the freeman 1980 · 300 north zeeb road, ann arbor, mich. 48106. ... devastation oflife and...
TRANSCRIPT
the
FreemanVOL. 30, NO.3 • MARCH 1980
Two Kinds of Sabotage Robert G. Anderson 131Market disruptions may be as destructive as terrorist bombs.
The Outcome of the Income Tax Scott W. Hahn 134A historical review of the graduated income tax and today's conse-quences in the U.S.
Government Regulation ofMass Media Communication Bettina Bien Greaves 141
Study questions for the national college debate topic.
How to Produce Human Beings P. Dean Russell 147It is human nature to respond to incentives and to penalties.
Inflation Ludwig von Mises 151To avoid the ravages of inflation requires withdrawing from govern-ment the power to create fiat money.
The Rotting Fabric of Trust Donald L. Kemmerer 164When government debases the currency, fear displaces trust andlowers the level of living.
Witch-Hunting for Robber Barons:The Standard Oil Story Lawrence W. Reed 166
A review of the monopoly charges and antitrust action againstStandard Oil.
The Invisible Hand-1980 William H. Peterson 176The profit motive is a great civilizer, peacefully and harmoniouslypromoting human interests and well-being.
Justice and Freedom Leslie Snyder 180"To live honestly, to hurt no one, to give every one his due."
Book Reviews: 189"Reflections on History" by Jacob Burckhardt.
Anyone wishing to communicate with authors may sendfirst-class mail in care of THE FREEMAN for forwarding.
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Robert G. Anderson
2 KINDS OFSABOTAGE
THE newspaper headline read, DamDestroyed,-Damages In Millions.The copy relates the horrifying details: ~~A group of terrorists announced responsibility for the destruction of the hydro-electric dam... A bomb exploding deep in the damfractured the superstructure ... Thecollapsing dam released a huge wallof water into the valley below ...Within hours the lake was drainedcompletely . . . Power generationwas cut off instantly."
The stunned reader can clearlyrecognize the devastation inflictedon life and property from such anevil event. Bombs in the hand ofsaboteurs can wreak havoc. Thedamage, both seen and unseen, isapparent to all.
The physical destruction of thedam, the leveling of properties from
Mr. Anderson Is Executive Secretary of The Foundation for Economic Education.
the onslaught of water below thedam, the loss of both electricalpower and the lake itself are immediately discernible. Also recognized are the losses of future recreational activities from the lake, irrigation water for agriculture, and alow-cost source of electrical energy.The impact of the saboteur's bomb interms of capital destruction and alower material well being for manypeople angers all who read or hear ofsuch a violent act.
A public debate on the merits ofblowing up the dam would be a discussion reserved for madmen. Theharm from such sabotage is directlyrelated to the exploding bomb. Auniversal condemnation of terrorism inevitably results becausethe devastation is so clearly recognized.
There is, however, another kind ofsabotage. Unlike the exploding
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132 THE FREEMAN March
bomb at the dam, the damage fromthis sabotage is not as readily perceived. This second kind of sabotageis the tttime bomb" of governmentinterference in the marketplace.And unlike madmen· debating themerits of blowing up dams, practically everyone participates in thisforum of economic sabotage by political manipulation.
The problem arises not from anabandonment of common sense insuch debates, but instead from afailure to grasp the destructive consequences that this governmenttttime bomb" can impose on life andproperty. If the economic consequences of government interventioncould be as clear and direct as thedamage from an exploding bomb, noproblem would exist. The greattragedy, however, is that the effectsof this latter bomb are rarely thatclear.
Windfall Profits Taxa Time Bomb
An excellent demonstration ofthis government tttime bomb"sabotaging the productivity of themarket has been witnessed in thepublic debates over the ttwindfallprofits tax." Political rhetoric seriously argued that the ttsolution" tothe energy crisis was yet anothertax. It was argued that such a taxwould ttsolve" the problem ofeconomic waste, while at the sametime lead us to greater socialjustice.
But what is argued and what istrue are rarely the same in politicstoday. The ttwindfall profits tax" is aclassic example of sabotage with agovernment tttime bomb." Andwhether this sabotage is an act ofevil or ignorance is irrelevant, for itin no way alters the outcome. Theresult of sabotage, intentional ormisguided, is always the samedevastation of life and property.
The Hwindfall profits tax" is awedge driven between consumersand suppliers of a scarce and valu:..able resource. It deprives thesuppliers of a part of the price consumers will pay for additional oil orother forms of energy. So it is a costof production that will have to becovered by higher prices if the additional production is to be undertaken. Gasoline prices and cigaretteprices have consistently demonstrated this principle in the pastwhenever new taxes were imposedupon them.
It is, of course, this very result ofincreasing product price that has ledto the advocating of a ttwindfall profits tax" as a means of curtailingenergy consumption. At least thereseems to be an understanding thatless of a good will be consumed athigher prices than at lower prices.But it's the other things that are notseen, and their harm to life andproperty, that is the force of sabotage to the marketplace.
It must never be forgotten that
1980 TWO KINDS OF SABOTAGE 133
the advancement of human welfareis accomplished by increasing theabundance of goods and services insociety. A curtailment of consumption by taxation can only discourageproduction and therefore lead to aworsening of economic conditions.Such taxation, therefore, is a directundermining of our economic wellbeing as it increases energy costsand makes energy ever more scarce.
The Function of Price
A distinction between rIsIngprices generated by increased taxesand rising prices resulting frommarket forces must be made. Risingprices generated by the marketforces ofsupply and demand performa valuable economic function. Thehigher market price makes consumption more costly and therebyconsumers will demand less. Correspondingly, producers receivingthese higher prices are motivated tosupply more of the good. Thesehigher prices, when market determined, encourage more efficient useby consumers and greater productive output by producers. This increased efficiency in the use of thehigher priced good by the consumerand the increased incentive to produce more of the good by producersbrings about an ultimate improvement in total welfare.
When higher prices are generatedby taxation, however, the marketprocess is sabotaged. The signal gets
short-circuited. The demand by consumers falls in response to thehigher price, but the ~~tax wedge"prevents the signal from reachingthe producers. The result is a transfer of wealth, equal to the tax, fromthe consumers to the tax collector.
The public expenditure of thewealth collected by the tax invariably leads to the destruction of thatwealth. Either through its consumption in wasteful activities (synfuelplants) or its employment in government regulation of future production (an energy department) thewealth collected by the tax is lost.The final result is a lower standardof living as the cost of living increases and productive activity declines.
The devastation to life and property from the destruction of the damwas visible to all. The evil of suchsabotage could be clearly seen. Butthe sabotage by government taxation is never so visible. The unseendestruction of future prosperity bythe political consumption of thiswealth is every bit as devastating toour lives and property as the terrorist's bomb. But to see it requiresan understanding of the economicforces in the marketplace that directour lives.
An understanding of all of theeconomic consequences, both seenand unseen, is vital if we are toguard ourselves from this secondkind of sabotage. @
Scott W. Hahn1"-"'_·'f
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OF THE" ...,.•....•~~
The moment you abandon the cardinal principle of exacting from allindividuals the same proportion oftheir income or of their property, youare at sea without rudder or compass, and there is no amount of injustice and folly you may not commit
-J. R. McCullough
* * *MORE than a century ago, a youngradical proposed the notion that thespecter of communism would inevitably rise up and conquer the world.However, several measures had tobe taken before this proletarianutopia could be ushered in. YoungMarx admitted that these necessarymeasures could not be broughtabout
except by means of despotic inroads onthe rights of property, and on the condi-
134
tions of bourgeois production; by meansof measures, therefore, which appeareconomically insufficient and untenable,but which, in the course of the movement, outstrip themselves, necessitatefurther inroads upon the old social order,and are unavoidable as a means of entirely revolutionizing the mode of production.
One of the most significant of theseproposed measures was the application of ((a heavy progressive or graduated income tax."
For more than half a century, ournation has been experimenting withsuch a tax. Objections would bestrenuously raised if one concludedthat these American social ((scientists" were consciously working toimplement Marxist ideology. Indeedsuch name calling usually producesmore heat than light. It would not beMr. Hahn, a recent graduate of Grove City Collegewhere he majored In economics, theology, and philosophy, Is now studying at Gordon-ConwellTheological Seminary.
THE OUTCOME OF THE INCOME TAX 135
improper, however, to examine theeffect that this graduated incometax has had upon the American society. For I believe that Marx wasright. This progressive tax trulyrepresents CC a despotic inroad" whichis cCeconomically insufficient and untenable," thus cCnecessitatingfurther inroads" upon the establishment of American liberty.Therefore, it would be profitable todiscern how the graduated incometax has worked to subtly erode theeconomic, legal, and moral pillarsupon which our nation has longrested.
Attacks on Income and Economy
Especially as April fifteenthcomes and goes, taxpayers acrossthe country ache from the powerfulone-two combination of inflationand graduated taxation. Throughout the economy, there have appeared signs of a sustained rate ofdouble-digit inflation. This unfortunate reality, coupled with the currently steep rates of the graduatedincome tax, works as a double poisonwhich is slowly crippling private enterprise. This is no small cause forconcern. It is crucial that we perceive how this combination subtlyerodes our economic substance. Suchaccurate perception is the prerequisite for proper action. And both aredesperately needed to prevent ourreeling economy from going downfor the count. Let us then briefly
examine the economic consequencesof our graduated income tax in thisage of inflation.
First of all, it is imperative thatwe recognize the current understanding and explanation of inflation for what it is: an economicmyth. All are agreed that inflationis a dreadful evil which shortchanges the moneyholders. (Themainstream economists even assentto this fact.) All the while, however,these economists wag their tonguesat the alleged cCcauses" of inflation:big business or labor unions. (Whichside is blamed usually depends, ofcourse, on the individual economist's own special interests.)
The accusations of these economists produce much legislationbut little change in the inflationrate. Well, that's not quite true; therate inevitably rises. So, everyonestruggles to stay one step ahead ofinflation. They hope to make a littleprofit or just break even. In order todo this, however, their moneyincome must steadily rise at orabove the present inflation rate.Such income increases are maintained at no small cost to both laborand management alike. Social conflict also inevitably rises.
The manner in which mainstreameconomists ignore the actual causeof this economic calamity is as baffling as it is reprehensible. The history of economic thought must beunknown to these men, or else it has
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been rewritten. Whatever the case,the issue will remain obscure untilit is clearly understood that the government's expansion of the currencyand credit is truly the cause ofinflation. (Actually, such expansionshould be identified as inflation,properly defined.) Thus, we wait forthe ebb of economic ignorance andwatch as moneyholders continue toget shortchanged in the meantime.
If this reality only affectedmoneyholdings, it would be badenough. However, insult is added toinjury when people fill out their income tax returns and discover thattheir brutal struggle to stay evenwith inflation has lifted them intohigher and more confiscatory ratesof taxation. If inflation were notharsh enough, the graduated rate ofincome tax serves only to rub saltinto their economic wounds. Suchabuse inescapably wreaks havoc onan individual's incentive to produce.
Inflation Speeds the Erosion
Actually, the inflation is notnecessary for the graduated incometax to effectively erode the nation'seconomic foundation. It only servesto expedite the process. But the government betrays both its impatienceand immoral intention by continually boosting the rate of inflation.Throughout the economy, thecrunch is felt by all. The whole time,the ravenous reapers of revenue inWashington clean up.
One might think that Americanshave always been subjected to thisannual headache. Clearly, such isnot the case. In fact, a Constitutional amendment was necessarybefore the graduated income taxcould be legally loosed upon theAmerican taxpayers in 1913. Thisfact alone serves to confirm one'ssuspicion that such a revenue measure was far from the intention ofthe founding fathers. In fact, prior tothe amendment, it was commonlyunderstood that such a tax flew inthe face of the direct and proportioned taxes called for in the Constitution. Specifically, the progressive income tax marked a distinctbreak from the established principleof nondiscriminating uniformity intaxation. This principle had longbeen recognized as crucial to thebalance and stability of the American market economy. It also wasunderstood to be a necessary meansto protect private property and sustain voluntary exchange.
The first century of American independence saw the majority of revenues coming from tariffs andduties. Taxation, when it occurred,was slight and proportioned so as todistribute the tax burden impartially. This all changed in 1913,when the relatively young incometax was apportioned upon agraduated scale. The break fromtradition has been widening as thegraduated scale has become steeper.
1980 THE OUTCOME OF THE INCOME TAX 137
What was it that motivated such adistinctive break from the Constitution? It would be profitable to brieflyexamine the arguments put forth infavor of the graduated scale.
~~The rich should pay a greaterproportion of taxes!" ~~Only such ameasure will actually bring aboutgreater equality of sacrifice!" Generally speaking, these arguments infavor of the graduated income taxhave been exposed for what theyare: expressions ofegalitarian ideology. There were very few argumentswhich gained any credence ineconomic circles as providing ~~scien
tific justification" for this socialdogma of reform.
Punishing Those Who HaveBeen Most Productive
One such case ostensibly providing rational grounds was the argument from ~~the decreasing marginalutility ofsuccessive acts ofconsumption."1 In crude terms, this theoryasserted that the rich entrepreneur,after making a cool million, wouldtend to value $10,000 less thanwould a typical American breadwinner. Such arguments, however,are rendered invalid by a properunderstanding of marginal utilityand subjective value. (This understanding goes all the way back tothe last century when Boehm-
lFriedrich A. Hayek, The Constitution ofLiberty (South Bend, Ind.: Gateway Editions,1972), p. 309.
Bawerk exposed the inadequate distinction between ~~use value" and(~exchange value."2) And recently,even the most dedicated econometricians have abandoned the hope ofbeing able to calculate and comparedifferent subjective utilities between individuals. Such utilitymeasurements are in fact as undesirable as they are unscientific!Therefore, the ultimate foundationfor the graduated income tax seemsto have been the dogma of socialequality.
What, then, are the economic consequences of implementing this social dogma by establishing a progressive income tax? Quite simply,this graduated tax structure worksto burden the economy in generaland the most productive members inparticular. This is so beeause thereis a heavier, disproportionate taxupon those who earn the higher incomes. And in a market economy,the more productive people makethe higher incomes. Thus, a greaterproportion ofcapital is diverted fromthe most productive channels of themarketplace. Instead of fundingproductive investments, this disproportionate amount of income willfind its way into the conspicuouslyconsumptive hands of the federalgovernment.
The graduated income tax will
2Eugen von Boehm-Bawerk, Capital andInterest (South Holland, TIL: Libertarian Press,1959), II, p. 160.
138 THE FREEMAN March
only serve to discourage initiativewhile dissolving incentive. For whatman would be overly anxious to poolcapital resources into a more productive combination if his profitswill only serve to lift him into asteeper tax bracket which offsets hisgains? Only the confident, daring, ormasochistic would be interested. Ithink we can then accurately conclude that the graduated income taxis at work, even now, slowly consuming our substance and erodingthe economic base of our independent republic. This parasite is asunnatural as it is unnecessary. HereAmericans have gravely erred. Wehave sold our birthright of libertyfor a mess of CCprogressive" pottage.
