,73-74,82163-64,165,169of1920-21,78Paternalism,33,97,98,99,127of1930s(seeGreatDepression)Peltzman,Sam,207of1937-38,89Penney,JamesCash,138Regulatoryactivity,95,189-227,Pensionplans,private,124243,288,291-92,298.SeePerkins,CharlesE.,197alsonamesofgovernmentPeron,Isabel,253agenciesPhysicians,230-32,234,238-39,Religiousfreedom,69,130,163-64240-41ReportonManufactures(Hamil-Politicalfreedom,2-3,4,7,39,127ton),35-36,49,134economicfreedomand,2-3,7,Richards,Malcolm,19911,39,54-55,64,67--69,Rockefeller,JohnD.,138148-49,285,309Rockefeller,JohnD.,Jr.,182equality(seeEquality)RockefellerFoundation,139liberty(seeLiberty)Roosevelt,FranklinD.,83,84,90,Pollutionandantipollutionmea-92-94,100,190sures,213-18,221Roosevelt,Theodore,72Populistparty,196Rumsfeld,Donald,68Povertylevel,108Russia.SeeUSSRPricesystem,13-24,254functionsof,14-24Sabath,A.J.,86distributionofincome,20-24St.JohnChrysostom'sschool,incentives,18-20,23,24Bronx(NewYork),159transmissionofinformation,St.Louis(Missouri),Pruitt-Igoe14-18,274,305housingproject,110inflationand(seeInflation)SanFrancisco(California),244pricecontrolsand,17,68,219-Schools.SeeEducation20,279-80,281,305SecuritiesandExchangeCommis-price-wagespiraland,274-75sion(SEC),66,93,298voluntaryexchangeand,13-24Seniority,235Productivity,3-4,6,21,44,133,ShermanAnti-TrustLaw,53,133,247242declinein,145,146,155-56,191SilentSpring(Carson),189,205inflationand,254-55,263Silver,252-53,255,307Prohibition,226-27Sinclair,Upton,194,203Property,67,136Singapore,57Proposition13,283Slavery,3,64,128,131,152Prussia,154Smith,Adam,1-2,4,5-6,7,13,Publicassistance,93,95,102-3,24,25,35,144-45,179,107-9.SeealsoWelfareand185,189,222,229,284,welfarestate285,292Publicworks,30oneducation,171 336IndexSmith,Adam(cont.)resultsofwelfarestatein,100ongovernment'sroleinvolun-101taryexchange,2832Sweden,TheMiddleWay(Childs),ontrade,38100Socialism,9596,97100,154,203,Switzerland,254284,286Socialistparty,28687Taiwan,40,50,57,147Socialmobility,133,134,149Tariffs,38,3954,62,134,3045.SocialSecuritysystem,69,93,96,SeealsoTrade108,117,164,278argumentsusedtosupport,41doubledippers,24350gradualeliminationof,120,123Tax(es),65,67,140,141,143,24222,234,247,294,298precursorsof,97,98100constitutionalamendmentstoresultsof,1027,127,146limit,3014SouthAmerica,146,148,276governmentspendingand,264,SouthKorea,147265,266,267,268Spain,52,148inGreatBritain,144,289"Specialinterests,"3839,40,97,income,graduated,143,306201,2034,240,29098,income,negative,97,12023,301,3023124,12526bureaucracyand,29498,301inflationand,269,27879,283concentratedvs.diffuse,2929484,294powerinWashington,29092replacingSixteenthAmendmentStateUniversityofNewYork,186and,3067Stockholders,2021,306tosupporthighereducation,Stockmarket,1929crashof,79,8017583,188Strong,Benjamin,78,79tosupportpublicschools,151,Subsidies,47,49,292,293153,158,16061,164,171byforeigngovernmentstoindus-inSweden,28990try,4546,5152,62,63inwelfarestate,100,101,109,tohighereducation,17587117,288housing(seeHousing)SocialSecurity,102,1037,negativeincometax,97,12023123,127welfare(seeWelfareandwelfareTeachers.SeeEducatorsstate)Teamsters'Union,242Sumner,WilliamGraham,140Teller,Edward,191Sunday,Billy,226Textileindustry,6364Supplementalsecurityincome,108Thatcher,Margaret,101,283SupremeCourt,U.S.,93,163,287,TheoryofBureaucraticDisplace-288,3078ment,114,15556"Sweat-equity"housingproject,Thomas,Norman,286,28711011Tito,Marshal,56,57Sweden,93,95Tobacco,291reactionagainstbiggovernmentusedasmoney,25052,255in,283,28990Tocqueville,Alexisde,13031,133 