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FreemanVOL. 29, NO. 12 • DECEMBER 1979

Capitalism LUdwig von .Mises 707The so-called miracle of product~on in the free market economystems from the adoption of sound economic policies.

Profits and Payrolls: 1978 Henry Hazlitt 718The latest figures on the per cent of corporate income available toemployees and to shareholders

Dishonest About Inflation Melvin D. Barger 721If we are cheating and being cheated by inflation, the cure lies inour resolution to return to "honest'" money.

Where There Was a Will- Jess Raley 727A look into the loss of the American will to self-responsibility andindependence.

The Social Cost of RailroadRegulation John Semmens 732

Government regulations and controls reduce returns and divert re-sources out of rai Iroading.

Education and Grades P. Dean Russell 740A call for voluntary methods and open competition in teaching andlearning.

Permanent Depression Clarence B. Carson 743Government regulations and controls depress production so thathuman wants go unsatisfied.

Free Market: Elementary,My Child Barbara H. Bryan 752

It's never too early to demonstrate and discuss the natural se-quence of willing exchange.

Book Reviews: 755"The Freedom Freeway" by Leonard E. Read"Restoring the American Dream" by Robert J. Ringer

Index for 1979 761

Anyone wishing to communicate with authors may send•• •• -, • - _L -rl 1Ir- .-.r"'IIlr-r-a. .. A'" ~__ 4 __ ..... __"':__

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Some articles available as reprints at cost; state quantity desired. Permissiongranted to reprint any article from this issue, with appropriate credit except"Capital ism."

Ludwig von Mises

Capitalism

DESCRIPTIVE terms which people useare often quite misleading. In talking about modern captains of industry and leaders of big business, forinstance, they call a man a Hchocolate king" or a ((cotton king" or an~(automobileking." Their use of suchterminology implies that they seepractically no difference betweenthe modern heads of industry andthose feudal kings, dukes or lords ofearlier days. But the difference is infact very great, for a chocolate kingdoes not rule at all, he serves. Hedoes not reign over conquered territory, independent of the market,independent of his customers. Thechocolate king-or the steel king orthe automobile king or any otherking of modern industry-dependson the industry he operates and onthe customers he serves. This ((king"

must stay in the good graces of hissubjects, the consumers; he loses his((kingdom" as soon as he is no longerin a position to give his customersbetter service and provide it at lowercost than others with whom he mustcompete.

Two hundred years ago, before theadvent of capitalism, a man's socialstatus was fixed from the beginningto the end of his life: he inherited itfrom his ancestors, and it neverchanged. If he was born poor, healways remained poor, and if he wasborn rich-a lord or a duke-he kepthis dukedom and the property thatwent with it for the rest of his life.

As for manufacturing, the primitive processing industries of thosedays existed almost exclusively forthe benefit of the wealthy. Most ofthe people (ninety per cent or more

707

708 THE FREEMAN December

of the European population) workedthe land and did not come in contactwith the city-oriented processing industries. This rigid system of feudalsociety prevailed in the most developed areas of Europe for manyhundreds of years.

However, as the rural populationexpanded, there developed a surplusof people on the land. For thissurplus of population without inherited land or estates, there was notenough to do, nor was it possible forthem to work in the processing industries; the kings of the cities denied them access. The numbers ofthese tCoutcasts" continued to grow,and still no one knew what to dowith them. They were, in the fullsense of the word, ttproletarians,"outcasts whom the governmentcould only put into the workhouse orthe poorhouse. In some sections ofEurope, especially in the Netherlands and in England, they becameso numerous that, by the eighteenthcentury, they were a real menace tothe preservation of the prevailingsocial system~

Today, in discussing similar conditions in places like India or otherdeveloping countries, we must notforget that, in eighteenth-centuryEngland, conditions were muchworse. At that time, England had apopulation of six or seven millionpeople, but of those six or sevenmillion people, more than one million, probably two million, were

simply poor outcasts for whom theexisting social system made no provision. What to do with these outcasts was one of the great problemsof eighteenth-century England.

Another great problem was thelack of raw materials. The British,very seriously, had to ask themselves this question: what are wegoing to do in the future, when ourforests will no longer give us thewood we need for our industries andfor heating our houses? For the ruling classes it was a desperate situation. The statesmen did not knowwhat to do, and the ruling gentrywere absolutely without any ideason how to improve conditions.

The Start of Mass Production

Out ofthis serious social situationemerged the beginnings of modemcapitalism. There were some persons among those outcasts, amongthose poor people, who tried to organize others to set up small shopswhich could produce something.This was an innovation. These innovators did not produce expensivegoods suitable only for the upperclasses; they produced cheaperproducts for everyone's needs. Andthis was the origin of capitalism asit operates today; It was the beginning of mass production, the fundamental principle of capitalistic industry. Whereas the old processingindustries serving the rich people inthe cities had existed· almost exclu-

1979 CAPITALISM 709

sively for the demands of the upperclasses, the new capitalist industriesbegan to produce things that couldbe purchased by the general population. It was mass production tosatisfy the needs of the masses.

This is the fundamental principleof capitalism as it exists today in allofthose countries in which there is ahighly developed system of massproduction: Big business, the targetof the most fanatic attacks by theso-called leftists, produces almostexclusively to satisfy the wants ofthe masses. Enterprises producingluxury goods solely for the well-to-docan never attain the magnitude ofbig businesses. And today, it is thepeople who work in large factorieswho are the main consumers of theproducts made in those factories.

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 Foundation for Economic Education, Inc.,Irvington-on-Hudson, N.Y. 10533.

This is the fundamental differencebetween the capitalistic principles ofproduction and· the feudalistic principles of the preceding ages.

Consumer Sovereignty

When people assume, or claim,that there is a difference betweenthe producers and the consumers ofthe products of big businesses, theyare badly mistaken. In Americandepartment stores you hear the slogan ttthe customer is always right."And this customer is the same manwho produces in the factory thosethings which are sold in the department stores. The people who thinkthat the power of big business isenormous are mistaken also, sincebig business depends entirely on thepatronage of those who buy its prod-


ucts; the biggest enterprise loses itspower and its influence when it losesits customers.

Fifty or sixty years ago it was saidin almost all capitalist countriesthat the railroad companies were toobig and too powerful; they had amonopoly; it was impossible to compete with them. It was alleged that,in the field of transportation, capitalism had already reached a stageat which it had destroyed itself, forit had eliminated competition. Whatpeople overlooked was the fact thatthe power of the railroads dependedon their ability to serve people better than any other method of transportation. Of course it would havebeen ridiculous to compete with oneof these big railroad companies bybuilding another railroad parallel tothe old line, since the old line wassufficient to serve existing needs.But very soon there came othercompetitors. Freedom ofcompetitiondoes not mean that you can succeedsimply by imitating or copying precisely what someone else has done.Freedom of the press does not meanthat you have the right to copy whatanother man has written and thus toacquire the success which this otherman has duly merited on account ofhis achievements. It means that youhave the right to write somethingdifferent. Freedom of competitionconcerning railroads, for example,means that you are free to inventsomething, to do something, which

will challenge the railroads andplace them in a very precariouscompetitive situation.

In the United States the competition to the railroads-in the form ofbuses, automobiles, trucks, andairplanes-has caused the railroadsto suffer and to be almost completelydefeated, as far as passenger transportation is concerned.