The Distortion of Disproportion
The market order has often beendepicted by its opponents as restingupon the competitive savagery ofthe law ofthe jungle, where only thestrong survive. An examination ofthis disparaging allusion is notwithin the scope of this essay.Whether or not this was ever true, itcould be more safely asserted that,with the dramatic reversal in socialthought in this past century, we arenow living in a society ensnarled inajungle of law. The irony of it all isdiscomforting. The turning pointcame with an exchange of legalprinciples.
For centuries, the conflict raged inEurope between serfs and lords,
peasants and monarchs. The issue atstake: the nature of the individualand his rights before the law. Theoutcome of the conflict marked adecisive victory for human liberty.cCThe equality of all men before thelaw" represented a most significantstep in the progress of justice.
What did it all mean for America?The founding fathers viewed thishard-fought acquisition as the legalpillar which would support the republic. CCEquality before the law"meant that where an individualstood before the court, he could beassured that his guilt or innocencewould be determined without regardto his economic status. The lawwould judge all men impartially. AsBenjamin Franklin stated: cCThesame for every member of the society; and the poorest continues tohave an equal claim to them withthe most opulent, whatever difference time, chance, or industry mayoccasion in their circumstances."
While the United States enjoyedlegal stability within its land, European nations began toying with thenotion ofthe progressive income tax.They seemed disinterested in understanding the legal struggle thattheir ancestors had undergone toestablish impartiality within therule of law. In 1891 Prussia beganits social experiment with thegraduated income tax. Many Americans and Europeans perceived thedanger. Dissent was raised by many
1980 THE OUTCOME OF THE INCOME TAX 139
who argued that ((the sacred principle of equality before the law" was((the only barrier against the en-croachment on private property."3However, the argument fell on deafears as the progressive rate was tooinsignificant to render any force tothe argument against graduatedrates in principle.
In the meantime, American andBritish social reformers were sounding the battle cry for greater ((equality of sacrifice." With the opposition's arguments rendered ineffective by the very smallness of the taxburden, these reformers did theirhomework. Within less than twentyyears of Prussia's experiment, GreatBritain succumbed to the progressive temptation.
America soon followed. Sowithin one generation, the legal lessons learned and the advancesmade, after the centuries of struggle, were forgotten. It was felt that amajority, by the mere fact of itsnumerical strength, could apply aburden to the wealthier minoritywithout being affected itself by anequal load.
At that point, any remainder oflegal clarity was distorted beyondrecognition. Granted, the graduatedburden was seemingly light. However, any attempt to impose a limitin the future would be arbitraryand, inevitably, only temporary.
3Hayek, op. cit., p. 310.
Thus, once the floodgate wasopened, there no longer existed anyprinciple which could prevent thetrickle from becoming a deluge.
So much was lost so quickly.Where the law had once beencharacterized by impartiality andpredictability, it was now an arbitrary standard which was shifted bythe will of the majority. A man'srelation to the law was now greatlyinfluenced, if not determined, by hiseconomic status.
What can this produce but a conflict society? Suppose, after all, oneman is taxed at one rate and hisneighbor at a lower rate. Now thisdoes not exactly create social harmony; rather it breeds suspicion andenvy. So much of this confusion isbrought about by a progressive income tax.
The Oppression of Progression
The redistribution of income andproperty by progressive taxation isnow universally recognized as aproper means to attain socialjustice.It has been argued in this essay thatsuch a policy is at once economicallyunproductive and legally unjust. Inaddition, it is morally reprehensible,contradicting the principles whichestablished the nation upon thefoundation of freedom and justice.
These principles were formulatedby men who comprehended that anation had to be built and sustainedby individuals who understood both
140 THE FREEMAN
self-discipline and self-development.Anything less would not endure. Solong as their actions did not violatethe rights of another, men were freeto pursue happiness according to thedictates of their· own conscience.Hence, men learned that individualenterprise and self-reliance weregifts of God which were to be cultivated and utilized. As they weredeveloped, the American peopleprospered.
In the midst of their prosperity, asubtle shift began to occur. Thechange was imperceptible at first.The results of the change, however,were most distinct. Perhaps theprosperity led to economic fatness,and fatness in turn led to moralflabbiness. Whatever the causes, theeffects remain with us. Where therewas once individual enterprise andself-reliance, there is now a growingdependence upon the state and federal governments. Accompanyingthis shift came a growing distrustdirected toward the more productivemembers of the society.
This distrust has blossomed intoopen hostility. With the instrumentality of the progressive taxstructure, this hostility has led to an
Frederic BastiatIDEAS ON
economic and legal assault upon thewealth ofthese productive members.Prior to 1913, such hostility surelyexisted. But once a disproportionatetax was permitted to burden somemore than others, the governmentthen became the means of economic,legal, and moral oppression.
When a discriminating incometax is allowed to become the meansof legal plunder, the spark of envywithin the classes of men is fannedinto a raging fire. No longer is thestate able to restrain the fruits ofcovetousness; now it works to produce them. From the spark of envyto a conflagration of confiscation,the graduated income tax has led todemocratic tyranny.
The progressive income tax hascome upon us gradually. It beganwith a seemingly harmless maximum rate of 7 per cent. Yet withinless than a generation, this rateclimbed higher than 90 per cent.Of course ((progressive" is a misnomer. ((Aggressive" might be closerto the truth. But alas, perhaps((regressive" would be best, as thisgraduated tax policy has takenAmerica back centuries-down theroad to serfdom. @
LIBERTY
THE STATE is and ought to be nothing whatever but community forceorganized, not to be an instrument of oppression and mutual plunderamong citizens, but, on the contrary, to guarantee to each his own, andto cause justice and security to reign.
Bettina Bien Greaves
GovernmentRegulation of
Mass MediaCommunication
PEACEFUL RELATIONS among peopledepend on voluntary social cooperation. And the success of social cooperation rests in large part on ease ofcommunication. With the development, many millennia ago, of primitive language and, in time, of thewritten word, interpersonal communication and cooperation couldbegin. Much more sophisticated andefficient ways of relaying ideas andknowledge have since been developed and communicationtechniques have changed radicallysince the time of footrunningcouriers and town criers.
Our modern mass media of communication have been made possibleby countless inventions and im-
Mrs. Greaves is a member of the senior staff of TheFoundation for Economic Education and the authorof the two-volume Basic Reader and Syllabus-FreeMarket Economics. For many years she has assembled material on national high school and collegedebate topics.
This essay deals with the SUbject of the currentcollege debate resolutions.
provements made by unnumberedindividuals over the years. Printingtechniques and the production ofpaper, books and newspapers havebeen considerably improved. Today's very remarkable radio, TV,print and film industries are products of extremely complicatedcapital-intensive electrical, electronic and photographic technologies andequipment. Readers, listeners andviewers everywhere want these mechanical techniques of communication to be continually improved stillmore. They also want the quality ofthe material published, produced andbroadcast to be upgraded so as tosatisfy better their own personalinterests.
1. What information do peoplewant to communicate and to havecommunicated to them? Onethinks first offof personal messages,letters and daily newspapers. Butcommunication involves much more
141
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than that. Access to theoretical, factual and historical knowledge accumulated throughout the centuriesis most important. People also wantto learn what others have beendoing recently. They want reports oncurrent events with comments, oftencritical of specific persons and theiractions. They want to learn whattheir government is doing, or maydo. They are interested in politicalevents. They want to know aboutlaws, proposed or enacted, and aboutactual or likely administrative decisions. They want reports on judicialprocedures and court trials. Theywant to be able to petition theirgovernment. They want reports onbusiness, production, trade and othereconomic activities. They want toknow likely production costs, as wellas what prices producers and retailers are asking for goods and services. They want to hear weatherreports and forecasts. They want information on new products and scientific developments. They want entertainment. They follow competitive sports closely. They want toknow about social events, as well asdisasters, accidents, crimes. Peoplenow rely on mass media communication facilities for all these andmany other kinds of informationand entertainment.
2. What forms of communicationare used to transmit all this material? The traditional mass media of
communication are television, radio,print and/or film. But ideas, knowledge, factual data and entertainment are also transmitted by othermeans. Personal messages are delivered by hand, through the mails,by word of mouth and by telephone.Printed messages and commentariesappear in books, newspapers, pamphlets and on billboards. Radio andtelevision offer news of all kinds,sports and entertainment, films, fictional and documentary, interviewswith prominent personalities, advertising and much more. Modernloud speakers, often with radioand/or TV hook-up, enable speakersto be heard by hundreds, thousands,even millions, from outdoor lectureplatforms or even a soap box, as wellas in theaters or auditoriums.
Although not usually classified ascommunications media, schools anduniversities are among the most important means for transmitting fromone generation to another the vastbody of theoretical knowledge andfactual data accumulated over centuries. And businessmen everywherelook to daily prices and stock marketreports for information about anticipated prices and future demandsfor products throughout the world.
3. How have communicationsmedia changed over the years?Inventors and investors have substantially modified and improvedcommunication facilities. Many more
1980 GOVERNMENT REGULATION OF MASS MEDIA 143
individuals may now transmit moremessages to more people morequickly and more easily than everbefore. We no longer need rely ondirect word of mouth communication or hand-to-hand transmission oforiginal messages.
Improvements in distributioncame first. By wagon, coach, ponyexpress, train, automobile andplane, messages could be deliveredmuch faster than men could run,over much longer distances. Printing presses, rag and woodpulp papers, book binding equipment,strong glues, etc., improved the publishing of printed books and newspapers. With the development ofelectricity, photography, electronics,transistors, and so forth, the telegraph, ticker tape, telephone, radio,television, teletype, communicationsatellites, etc., became possible,permitting spoken words and pictures to be sent through the air.Using these modern techniques, anyarrangement of words and photosmay be transmitted promptly andaccurately all around the world.Books, newspapers, statistics, films,radio broadcasts, TV shows, and thelike, may be transmitted in preciseand accurate reproduction.
Lies, distortions, propaganda andmisinterpretations of truth are relayed just as faithfully as are truths,accurate data and reliable knowledge. The media themselves aremerely tools created by individuals
to facilitate communication. Themedia are not selective; they may beused for good or evil.
4. How can we best assure thatthe media transmit truths, not lies?The eagerness to know and to communicate often conflicts with thedesire of individuals to live in privacy and to keep unpleasant matters hidden. Yet freedom ofthe presshas been traditional in this country.Generally speaking, reporters havebeen free to write as they chose, solong as they were responsible forwhat they wrote. The broadcastingof libelous (defamatory) statementsthat destroy a person's reputationwas generally considered a form oftheft. Yet, since the trial of journalist John Peter Zenger (16971764) in colonial New York, a derogatory statement that was truewas not considered libelous; to defend himselfagainst charges ofHbel,an author had only to demonstratehis statement was true.
With recent technological advances, .freedom of press principleshave been expanded to apply toradio, TV, even films and all printedmatter, as well as traditional newspapers. However, the principle ofreporter responsibility has been diluted. Since New York Times v. Sullivan I (1964), reporters have beenfree to publish almost anything,true or false, about~~public figures,"confident that they could not be
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charged with libel unless ((actualmalice" were proved. Some reportersnow refuse to reveal the sources onwhich they base a story, claimingthey promised anonymity to obtaininformation to satisfy their readers'((right to know." Some reportershave lost their jobs as a result. Somehave even been jailed. Marie Torre,William T. Farr, Daniel Schorr, M.A. Farber are a few who refused toreveal sources.
However, the principle of a freepress is not simply protecting thefreedom of reporters to publish whatthey choose. How about the readers'((right to know" the source ofa story,so as to judge bias and reliability ina particular instance? How aboutthe constitutional right (Amendment VI) of a person being accused((to be confronted with the witnessesagainst him"? What will happen ifreporters may write what theychoose without any obligation todemonstrate its truth or to revealsources? What assurance will thepublic then have of the reliability ofnews reporting?
5. Suppose the federal government assumed responsibility forthe quality and reliability of communications by strengthening itsregulation of the media? Government officials, like private individuals, would prefer at times not to bein the public eye; they would like tohide their mistakes, misjudgments
and indiscretions. Yet private reporters want to uncover and publicizeprecisely the informat!on government officials are most intent onconcealing. Thus reporters and officials frequently become adversaries.If more power is given government,the officials gain the upper hand andcan threaten recalcitrant reporterswith reprisals. Classification of governm~nt documents as SECRET orCONFIDENTIAL (viz. the PentagonPapers, released in 1971 by DanielEllsberg) may sometimes be usedsimply to avoid government embarrassment. Such a situation couldlead, on the one hand, to censorshipwith the concealment of any information unfavorable to the government and, on the other hand, topropaganda with the release of progovernment handouts only.
6. How does the federal government now influence the communications media? The federal government now exercises considerablecontrol over the private media, oftenby the back door-through FCC requirements with respect to licensing, radio-TV programming, allotment of time to public service andnews programs, equal time provisions in political campaigns, freetime for persons to answer criticismunder the ~~faimessdoctrine," advertising limitations, and so on. Government may also interfere throughantitrust regulations, labor-
1980 GOVERNMENT REGULATION OF MASS MEDIA 145
IT is a sad fact that some people try to exploit their fellow men'splight by offering them patent medicines.... It would not impair theoperation of the market if the authorities were to prevent suchadvertising.... But whoever is ready to grant to the government thispower would be inconsistent if he objected to the demand to submitthe statements of churches and sects to the same examination.Freedom is indivisible. As soon as one starts to restrict it, one entersupon a decline on which it is difficult to stop. If one assigns to thegovernment the task of making truth prevail in the advertising ofperfumes and tooth paste, one cannot contest it the right to lookafter truth in the more important matters of religion, philosophy, andsocial ideology.
LUDWIG VON MISES, Human Action
management relations, the SEC,CIA and FBI surveillance activities,etc. Government directly subsidizessome communications-throughUSIA, Radio Free Europe, CETA,the poverty program, aid to the arts,etc. Government is also concerned,necessarily, with publicity givencourt cases, for it may contribute to,or hamper, fair trials for defendants.All in all, the influence of the federal government over the media isconsiderably more pervasive thanappears at first glance.
7. What authority should the federal government have to regulatecommunications media? The FirstAmendment to the Constitutionprovides that the Congress shall((make no law . . . abridging thefreedom of speech, or of the press
..."Generally speaking, the principles of a free press should prevailthroughout the communications industry. Radio, television, printing,film production, etc., should all becompletely private enterprises, financed entirely by the savings ofprivate investors. They should besubject to free and open competitionon the market, free to experiment, totryout new ideas, dependent forsurvival, like any other enterprise,on satisfying consumers.
In a completely free system, thecommunications media would relyfor news of production costs and thedemand for goods and services onpricing information communicatedthrough the market. Government'sobligation to them would be thesame as to any other privateenterprise-to protect them from
146 THE FREEMAN
those who would use force, fraud orthreat of either to destroy life andproperty.
In war, truth inevitably becomesThe First Casualty, as PhillipKnightley demonstrates in his bookof that title. For patriotic and military reasons, reporters then usuallysubmit willingly to censorship. Butonce war ends, freedom of the pressprinciples should prevail. The communications media should then become once more the eternally vigilant ((watchdog," reporting the newsas accurately and as responsibly aspossible.