lndex337Trade,38-54overenergy,14,17,67-68,domestic,38194,218-22,296free,304-5intentionsoffoundingfathers,economiccasefor,40-51129-30,131,286international,andinternaloverprices,68,94,219-20,competition,53-54,225-26279-80,305politicalcasefor,51-53reactionagainst,283-84,288-unilateralmovetoward,50-5189,298-309international,38-54,134,225-regulatoryactivities,95,189-26,293,294,297,304-5227,243,288,291-92Tradeunions,19-20,40,69,144,tariffs(seeTariffs)293,294overwages,19,68,93,94,Transportationindustry,193-203,236-38,245,279-80,292,224-26,297-98.Seealso305kindsoftransportationoverwelfare(seeWelfareandTruckingindustry,197-99,202,welfarestate)297-98GreatDepressionin(seeGreatTurner,Graham,289Depression)inflationin,251,254,255,256-Unemployment,89,90,94,100,67,273,275-76,282101,266governmentrevenuesfrom,insurance,93,96,100,102,108269-70assideeffectofinflationcure,nationaldebtand,269-70273,277,281,282reasonsforexcessivemonetaryteenage,237-38,245growth,264-67,282Unions.SeeLaborunions;Trademonetarypolicyin(seeMoney;unionsMonetarypolicy)UnitedMineWorkers,241moneyincolonial,250-52UnitedStates,1-3,5-7,101,102,innineteenthcentury,1-4,35-25537,39,133,138-40agriculturein,3-4,36,293U.S.Congress,83,97,124,125,balanceofpaymentsof,43-44219,278,292,294,295,bureaucracyin(seeBureaucracy)302-3,308equalityin(seeEquality)U.S.PostOffice,288,294,297FederalReserveSystem(seeU.S.SavingsBonds,269,279FederalReserveSystem)Universities.SeeCollegesanduni-governmentcontrolin,5-6,17,versities39,64-69,286UniversityofCalifornia,182,186after1932,5,70-71,92-127,UniversityofCaliforniaatBerke-284ley,176,178,180constitutionalamendmentstoUniversityofCaliforniaatLosAn-limit,301-9geles,176,177overdistributionofincomeUniversityofMichigan,176,178(seeEquality;WelfareandUniversityofRochester,Centerforwelfarestate)theStudyofDrugDevelop-overeducation(seeEducation)ment,206 338lndexUniversityofVirginia,129,130impactof,onpublicschools,UniversityofWisconsin,176,17817071UnsafeatAnySpeed(Nader),205newschoolsand,doubtabout,Urbanrenewalprograms,96,1111697012obstaclesto,17175USSR,3,53,135,148,253racialissueand,16566agriculturein,10Wages,229centrallyplannedeconomyof,cost-of-livingadjustmentsto,277810,56,146governmentcontrolsover,19,68,classdivisionsin,14647labormarketin,1093,94,23638,245,27980,281,292,305voluntarymarketin,10,24laborunionsand,23238,247Vanderbilt,WilliamH.,36minimumwagelaw,23738,245,292Virginia,25052-pricespiral,27475VirginiaDeclarationofRights,4Voluntaryexchange,8,1037,97Wagner,Robert,101comparedwithcentraleconomicWallis,W.Allen,9596WallStreetJournal,16,112,221,planning,5464equalityand,140,14648244,28990,298freedomand(seePoliticalfree-Walton,Maurice,174Wardell,Dr.William,2067dom,economicfreedomWatts(LosAngeles),110and)WealthofNations(Smith),1,13,government'srolein,273735,38,189administrationofjustice,29Welfareandwelfarestate,93,95,30erectingandmaintainingpub-96,12627licworksandinstitutions,alternativesto,97,11926emergenceofmodern,9710029,3032fallacyof,11519examplesoflimited,3337resultsof,100115,24546topreventcoercion,28,29West,E.G.,153,154,171toprotect"irresponsible,"32WestGermany,55,5633highereducationand,17778,Wimmer,Herschel,199187Women'sChristianTemperanceUnion,203pricesystemand,1324WorksProgressAdministrationregulatoryactivityand,95,189227(WPA),94WorldWarII,94,252Voucherplanforschoolsystem,15875,188Yen,dollarand,40,4143,44,47,"add-ons,"1676848church-stateissueand,16364YourSocialSecurity(HEW),103,costof,16465104economicclassissue,16669Yugoslavia,3,56,57,148,254fraudprevention,165forhighereducation,18588Zacharias,JerroldR.,18485