Capitalism Transformed the World

The development of capitalismconsists in everyone's having theright to serve the customer betterand/or more cheaply. And thismethod, this principle, has, within acomparatively short time, transformed the whole world. It has madepossible an unprecedented increasein world population.

In eighteenth-century England,the land could support only six million people at a very low standard ofliving. Today more than fifty millionpeople enjoy a much higher standard of living than even the richenjoyed during the eighteenthcentury. And today's standard of Iiving in England would probably bestill higher, had not a great deal ofthe energy of the British beenwasted in what were, from variouspoints of view, avoidable politicaland military ~~adventures."

These are the facts about capitalism. Thus, if an Englishman-or, forthat matter, any other man in anycountry of the world-says today to

1979 CAPITALISM 711

his friends that he is opposed tocapitalism, there is a wonderful wayto answer him: ttyou know that thepopulation of this planet is now tentimes greater than it was in the agespreceding capitalism; you know thatall men today enjoy a higher standard of living than your ancestorsdid before the age of capitalism. Buthow do you know that you are theone out of ten who would have livedin the absence of capitalism? Themere fact that you are living todayis proof that capitalism has succeeded, whether or not you consideryour own life very valuable."

Development of Factory System

In spite of all its benefits, capitalism has been furiously attacked andcriticized. It is necessary that weunderstand the origin of this antipathy. It is a fact that the hatred ofcapitalism originated not with themasses, not among the workersthemselves, but among the .landedaristocracy-the gentry of Englandand the European continent. Theyblamed capitalism for somethingthat was not very pleasant for them:at the beginning of the nineteenthcentury, the higher wages paid byindustry to its workers forced thelanded gentry to pay equally higherwages to their agricultural workers.The aristocracy attacked the industries by criticizing the standard ofliving of the masses of the workers.

Of course-from our viewpoint,

the workers' standard of living wasextremely low; conditions underearly capitalism were absolutelyshocking, but not because the newlydeveloped capitalistic industries hadharmed the workers. The peoplehired to work in factories had already been existing at a virtuallysubhuman level.

The famous old story, repeatedhundreds of times, that the factoriesemployed women and children andthat these women and children, before they were working in factories,had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers whoworked in the factories had nothingto cook with; they did not leave theirhomes and their kitchens to go intothe factories, they went into factories because they had no kitchens,and if they had a kitchen they hadno food to cook in those kitchens.And the children did not come fromcomfortable nurseries. They werestarving and dying. And all the talkabout the so-called unspeakablehorror of early capitalism can berefuted by a single statistic: precisely in these years in whichBritish capitalism developed, precisely in the age called the Industrial Revolution in England, in theyears from 1760 to 1830, precisely inthose years the population of England doubled, which means thathundreds of thousands ofchildren-who would have died in


preceding times-survived and grewto become men and women.

Trade Brings Improvement

There is no doubt that the conditions of the preceding times werevery unsatisfactory. It was capitalistbusiness that improved them. It wasprecisely those early factories thatprovided for the needs of their workers, either directly or indirectly byexporting products and importingfood and raw materials from othercountries. Again and again, theearly historians of capitalismhave---one can hardly use a milderword-falsified history.

One anecdote they used to tell,quite possibly invented, involvedBenjamin Franklin. According tothe story, Ben Franklin visited acotton mill in England, and theowner of the mill told him, full ofpride: ~~Look, here are cotton goodsfor Hungary." Benjamin Franklin,looking around, seeing. that theworkers were shabbily dressed said:~~Why don't you produce also for yourown workers?"

But those exports of which theowner ofthe mill spoke really meantthat he did produce for his ownworkers, because England had toimport all its raw materials. Therewas no cotton either in England orin continental Europe. There was ashortage of food in England, and ithad to be imported from Poland,from Russia, from Hungary. These

exports were the payment for theimports of the food which made thesurvival of the British populationpossible. Many examples from thehistory of those ages will show theattitude of the gentry and aristocracy toward the workers. I want tocite only two examples. One is thefamous British Speenhamland system. By this system, the Britishgovernment paid all workers who didnot get the minimum wage (determined by the government) the difference between the wages they received and this minimum wage.

.This saved the landed aristocracythe trouble of paying higher wages.The gentry would pay the traditionally low agricultural wage, andthe government would supplementit, thus keeping workers from leaving rural occupations to seek urbanfactory employment.

Eighty years later, after capitalism's expansion from England tocontinental Europe, the landed aristocracy again reacted against thenew production system. In Germanythe Prussian Junkers, having lostmany workers to the higher-payingcapitalistic industries, invented aspecial term for the problem: ~~flight

from the countryside"-Landflucht.And in the German Parliament,they discussed what might be doneagainst this evil, as it was seen fromthe point of view of the landed aristocracy. Prince Bismarck, the famous chancellor of the German

1979 CAPITALISM 713

Reich, in a speech one day said, tt][met a man in Berlin who once hadworked on my estate, and I askedthis man, tWhy did you leave theestate; why did you go away from thE~

country; why are you now living inBerlin?' "

And, according to Bismarck, thisman answered, ttyou don't havesuch a nice Biergarten in the villageas we have here in Berlin, whereyou can sit, drink beer, and listen tomusic." This is, of course, a storytold from the point of view of PrinceBismarck, the employer. It was notthe point of view of all his employees. They went into industry because industry paid them higherwages and raised their standard ofliving to an unprecedented degree.

Living Standards under Capitalism

Today, in the capitalist countries,there is relatively little differencebetween the basic life of the socalled higher and lower classes; bothhave food, clothing, and shelter. Butin the eighteenth century and earlier, the difference between the manof the middle class and the man ofthe lower class was that the man ofthe middle class had shoes and theman of the lower class did not haveshoes. In the United States todaythe difference between a rich manand a poor man means very oftenonly the difference between a Cadillac and a Chevrolet. The Chevroletmay be bought secondhand, but bas-

ically it renders the same services toits owner: he, too, can drive from onepoint to another. More than fiftypercent of the people in the UnitedStates are living in houses andapartments they own themselves.

The attacks against capitalismespecially with respect to the higherwage rates-start from the false assumption that wages are ultimatelypaid by people who are differentfrom those who are employed in thefactories. Now it is all right foreconomists and for students ofeconomic theories to distinguish between the worker and the consumerand to make a distinction betweenthem. But the fact is that everyconsumer must, in some way or theother, earn the money he spends,and the immense majority of theconsumers are precisely the samepeople who work as employees in theenterprises that produce the thingswhich they consume.

Wage rates under capitalism arenot set by a class of people differentfrom the class ofpeople who earn thewages: they are the same people. Itis not the Hollywood film corporation that pays the wages of a moviestar; it is the people who pay admission to the movies. And it is not theentrepreneur of a boxing match whopays the enormous demands of theprize fighters; it is the people whopay admission to the fight. Throughthe distinction between the employer and the employee, a distinc-


tion is drawn in economic theory,but it is not a distinction in real life;here, the employer and the employee ultimately· are one and thesame person.

There are people in many countries who consider it very unjustthat a man who has to support afamily with several children will receive the same salary as a man whohas only himself to take care of. Butthe question is not whether the employer should bear greater responsibility for the size of a worker's family.