Thomas Jefferson had profoundconfidence in a free press. He wrote,nWere it left to me to decide whetherwe should have a government without newspapers, or newspaperswithout· a government, I should not
hesitate to prefer the latter.... Reason and free inquiry are the onlyeffectual agents against error." If allour communications media today-not only radio, TV, film andprinting industries, but also schools,libraries, churches, theaters, advertisers, politicians, and so on-wererelieved of the hampering effects ofgovernment regulations, controls,red tape and excess taxes, theywould have to become more responsible to the ever-changing wishes ofconsumers, or go out of business.Those enterprises that succeededbest in presenting sound principle,truth and lively entertainment totheir customers, in· free and opencompetition with all other enterprises, would become increasinglymore effective and vigorouscommunicators. @
DEBATE TOPICS OF RECENT. YEARSGovernment Regulation of Mass Media
CommunicationsForeign PolicyEmployment OpportunitiesEnergyFederal Law Enforcement-Investigation
and Prosecution of Felony CrimesConsumer "Protection" or Consumer Sovereignty
Mrs. Greaves has a limited supply of her suggested study questions andreferences for each of these topics, available on request while the supplylasts. Send requests (specify topic or topics desired) to:
The Foundation for Economic Education, Inc.30 South BroadwayIrvington-on-Hudson, N.Y. 10533
P. Dean Russell
HOW TOPRODUCE
HUMAN BEINGSA FEATURE of our tour of a collectivefarm in China was a visit to thehome of a worker. To my astonishment, our host had five children.
I wondered if he was aware of thepolicy of the State Council's familyplanning department. The chairwoman, Vice Premier Chen Muhua,summed up that policy in this clearstatement: ~~The planned economy ofsocialism should make it possible toregulate the reproduction of humanbeings so that the population growthkeeps in step with the growth ofmaterial production."
Five children in one family is notin harmony with the current level ofmaterial production in the People'sRepublic of China. In fact, the gov-
Dr. Russell, Professor of Management, University ofWisconsin at La Crosse, also gains economic Insight from his observation of people and conditionsaround the world.
ernment's plan to equalize them isbased on the production of no morethan two children per couple-andone, or even none, is preferred.
At my request, our tour guide putthis information into a question toour farmer-host. He listened carefully, smiled proudly, and repliedthat the official policy on his collective farm of 26,000 members is topermit the production of childrenuntil a son is born. He and his wifehad produced four daughters beforethe son arrived. Then both weresterilized.
This policy on the production ofhuman beings in China varies fromprovince to province and, apparently, from collective to collective.Also the ((child production allotment" appears to be larger on collective farms than in collective factories. Increasingly, however, the
147
148 THE FREEMAN March
philosophy now followed in ruralGuizhou Province is becoming thenorm for the nation: ((The party organizations at all levels have calledon the masses to resolutely dealblows to the criminals ... [who]have used the masses' old ideas,"(i.e., more sons, more bliss) to sabotage socialist population controlmeasures.
Traditions die hard, however, inany society. Prime Minister IndiraGandhi also discovered this truthwhen she encouraged the use offorce to sterilize people who refusedto comply with her plans to decreasethe population in India. Her successor as prime minister, Maraji Desai,once told me that Mrs. Gandhi'scompulsory sterilization policies hadfar more to do with her politicaldefeat than did the charges of corruption against her administrationand family.
Rewards and Penalties
In India and China, a combinationof both ((carrot and stick" measuresare used in the attempt to keep theproduction of human beings in harmony with state plans. For example,free birth control devices, abortions,and sterilizations are readily available to all. These control measuresare always actively promoted andare sometimes even enforcedagainst reluctant participants. Insome cities in China, e.g., Peking,the production of a third child may
bring a fine of 10 per cent of pay forup to 14 years. One-child and nochild families in China are oftenrewarded by the government withmore housing space and better jobopportunities. These cooperatingparents may also get special creditsadded to their retirement pensions.
Similar reward and punishmentmeasures are used (in reverse) inwestern nations where the production of children is positively encouraged. For example, in Sweden thelow birth rate is of great concern tothe government. The allocation ofscarce housing is one of several waysthe government uses to reward theproducers of more Swedish babies.During my two visits to Stockholmin the 1960s I found that the waitingtime for an apartment was from fourto ten years. But a woman couldmove to the top ofthe waiting list forscarce and low-rent housing if shebecame pregnant. That's a most persuasive production bonus in a society where there's a housing shortage.
In France with its declining birthrate, a friend ofmine in Paris is paidmore (directly and indirectly) by thegovernment for his five childrenthan he's paid (take home) by hisemployer. He once joked to me thathis family is a two-income family;his wife is paid for producing morechildren while he's paid for producing more lectures.
In New York City, the payment of
1980 HOW TO PRODUCE HUMAN BEINGS 149
various direct and indirect subsidiesto families with dependent childrenusually adds up to considerablymore than the parent could earn atany available job. And so on, inevery nation of the world, with thegovernment applying both carrotand stick to increase or decrease theproduction of human beings according to state plans.
Motivation
There is a strong tendency bymost persons in any society to takethe job that offers the most materialgoods and services for the least effort. And quite frequently in variouswestern nations, the governmentpays more for the production of children than the market pays for theproduction of goods and services.
This ~~reward principle" applies tothe· production of anything and everything, at all times, and in allnations. For example, when thestate planners in Russia wantedmore food produced, they permittedprivate farming, market pricing,and high profits. The socialist planners knew with certainty that theRussian farmers would respond tothe profit motive in precisely thesame way the managers of GeneralMotors respond to the same motive.Both will produce more of thewanted products. In Poland, I observed people standing in line forthree hours at the no-profit government stores while other people were
getting immediate service in the~~private sector" of the economy thatoperates on the profit motive.
This motivation to increase production, i.e., the basic desire ofmankind to accumulate productsand services for survival and comfort, is not restricted to any particular economic system. It is aninherent-not an acquiredcharacteristic. It came with the firsthuman being, and everyone of ustoday was born with it in our genes.Even the persons who use force in aneffort to suppress this motivatingprinciple ~~to get ahead" are themselves thereby trying to get ahead ofthe rest of us.
This acquisitive characteristic isresponsible for all progress, including art by the old masters. Thephilosopher who argues how the~~surplus" production should be distributed seems happily unawarethat the surplus was produced bypersons who expected to gain something from it personally. What didthey eXPect to gain? Ask any producer, including yourself. While theanswers will vary widely, they willall involve self-interest (includingself-glorification and immortalization) in one way or another.
As my minister sincerely denounced the ~~root of all evil" in hissermons, I continued to help him inhis search for a larger church thatpaid its pastor more money. I recommended him because he was a
150 THE FREEMAN
high producer and a good man inevery sense of the word. He, too,wanted (and I think, deserved) moreof the world's products and services.
What do you want more of?Babies? Tobacco? Chrysler cars? Thesecret ofhow to get them produced isknown to everyone, in Russia as inthe United States. Just pay a biggerbonus in one form or another, including the government's support ofprices higher than the market wouldtolerate.
Leave to the Individual theChoice and Its Consequences
What do you want less of? Babies?Rental housing and apartments? Investment in machinery? The secretof how to decrease production is alsoknown to everyone, in China as inthe United States. Just penalizesuch production in one way oranother, including the government'ssetting of prices lower than themarket would offer.
Personally, I'm not in favor of ourgovernment's rewarding or penalizing the producers of any product,most especially the producers ofhuman beings. That's a bit too close
The Right to Choose
to cCplaying God" for my taste.Perhaps we collectively (throughour government) would be well advised neither to reward nor topenalize anyone for having or nothaving babies. Perhaps that decision should be left with the individuals who are directly concerned, andwith no one else.
In retrospect, I just can't imaginethat any government planningagency would have permitted me(unit number 11) to be added to theexisting 10 children already produced by a dirt-poor family in theVirginia mountains. Even the worstof the bureaucratic plannerscouldn't make such an obviousblunder as that.
I think of that when I take thegovernment-granted income tax deduction for my own children. If I askthe government to reward me withtax rebates (and other subsidies) forproducing human beings, I have nomoral ground to stand on when thegovernment planners decide topenalize me for it. If they have theright to do the one, then most definitely they have the right to do theother. ®
IDEAS ON
LIBERTY
IT must be obvious that liberty necessarily means freedom to choosefoolishly as well as wisely; freedom to choose evil as well as good;freedom to enjoy the rewards ofgood judgment, and freedom to suffer thepenalties of bad judgment.
BEN MOREELL, "Survival of the Species"
Ludwig von Mises
Inflation
IF the supply of caviar were as plentiful as the supply of potatoes, theprice of caviar-that is, the exchange ratio between caviar andmoney or caviar and other commodities-would change considerably. In that case, one could obtaincaviar at a much smaller sacrificethan is required today. Likewise, ifthe quantity of money is increased,the purchasing power of the monetary unit decreases, and the quantityof goods that can be obtained for oneunit of this money decreases also.
When, in the sixteenth century,American resources of gold andsilver were discovered and exploited, enormous quantities ofthe precious metals were transported to Europe. The result of thisincrease in the quantity of moneywas a general tendency toward anupward movement of prices. In thesame way, today, when a government increases the quantity of papermoney, the result is that the purchasing power of the monetary unit
begins to drop, and so prices rise.This is called inflation.
Unfortunately, in the UnitedStates, as well as in other countries,some people prefer to attribute thecause of inflation not to an increasein the quantity ofmoney but, rather,to the rise in prices.
However, there has never beenany serious argument against theeconomic interpretation of the relationship between prices and thequantity of money, or the exchangeratio between money and othergoods, commodities, and services.Under present day technologicalconditions there is nothing easierthan to manufacture pieces of paperupon which certain monetaryamounts are printed. In the UnitedStates, where all the notes are of thesame size, it does not cost the government more to print a bill of athousand dollars than it does toprint a bill of one dollar. It is purelya printing procedure that requiresthe same quantity of paper and ink.
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152 THE FREEMAN March
Ludwig von Mises, 1881-1973, was oneof the great defenders of a rationaleconomic science, and perhaps the single most creative mind at work in thisfield in our century.
Found among the papers of Dr. Miseswere transcripts of lectures he deliveredin Argentina in 1959. These have nowbeen edited by his widow and are available as a Regnery/Gateway paperbacked book. This article, one of thelectures, is here reprinted by permissionof the publishers. All rights reserved.
The book, Economic Policy: Thoughtsfor Today and Tomorrow, also may bepurchased at $4.95 from The Foundationfor Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533.
In the eighteenth century, whenthe first attempts were made toissue bank notes and to give thesebank notes the quality of legaltender-that is, the right to be honored in exchange transactions in thesame way that gold and silver pieceswere honored-the governmentsand nations believed that bankershad some secret knowledge enablingthem to produce wealth out of nothing. When the governments of theeighteenth century were in financialdifficulties, they thought all theyneeded was a clever banker at thehead of their financial managementin order to get rid of all their difficulties.
Some years before the FrenchRevolution, when the royalty ofFrance was in financial trouble, the
king of France sought out such aclever banker, and appointed him toa high position. This man was, inevery regard, the opposite of thepeople who, up to that time, hadruled France. First of all he was nota Frenchman, he was a foreigner-aGenevese. Secondly, he was not amember of the aristocracy, he was asimple commoner. And whatcounted even more in eighteenthcentu!y France, he was not aCatholic, but a Protestant. And soMonsieur Necker, the father of thefamous Madame de StaiH, becamethe minister of finance, andeveryone expected him to solve thefinancial problems of France. But inspite ofthe high degree ofconfidenceMonsieur Necker enjoyed, the royalcashbox remained empty-Necker'sgreatest mistake having been hisattempt to finance aid to the American colonists in their war of independence against England withoutraising taxes. That was certainly thewrong way to go about solvingFrance's financial troubles.
No Secret Source of Funds
There can be no secret way to thesolution of the financial problems ofa government; if it needs money, ithas to obtain the money by taxingits citizens (or, under special conditions, by borrowing it from peoplewho have the money). But manygovernments, we can even say mostgovernments, think there is another
1980 INFLATION 153
method for getting the neededmoney; simply to print it.
If the government wants to dosomething beneficial-if, for example, it wants to build a hospital-theway to find the needed money forthis project is to tax the citizens andbuild the hospital out of tax revenues. Then no special Hprice revolution" will occur, because when thegovernment collects money for theconstruction of the hospital, the citizens-having paid the taxes-areforced to reduce their spending. Theindividual taxpayer is forced to restrict either his consumption, hisinvestments or his savings. Thegovernment, appearing on the market as a buyer, replaces the individual citizen: the citizen buys less, butthe government buys more. Thegovernment, of course, does not always buy the same goods which thecitizens would have bought; but onthe average there occurs no rise inprices due to the government's construction of a hospital.
I choose this example of a hospitalprecisely because people sometimessay: HIt makes a difference whetherthe government uses its money forgood or for bad purposes." I want toassume that the government alwaysuses the money which it has printedfor the best possible purposespurposes with which we all agree.For it is not the way in which themoney is spent, it is the way inwhich the government obtains this
money that brings about those consequences we call inflation andwhich most people in the worldtoday do not consider as beneficial.
For example, without inflating,the government could use the taxcollected money for hiring new employees or for raising the salaries ofthose who are already in government service. Then these people,whose salaries have been increased,are in a position to buy more. Whenthe government taxes the citizensand uses this money to increase thesalaries of government employees,the taxpayers have less to spend, butthe government employees havemore. Prices in general will not increase.
But if the government does notuse tax money for this purpose, if ituses freshly printed money instead,it means that there will be peoplewho now have more money while allother people still have as much asthey had before. So those who received the newly-printed money willbe competing with those people whowere buyers before. And since thereare no more commodities than therewere previously, but there is moremoney on the market-and sincethere are now people who can buymore today than they could havebought yesterday-there will be anadditional demand for that samequantity of goods. Therefore priceswill tend to go up. This cannot beavoided, no matter what the use of
154 THE FREEMAN March
this newly-issued money will be.And most importantly, this ten
dency for prices to go up will developstep by step; it is not a .generalupward movement of what has beencalled the ((price level." Themetaphorical expression ((pricelevel" must never be used.
When people talk of a ((pricelevel," they have in mind the imageof a level of a liquid which goes up ordown according to the increase ordecrease in its quantity, but which,like a liquid in a tank, always risesevenly. But with prices, there is nosuch thing as a ((level." Prices do notchange to the same extent at thesame time. There are always pricesthat are changing more rapidly, rising or falling more rapidly thanother prices. There is a reason forthis.
Early Beneficiaries
Consider the case of the government employee who received thenew money added to the money supply. People do not buy today precisely the same commodities and inthe same quantities as they did yesterday. The additional money whichthe government has printed and introduced into the market is not usedfor the purchase of all commoditiesand services. It is used for the purchase of certain commodities, theprices of which will rise, while othercommodities will still remain at theprices that prevailed before the new
money was put on the market.Therefore, when inflation starts, different groups within the populationare affected by this inflation, in different ways. Those groups who getthe new money first, gain a temporary benefit.