The question we must ask in thiscase is: Are you, as an individual,prepared to pay more for something,let us say, a loaf of bread, if you aretold that the man who produced thisloaf of bread has six children? Thehonest man will certainly answer inthe negative and say, ~~In principle Iwould, but in fact I would rather buythe bread produced by a man without any children." The fact is that, ifthe buyers do not pay the employerenough to enable him to pay hisworkers, it becomes impossible forthe employer to remain in business.

The Meaning of Capitalism

The capitalist system was termed((capitalism" not by a friend of thesystem, but by an individual whoconsidered it to be the worst of allhistorical systems, the greatest evilthat had ever befallen mankind.That man was Karl Marx.

Nevertheless, there is no reason toreject Marx's term, because it describes clearly the source of thegreat social improvements broughtabout by capitalism. Those improvements are the result of capitalaccumulation; they are based on thefact that people, as a rule, do notconsume everything they haveproduced, that they save-andinvest-a part of it.

There is a great deal of misunderstanding about this problemand-in the course of these sixlectures-I will have the opportunity to deal with the most fundamental misapprehensions whichpeople have concerning the accumulation of capital, the use of capital,and the universal advantages to begained from such use. I will dealwith capitalism particularly in mylectures about foreign investmentand about that most critical problemof present-day politics, inflation.You know, of course, that inflationexists not only in this country. It is aproblem all over the world today.

An often unrealized fact aboutcapitalism is this: savings meanbenefits for all those who are anxious to produce or earn wages. Whena man has accrued a certain amountof money-let us say, one thousanddollars-and, instead of spending it,entrusts these dollars to a savingsbank or an insurance company, themoney goes into the hands of anent"repreneur, a businessman,

1979 CAPlTALISM 715

The owner of producer's goods inthe frame of a market economy isforced to employ them for thebest possible satisfaction of thewants of the consumers. He forfeits his property if other peopleeclipse him by better serving theconsumers. In the market economy property is acquired andpreserved by serving the publicand is lost when the public becomes dissatisfied with the way inwhich· it is served. . . . By theinstrumentality of the profit-andloss system, the owners areforced to deal with "their" property as if it were other peoples'property entrusted to them underthe obligation to utilize it for thebest possible satisfaction of thevirtual beneficiaries, the consumers.

enabling him to go out and embarkon a project which could not havebeen embarked on yesterday, because the required capital was unavailable.

How Capital Creates Jobs

What will the businessman donow with the additional capital? Thefirst thing he must do, the first usehe will make of this additional capital, is to go out and hire workers andbuy raw materials-in turn causinga further demand for workers andraw materials to develop, as well asa tendency toward higher wages and

higher prices for raw materials.Long before the saver or the entrepreneur obtain any profit from all ofthis, the unemployed worker, theproducer of raw materials, thefarmer, and the wage-earner are allsharing in the benefits of the additional savings.

Whether the entrepreneur willget something out of the project dePends on the future state of themarket and on his ability to anticipate correctly the future state of themarket. But the workers as well asthe producers of raw materials getthe benefits immediately. Much wassaid, thirty or forty years ago, aboutthe ~~wage policy," as they called it,of Henry Ford. One of Mr. Ford'sgreat accomplishments was that hepaid higher wages than did otherindustrialists or factories. His wagepolicy was described as an ~~inve~

tion," yet it is not enough to say thatthis new ~~invented" policy was theresult of the liberality of Mr. Ford. Anew branch of business, or a newfactory in an already existingbranch of business, has to attractworkers from other employments,from other parts of the country, evenfrom other countries. And the onlyway to do this is to offer the workershigher wages for their work. This iswhat took place in the early days ofcapitalism, and it is still takingplace today.

When the manufacturers in GreatBritain first began to produce cotton

.716 THE FREEMAN December

goods, they paid their workers morethan they had earned before. Ofcourse, a great percentage of thesenew workers had earned nothing atall before that and were prepared totake anything they were offered.But after a short time-when moreand more capital was accumulatedand more and more new enterpriseswere developed-wage rates wentup, and the result was the unprecedented increase in British population which I spoke of earlier.

Theory of "Impoverishment"

The scornful depiction of capital:ism by some people as a systemdesigned to make the rich becomericher and the poor become poorer iswrong from beginning to end.Marx's thesis regarding the comingof socialism was based on the assumption that workers were gettingpoorer, that the masses were becoming more destitute, and that finallyall the wealth of a country would beconcentrated in a few hands or inthe hands ofone man only. And thenthe masses of impoverished workerswould finally rebel and expropriatethe riches of the wealthy proprietors. According to this doctrine ofKarl Marx, there can be no opportunity, no possibility within the capitalistic system for any improvementof the conditions of the workers.

In 1865, speaking before theInternational Workingmen's Association in England, Marx said the

belief that labor unions could improve conditions for the workingpopulation was «(absolutely in error." The union policy of asking forhigher wage rates and shorter workhours he called conservative-conservatism being, of course, the mostcondemnatory term which KarlMarx could use. He suggested thatthe unions set themselves a new,revolutionary goal: that they (doaway with the wage system altogether," that they substitute((socialism"-government ownershipof the means of production-for thesystem of private ownership.

If we look upon the history of theworld, and especially upon the history of England since 1865, werealize that Marx was wrong inevery respect. There is no western,capitalistic country in which theconditions of the masses have notimproved in an unprecedented way.All these improvements of the lasteighty or ninety years were made inspite of the prognostications of KarlMarx. For the Marxian socialistsbelieved that the conditions of theworkers could never be ameliorated.They followed a false theory, thefamous uiron law ofwages"-the lawwhich stated that a worker's wages,under capitalism, would not exceedthe amount he needed to sustain hislife for service to the enterprise.

The Marxians formulated theirtheory in this way: if the workers'wage rates go up, raising wages

1979 CAPITALISM 717

above the subsistence level, theywill have more children; and thesechildren, when they enter the laborforce, will increase the number ofworkers to the point where the wagerates will drop, bringing the workersonce more down to the subsistencelevel-to that minimal sustenancelevel which will just barely preventthe working population from dyingout.

But this idea of Marx, and ofmany other socialists, is a concept ofthe working man precisely like thatwhich biologists use-and rightlyso-in studying the life of animals.Of mice, for instance.

Improved Conditions Depend onSound Economic Policies

If you increase the quantity offood available for animal organisInsor for microbes, then more of themwill survive. And if you restricttheir food, then you will restricttheir numbers. But man is different.Even the worker-in spite ofthe factthat Marxists do not acknowledgeit-has human wants other tha.nfood and reproduction of his species.An increase in real wages resultsnot only in an increase in population' it results also, and first of all,in an improvement in the averagestandard of living. That is whytoday we have a higher standard -ofliving in Western Europe and in theUnited States than in the developingnations of, say, Africa.

We must realize, however, thatthis higher standard of living depends on the supply of capital. Thisexplains the difference betweenconditions in the United States andconditions in India; modern methodsof fighting contagious diseases havebeen introduced in India-at least,to some extent-and the effect hasbeen an unprecedented increase inpopulation but, since this increasein population has not been accompanied by a corresponding increasein the amount of capital invested,the result has been an increase inpoverty. A country becomes moreprosperous in proportion to the risein the invested capital per unit of itspopulation.

But you have to remember that, ineconomic policies, there are nomiracles. You have read in manynewspapers and speeches, aboutthe so-called German economicmiracle-the recovery of Germanyafter its defeat and destruction inthe Second World War. But this wasno miracle. It was the application ofthe principles of the free marketeconomy, of the methods of capitalism, even though they were notapplied completely in all respects.Every country can experience thesame umiracle" of economic recovery, although I must insist thateconomic recovery does not comefrom a miracle; it comes from theadoption of-and is the result ofsound economic policies. ,

Henry Hazlitt

IN the August issue of The FreemanI pointed out that, in the division ofthe part of the gross income of thecorporations available for the employees and for the stockholders, theemployees got the lion's share. In1977, for example, the last full yearfor which the figures were thenavailable, the employees got 89.4 percent of the division and the ownerswere credited with net profits aftertaxes of only 10.7 per cent. They didnot actually receive that much, butdividends amounting to only 4.5 percent of the combined total.

Henry Hazlitt, noted economist, author, editor, reviewer and columnist, Is well known to readers ofthe New York Times, Newsweek, The Freeman, Sarron's, Human Events and many others. Among themore recent of his numerous books are The InflationCrisis and How to Resolve It and a revised edition ofEconomics In One Lesson.

718

This division, I went on to show,was in no way unusual, but in facttypical of the division over theyears. In the whole thirty-yearperiod from 1949, the employees received an average of 88.1 per cent ofthe two-way division, the stockholders were credited with an average of11.9 per cent: the actual dividendsthey received came to only 5.3 percent. And in the. last ten of thosethirty years, contrary to what newspaper headlines, union leaders andpolitical speeches during the periodwould lead one to expect, the average division was even more in favorof the employees. In those ten yearsemployees had been getting an average of 90.2 per cent of the combined total available for division between the two groups, and stock-

PROFITS ANI) PAYROLLS: 1978 719

holders an average of only 9.8 percent.

So much for the previous record.The percentages I have been citingare calculated from the corporationearnings of the nation as compiledby the Bureau of Economic Analysisof the U.S. Department of Commerce and published in its monthlySurvey of Current Business. Thefinal figures for calendar 1978 arenow available, as they were notwhen my August article was written. What do they show?

For the last thirty years theemployees of this country'scorporations have been receiving an average of eighttimes as much from them ashas been cred ited to thestockholders.

The reader will recall that a fewmonths ago, when preliminary figures of corporate earnings in 1978were first appearing, they werebeing roundly denounced by politicians and by some Administrationleaders as not only excessive but asshocking, ~~obscene," and even udisastrous." It is true, as might havebeen expected in such an inflationary period, that in dollar amountthey rose to record levels. The profits after taxes of the nation's corporations rose in 1978 to $111.3 billion, compared with $94.7 billion in

1977, itself a record year for profitsin dollar terms.

But these figures have to be seenin their full context. For the compensation of employees of the country's corporations, in dollar terms,also rose in 1978 to the highest levelon record-$884.9 billion comparedwith $776.9 billion in 1977. So theemployees in 1978 received 88.8 percent of the total available for both,compared with 11.2 per cent credited to the stockholders. The stockholders were actually paid in dividends only $42.1 billion, or 4.2 percent of the total available for employees plus stockholders.

It will be noticed that this divisiondoes not differ very markedly fromthat in 1977 or the average in thelast ten years. The percentage distributed in dividends actually fellbelow the 4.5 per cent average of thepreceding ten years.

Any government action thatseriously reduces profits mustdiminish employment andpayrolls as well.

What is most striking about allthese facts is their complete contrastnot only with leftist propaganda butwith prevailing public assumptions. Frequent polling by the Opinion Research Corporation, for example, has found that the consensus ofmost Americans is that the corpo-

720 THE FREEMAN

rate stockholders get about 75 percent of the two-way division of grossearnings and the employees onlyabout 25 per cent. Judging by theirstatements, this must also be closeto the assumption of the Washington bureaucrats. And millions ofCommunists throughout the worldstill adhere to the Marxist myththat labor under capitalism is paidthe merest fraction of what it helpsto produce and is forced to acceptjust enough to stay alive and reproduce its numbers.

The truth is that-when recalculated to allow for the distortions of inflation-corporateprofits are still far too low forthe health of the Americaneconomy.

Though corporate wages in 1978were eight times corporate profitsafter taxes, though wages made up76 per cent of the national incomeand profits only about 7 per cent(really much lower if accountingprocedures were permitted by the IRSto make full allowance for inflation)it was the latter figure that was denounced as ~~obscene" and ~~dis

astrous."This demagogic hatred of profits

has in fact done immense harm tothe American economy, and above

all to the workers. For payrolls andprofits, as statistics have shownyear by year over the last half century, go up and down together. Theyare interdependent, and causallytied. The amount and outlook forprofits determines employment andnew investment. The way to encourage employment is to encourage employers. The way to increase realwages is to increase productivity;the way to do that is to encourageinvestment; and the way to do thatis to encourage adequate profits.

The result of our actual policies isthat our average annual percentageincrease in productivity in theperiod from 1960 to 1977 was lowerthan that in Japan, in France, inGermany, in Canada, and in Britain. Our rate of capital investmentbetween 1966 and 1976, as a percentage of GNP, was also lower thanin any of these countries.

The lesson ought to be clear. ®

Reprints of ~~Profits and Payrolls," from the August 1979Freeman, available from TheFoundation for Economic Education, Irvington-on-Hudson,N. Y. 10533.

10 copies $2.00100 or more, 15¢ each

Melvin D. Barger

UishQnestAIaQut

InflatiQn

MOST ofthe opinion polls tell us thatinflation is the public's Number Oneworry. We shouldn't need thepollsters to tell us that. We canlisten to the complaints in the linesat the supermarkets, read the headlines in newspapers, or hear thepronouncements of business leadersand political candidates. Inflation isa terrible cancer that must bebrought under control, we are constantly warned, or we face a bleakfuture and perhaps an economic disaster.

But what causes inflation? Manyeconomists and savants tell us thatinflation is a very complex problemwith neither a single cause nor asingle solution. Few economistswould dare deny that arbitrary government expansion of money andcredit produces inflation. Yet, thereseems to be a universal desire tobring in other alleged causes: thegreed of unions and businessmen,Mr. Barger is a corporate public relations executiveand writer in Toledo, Ohio.

government regulations, rISIng oilprices, and even such matters aslowered American productivity andreduced capital investment.

What is behind all this confusionabout inflation? It grows out of thesame character defect that causesinflation in the first place. Thatcharacter defect is dishonesty, and ithas seduced a whole nation. Butevents may eventually force us toaccept inflation as a dishonesthuman action that can be avoided ifpeople have the will and the understanding to do so. Nor is inflation acomplex problem when one is prepared to see it as a moral issuerather than simply as political orsocial phenomena.