When the government. inflates inorder to wage a war, it has to buymunitions, and the first to get theadditional money are the munitionindustries and the workers withinthese industries. These groups arenow in a very favorable position.They have higher profits and higherwages; their business is moving.Why? Because they were the first toreceive the additional money. Andhaving now more money at theirdisposal, they are buying. And theyare buying from other people whoare manufacturing and selling thecommodities that these munitionmakers want.
These other people form a secondgroup. And this second group considers inflation to be very good forbusiness. Why not? Isn't it. wonderful to sell more? For example, theowner of a restaurant in theneighborhood of a munitions factorysays: ((It is really marvelous! Themunition workers have moremoney; there are many more ofthem now than before; they are allpatronizing my restaurant; I amvery happy about it." He does notsee any reason to feel otherwise.
The situation is this: those people
1980 INFLATION 155
to whom the money comes first nowhave a higher income, and they canstill buy many commodities and services at prices which correspond tothe previous state of the market, tothe condition that existed on the eveof inflation. Therefore, they are in avery favorable position. And thusinflation continues step by step,from one group of the population toanother. And all those to whom theadditional money comes at the earlystage of inflation are benefited because they are buying some thingsat prices still corresponding to theprevious stage of the exchange ratiobetween money and commodities.
Others Must Lose
But there are other groups in thepopulation to whom this additionalmoney comes much, much later.These people are in an unfavorableposition. Before the additionalmoney comes to them they areforced to pay higher prices than theypaid before for some~r for practically all-of the commodities theywanted to purchase, while their income has remained the same, or hasnot increased proportionately withprices.
Consider for instance a countrylike the United States during theSecond World War; on the one hand,inflation at that time favored themunitions workers, the munitionindustries, the manufacturers ofguns, while on the other hand it
worked against other groups of thepopulation. And the ones who suffered the greatest disadvantagesfrom inflation were the teachers andthe ministers.
As you know, a minister is a verymodest person who serves God andmust not talk too much aboutmoney. Teachers, likewise, are dedicated persons who are supposed tothink more about educating theyoung than about their salaries.Consequently, the teachers andministers were among those whowere most penalized by inflation, forthe various schools and churcheswere the last to realize that theymust raise salaries. When thechurch elders and the school corporations finally discovered that, afterall one should also raise the salariesof those dedicated people, the earlierlosses they had suffered still remained.
For a long time, they had to buyless than they did before, to cutdown their consumption of betterand more expensive foods, and torestrict their purchase of clothing-because prices had already adjusted upward, while their income,their salaries, had not yet beenraised. (This situation has changedconsiderably today, at least forteachers.)
There are therefore always different groups in the population beingaffected differently by inflation. Forsome of them, inflation is not so bad;
156 THE FREEMAN March
they even ask for a continuation ofit, because they are the first to profitfrom it. We will see, in the nextlecture, how this unevenness in theconsequences of inflation vitally affects the politics that lead towardinflation.
Under these changes broughtabout by inflation, we have groupswho are favored and groups who aredirectly profiteering. I do not use theterm ~(profiteering"as a reproach tothese people, for if there is someone to blame, it is the governmentthat established the inflation. Andthere are always people who favorinflation, because they realize whatis going on sooner than other peopledo. Their special profits are due tothe fact that there will necessarilybe unevenness in the process of inflation.
Inflation as a Tax
The government may think thatinflation-as a method of raisingfunds-is better than taxation,which is always unpopular and difficult. In many rich and great nations, legislators have often discussed, for months and months, thevarious forms ofnew taxes that werenecessary because the parliamenthad decided to increase expenditures. Having discussed variousmethods of getting the money bytaxation, they finally decided thatperhaps it was better to do it byinflation.
But of course, the word Hinflation"was not used. The politician in powerwho proceeds toward inflation doesnot announce: ~~I am proceeding toward inflation." The technicalmethods employed to achieve theinflation are so complicated that theaverage citizen does not realize inflation has begun.
During one of the biggest inflations in history, in the GermanReich after the First World War, theinflation was not so momentous during the war. It was the inflationafter the war that brought about thecatastrophe. The government didnot say: ~(We .are proceeding towardinflation." The government simplyborrowed money very indirectlyfrom the central bank. The government did not have to ask how thecentral bank would find and deliverthe money. The central bank simplyprinted it.
Today the techniques for inflationare complicated by the fact thatthere is checkbook money. It involves another technique, but theresult is the same. With the strokeof a pen, the government creates fiatmoney, thus increasing the quantityof money and credit. The government simply issues the order, andthe fiat money is there.
The government does not care, atfirst, that some people will be losers,it does not care that prices will goup. The legislators say: ((This is awonderful system!" But this wonder-
1980 INFLATION 157
ful system has one fundamentalweakness: it cannot last. If inflationcould go on forever, there would beno point in telling governments theyshould not inflate. But the certainfact about inflation is that, sooner orlater, it must come to an end. It is apolicy that cannot last.
In the long run, inflation comes toan end with the breakdown of thecurrency-to a catastrophe, to asituation like the one in Germany in1923. On August 1, 1914, the valueof the dollar was four marks andtwenty pfennigs. Nine years andthree months later, in November1923, the dollar was pegged at 4.2trillion marks. In other words, themark was worth nothing. It nolonger had any value.
Some years ago, a famous authorwrote: ~~In the long run we are alldead." This is certainly true, I amsorry to say. But the question is, howshort or long will the short run be?In the eighteenth century there wasa famous lady, Madame de Pompadour, who is credited with thedictum: ~~Apres nous Ie deluge" C~Af
ter us will come the flood"). Madamede Pompadour was happy enough todie in the short run. But her successor in office, Madame du Barry, outlived the short run and was beheaded in the long run. For manypeople the ~~long run" quickly be-comes the ~~short run"-and thelonger inflation goes on the soonerthe Hshort run."
How long can the short run last?How long can a central bank continue an inflation? Probably as longas people are convinced that thegovernment, sooner or later, but certainly not too late, will stop printingmoney and thereby stop decreasingthe value of each unit of money.
The Flight from Money
When people no longer believethis, when they realize that the government will go on and on withoutany intention of stopping, then theybegin to understand that prices tomorrow will be higher than they aretoday. Then they begin buying atany price, causing prices to go up tosuch heights that the monetary system breaks down.
I refer to the case of Germany,which the whole world was watching. Many books have described theevents of that time. (Although I amno German, but an Austrian, I saweverything from the inside: in Austria, conditions were not very different from those in Germany; norwere they much different in manyother European countries.) For several years, the German people believed that their inflation was just atemporary affair, that it would sooncome to an end. They believed it foralmost nine years, until the summerof 1923. Then, finally, they began todoubt. As the inflation continued,people thought it wiser to buy everything available, instead of keeping
158 THE FREEMAN March
money in their pockets. Furthermore, they reasoned that one shouldnot give loans of money, but on thecontrary, that it was a very goodidea to be a debtor. Thus inflationcontinued feeding on itself.
And it went on in Germany untilexactly August 28, 1923. Themasses had believed inflation moneyto be real money, but then they foundout that conditions had changed. Atthe end of the German inflation, inthe fall of 1923, the German factories paid their workers everymorning in advance for the day. Andthe workingman who came to thefactory with his wife, handed hiswages-all the millions he got~
over to her immediately. And thelady immediately went to a shop tobuy something, no matter what. Sherealized what most people knew atthat time-that overnight, from oneday to another, the mark lost 50% ofits purchasing power. Money, likechocolate on a hot oven, was meltingin the pockets of the people. Thislast phase of German inflation didnot last long; after a few days, thewhole nightmare was over: themark was valueless and a new currency had to be established.
Lord Keynes, the same man whosaid that in the long run we are alldead, was one of the long line ofinflationist authors of the twentiethcentury. They all wrote against thegold standard. When Keynes attacked the gold standard, he called
it a Hbarbarous relic." And mostpeople today consider it ridiculous tospeak of a return to the gold standard. In the United States, for instance, you are considered to bemore or less a dreamer if you say:((Sooner or later, the United Stateswill have to return to the gold standard."
Yet the gold standard has onetremendous virtue: the quantity ofthe money supply, under the goldstandard, is independent of thepolicies of governments and politicalparties. This is its advantage. It is aform of protection against SPendthrift governments. If, under thegold standard, a government isasked to spend money for somethingnew, the minister of finance can say:((And where do I get the money? Tellme, first, how I will find the moneyfor this additional expenditure."
A Restraint on Spending
Under an inflationary system,nothing is simpler for the politiciansto do than to order the governmentprinting office to provide as muchmoney as they need for their projects.Under a gold standard, sound government has a much better chance;its leaders can say to the people andto the politicians: ((We can't do itunless we increase taxes."
But under inflationary conditions,people acquire the habit of lookingupon the government as an institution with limitless means at its dis-
1980 INFLATION 159
posal: the state, the government,can do anything. If, for instance, thenation wants a new highway system, the government is eXPected tobuild it. But where will the government get the money?
One could say that in the UnitedStates today-and even in the past,under McKinley-the Republicanparty was more or less in favor ofsound money and of the gold standard, and the Democratic party wasin favor of inflation. Of cours~ not apaper inflation, but of silver.
It was, however, a Democraticpresident of the United States, President Cleveland, who at the end ofthe 1880s vetoed a decision of Congress, to give a small sum-about$10,OOO-to help a community thathad suffered some disaster. AndPresident Cleveland justified hisveto by writing: ((While it is the dutyof the citizens to support the government, it is not the duty of thegovernment to support the citizens."This is something which everystatesman should write on the wallof his office to show to people whocome asking for money.
I am rather embarrassed by thenecessity to simplify these problems.There are so many complex problems in the monetary system, and Iwould not have written volumesabout them ifthey were as simple asI am describing them here. But thefundamentals are precisely these: ifyou increase the quantity of money,
you bring about the lowering of thepurchasing power of the monetaryunit. This is what people whose private affairs are unfavorably affecteddo not like. People who do not benefit from inflation are the ones whocomplain.
A Worldwide Plague
If inflation is bad and if peoplerealize it, why has it become almosta way of life in all countries? Evensome of the richest countries sufferfrom this disease. The United Statestoday is certainly the richest country in the world, with the higheststandard of living. But when youtravel in the United States, you willdiscover that there is constant talkabout inflation and about the necessity to stop it. But they only talk;they do not act.
To give you some facts: after theFirst World War, Great Britain returned to the prewar gold parity ofthe pound. That is, it revalued thepound upward. This increased thepurchasing power of every worker'swages. In an unhampered marketthe nominal money wage wouldhave fallen to comPensate for thisand the workers' real wage wouldnot have suffered. We do not havetime here to discuss the reasons forthis. But the unions in Great Britainwere unwilling to accept an adjustment of wage rates to the higherpurchasing power of the monetaryunit, therefore real wages were
160 THE FREEMAN March
raised considerably by this monetary measure. This was a seriouscatastrophe for England, becauseGreat Britain is a predominantlyindustrial country that has to import its raw materials, half-finishedgoods, and food stuffs in order tolive, and has to export manufactured goods to pay for these imports.With the rise in the internationalvalue of the pound, the price ofBritish goods rose on foreign markets and sales and exports declined.Great Britain had, in effect, priceditself out of the world market.
The unions could not be defeated.You know the power of a union today. It has the right, practically theprivilege, to resort to violence. Anda union order is, therefore, let ussay, not less important than a government decree. The governmentdecree is an order for enforcementfor which the enforcement apparatus of the government-thepolice-is ready. You must obey thegovernment decree, otherwise youwill have difficulties with the police.
The Impact of Unions
Unfortunately, we have now, inalmost all countries all over theworld, a second power that is in aposition to exercise force: the laborunions. The labor unions determinewages and the strikes to enforcethem in the same way in which thegovernment might decree aminimum wage rate. I will not dis-
cuss the union question now; I shalldeal with it later. I only want toestablish that it is the union policyto raise wage rates above the levelthey would have on an unhamperedmarket. As a result, a considerablepart of the potential labor force canbe employed only by people or industries that are prepared to sufferlosses. And, since businesses are notable to keep on suffering losses, theyclose their doors and people becomeunemployed. The setting of wagerates above the level they wouldhave on the unhampered marketalways results in the unemploymentof a considerable part of the potential labor force.
In Great Britain, the result ofhigh wage rates enforced by thelabor unions was lasting unemployment, prolonged year afteryear. Millions of workers were unemployed, production figuresdropped. Even experts wereperplexed. In this situation theBritish government made a movewhich it considered an indispensable, emergency measure: it devaluedits currency.
The result was that the purchasing power of the money wages, uponwhich the unions had insisted, wasno longer the same. The real wages,the commodity wages, were reduced.Now the worker could not buy asmuch as he had been able to buybefore, even though the nominalwage rates remained the same. In
1980 INFLATION 161
this way, it was thought, real wagerates would return to free marketlevels and unemployment woulddisappear.
This measure-devaluation-wasadopted by various other countries,by France, the Netherlands, andBelgium. One country even resortedtwice to this measure within aperiod of one year and a half. Thatcountry was Czechoslovakia. It wasa surreptitious method, let us say, tothwart the power of the unions. Youcould not call it a real success, however.
Indexation
After a few years, the people, thew.orkers, even the unions, began tounderstand what was going on.They came to realize that currencydevaluation had reduced their realwages. The unions had the power tooppose this. In many countries theyinserted a clause into wage contracts providing that money wagesmust go up automatically with anincrease in prices. This is called indexing. .The unions became indexconscious. So, this method of reducing unemployment that the government of Great Britain started in1931-which was later adopted byalmost all important governments-this method of ((solving un-employment" no longer works today.
In 1936, in his General Theory ofEmployment, Interest and Money,Lord Keynes unfortunately elevated
this method-those emergency measures of the period between 1929and 1933-to a principle, to a fundamental system of policy. And hejustified it by saying, in effect: ((Unemployment is bad. If you want unemployment to disappear you mustinflate the currency."
He realized very well that wagerates can be too high for the market,that is, too high to make it profitablefor an employer to increase his workforce, thus too high from the point ofview of the total 'working population, for with wage rates imposed byunions above the market level, onlya part of those anxious to earnwages can obtain jobs.
And Keynes said, in effect: ((Certainly mass unemployment, prolonged year after year, is a veryunsatisfactory condition." But instead of suggesting that wage ratescould and should be adjusted tomarket conditions, he said, in effect:((If one devalues the currency andthe workers are not clever enough torealize it, they will not offer resistance against a drop in real wagerates, as long as nominal wage ratesremain the same." In other words,Lord Keynes was saying that if aman gets the·same amount of sterling today as he got before the currency was devalued, he will notrealize that he is, in fact, now getting less.
In old fashioned language, Keynesproposed cheating the workers. In-
162 THE FREEMAN March
stead of declaring openly that wagerates must be adjusted to the conditions ofthe market-because, iftheyare not, a part of the labor force willinevitably remain unemployed-hesaid, in effect: ((Full employment canbe reached only if you have inflation. Cheat the workers." The mostinteresting fact, however, is thatwhen his General Theory was published, it was no -longer possible tocheat, because people had alreadybecome index conscious. But thegoal of full employment remained.
Full Employment
What does Hfull employment"mean? It has to do with the unhampered labor market, which is notmanipulated by the unions or by thegovernment. On this market, wagerates for every type of labor tend toreach a level where everybody whowants a job can get one and everyemployer can hire as many workersas he needs. Ifthere is an increase inthe demand for labor, the wage ratewill tend to be greater, and if fewerworkers are needed, the wage ratewill tend to fall.
The only method by which a Hfullemployment" situation can bebrought about is by the maintenance of an unhampered labor market. This is valid for every ·kind oflabor and for every kind of commodity.
What does a businessman do whowants to sell a commodity for five
dollars a unit? When he cannot sellit at that price, the technical business expression in the United Statesis, ((the inventory does not move."But it must move. He cannot retainthings because he must buy something new; fashions are changing.So he sells at a lower price. If hecannot sell the merchandise at fivedollars, he must sell it at four. If hecannot sell it at four, he must sell itat three. There is no other choice aslong as he stays in business. He maysuffer losses, but these losses are dueto the fact that his anticipation ofthe market for his product waswrong.
It is the same with the thousandsand thousands of young people whocome every day from the agricultural districts into the city, trying toearn money. It happens so in everyindustrial nation. In the UnitedStates they come to town with theidea that they should get, say, ahundred dollars a week. This may beimpossible. So if a man cannot get ajob for a hundred dollars a week, hemust try to get a job for ninety oreighty dollars, and perhaps evenless. But if he were to say-as theunions do- ((one hundred dollars aweek or nothing," then he mighthave to remain unemployed. (Manydo not mind being unemployed, because the government pays unemployment benefits-out of specialtaxes levied on the employerswhich are sometimes nearly as high
1980 INFLATION 163
as the wages the man would receiveif he were employed.)
Because a certain group of peoplebelieves that full employment canbe attained only by inflation, inflation is accepted in the United States.But people are discussing the question: Should we have a sound currency with unemployment, or inflation with full employment? This isin fact a very vicious analysis.
Clarifying the Problem
To deal with this problem we mustraise the question: How can one improve the condition of the workersand of all other groups of the population? The answer is: by maintainingan unhampered labor market andthus achieving full employment.Our dilemma is, shall the marketdetermine wage rates or shall theybe determined by union pressureand compulsion? The dilemma is not((shall we have inflation or unemployment?"
This mistaken analysis of theproblem is argued in England, inEuropean industrial countries andeven in the United States. And somepeople say: HNow look, even theUnited States is inflating. Whyshould we not do it also."
To these people one should answerfirst of all: HOne of the privileges of arich man is that he can afford to befoolish much longer than a poorman." And this is the situation ofthe United States. The financial pol-
icy of the United States is very badand is getting worse. Perhaps theUnited States can afford to befoolish a bit longer than some othercountries.
The most important thing to remember is that inflation is not anact of God, that inflation is not acatastrophe of the elements or a disease that comes like a plague. Inflation is a policy-a deliberate policyof people who resort to inflation because they consider it to be a lesserevil than unemployment. But thefact is that, in the not very long run,inflation does not cure unemployment.
Inflation is a policy. And a policycan be changed. Therefore, there isno reason to give in to inflation. Ifone regards inflation as an evil, thenone has to stop inflating. One has tobalance the budget of the government. Ofcourse, public opinion mustsupport this; the intellectuals musthelp the people to understand.Given the support of public opinion,it is certainly possible for the people's elected representatives toabandon the policy of inflation.
We must remember that, in thelong run, we may all be dead andcertainly will be dead. But weshould arrange our earthly affairs,for the short run in which we have tolive, in the best possible way. Andone of the measures necessary forthis purpose is to abandon inflationary policies. @
Donald L. Kemmerer
THEROTTINGFABRIC
OFTRUST
164
As we drove from New Delhi to Agrato see India's famous Taj Mahal, wepassed through extremely primitivevillages. There was not a petrol can,broken umbrella or empty bottle tobe seen. We thought, HPerhaps aTime Machine has carried us back1000 years or more." In one dustyhamlet we saw an Indian womanwearing a crude anklet of silver. Thereason for this abysmal squalorstruck us. That silver was all hersavings and no one was going totake it from her. She didn't trust herneighbors and they didn't trust anyone either. There could be no banks,and businessmen found it almostimpossible to borrow. Progress wasat a standstill and had been forcenturies because an all-importantingredient was missing in thateconomy, the fabric of trust betweenmen, that enables them to work together willingly toward productiveends.
When men work with tools andequipment-economists call thesecapital-they can produce morethan when they work with barehands. But to produce capital ittakes a willingness to save and toinvest those savings. And men willsave little and invest less unlessthey trust their fellow men as individuals and believe that their prop-
Dr. Kemmerer, president of The Committee forMonetary Research and Education, Inc., taughteconomic history for many years at the University of
illinois.
1980 THE ROTTING FABRIC OF TRUST 165
erty and savings will be safe andthat the money of the realm willhold its buying power. These are thewarp and woof of the fabric of trust.
Aggravated Inflation
In the United States today, due togovernment-caused expansion of thesupply ofmoney and credit, inflationis raging at a rate of about 13 percent a year, double what it was twoyears ago. If this continues, the dollar will lose half of its present buying power in six years. That presentbuying power is only a fifth of whatit was in 1933. Those conditions arenot conducive to saving. The rate ofsaving and of capital investment isfive per cent a year, the lowestamong major modern nations.
Such misuse of power by government sets a bad example to manywho then lash back at governmentand often at others too. The government should set an example oftrustworthiness. Its courts punishcounterfeiters, embezzlers andthieves. To find the government itself engaged in similar actions isdemoralizing. A government thatinflates and destroys the buyingpower of its money pours, as it were,a destructive acid over the economy's fabric of trust which rots thefabric and seriously damages theeconomy.
Just how suspicious Americansare of their government's money canbe seen by the fact that millions of
them are putting more and more ofthe savings they have left into gold,silver, diamonds, rare coins, stampsand paintings and antique furniture, to name just some items. All ofthese they increasingly look upon aspreferable to banking their money,the buying power of which meltsaway like an ice cube in July. Thedegree of distrust can be gauged bythe fact that the prices of these nonincome producing ~~stores of value"have been bid up much higher thanwholesale or consumer price levelshave risen. Whereas price levelstoday are five times higher than in1933, the price of gold is 29 timeshigher, of silver at least 70 timesand of precious gems 20 to 60 timeshigher. These prices rise out of distrust and fear more than they dofrom speculation.
Inflation is rotting away the fabric of trust which helped so much tomake this nation economicallystrong. Fear is rendering a growingportion of our savings as unproductive as that Indian woman's anklet.President Carter has said we mustlower our standard of living. He andCongress, and preceding administrations too, by their inflationarypolicies, have been bringing on thatlowering process for some time. Letus hope that we never regress toconditions in those Indian villages,but we are headed in that direction.That precious fabric of trust is disintegrating before our eyes. @
Lawrence W. Reed
WITCH-HUNTING FORROBBER BARONS:
The Standard Oil Story
AMONG the great misconceptions ofthe free economy is the widely-heldbelief that ((laissez faire" embodies anatural tendency toward monopolyconcentration. Under unfetteredcapitalism, so goes the familiar refrain, large firms would systematically devour smaller ones, cornermarkets, and stamp out competitionuntil every inhabitant of the landfell victim to their power. Just aspopular is the notion that John D.Rockefeller's Standard Oil Companyof the late 1800s gave substance tosuch an evil course of events.
Regarding Standard Oil's chiefexecutive, one noted historianwrites, HHe (Rockefeller) ironhandedly ruined competitors by cutting prices until his victim wentbankrupt or sold out, whereupon
Mr. Reed Is Assistant Professor of Economics atNorthwood Institute In Midland, Michigan. This artl·cle Is based upon one of his lectures for a course,"Philosophy of American Life and Business."
166
higher prices would be likely to return."!
Two other historians, co-authorsof a popular college text, opine that((Rockefeller was a ruthless operatorwho did not hesitate to crush hiscompetitors by harsh and unfairmethods."2
In 1899, Standard refined 90 percent of America's oil-the peak ofthe company's dominance of the refining business. Though that market share was steadily siphoned offby competitors after 1899, the company nonetheless has been brandedever since as «an industrial octopus."
Does the story of Standard Oilreally present a case against the freemarket? In my opinion, it most emphatically does not. Furthermore,setting the record straight on thisissue must become an importantweapon in every free market advocate's intellectual arsenal. That's
WITCH-HUNTING FOR ROBBER BARONS 167
the purpose of the following remarks.
Theoretically, there are two kindsof monopoly: coercive and efficiency.A coercive monopoly results from, inthe words of Adam Smith, ~~a
government grant of exclusiveprivilege." Government, in effect,must take sides in the market inorder to give birth to a coercivemonopoly. It must make it difficult,costly, or impossible for anyone butthe favored firm to do business.
The United States Postal Serviceis an example of this kind ofmonopoly. By law, no one can deliver first class mail except theUSPS. Fines and imprisonment(coercion) await all those daringenough to compete.
In some other cases, the government may not ban competition outright, but simply bestow privileges,immunities, or subsidies on one firmwhile imposing costly requirementson all others. Regardless of themethod, a firm which enjoys a coercive monopoly is in a position toharm the consumer and get awaywith it.
An efficiency monopoly, on theother hand, earns a high share of amarket because it does the best job.It receives no special favors from thelaw to account for its size. Othersare free to compete and, if consumers so will it, to grow as big as the~~monopoly."
An efficiency monopoly has no
legal power to compel people to dealwith it or to protect itself from theconsequences of its unethical practices. It can only attain bignessthrough its excellence in satisfyingcustomers and by the economy of itsoperations. An efficiency monopolywhich turns its back on the veryperformance which produced its success would be posting a sign, ~~COMPETITORS WANTED." The marketrewards excellence and exacts a tollon mediocrity.
It is my contention that the historical record casts the Standard OilCompany in the role of efficiencymonopoly-a firm to which consumers repeatedly awarded their votesof confidence.
The oil rush began with the discovery of oil by Colonel Edwin Drakeat Titusville, Pennsylvania in 1859.Northwestern Pennsylvania soon~~was overrun with businessmen,speculators, misfits, horse dealers,drillers, bankers, and just plainhell-raisers. Dirt-poor farmersleased land at fantastic prices, andrigs began blackening the landscape. Existing towns jammed fullovernight with ~strangers,' and newtowns appeared almost as quickly."3
In the midst of chaos emergedyoung John D. Rockefeller. An exceptionally hard-working andthrifty man, Rockefeller transformed his early interest in oil into apartnership in the refinery stage ofthe business in 1865.
168 THE FREEMAN March
Five years later, Rockefellerformed the Standard Oil Companywith 4 per cent of the refining market. Less than thirty years later, hereached that all-time high of 90 percent. What accounts for such stunning success?
On December 30, 1899, Rockefeller was asked that very questionbefore a governmental investigatingbody called the Industrial Commission. He replied:
I ascribe the success of the Standard toits consistent policy to make the volumeof its business large through the meritsand cheapness of its products. It hasspared no expense in finding, securing,and utilizing the best and cheapestmethods of manufacture. It has soughtfor the best superintendents and workmen and paid the best wages. It has nothesitated to sacrifice old machinery andold plants for new and better ones. It hasplaced its manufactories at the pointswhere they could supply markets at theleast expense. It has not only soughtmarkets for its principal products, butfor all possible by-products, sparing noexpense in introducing them to the publie. It has not hesitated to invest millionsof dollars in methods of cheapening thegathering and distribution of oils by pipelines, special cars, tank steamers, andtank wagons. It has erected tank stationsat every important railroad station tocheapen the storage and delivery of itsproducts. It has spared no expense inforcing its products into the markets ofthe world among people civilized anduncivilized. It has had faith in Americanoil, and has brought together millions ofmoney for the purpose of making it what
it is, and holding its markets against thecompetition of Russia and all the manycountries which are producers of oil andcompetitors against American oi1.4
A Master Organizerof Men and Materials
Rockefeller was a managerialgenius-a master organizer of menas well as of materials. He had a giftfor bringing devoted, brilliant, andhard-working young men into hisorganization. Among his most outstanding associates were H. H.Rogers, John D. Archbold, StephenV. Harkness, Samuel Andrews, andHenry M. Flagler. Together theyemphasized efficient economic operation, research, and sound financialpractices. The economic excellenceof their performance is described byeconomist D. T. Armentano:
Instead ofbuying oil fromjobbers, theymade the jobbers' profit by sending theirown purchasing men into the oil region.In addition, they made their own sulfuricacid, their own barrels, their ownlumber, their own wagons, and their ownglue. They kept minute and accuraterecords of every item from rivets to barrel bungs. They built elaborate storagefacilities near their refineries. Rockefeller bargained as shrewdly for crude asanyone before or since. And Sam Andrews coaxed more kerosene from a barrel of crude than could the competition.In addition, the Rockefeller firm put outthe cleanest-burning kerosene, andmanaged to dispose of most of the residues like lubricating oil, paraffin, andvaseline at a profit.5
1980 WITCH-HUNTING FOR ROBBER BARONS 169
Even muckraker Ida Tarbell, oneof Standard's critics, admired thecompany's streamlined processes ofproduction:
Not far away from the canning works,on Newton Creek, is an oil refinery. Thisoil runs to the canning works, and, as thenewmade cans come down by a chutefrom the works above, where they havejust been finished, they are filled, twelveat a time, with the oil made a few milesaway. The filling apparatus is admirable. As the newmade cans come down thechute they are distributed, twelve in arow, along one side of a turn-table. Theturn-table is revolved, and the cans comedirectly under twelve measures, eachholding five gallons of oil-a turn of avalve, and the cans are full. The table isturned a quarter, and while twelve morecans are filled and twelve fresh ones aredistributed, four men with solderingcappers put the caps on the first set.Another quarter. turn, and men standready to take the cans from the filler andwhile they do this, twelve more are having caps put on, twelve are filling, andtwelve are coming to their place from thechute. The cans are placed at once inwooden boxes standing ready, and, aftera twenty-four-hour wait for discoveringleaks, are nailed up and carted to anearby door. This door opens on theriver, and thereat anchor by the side ofthe factory is a vessel chartered forSouth America or China or wherenot-waiting to receive the cans which alittle more than twenty-four hours beforewere tin sheets lying on flatboxes. It is amarvellous example ofeconomy, not onlyin materials, but in time and infootsteps. 6
Market CompetitionProtects the Public
Socialist historian Gabriel Kolko,who argues in The Triumph ofConservatism that the forces of comPetition in the free market of the late1800s were too potent to allow Standard to cheat the public, stressesthat HStandard treated the consumer with deference. Crude andrefined oil prices for consumers declined during the period Standardexercised greatest control of the industry ..."7
Standard's service to the consumer in the form of lower prices iswell-documented. To quote fromProfessor Armentano again:
Between 1870 and 1885 the price ofrefined kerosene dropped from 26 centsto 8 cents per gallon. In the same period,the Standard Oil Company reduced the[refining] costs per gallon from almost 3cents in 1870 to .452 cents in 1885.Clearly, the firm was relatively efficient,and its efficiency was being translated tothe consumer in the form of lower pricesfor a much improved product, and to thefirm in the form of additional profits.8
That story continued for the remainder of the century, with theprice of kerosene to the consumerfalling to 5.91 cents Per gallon in1897. Armentano concludes fromthe record that Hat the very pinnacleof Standard's industry (control,' thecosts and the prices for refined oilreached their lowest levels in the history of the petroleum industry."9
170 THE FREEMAN March
John D. Rockefeller's success,then, was a consequence of hissuperior performance. He derivedhis impressive market share notfrom government favors but ratherfrom aggressive courting of the consumer. Standard Oil is one of history's classic efficiency monopolies.