A steel company executive namedEnders M. Voorhees pointed to themoral problem of inflation in a 1950speech entitled, ~~Wanted-De

pendable Dollars." Even then,corporate financial officers in Mr.Voorhees' position were discoveringthat inflation distorted business cal-

721


culations and made future businessplanning a nightmare. In the samespeech, he unashamedly showed apreference for the terms ((dependable dollars" or ((honest money"rather than such terms as ((soundmoney" or ((gold standard." He hadharsh words for ((printing-pressmoney," i.e., money created by government manipulations. But whywere we beguiled by ((printingpress" money and why were we unable to stop inflation? Mr. Voorheesconcluded, uIn the end we may discover that it is our own deficiency inmoral stamina that is to blame, andthat the printing-press operators aremerely reflecting our own attitudes." (emphasis added)1

Mr. Voorhees was politely sayingthat character defects get in the wayof efforts to stop inflation. He couldhave gone on to say that dishonestmoney is produced by dishonest people who are trapped by greed, fear,and weakness. This would 'Qe a verystrong statement, but the facts bearit out. Inflation begins with an expansion of the money supply whichimmediately produces benefits forcertain people while causing lossesfor others. In general, people onfixed incomes and holders of bonds,loans, and savings accounts are

lSee Enders M. Voorhees, Financial Policyin a Changing Economy, Sowers PrintingCompany, Lebanon, Pennsylvania, 1970. Seeparticularly pp. 184-200. Speech was presented at Dartmouth in 1950.

cheated, while borrowers, propertyowners, and inflation-wise speculators show gains.

Lying and Cheating

Lying and bland promises are anessential part of the inflation program. The public is constantly toldthat inflation will be brought undercontrol, for it is important that mostof the victims be unaware of what isgoing on. Still, a student of inflationis finally forced to believe that thepublic wants to go on believing inthe inflation game. The old saying,((You can't cheat an honest man,"may have some relevance to the waywe are cheating and being cheatedby inflation.

It would be unfair to say that thecurrent generation of Americans isless honest than earlier generationsthat somehow were able to maintainan ((honest" or ((dependable" dollar.And for that matter, it would evenbe unfair to say that Americans aremore dishonest, say, than the Germans or Swiss who have been able tomaintain the strength of their currencies. Our problem, as Americans,is that we have been practicing aselective dishonesty. While often insisting on rigorous honesty in othermatters, we have accepted the dishonest practices that produce inflation. Then we have gone further inthis deceit and have attributed theshrinkage of the dollar's buyingpower to conditions that are really

1979 DISHONEST ABOUT INFLATION 723

the effects of inflating. This tends todeflect attention from the actionsthat dilute the market value ofmoney· and ought to be stopped.

Needed: An Acceptable Definition

One of our most disturbing problems is that professional economistsdo not agree in their definitions ofinflation. One of the most widelyaccepted definitions of inflation isthat it is a rising general level ofprices.2 Another popular definitionof inflation is «too much moneychasing too few goods." Actually,more honest and precise than eitherof these definitions would be an explanation of the actions that causeprices to rise generally or bring ~~too

much money" into existence.The public should understand

that a widespread drought may result in temporarily higher prices forfood, relative to prices of otherthings. But that is not the same as a.government action that arbitrarilyproduces more paper money and.credit and results in a persistinggeneral increase in prices.

Why do professional economistsemploy such deceptive and mislead··ing definitions of a condition thatcould prove to be a terminal illnessfor our way of life? One reason forthis dishonesty is that the need tomaintain ~~sound"or ~~honest"money

2Campbell R. McConnell, Economics (NewYork: McGraw-Hill, 1975), p. 197.

was badly ridiculed and discreditedin the early 1930s and since thenhas never been defended except by afew economists. There is also something about inflation that promotesdemands for centralized governmentcontrol, which many economists advocate. Finally, the Keynesian deficit spending programs endorsed bymany economists make inflationunavoidable.

Yet another argument againstUhonest money" is that it is a returnto the gold standard, which had itssevere critics and was often lookedupon as a means of keeping moneyscarce and concentrating power inthe hands of eastern bankers. Actually, honest money could take several forms and could be backed bymetals and commodities other thangold. It is even possible to conceiveof a privately-issued currency without any specific backing other thanthe assets of the bank or companywhich offers it. A gold standard willsoon collapse if it is seen as a hindrance to progress rather than a wayof protecting the public.

Effects Seen As CausesIn the general dishonesty about

inflation, most experts make theerror of blaming inflation on conditions that are really the effects ofexpanding the money supply. Business leaders like to focus on ~~cost

push" inflation, for example, withunions as the villains. According to


this argument, monopolistic unionsare able to impose increased costs onbusiness which must eventually bepassed through as price increases. Ifunions would only be less greedy,cost-push inflation could be keptunder control.

Union leaders and their· staffeconomists. seize on the same argument, usually with the twist thatinflation is caused by unwarrantedprice increases, excessive profits,high executive salaries, andmonopolistic or oligopolistic enterprises. Both unions and management, in making such arguments,play directly into the hands of politicians who would like to institutewage-price controls. Despite the factthat wage-price controls are virtually unworkable and result in a bureaucratic nightmare, the demandfor them is kept alive by the persistent belief that unions cause inflation by raising wages or managements cause the same condition byincreasing prices.

Professional economists could perform a great service by rooting outthe fallacies in these beliefs. Theycould show, for example, that raising either wages or prices withoutcorresponding expansion of themoney supply will result in unemployment; there is less demandfor either labor or goods ifwages andprices go up with no equivalent increase in available money. With noexpansion in the money supply,

workers who demand too much orbusinesses which raise prices abovethe market would merely lose out tocompetitors.

Blaming Government Regulations

Inflation commentators have recently discovered another culprit inproducing inflation: the high costs ofgovernment regulation. This hasbeen useful to managements protesting the costs of meeting factoryemission regulations or of makinggovernment-required productchanges. There are good reasons tooppose these regulations and to deplore the costs of meeting them. It isfalse, however, to say that costlygovernment regulations cause inflation.

The economic effect of a government regulation is exactly the sameas a wage increase or any other cost,including higher oil prices. It issomething that must be included inthe prices of the goods or servicesbeing offered by the company. Taxesare in the same category. And if thefirm's customers will not accept theincreased prices, the company eitherwill go out of business or will divertits production to lines that can bemarketed profitably.

But regulations in themselves donot cause inflation. They do causehigher prices of certain products.These higher prices are mistakenlycalled inflationary, when they reallyreflect higher costs. The customer

1979 DISHONEST ABOUT INFLATION 725

who must pay these higher priceswill make equivalent reductions inother purchases.

Is Low Productivitya Cause of Inflation?

Low productivity is still anothersuspect in causing the inflationmess. With lower-priced importsflooding the country, there is increased concern about conditionsthat adversely affect American productivity. One of these conditions isthe high cost of wages and benefitswhich raises unit costs of Americangoods. There is also deepening concern about the decline in capitalinvestments. It is alleged that ourown plant capacity is becoming obsolete and inefficient in comparisonwith the plants of foreign producers.Meanwhile, prices of most manufactured goods are going up. But withhigher productivity, prices wouldtend to stabilize, or at least the increases would not be so large.

Here again, low productivity isblamed because it supposedly increases the unit costs of certainproducts. Productivity itself hasnothing to do with causing inflation,nor can it stop the process. The bestspur to productivity is the producer'sdesire to capture a larger share ofthe market and to increase his overall productivity. Few producers arelikely to increase their efforts simply to fight inflation.

But there is a very serious decep-

tion in the effort to use higher productivity as an inflation-fighter.This deception comes from defininginflation as a general rise in prices.Theoretically, an annual increase offour per cent in the money supplywould not result in a general pricerise if there also was a four per centimprovement in productivity. Priceswould probably remain at the samelevel.

This would not mean, however,that inflation had been stopped. Itwould only mean that its effects hadbeen concealed. For, without an arbitrary expansion of the money supply, the four per cent improvementin productivity would have gone tocertain workers, owners, and customers, as wages, dividends, orlower prices. So increased productivity only makes inflation less visible,and perhaps more acceptable politically. But it is not the answer toinflation.