But what about the many' seriouscharges leveled against Standard?Predatory price cutting? Buying outcompetitors? Conspiracy? Railroadrebates? Charging any price itwanted? Greed? Each of these can beviewed as an assault not just onStandard Oil but on the free marketin general. They can and must beanswered.
Predatory price cutting
Predatory price cutting is ((thepractice of deliberately undersellingrivals in certain markets to drivethem out of business, and then raising prices to exploit a market devoidof competition."lo
Professor John S. McGee, writingin the Journal ofLaw and Economics for October 1958, stripped thischarge of any intellectual substance.Describing it as ((logically deficient,"he concluded, ((I can find little or noevidence to support it."ll
In his extraordinary article,McGee scrutinized the testimony ofRockefeller's competitors who
claimed to have been victims of pred;.atory price cutting. He found theirclaims to be shallow and misdirected. McGee pointed out that someof these very people later openednew refineries and successfully challenged Standard again.
Beyond the actual record,economic theory also argues againsta winning policy of predatory pricecutting in a free market for thefollowing reasons:
1. Price is only one aspect ofcompetition. Firms compete in a varietyof ways: service, location, packaging, marketing, even courtesy. Forprice alone to draw customers awayfrom the competition, the predatorwould have to cut substantiallyenough to outweigh all the othercompetitive pressures the others canthrow at him. That means sufferinglosses on every unit sold. If the predator has a war-chest of ((monopolyprofits" to draw upon in such a battle, then the predatory price cuttingtheorist must explain how he wasable to achieve such ability in theabsence of this practice in the firstplace!
2. The large firm stands to losethe most. By definition, the largefirm is already selling the most units.As a predator, it must actuallystep up its production if it is to haveany effect on competitors. As Professor McGee observed, ((To lure customers away from somebody, he (thepredator) must be prepared to serve
1980 WITCH-HUNTING FOR ROBBER BARONS 171
them himself. The monopolizer thusfinds himself in the position of selling more-and therefore losingmore-than his competitors."12
3. Consumers will increase theirpurchases at the rrbargain prices."This factor causes the predator tostep up production even further. Italso puts off the day when he can((cash in" on his hOPed-for victorybecause consumers will be in a position to refrain from purchasing athigher prices, consuming theirstockpiles instead.
4. The length. of the battle is always uncertain. The predator doesnot know how long he must sufferlosses before his competitors quit. Itmay take weeks, months, or evenyears. Meanwhile, consumers are~~cleaningup" at his expense.
5. Any rrbeaten" firms may reopen. Competitors may scale downproduction or close only temporarilyas they ~~wait out the storm." Whenthe predator raises prices, theyenter the market again. Conceivably, a ~~beaten" firm might be boughtup by someone for a H song," andthen, under fresh management andwith relatively low capital costs,face the predator with an actualcompetitive cost advantage.
6. High prices encourage newcomers. Even if the predator driveseveryone else from the market, raising prices will attract competitionfrom people heretofore not even inthe industry. The higher the prices
go, the more powerful that attraction.
7. The predator would lose thefavor of consumers. Predatory pricecutting is simply not good publicrelations. Once known, it wouldswiftly erode the public's faith andgood will. It might even evoke consumer boycotts and a backlash ofsympathy for the firm's competitors.
In summary, let me quote Professor McGee once again:
Judging from the Record, Standard Oildid not use predatory price discrimination to drive out competing refiners, nordid its pricing practice have that effect.Whereas there may be a very few cases inwhich retail kerosene peddlers or dealerswent out of business after or during pricecutting, there is no real proof that Standard's pricing policies were responsible. Iam convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, toreduce competition. To do so would havebeen foolish; and, whatever else has beensaid about them, the old Standard organization was seldom criticized formaking less money when it could readilyhave made more.13
Buying out competitors
The intent of this practice, thecritics say, was to stifle competitorsby absorbing them.
First, it must be said that Standard had no legal power to coerce acompetitor into selling. For a pur-
172 THE FREEMAN March
chase to occur, Rockefeller had topay the market price for an oil refinery. And evidence abounds that heoften hired the very People whoseoperations he purchased. ((Victimized ex-rivals," wrote McGee,~~might be expected to make pooremployees and dissident or unwilling shareholders."14
Kolko writes that ~~Standard attained its control of the refinerybusiness primarily by mergers, notprice wars, and most refinery owners were anxious to sell out to it.Some of these refinery owners laterreopened new plants after selling toStandard."15
Buying out competitors can be awise move if achieving economy ofscale is the intent. Buying out competitorsmerely to eliminate themfrom the market can be a futile,expensive, and never-ending policy.It appears that Rockefeller's mergers were designed with the firstmotive in mind.
Even so, other people found itprofitable to go into the business ofbuilding refineries and selling toStandard. David P. Reighard managed to build and sell three successive refineries to Rockefeller, all onexcellent terms.
A firm which adopts a policy ofabsorbing others solely to stiflecompetition embarks upon the impossible adventure of putting outthe recurring and unpredictableprairie fires of competition.
Conspiracy to fix prices
This accusation holds that Standard secured secret agreements withcompetitors to carve up markets andfix prices at higher-than-marketlevels.
I will not contend here that Rockefeller never attempted this policy.His experiment with the South Improv~ment Company in 1872 provides at least some evidence that hedid. I do argue, however, that allsuch attempts were failures fromthe start and no harm to the consumer occurred.
Standard's price performance,cited extensively above, supports myargument. Prices fell steadily on animproving product. Some conspiracy!
From the perspective of economictheory, collusion to raise and/or fixprices is a practice doomed to failurein a free market for these reasons:
1. Internal pressures. Conspiringfirms must resolve the dilemma ofproduction. To exact a higher pricethan the market currently permits,production must be curtailed.Otherwise, in the face of a fall indemand, the firms will be stuck witha quantity of unsold goods. Who willcut their production and by howmuch? Will the conspirators acceptan equal reduction for all when it islikely that each faces a unique constellation of cost and distribution
1980 WITCH-HUNTING FOR ROBBER BARONS 173
advantages and disadvantages?Assuming a formula for restrict
ing production is agreed upon, itthen becomes highly profitable forany member of the cartel to· quietlycheat on the agreement. By offeringsecret rebates or discounts or other~~deals" to his comPetitors' customers, any conspirator can undercutthe cartel price, earn an increasingshare of the market and make a lotof money. When the others get windof this, they must quickly break theagreement or lose their marketshares to the ~~cheater." The veryreason for the conspiracy in the firstplace-higher profits-proves to beits undoing!
2. External pressures. This comesfrom comPetitors who are not parties to the secret agreement. Theyfeel under no obligation to abide bythe cartel price and actually usetheir somewhat lower price as a selling point to customers. The. higherthe cartel price, the more this external competition pays. The conspiracy must either convince all outsiders to join the cartel (making itincreasingly likely that somebodywill cheat) or else dissolve the cartelto meet the comPetition.
I would once again call the reader's attention to Kolko's TheTriumph of Conservatism, whichdocuments the tendency for collusive agreements to break apart,sometimes even before the ink isdry.
Railroad rebates
John D. Rockefeller received substantial rebates from railroads whohauled his oil, a factor which criticsclaim gave him an unfair advantageover other refiners.
The fact is that most all refinersreceived rebates from railroads.This practice was simply evidence ofstiff comPetition among the roadsfor the business of hauling refinedoil products. Standard got thebiggest rebates because Rockefellerwas a shrewd bargainer and becausehe offered the railroads large volume on a regular basis.
This charge is even less crediblewhen one considers that Rockefellerincreasingly relied on his ownpipelines, not railroads, to transporthis oil.
The power to chargeany price wanted
According to the notion thatStandard's size gave it the power tocharge any price it wanted, bignessper se immunizes the firm fromcompetition and consumer sovereignty.
As an ~~efficiency monopoly,"Standard could not coercively prevent others from comPeting with it.And others did, so much so that thecompany's share of the market de-
174 THE FREEMAN March
clined dramatically after 1899. Asthe economy shifted from keroseneto electricity, from the horse to theautomobile, and from oil productionin the East to production in the GulfStates, Rockefeller found himselflosing ground to younger, more aggressive men.
Neither did Standard have thepower to compel people to buy itsproducts. It had to rely on its ownexcellence to attract and keep customers.
In a totally free market, the following factors insure that no firm,regardless of size, can charge andget ~~any price it wants":
1. Free entry. Potential competition is encouraged by any firm'sabuse of the consumer. In describingentry into the oil business, Rockefeller once remarked that ~(all sorts ofpeople . . . the butcher, the baker,and the candlestick maker began torefine oil."16
2. Foreign competition. As long asgovernment doesn't hamper international trade, this is always a potent force.
3. Competition of substitutes.People are often able to substitute aproduct different from yet similar tothe monopolist's.
4. Competition ofall goods for theconsumer's dollar. Every businessman is in competition withevery other businessman to get consumers to spend their limited dollarson him.
5. Elasticity ofdemand. At higherprices, people will simply buy less.
It makes sense to view competition in a free market not as a staticphenomenon, but as a dynamic,never-ending, leap-frog process bywhich the leader today can be thefollower tomorrow.
Rockefeller was greedy
The charge that John D. Rockefeller was a (~greedy" man is the mostmeaningless of all the attacks onhim but nonetheless echoes constantly in the history books.
If Rockefeller wanted to make alot of money (and there is no doubting he did), he certainly discoveredthe free market solution to his problem: produce and sell somethingthat consumers will buy and buyagain. One of the great attributes ofthe free market is that it channelsgreed into constructive directions.One cannot accumulate wealthwithout offering something in exchange!
At this point the reader mightrightly wonder about the dissolutionof the Standard Oil Trust in 1911.Didn't the Supreme Court findStandard guilty of successfullyemploying anti-competitive practices?
Interestingly, a careful reading ofthe decision reveals that no attemptwas made by the Court to examine
1980 WITCH-HUNTING FOR ROBBER BARONS 175
Standard's conduct or performance.The justices did not sift through theconflicting evidence concerning anyof the government's allegationsagainst the company. No specificfinding of guilt was made with regard to those charges. Although therecord clearly indicates that ~~prices
fell, costs fell, outputs expanded,product quality improved, and hundreds of firms at one time or another produced and sold refined petroleum products in competitionwith Standard Oil,"17 the SupremeCourt ruled against the company.The justices argued simply that thecompetition between some of thedivisions of Standard Oil was lessthan the competition that existedbetween them when they were separate companies before merging withStandard.
In 1915, Charles W. Eliot, president of Harvard, observed: ~tThe organization of the great business oftaking petroleum out of the earth,piping the oil over great distances,distilling and refining it, and distributing it in tank steamers, tankwagons, and cans all over the earth,was an American invention."18 Letthe facts record that the great Standard Oil Company, more than anyother firm, and John D. Rockefeller,more than any other man, were· responsible for this amazingdevelopment. i
-FOOTNOTES-
lThomas A. Bailey, The American Pageant:A History of the Republic, 2 vols., 8th ed.(Boston: D. C. Heath and Company, 1966),2:532.
2Gilbert C. Fite and Jim E. Reese, AnEconomic History of the United States, 2nd ed.(Boston: Houghton Mifflin Company, 1965), p.367.
3D. T. Armentano, The Myths of Antitrust:Economic Theory and Legal Cases (NewRochelle, N.Y.: Arlington House, 1972), p. 64.
4'fhomas G. Manning, E. David Cronon, andHoward R. Lamar, The Standard Oil Company: The Rise ofa National Monopoly, part 3:Government and the American Economy: 1870to the Present, revised (New York: Henry Holtand Company, 1960), p. 19.
5Armentano, Myths ofAntitrust, p.67.6Ida M. Tarbell, The History ofthe Standard
Oil Company, 2 vols. in 1 (Gloucester, Mass.:Peter Smith, 1950), p. 240-241.
7Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916 (New York: The MacmillanCompany, 1963; reprint ed., Chicago: Quadrangle Books, 1967), p. 39.
8Armentano, Myths ofAntitrust, p. 70.9Ibid., p. 77.lOIbid., p. 73.llJohn S. McGee,ttPredatory Price Cutting:
The Standard Oil (N.J.) Case," Journal ofLawand Economics, I (October, 1958), p. 138.
l2Ibid., p. 140.l3Ibid., p. 168.l4Ibid., p. 145.l5Kolko, Triumph ofConservatism, p. 40.l6John A. Garraty, The American Nation,
vol. 2: A History of the United States Since1865, 3rd ed. (New York: Harper and Row,1975), p. 499.
17Armentano, Myths ofAntitrust, p. 83.l8Fite and Reese, An Economic History, p.
366.
William H. Peterson
TheInvisible
Hand
PITIFUL helpless giant.Is that what America is becoming,
wracked by inflation, energy constrictions and an unfolding recession? If so, it's all, I submit, for wantof understanding the ramificationsof one little word: profits.
The immediate problem may havestarted last March when a 26 percent advance in fourth-quarter 1978corporate profits (over fourthquarter 1977 profits) was greeted byAdministration spokesmen as a((catastrophe," as putting ((businesson trial," as Hunnecessarily high."
Then, later in the year, the assault turned on ((already enormous"oil profits. In a television address tothe American people, President Carter demanded a ((windfall profits
Dr. Peterson Is the Scott L Probasco, Jr., Professorof Free Enterprise and director of the Center forEconomic Education at the University of Tennesseeat Chattanooga.
176
1980
tax" to curb those who would ((cheatthe public and ... damage the nation" via ((unearned billions of dollars."
Catastrophe? Unearned? Cheat?Damage? What goes on here?
This is not the place to engage inextensive statistical rebuttal.Enough to say that inflation causesplant and equipment to be underdepreciated and inventories undervalued, due to IRS rules and regulations. Profits become overstated,exaggerated. Remove the resultingphantom profits, and corporate profits are indeed what they have beenfor a long time, a ((catastrophe"-acatastrophic low: for example, a 5.5per cent return on assets in 1978against 7.6 per cent 10 years prior.So talk nowadays of ((record profits"is really an inflationary mirage, anational delusion.
One result of this prolonged profit
THE INVISIBLE HAND-1980 177
famine has been a drop of the current Dow Jones Industrial Averageby more than half in real termssince hitting 1,000 in February1966. Another result has been prolonged weakening in the rates ofpersonal saving, business investment and productivity growthrates now about the lowest in theWestern industrial world, eventhough they represent pathways tojob creation and rising living standards, and offsets to inflationarypressures.
Enough to say, too, that oil profits,when measured as a return on salesor equity, were less than industrialprofits as a whole in 1978, that, asPresident Carter himself concedes,oil price controls-read oil profitcontrols-have failed, that theyhave caused domestic oil productionto lag almost every year since theywere first imposed in 1971.
Profit Controls
Why, then, the masochism in denying ourselves desperately-neededdomestic oil supplies via a tax on~~windfall profits"? After all, it isprofits, or rather, the lure of profitsthat induces production, not prices.The bigger the lure, as a ratherstrict rule, the greater the production. This logic is now officially recognized for heavy oil-why not forall oil?
And in view of the overall anti~~big profits" campaign (super-
market operators and meatpackershave also been singled out), with itsveiled implication that perhapsprofit itself is somehow unethical,the larger question is: Just what isprofit and how, if at all, is it earned?
Critics from antiquity on haveequated profit with greed and selfishness. In a typical vein, Cicerowrote in his De Officiis: ~~Those whobuy to sell again as soon as they canare to be accounted as vulgar; forthey can make no profit except by acertain amount of falsehood, andnothing is meaner than falsehood."In 1704 Bernard de Mandeville sawprofit as vile in origin but positive ineffect in his Fable of the Bees: Private Vices, Public Benefits. Mandeville's idea was that not onlywealth but also the arts andsciences-indeed all civilization-isthe result of not the nobility of manbut rather his baser nature. In otherwords, Mandeville labeled as vicesnormal longings for the good thingsof life-luxury, comfort, well-beingand all the other pleasures stemming from man's natural wants.And more recently, to cite anotherexample, in the introduction to theModern Library 1937 edition ofAdam Smith's classic Wealth ofNations (1776), Max Lerner calledSmith u an unconscious mercenaryin the service of the rising capitalistclass," and held that he gave eta newdignity to greed and a new sanctification to the predatory impulses."
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In truth, profit does extend beyond business and finance. It is,frankly, gain, advantage, selfinterest; and it applies to every man,woman and child-even to the altruist, who seeks to profit others. Itcan parade under other colorswages, salaries, fees, interest, tuition, rent and so on. It can be seen inthe winning of nonfinancial rewards-say, the captaincy of a football team, a prize in a bridge tournament, a jury's verdict of ((notguilty." (Conversely, not winningthese things involves losses in onedegree or another.)
A Natural Motive
The profit-and-loss idea can bereadily inferred from the writings ofphilosophers from Aristotle to Santayana' of psychologists from Freudto Skinner. It can be seen in allhuman motivation, in every humanaction, said Austrian economistLudwig von Mises, holding thatprofit and loss are ultimatelypsychic phenomena.
Broadly speaking, I think thatwhat every individual really wantsis, in the word of early 20th centurylabor leader Samuel Gompers,((more"-more as the individual seesit. More happiness as a rule. Andmore is but another name for profit.Again, I think that given theprimordial economic law of scarcity,of the universal urgency to allocatelimited resources, including time,
man must seek the most for theleast, to maximize gain, to minimizeloss. Profit-seeking is part of humannature. Nobody is exempt.
Adam Smith saw the immensityand pervasiveness of human incentive, of self-interest, of the profitmotive in human affairs when hewrote in The Wealth ofNations: ~~It
is not from the benevolence of thebutcher, the brewer, or the bakerthat we expect our dinner, but fromtheir regard to their own interest.We address ourselves, not to theirhumanity but to their self-love, andnever talk to them of our own necessities but of their advantages."
This is not to glorify profit. Likesex, the profit drive is subject toabuse. When profit overrides individual rights as in fraud or force,obviously the social fabric is torn.The mugger in Central Park, forexample, is obeying his self-interestbut to the detriment of his fellowman.
But in any free exchange bothparties profit or expect to profit, elsethe exchange would not take place.Advantage is two-way. Gain ismutual. Moreover, it invariably involves service to the other or others,and it is immediately reciprocated.It is, in this sense, the Golden Rulein action. The exchangers-buyersand sellers-are saying to eachother, in the words of Adam Smith:~(Give me that which I want, and youshall have this which you want."
1980 THE INVISIBLE HAND-1980 179
The profit motive is also a greatcivilizer. It promotes not only civility and individual responsibility butdivision of labor and specialization,social cooperation and still more exchanges. Hence productivity improvement emerges as does in timean economic surplus beyond mereprovisioning of necessities. Hencethe surplus permits the flowering ofcharity, religion, music, painting,literature, education, science.Hence-if I may accelerate thethought-Western Civilization.
So Montaigne and Marx had it allwrong when they argued one man'sprofit involves another man's loss,that production for profit is at variance with production for use.
The Market at Work
The fact is that the prospect ofprofit-along with its magnitudemotivates and activates producers,steering production into those usesmost demanded by consumers, i.e.,into products broadly considered tobe the most useful. This is supplyand demand in action, the marketplace at work. As University ofChicago economist Yale Brozen andothers have noted, production forprofit is production for use.
Indeed, the genius of the free enterprise system is that it can takethe profit motive-this innate, inescapable and potentially destructivehuman trait of self-interest-andpeacefully, harmoniously and, above
all, voluntarily convert it into constructive channels of human effort,cooperation, service and advancement. Are profits, then, earned?Most assuredly, yes.
In this light the concept of a~~windfall" profits tax on oil becomes,however inadvertently, a greatdeception-a tax ultimately bornenot by the companies but by theAmerican consumer, a tax that willhamper the discovery and development of new domestic oil supplies.Windfall? Again, it is the U.S. Government itself that has repressed oilprices, beginning in 1971.
To be sure, repressing and decontrolling prices and then taxing~~windfall" gains are done under thename of the public interest. Butself-interest in a market systemusually advances the public interestmore than those who profess to servethe public interest (apart from theirown inevitable personal interest).As Adam Smith observed, the individual ((neither intends to promotethe public interest nor knows howmuch he is promoting it.... By ...directing (his) industry in such amanner as its produce may be of thegreatest value, he intends only hisown gain, and he is in this, as inmany other cases, led by an invisiblehand to promote an end which wasno part of his intention."
Energy availability. Inflation alleviation. Economic growth. Profitmotive. All are of one piece. ®
Leslie Snyder
The administration of a republic issupposed to be directed by certainfundamental principles of right andjustice, from which there cannot,because there ought not to, be anydeviation; and whenever any deviation appears, there is a kind ofstepping out of the republican principle, and an approach toward thedespotic one. -Thomas Paine
* * *JUSTICE is the only foundation uponwhich a society of free and independent people can exist. Justice is aconcrete, recognizable, and objectiveprinciple. It is not a matter of opinion.
In our day and age the word justice is rarely used in political andeconomic discussions. The entirereason for the existence of communities, laws, governments andcourt systems has been forgotten.
180
But if life and property are to beprotected and secured, which is thepurpose of society, then justice mustbe the rule. To quote Paine again,~~A republic, properly understood, isa sovereignty of justice."
According to a 1931 Webster's dictionary, justice is the ~~quality ofbeing just; impartiality." Just isHconforming to right; normal; equitable." A 1961 Webster's dictionarysays justice is ~~The principle of rectitude and just dealings of menwith each other-one of the cardinalvirtues. Administration of law ..."A 1975 edition of a Grolier Websterdictionary says justice is HEquitableness; what is rightly due; lawfulness...."
Since 1931 a new. meaning of theword justice has been added, that oflawfulness, which is not only erroneous, but deceitful and misleading. Justice is not based on law;
JUSTICE AND FREEDOM 181
rather, law ought to be based onjustice. It is only common sense, formen lived and worked together before laws were formed. Generallylaws are passed to formalize whathas preceded under common practice, what has stood the test of timeas being just and equitable. Lawsare common practice put down inblack and white for all to see andknow.
Leslie Snyder has specialized infinance and economics, businessand investments. The growingpressure of new laws has arousedher concern for the principledand peaceful return to justice.
This article is excerpted, bypermission, from her latest book,Justice Or Revolution, publishedin 1979 and available from:
Books In Focus, Inc.Suite 318160 East 38th StreetNew York, New York 10016
194 pages. $10.95
The ancient philosophers saidthat justice is speaking the truthand paying your debts, giving toeach man what is proper to him,doing good to friends and evil toenemies. Therefore, there must besomething more basic, more fundamental than laws on which to foundjustice. In fact, the French juristCharles de Montesquieu (16891755) ably contended that ~~before
laws were made, there were rela-
tions of possible justice. To say thatthere is nothing just or unjust butwhat is commanded or forbidden bypositive laws, is the same as sayingthat before the describing of a circleall the radii were not equal."
Minding One's Own Business
The Greek philosophers had thesimplest definition of justice. ToPlato (c. 428-348 B.C.), in The Republic, Book IV, justice is simply~~doing one's own business, and notbeing a busybody.... A man mayneither take what is another's, norbe deprived of what is his own....This is the ultimate cause and condition of the existence of all" othervirtues in the State, ~~and while remaining in them is also their preservative."
In Book XII of Plato's Laws, theconclusion is drawn that ~~by therelaxation of that justice which isthe uniting principle of all constitutions, every power in the state isrent asunder from every other." Inother words, without justice thethreads of society unravel and society disintegrates into barbarism.
Aristotle (384-322 B.C.) inNicomachean Ethics, Book V, givesgreater perception to what justice is.It ~~is found among men who sharetheir life with a view to selfsufficiency, men who are free. . . .Thereforejustice is essentially something human." (Emphasis added.) Inother words, free men may choose to
182 THE FREEMAN March
bejust or unjust. Justice, as an ethical term, is voluntary; ~( ... a manacts unjustly or justly whenever hedoes such acts voluntarily." Whenwrong is done and done voluntarily,it then becomes an act of injustice.In short, HAll virtue is summed up indealing justly," said Aristotle.
More concretely, Aristotle claims,in Rhetoric, Book I, ~(Justice is thevirtue through which everybody enjoys his own possessions in accordance with the law; its opposite isinjustice, through which men enjoythe possessions of others in defianceof the law." There is the problem ofusing the law to legalize theft and toredistribute the property of onegroup to another group, but for thetime being, we must assume Aristotle means the use of laws that arerightful and just. For when he says~Justice has been acknowledged byus to be a social virtue, and it implies all others," he has laid thefoundation of a just society.
Furthermore, Aristotle maintainsthat ~~legal justice is the discrimination of the just and the unjust." And,~~Of political justice part is natural,part legal-natural, that whicheverywhere has the same force anddoes not exist by people's thinkingthis or that." Natural justice mustprecede law and form the basis oflaw thereon.
In the sixteenth century Michel deMontaigne (1533-1592), in his TheEssays, eloquently said: ~~The justice
which in itself is natural and universal, is otherwise and more noblyordered, than that other justice,which is special, national, and constrained to the ends of government."He continues, ~~There cannot a worsestate of things be imagined, thanwhere wickedness comes to belegitimate, and assumes with themagistrate's permission, the cloak ofvirtue.... The extremest sort ofinjustice, according to Plato, iswhere that which is unjust, shouldbe reputed for just."
Hobbes on Natural Justice
In Thomas Hobbes' (1588-1679)Leviathan, further ground is laid onwhich to base natural justice. Thenames just and unjust, says Hobbes,when they are attributed to men'sactions, signify conformity or nonconformity to reason. Therefore,~~Justice . . . is a rule of reason bywhich we are forbidden to do anything destructive to our life, andconsequently a law of nature."
Then Hobbes leads beautifullyinto the virtue ofjust actions: ~(That
which gives to human actions therelish of justice is a certain nobleness or gallantness of courage,rarely found, by which a man scornsto be beholding for the contentmentof his life to fraud, or breach ofpromise. This justice of the mannersis that which is meant where justiceis called a virtue; and injustice, avice."
1980 JUSTICE AND FREEDOM 183
Earlier it was established thatjustice is the social virtue on which ajust society is constructed. Hobbesadds to this not only by tying virtues to the laws of nature, but tomoral philosophy as well. ~~Now thescience of virtue and vice is moralphilosophy; and therefore the truedoctrine of the laws of nature is thetrue moral philosophy.... For moralphilosophy is nothing. else but thescience of what is good and evil inthe conversation and society ofmankind." Thus, Hobbes establishesthe fact that ajust society is a moralsociety.
Saint Augustine (354-430) in TheCity of God, Book XIX, declares~~Where, therefore, there is no truejustice there can be no right. Forthat which is done right is justlydone, and what is unjustly donecannot be done by right." Hence,justice precedes Hrights."
Joseph Joubert eloquentlyphrased justice as truth in action.
Since practicing the virtue of justice is voluntary, man ought to havethe courage to stand up and fight forwhat is right and against what iswrong. Cato the Younger said it thisway: ~~ ... a man has it in his powerto be just, if he have but the will tobe so, and therefore injustice isthought the most dishonorable because it is least excusable."
Another way to consider what justice is, is to compare it with injustice. For example, in Utilitarianism,
John Stuart Mill (1806-1873) statesthat (( ... it is just to respect, unjustto violate, the legal rights of anyone." Second, U ••• injustice consistsin taking or withholding from anyperson that to which he has a moralright." Third, ((It is universally con-sidered just that each person shouldobtain that (whether good or evil)which he deserves." Fourth, ((It isconfessedly unjust to break faithwith anyone: to violate an engagement, either expressed or implied...." Fifth, HIt is, by universal admission, inconsistent with justice to be partial."
A Moral Issue
Mill, too,sees justice as a moralissue. He concludes: ((Whether theinjustice consists in depriving a person of a possession, or in breakingfaith with him, or in treating himworse than he deserves, or worsethan other people who have nogreater claims, in each case the supposition implies two things-awrong done, and some assignableperson who is wronged. Injusticemay also be done by treating a person better than ot_hers; but thewrong in this case is to his competitors, who are also assignable persons.... Justice implies somethingwhich it is not only right to do, andwrong not to do, but which someindividual person can claim from usas his moral right."
Thomas Paine's Dissertations
184 THE FREEMAN March
speak about justice where the publicgood is concerned. He maintainsthat, ~~The foundation-principle ofpublic good is justice, and whereverjustice is impartially administered,the public good is promoted; for as itis to the good of every man that noinjustice be done to him, so likewiseit is to his good that the principlewhich secures him should not beviolated in the person of another,because such a violation weakenshis security, and leaves to chancewhat ought to be to him a rock tostand on."
The great American constitutional lawyer of the nineteenth century, Lysander Spooner, wrote apamphlet entitled: Natural Law, orThe Science of Justice, which succinctly summarizes what justice is:
The science of mine and thine-thescience of justice-is the science of allhuman rights; of all a man's rights ofperson and property; of all his rights Wlife, liberty, and the pursuit of happiness.
lt is the science which alone can tellany man what he can, and cannot, do;what he can, and cannot, have; what hecan, and cannot, say, without infringingthe rights of any other person.
It is the science of peace; and the onlyscience of peace; since it is the sciencewhich alone can tell us on what conditions mankind can live in peace, or oughtto live in peace, with each other.
These conditions are simply these: viz.,first, that each man shall do, towardsevery other, all that justice requires himto do; as, for example, that he shall pay
his debts, that he shall return borrowedor stolen property to its owner, and thathe shall make reparation for any injuryhe may have done to the person or property of another.
The second condition is, that each manshall abstain from doing to another, anything which justice forbids him to do; as,for example, that he shall abstain fromcommitting theft, robbery, arson, murder, or any other crime against the person or property of another.