The End of Dishonesty

We can probably expect more dishonesty about inflation until eventsforce us to change our ways. There isreason to believe that the Americanpeople become very worried wheninflation passes the double-digitlevel. While this does not lead to acomplete understanding of the problem, it does cast doubt on some oftheglib explanations and solutionsbeing offered. Unfortunately, themost recent surge in inflation was

726 THE FREEMAN

attributed to higher oil prices, whenin reality the OPEC nations whoraise their crude prices do so to protect themselves from the continuousinflating of the American dollar.

Yet, honesty or truth about moneymust always have its day; even theinflationists know that. As Ludwigvon Mises explained, inflation cannot go on endlessly. HIf one does notstop in time the pernicious policy ofincreasing the quantity of moneyand fiduciary media, the nation'scurrency system collapses entirely.The monetary unit's purchasingpower sinks to a point which for allpractical purposes is not better thanzero." Still, Mises believed thatmoney and credit expansion could bestopped in time if people had onlythe will and the understanding to doSO.3

Hans F. Sennholz, an economistwho studied under Mises, has beenless optimistic about the future ofthe dollar. In his view, two-digitinflation will be ended only by theadvent of three-digit inflation. Healso has suggested that Americaninflation may end in a frenzied, hysterical spending debacle not unlikethat which overtook Germany in1923.

But whether the landing fromdishonest money is soft or hard,Americans will some day become

3Ludwig von Mises, Planning for Freedom(South Holland, Illinois: Libertarian Press,1974), p. 155.

more honest about the causes andeffects of inflation. We will becomecourageous enough to demand honest, or dependable, money.

And we should not be too hard onourselves when we finally learn howwe have been deceived about thenature of inflation. Mr. Voorhees, inhis plea for dependable dollars,pointed out that it seems to be thosepeople who have had bitter personalexperience of living under bad currencies who most appreciate goodcurrencies and are willing to makesome sacrifices to secure and maintain them. He was probably referring to the West Germans, whosebitter experiences of 1923 probablytaught them the value of strong,honest, dependable money.

We have had no experience similar to Germany's runaway inflationof 1923. Let's hope we don't have toendure such a disaster, which someobservers thought was a worsecalamity for Germany than theirlosses ofWorld War I. But adversity,if it cannot be avoided, can at leastbe put to good use. In the case of aninflationary collapse, it could teachus honesty. As Sennholz says,HAffiiction is a school of virtue thatmay correct levity and interrupt theconfidence of sinning. But how longand how often must man be affiictedbefore he learns the lesson?"4 @

4Hans F. Sennholz, uTwo-Digit Inflation,"The Freeman, January, 1975.

IN AMERICA today there seems to benear universal awakening to thefact that something is wrong. Individuals in vast numbers are nolonger inspired to excel in their respective fields of endeavor.

Business leaders fault labor,OPEC, government, imports andemployee apathy. Labor blamesbusiness, government, OPEC, andthe low wages paid in exportingcountries. Rank and file citizensgenerally believe government,OPEC, labor, business and lousyworking conditions to be the primary culprits. Government suspectsbusiness, OPEC, foreign ingenuity,lack of respect for the dollar abroadand malingering personnel on production lines. (Labor controls toomany votes to be faulted by those

Mr. Raley Is a free-lance author, speaker, phIlosopher from Gadsden, Alabama.

Jess Raley

Where ThereWas a Will-

who have to stand for election fromtime to time).

Every cognizant individual oldenough to remember when the zestfor life was, of necessity, honed to afine edge is fully aware that theintangible known as the Americanwill has, in fact, diminished perceptibly. The only thing I can't understand about the case of diminishingwill-and it really bugs me-is somany people asking why.

One of the few things I know foran absolute certainty is why theAmerican will (that seems to be theaccepted term used, no doubt, toavoid complicated nomenclature) isless vivacious, aggressive, andsteadfast than it once was-why somany individuals feel little, if any,responsibility for themselves, theirjob, family and government. I knowwhy because I was there when it

727


happened, saw the seeds of irresponsibility planted and observed thefirst bitter fruits of that harvest.

Let me say at this point that Ihave never known or learned tothink of an average person. The people I meet, get to know, learn to likeor dislike, are all individuals and asurprisingly large number of themare by no means devoid of will. Onthe other hand relentless encroachment on freedom. of choice, innumerable restrictive regulations on enterprise and the fact that peoplehave learned that losers, as well asthose who never see the startinggate, have equal recourse to one ormore government wealth-sharingprogram tends to, more or less, dullthe once fine cutting edge of America's will to excel.

In January 1933 I found it necessary to drop out of school. Dad washaving a difficult time just feedingthe family so I decided to move to mygranddad's farm in Appalachiawhere I could, hopefully, earn myown living. Being in my middleteens at the time, I even expected tosave enough money to return toschool.

The old farm was in a steep narrow valley and, except for a fewsmall level plots, the productive soilhad washed away many years before. This was not particularly important to me since I didn't have themeans to cultivate the land anyway,but I did find innumerable ways to

make a living. I learned to hunt andtrap animals for their fur, dig medicinal roots, especially ginseng, andwhere to sell them; find and rob wildbees; pick and market wild berries;and numerous other ways to earnmoney.

As a matter of fact I had a ball inAppalachia, lived well after the firstfew weeks and actually accumulatedenough in the process to return toschool. I was, therefore, really just atransient who learned from the localresidents what I needed to know toattain my appointed goal, and then Imoved on.

Everyone in the area must havebeen well below poverty level ifthere was a poverty level in thosedays. But the people who lived in thelarger valleys and owned more levelland seemed to be doing fairly well.It was the real poor folk, however,who lived in the ridges and smalleroded valleys where I was, andwere almost as poor, that I came toknow and admire. These were thehustlers who parlayed their meagercrops with what they could earnfrom other sources to sustain theirfamilies. In my opinion-and I'vehad a love affair with anthropologysince the fifth grade-man, living inan organized society, has never beenmore free and independent thanthose people were. They acceptedfull responsibility for themselvesand their families; no one expected

1979 WHERE THERE WAS A WILL 729

anything from a source other thantheir own efforts.

Sometime that summer the government programs started. Anagent came through offering to payfarmers from eleven to twenty-onedollars an acre, depending on howgood he judged their cotton to be, toplow up all or any part of it. Mostfarmers plowed up some part oftheircrop. With cotton selling for aboutfive cents a pound and the area'shistory of low productivity, it wasthe practical thing to do.

The difference in payment causE~d

considerable resentment amongneighbors, however, since in midsummer most farmers think theircrop is as good as the best and betterthan the rest. I had put in a sma.llcrop that year after all by plowingfor an elderly gentleman in exchange for the use of his mule andplow, a day for a day. Since I hadonly three acres of cotton, I didn'tdestroy any of it. I did get a preview,however, of how government programs would be administered whenthe agent paid his cousin top moneyfor seven acres of very poor cottonwhile offering or paying at or nearthe bottom level to most everyoneelse.

Next came the commodity program designed by the ttphilanthropists" in Washington to feed thepoor better than they could feedthemselves while reducing themountains of surplus commodities.