So long as these conditions are fulfilledmen are at peace, and ought to remain atpeace, with each other. But when eitherof these conditions is violated, men are atwar. And they must necessarily remainat war until justice is re-established.
Through all time, so far as historyinforms us, wherever mankind have attempted to live in peace with each other,both the natural instincts, and the collective wisdom of the human race, haveacknowledged and prescribed, as an indispensable condition, obedience to thisone only universal obligation: viz., thateach should live honestly towards everyother.
The ancient maxim makes the sum ofman's legal duty to his fellow men to besimply this: "To live honestly, to hurt noone, to give to every one his due ..."
Never has such a complex subjectas justice been treated so clearly andsimply. To summarize justice thusfar: Justice means that each must beaccountable for his own actions, entitled to the reward of his labor, andresponsible for the consequences ofhis wrong doings.
The love of justice should be in-
1980 JUSTICE AND FREEDOM 185
stilled in every man, woman andchild-all should wish to see justicedone. For without justice the rule ofmen (dictatorship), not of law, assumes power. Without justice, society disintegrates into barbarism,where courts of law are administered by favor and pull instead ofobjective law, and without objectivelaws, the individual is at the mercyof the ruling power and its agents.The ancient atrocities return, suchas no trial by jury, confiscatorytaxes on life and properly, the purchasing of judges, legislators, andsheriffs; all previous forms of theprior administration of justice become part of the current machinerywhich administers not justice, butinjustice or tyranny.
In short, all that is good rests onjustice. Where there is no justice,there is no morality-no right orwrong-anything goes and usuallydoes. Justice is a social virtue to bepracticed by individuals. Justicedemands that the individual rewardor recognize good and condemn evil.To practice justice one should knowa man for what he is and treat himaccordingly, whether he be honest,dishonest, friend or thief. The goodshould be rewarded, the badpunished.
The Highest Goal
Society cannot place before it ahigher or nobler goal than the administration ofjustice. Thus, here is
a bit of advice from Conversationswith Goethe, March 22, 1825: cCAgreat deal may be done by severity,more by love, but most by cleardiscernment and impartial justice."
Once the meaning of justice hasbeen established, next comes theunderstanding of freedom and liberty, which are crucial because onlyunder freedom can the individualachieve his highest potential andpursue his happiness.
To speak of liberty and freedom isto speak first of natural laws or theright of nature. Hobbes lays an excellent foundation ofnatural laws orrights. He affirms that the right ofnature is the liberty each man has touse his own power for the preservation of his own life, and his ownjudgment and reason are the bestmeans for achieving it.
The first law of nature, accordingto Jean Jacques Rousseau (17121778), results from man's nature.cCHis first law is to provide for hisown preservation, his first cares arethose which he owes to himself; and,as soon as he reaches years ofdiscretion, he is the sole judge of theproper means of preserving himself...."
Therefore, ifman's first obligationis to provide for his own life, hemust live under the proper conditions in which to sustain his life,namely, liberty. By liberty is understood the absence of external impediments, the absence of opposition.
186 THE FREEMAN March
Hayek on LibertyIn The Constitution of Liberty,
Nobel-prize winner FriedrichA.Hayek points out that liberty is anegative concept like peace. ((It becomes positive only through whatwe make of it. It does not assure usof any particular opportunities, butleaves it to us to decide what use weshall make of the circumstances inwhich we find ourselves.... " Hecontinues, ((Liberty not only meansthat the individual has both the opportunity and the burden of choice;it also means that he must bear theconsequences of his actions and willreceive praise or blame for them.Liberty and responsibility are inseparable." (Emphasis added.)
To expound further, Mill explainsthat one cannot take away another'sfreedom no matter how sincerelyone tries to protect another. Only byour own hands can any positive andlasting improvement in our lives beworked out. And through ((the influence of these two principles all freecommunities have both been moreexempt from social injustice andcrime, and have attained morebrilliant prosperity, than anyothers...."
Further, ((. . . any restriction onliberty reduces the number of thingstried and so reduces the rate ofprogress. In such a society freedom ofaction is granted to the individual,not because it gives him greatersatisfaction but because if allowed to
go his own way he will on the average serve the rest of us better thanany orders we know how to give."
In short, liberty is the only objectwhich benefits all alike and shouldprovoke no sincere opposition. Liberty ((is not a means to a higherpolitical end. It is itself the highestpolitical end," says Lord Acton. It isrequired for security in the pursuitof the highest objects of private lifeand civil society.
Morality Requires Freedom
If liberty is to live upon one's ownterms and slavery is to live at themercy of another's, then it followsthat to live under one's own termsmeans the individual has a choice ofactions. He can be virtuous or not;he can be moral. Therefore, moralityrequires freedom. Thus, only freemen can be just men!
In his The Road to Serfdom,Hayek ties liberty to morality. Sincemorals are of necessity a phenomenon of individual conduct, to bemoral one must be free to makechoices. Where man is forced to actby coercion, the ability to choose hasbeen pre-empted. Only under libertyand freedom can man be moral. As aresult, only ((where we ourselves areresponsible for our own interests ...has our decision moral value. Freedom to order our own conduct in thesphere where material circumstances force a choice upon us, andresponsibility for the arrangement
1980 JUSTICE AND FREEDOM 187
of our own life according to our ownconscience, is the air in which alonemoral sense grows and in whichmoral values are daily recreated inthe free decision of the individual.Responsibility, not to a superior, butto one's conscience, the awareness ofa duty not exacted by compulsion ...and to bear the consequences ofone's own decision, are the very essence of any morals which deservethe name."
The facts have been establishedthus far that man must live underliberty to become as productive, asnoble, and as just as he can, sinceliberty is the condition under whichmorality thrives. Also, only the individual knows what is best for himself. And finally, liberty does notprovide opportunities, but leaves theindividual free to choose those actions which he thinks will best suithim and to bear the consequences ofthose actions.
The Price of Freedom
There is one more thing to consider about freedom and libertythe price. Tocqueville remarked,HSome abandon freedom thinking itdangerous, others thinking it impossible." But there is a third reason. Some abandon freedom thinking it too expensive. Freedom is notfree. ~~Those who expect to reap theblessings of freedom, must, likemen, undergo the fatigues of supporting it," noted Paine.
HFreedom is the most exactingform of civil government-it is, infact, the most demanding state of allfor man. That is because freedomdemands-depends upon-selfdiscipline from both the governedand the governing. The foundationof freedom is self-government andthe foundation of self-government isself-control," explains author RusWalton, of One Nation Under God.Freedom requires more, however. Itrequires a strong and vigilant defense. ~(The greater the threat of evil,the stronger that defense must be.That which is right does not surviveunattended; it, too, must have itsdefenders. . . . "
Is liberty worth the effort? According to Frederic Bastiat, all you haveto do is look at the entire world todecide. That is, which ~~countries
contain the most peaceful, the mostmoral, and the happiest people?Those people are found in the countries where the law least interfereswith private affairs; where government is least felt; where the individual has the greatest scope, andfree opinion the greatest influence;where administrative powers arefewest and simplest; where taxes arelightest and most nearly equal, andpopular discontent the least excitedand the least justifiable; where individuals and groups most activelyassume their responsibilities, and,consequently, where the morals of... human beings are constantly im-
188 THE FREEMAN
proving; where trade, assemblies,and associations are the least restricted; ... where mankind mostnearly follow its own natural inclinations; ... in short, the happiest,most moral, and most peaceful people are those who most nearly followthis principle: although mankind isnot perfect, still, all hope rests uponthe free and voluntary actions ofpersons within the limits of right;law or force is to be used for nothingexcept the administration ofuniversal justice."
What this means to us today isthat our society, so filled with government regulations and laws, hastaken away many of our liberties.For example, we cannot go into somebusinesses without being licensed,
Justice vs. Charity
taxed, and regulated. We are presumed guilty (of dishonesty) untilproven innocent (which is impossible). Our reputations are continually under attack and, for the mostpart, stand for nothing. Honesty andintegrity, once the backbone of oursociety, have been replaced by government regulations and promises.Under this system of injustice all ofus are losing our liberties, wealth,and happiness.
What better way to summarizethe spirit of liberty and freedom andjustice than to quote Tocqueville,who said, ttl should have loved freedom, I believe, at all times, but inthe time in which we live I am readyto worship it." @
IDEAS ON
UBERTY
JUSTICE is the execution of the law which treats all men equally. In itsexercise the state has the monopoly of the use of force.... The state hasthe power of the sword to execute justice.
Some feel that this idea of justice is a cold, heartless concept. Theywant the state to produce social and economic justice as well. They wantjustice to include a more equal distribution of the goods of this world.They want charity and sympathy to be effected by the power of the law.In the process of broadening the meaning of justice to include thesepolitical activities, real justice is destroyed. The use offorce to take fromsome to give to others is the very opposite ofjustice. Economic equalityor economic redistribution cannot be effected by force apart from anunequal, and thus unjust, treatment of individual citizens. When thisbecomes the policy of the state, justice no longer prevails.
FRANCIS E. MAHAFFY, "Social Justice"
A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN
Reflections onHistory
WHEN Jacob Burckhardt, the Swisshistorian of art and culture, died in1897, he left a series of classroomlecture notes that he considered unready for book publication. It wasonly as he was dying that he gavepermission to his heirs to bringthem out if they saw fit. The noteswere originally published in Germany in 1905, but it was not untilsome forty years later, in the middleof a war against the very totalitarianism that Burckhardt hadpredicted, that the first Englishtranslation was made.
The original American title, as of1943, was Force and Freedom;Reinhold Niebuhr and others seizedupon the book at once for its astoundingly accurate propheciesabout the coming of the GoliathState. The odd thing was thatBurckhardt, no Hegelian, did not
believe in historical determinism.His fluid conception of history couldhave done wonders to counteract theMarxism and neo-Marxism thathave bemused so many of our intellectuals. But his influence has beenlimited, and his name has been pretty much forgotten.
Now, as part of a program that isseeing many neglected classics restored to contemporary use, the Liberty Fund of Indianapolis has republished Force and Freedom as Reflections on History (Liberty Classics,7440 North Shadeland, Indianapolis, Indiana 46250, 354pages, $9.00 cloth; $4.00 paper),with a beautifully comprehensive introduction by Gottfried Dietze.What immediately strikes the readeris that Burckhardt, a man of thenineteenth century, explains the1980 headlines as no modern com-
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mentator has succeeded in doing.Take his discussion of Islam, forexample. In the West, he. says, stateand church have not fused into Honeoppressive whole." But in Islam thefusion took place. ~~The whole of culture," he wrote, Hwas dominated,shaped and colored by it. Islam hasonly one form of polity, of necessitydespotic, the consummation ofpower, secular, priestly, and theocratic.... This aridity, this drearyuniformity of Islam, which is so terribly limited on the religious side,probably did more harm than goodto culture, if only because it rendered the peoples affected by it quiteincapable of going over to anotherculture."
If our editorialists had knownabout Burckhardt, they would nothave been caught so short by theapparition of the Ayatollah Khomeini. And if our policy makers inWashington had absorbed some ofBurckhardt's wisdom, they wouldnever have been deluded into thinking that detente with a totalitarianpower could ever come to anything.
Consequences of Intervention:A Subtle Understanding
Burckhardt did not believe in historical ~~laws." But if nothing wasfated, how could he have been such agood prophet? Only by a subtle understanding of the word ~~if." Despotism would result Hif" the Statewere to be permitted to absorb all
the activities of men. But such absorption leads to stagnation and decay. History, as Burckhardt observed, is filled with overturns andinterruptions. Great men can makea difference, for good or for ill. Onewhole chapter in Reflections on History is given over to a discussion ofluck. It was lucky that the Greeksconquered Persia and the RomansCarthage, unlucky that Athens wasdefeated by Sparta. It was unluckythat Caesar was murdered before hehad time to consolidate the RomanEmpire into u an adequate politicalform." In the eighth century it waslucky that Europe held Islam at bay.(Query: can we count on luck a second time around?)
Marx defined history as the history of class struggles. Burckhardtsaid Hnonsense" to Marx and toMarx's master Hegel. InBurckhardt's estimation, historywas a result of the interaction ofState, religion, and culture, andcould take protean forms. Sometimes culture (as determined by social power) dominated the scene,sometimes it was religion. Therecould be totalitarianisms that wereatheistic; on the other hand, therecould be theocracies as despotic asany secular tyranny.
The Criminality of Rulers
Burckhardt regarded force as evil,but he had no illusions about itsinevitable exercise. Great men were
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quite capable of great crimes in consolidating a state, and genius andmadness often went together. A justification for the crimes of great menseemed to lie in the fact that bythem Han end could be put to thecrimes of countless others." ((Thegreatest example," said Burckhardt,((is offered by the Roman Empire,inaugurated by the most frightfulmethods . . . and completed by thesubjection ofEast and West in riversof blood." The end result of Romancrimes was the Hcreation of a common world culture, which also madepossible the spread of a world religion, both capable of being transmitted to the Teutonic barbarians ofthe Volkerwanderung as the futurebond of a new Europe."
But even though good may havecome from the evil of Romanmethods of conquest, Burckhardt refused to condone violence. The results of violence could be overcomeas men strove ((to tum· mere powerinto law and order." But not everydestruction entails generation.Sometimes, so Burckhardt observed,«a people which has been too brutally handled will never recover."Asia, so it appeared to Burckhardt,has been broken by the two periodsof Mongol rule.
The Plague of Centralization
Burckhardt's ideal· civilization wasone in which culture and religionestablished unseen· but effective
boundaries which the State did notdare to pass. His own Switzerlandwas a case in point. As GottfriedDietze points out in his introduction,Burckhardt was a product of thearistocratic Swiss city of Basel,which had somehow escaped theleveling and centralizing effects ofthe French Revolution and theNapoleonic conquests.
Burckhardt admired the Germanyof Goethe, a land of small principalities and culture-loving courts.He considered Bismarck an evil genius, and regarded the FrancoPrussian War as the beginning ofthe end of everything he had admired in the Germany where he hadstudied under Ranke. Since Germany, under Bismarck, had takenpolitics as its principle, it wouldhave, so Burckhardt said, to continue on that course. Dietze mentions a letter Burckhardt wrote to afriend during the Franco-PrussianWar in which the prediction wasmade that the learned gentry ofGermany would have a rude awakening when they saw the spiritualsterility that would come with Prussian centralization.
The Italy that Burckhardt lovedas a student and historian ofart waspre-Garibaldi and pre-Cavour. Afterall, the Renaissance took place insmall independent principalitiesand cities, not in a land that made((unification" a virtue. Burckhardtstopped writing for publication
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when it became apparent that thecentralizers were going to wineverywhere. He had enjoyed writingabout Ubeautiful things" in his TheCivilization of the Renaissance inItaly (1860) and The History of theRenaissance (1867). But after theFranco-Prussian War he became, asErnst Cassirer said, a ~~pathologist"
of a civilization that he saw on thedowngrade. It was because he felt hecould no longer cheer his readersthat he wanted his reflections onworld history to remain unpublished. He wanted his gloomy prognostications to be limited to a restricted audience. Luckily for us, herelented at the last. ®
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