The program seemed to work well inthat it achieved these goals. Nodoubt its sponsors were quitepleased with themselves. But I stillhurt when I remember what it did tomost of the People who participated.In retrospect, these first ripples ofgovernment intervention were verysmall indeed in relation to the tidalwaves that have followed. However,they were that first step of a longjourney, a foot in the door that hadheretofore been strictly private, thefirst pitch of a whole new ballgame.

At first only a few of· the moreindolent signed up to receive commodities. Then, as others saw theirneighbors eating better without effort than they could eat by scratching as hard as they could, more andmore· people capitulated. It was likewatching trees in a virgin forest falland knowing they would never growquite so tall again. Envy and resentment played a major role, alongwith nagging spouses. But for whatever reason, when individualssigned up for commodities theyseemed to become different people,lose the essence of their zest for life.

Everyone in the area must havebeen eligible to receive commodities.At first, only a few signed up so thepeople who had accepted the job ofdistributing them were forced to getout and beat the bushes in an effortto find people who would take themounting piles of food off their


hands. I happened to be at a friend'shouse one day--we had cut a beetree and were dividing thehoney-when a commodity agentcame by looking for prospects. Heexplained that the food was pilingup and that he had to move it to holdhis job. When we declined his offerthe agent asked my friend pointblank why we refused; and I doubtto this day that a better answercould have been given.

((I don't do nigh as good a jobsupporting my family as I would liketo do," he said, ((but I well knowwhose job it is." That, I believe, is aclassic example of the will, once soprevalent, that built America--thewill so many people are hoping theirfellow citizens can recapture in thisage.

By the time I left Appalachia itwas easy to detect participants inthe commodity program just by talking with them. People who had beeneager to help cut a bee tree, dig aload of rhododendron and ferns tosell, or any of the numerous projectsthat offered some small remuneration, were no longer interested afterbeing on commodities for a while.More than this, their thinkingchanged perceptibly. Americans,since the Revolution, had feltresponsible-not to government butfor government--in the same sensethat they felt responsible for themselves and their family. As individuals accepted or were forced to par-

ticipate in various programs, theychanged positions, in their ownmind, placing government in theparent role ofprimary authority andresponsibility. In less than twoyears, fully one-third of the peoplein the area were accepting government handouts in lieu of individualwill.

The things I saw happen in thatremote region were, of course, beingacted out in every nook and corner ofthese United States. As the yearspassed, more and more people became addicted to an ever-increasingnumber of government programs.Industrial workers protected bypowerful unions with unrealisticcontracts, obtained in many caseswith the aid of government pressure, often do no more than dabbleat their work. Extra effort and ingenuity is not necessary to hold ajob; as a matter of fact, motivation isoften frowned on by fellow workerswhere just drifting with the flow hasbecome the norm. After all, if thecompany goes broke, the employeescan always draw their pennies.

Since the stone of necessity nolonger keeps a cutting edge honedon individual will the Americaneconomy has been forced to drawmore and more on that reserve wehillbillies are wont to call gut fatcapital, labor, technology and motivation invested before the Americanwill was inhibited by government

1979 WHERE THERE WAS A WILL 731

handouts and restrictions. In thosedays a man was responsible withoutrecourse for his own house. He couldinvest his means in a business venture knowing that as the owner hecould hire acceptable personnel, direct operations, enjoy the fruits ofsuccess, or suffer loss if the venturewas a failure. The people employedby such a man knew they could dotheir job well and stay on thepayroll, possibly moving to a betterposition if the business prospered; orthey could fail to show incentive andfind themselves terminated.

A long-time friend of mine hasbeen associated with railroads allhis working life. He and I were discussing this gut-fat proposition recently and he ventured the guessthat if a railroad were built froInscratch today, rights of way included, the builder having to contend with all the regulations andrestrictions prevalent at this time, itwould cost at least one hundred dol-

lars to ship a peck of wheat bran, onsaid railroad, from St. Louis toChicago. No doubt my friend exaggerated somewhat, but I would beunwilling to promote such a projecthoping to prove him wrong.

With American productivity deteriorating progressively, rank andfile citizens as well as leadership ingovernment and business are voicing grave concern about the erosionof this element known as the American will. Even coming late in thegame as it has, when our place inthe sun is much less secure than itonce was, this near universal awakening should be good for the country. I must admit, however, that Iwould be a great deal more elated ifcognizant adults would quit ((playing like" they don't know what'scausing the trouble. This breed hasbeen known to pour water on adrowned man in a sincere effort torevive him. @)

IDEAS OI'J

UBERTY

Grover Cleveland

THE LESSON of paternalism ought to be unlearned and the better lessontaught that while the people should patriotically and cheerfully supporttheir Government, its functions do not include the support ofthe people.

Every thoughtful American must realize the importance of checking atits beginning any tendency in public or private station to regardfrugality and economy as virtues which we may safely outgrow. Thetoleration ofthis idea results in the waste ofthe people's money by theirchosen servants and encourages prodigality and extravagance in thehome life of our countrymen.

John Semmens

THESOCIAL

COSTOF

RAILROADREGULATION

DESPITE the fact that the economicregulation of transportation has·been an unmitigated disaster fromthe very beginning, substantive reform has been negated at everyjuncture. Worse still, each succeeding crisis has instead served as anexcuse to aggravate the ills of existing government interventions byenacting even more regulations.These further interventions havebeen Ujustified" on the grounds thatthe consequences of deregulationwould be too gruesome to contemplate. Removal of governmentcontrols would place the transportation industry and its customers atthe mercy of the market. And we alluknow" how horrible that would be.

Mr. Semmens is an economist for the Arizona Department of Transportation and is studying for anadvanced degree in business administration atArizona State University.

732

Well, perhaps we don't know howhorrible it would be. After all, we .cavalierly entrust our survival toessentially unregulated markets forfood, clothing, and shelter. Transportation, though, we are assured, isdifferent. One could hardly arguewith that, if for no other reason thanthat it has been treated as differentthrough government policy fornearly 100 years. It is a soberingthought to consider that a meremountain of bizarre and absurd government rules and regulations is allthat stands between the consumer ofAmerica and the menace ofcompetition in transportation.

Given the professed importance ofrail transportation to the ((publicinterest" one might have anticipated that public policy would havepaid greater heed to the financialhealth of the industry. Strangely,

THE SOCIAL COST OF RAILROAD REGULATION 733

though, the importance of rail service has spawned curious theories ofone-sided obligations.

The theory of the railroads' obligation to serve begins innocentlyenough with the rather bland assertion that railroads are different fromother businesses. While this is true,it hardly follows that railroads ca.nexist outside the constraints of economics that face every human enterprise in a world of scarcity. Railservice is not guaranteed merely because it is necessary or useful. Railservice, like any other economicgood, requires resources. Yet, whatare we to make of government decrees that railroads may be requiredto operate at a loss?1 Or that suchmandated losses do not constitute aform of confiscation?2

Ostensibly, the losses incurred inperforming the vital public serviceof expending scarce resources onunused or underused rail service areto be made up by cross subsidy. Theidea is that some other part of therail system will bear an inordinateportion of the costs by excessivecharges levied against its customers. However, both economic theoryand experience indicate. that crosssubsidization doesn't work. Jackingup rates in excess of full cost invitescompetition to take away the disfavored customers. This is preciselywhat has happened in the transportation industry.

The government can force the

railroads to suffer losses on littleused routes, but cannot deliver onthe promise of higher profitselsewhere. The result is that despitethe legislated Hfair" rate of return of5%% promised by the Transportation Act of 1920, the railroad industry has enjoyed a return of less than5% since 1929, and less than 4%since 1955. 3 Even these anemicearnings overstate the return on investment because no adjustment ismade for the effects of inflation. Theimpact of inflation is revealed in theinsufficient reserves set aside forcapital consumption. Since depreciation is based on historical costrather than replacement cost, theyearly amount allowed for depreciation reserves will, when the time forreplacement arrives, amount to toolittle to replenish the worn out trackand equipment. Meanwhile, moneywhich should have been accumulated to serve this. purpose has beenreported, and taxed, as income.

Railroad Earnings

The magnitude of the impact ofinflation is indicated by the estimated differences in return for thefifteen largest railroads (based on1977 revenues) for selected yearssince 1960. As can be seen from thetable, after adjustment for inflation,the return on investment never exceeded 3%. Worse yet, by 1977 thereturn was a pathetic .2% (twotenths of one percent).


IMPACT OF INFLATION ONINVESTMENT RETURNS FOR

FIFTEEN RAILROADS, 1960-1977

Sources: Moody's Transportation Manual andSurvey of Current Business (Bureau of theCensus). The reported financial results wereadjusted using the implicit price deflators forrail structures and equipment and the estimated proportion of asset life remaining.

The 15 railroads used in the sample were:Burlington Northern; Southern Pacific; SantaFe; Union Pacific; Norfolk & Western; MissouriPacific; Seaboard Coast Line; Louisville &Nashville; Baltimore & Ohio; Southern Railway; Illinois Central & Gulf; Chesapeake &Ohio; Chicago & Northwestern; Chicago, RockIsland & Pacific; St. Louis-San Francisco.

Such low rates of return areclearly inadequate to sustain anything close to existing levels of railservice regardless of the legislatedUobligations to serve." Under suchconditions, the shift of capital out ofthe railroad business becomes inevitable. Since capital is a limited resource, those opportunities whichoffer better rates of return go to thehead of the line. Almost anythingbeats the return yielded by rail in-

Year

19601965197019751977

Based onReportedEarnings

3.3%4.7%3.9%3.6%4.7%

AfterInflation

Adjustment

.8%2.8%2.2%

.2%

.2%

vestments. It should come as no surprise, then, that the management ofrailroad firms would seek to diversify out of the rail business.

Some degree of concern has beenvoiced that the diversion of rail retained earnings to non-rail investments will weaken the capacity toprovide rail services. There can belittle doubt that the trend is awayfrom rail investment and that thismust inevitably reduce the capacityof the rail system. Far from being asinister threat to the public welfare,however, this shift of resources frompotential rail investment to otherlines of business is a pragmatic response to a more urgent order ofconsumer needs. Channeling resources to these more urgent needsis a prime example of the exercise ofsocially responsible corporate management. Since resources are limited, it is desirable that they be putto their best use. The venture intonon-rail lines ofbusiness by railroadfirms is a reaction to, not a cause of,low returns in the rail industry.

Signals for Change

Low return on investment is a'social signal indicating that consumers want less of the particularproduct or service offered and moreof some other product or service.Railroad management would bemisusing the resources under theircontrol if they were to ignore thissignal. Perhaps the signal is less

1979 THE SOCIAL COST OF RAILROAD REGULATION 735

than completely valid given the factof heavy governmental intervention in the business. It is quite possible, even likely, that this intervention, itself, has played a key part inreducing returns and diverting resources out of railroading. If legitimate high order ofurgency needs forrail service are not being met, wemust look to the constraints imposedby public policy for an explanation,not fault railroad management forpursuing sound investment opportunities through diversification.

It may be that the low return inregulated industries results fromthe old theory that such industries,having an Hassured" level of profitwritten into law, were less risky,and therefore, would normally beexpected to experience low rates ofreturn. In recent years, though, ithas become painfully obvious thatthe ~~assured" level of profit all toooften has proven a ceiling ratherthan a floor. Consequently, at thesame time that the internal rate ofreturn on rail investment has beendeclining, the return on investmentdemanded by securities holders hasbeen increasing.4

Capital Requirements

Investors looking to the future areunimpressed by the regulatory authorities' concern with insuring thatfirms recover historical costs. Stockprices have been bid down belowtangible book value, effectively cut-

ting the regulated firm off from newequity capital. Access to externalsources of capital may be critical tothe railroad industry in the yearsimmediately ahead. The U.S. Department of Transportation has estimated the railroad industry will require $16 billion in outside capitalbetween 1980-1985 in order tomaintain the existing level of service. Unless the rate of return onrail investment improves markedlyin this period, the public interestcan be best served by reduction ofservice and disinvestment in lowyielding rail facilities. In this way,resources that would be underutilized on lightly traveled rail linescould be redirected to society's moreurgent needs.

It is unreasonable to expect railroads to continue to invest money atsuch low rates of return. This realization has spawned a number ofsubsidy proposals. In 1970 the RailPassenger Service Act establishedAmtrak-a government-owned andoperated passenger service. In 1976the Railroad Revitalization andRegulatory Reform Act led tothe formation of Conrail-a government-owned and operatedfreight service. The 1976 Act alsoset up procedures whereby unprofitable branch lines could receive subsidies to retain rail service. While itis true that government subsidiescould improve the return on investment from the perspective of the


railroad firm, the subsidy, since it isa transfer payment, does nothing toimprove the total return on society'slimited resources. In fact, since thefunds for subsidy must be drawnfrom investments with higher ratesof return, the net social benefit ofthe transfer is negative. That is,fewer goods and services in total willbe available than if the transferwere not made.

Paying the Price

Two general policy directives provide the guidance for InterstateCommerce Commission regulationof transportation. On the one hand,the Commission is bound to preventrate discrimination. On the otherhand, the inherent advantage ofeach mode is to be preserved. Tobegin with, ~~preventing" and ~~pre

serving" are innately conservativeactivities. Even if such activitieswere appropriate when first instituted, time would inevitably renderthem less and less satisfactory. As itis, though, the directives are basedupon fallacious economic doctrineand are representative more ofwishful thinking than practical policy.

The social prejudice against ratediscrimination springs from the notion that it is unfair to charge different prices to different buyers for the~~same" service. The early examplesof rate discrimination involved circumstances in which a railroadmight charge a lower rate for a long

·haul than for a short haul. Thelower rate is to be distinguishedfrom a mere quantity discount. Thelong haul total charge wouldamount to less than a short haulcharge, sometimes over the sametrack. SUPerficially, using estimatesof average costs to provide service, itcan apPear ftunfair" that a shorthaul which should cost less to supply, has a higher price. tag. Theproblem with this line of reasoningis two-fold. First, no two buyers ofrail service are purchasing identicalservice. Second, the reported ftcost",of providing a service, even if it canbe accurately determined, may berelatively unimportant in establishing the price of any SPecific transaction.

Transportation is purchased interms of origins, destinations, andtime Periods. Even goods movingbetween the same two points mayrequire different handling in termsof quantity, time of year, hour of theday, and the like. The service provided cannot be uniformly dividedinto equivalent units, such as tonmiles. Yet, this is precisely whatregulation has led to. The imposition of this type of price control canhave two kinds of results: none andbad. In the instances where the regulated price exactly matches whatwould have been the free marketprice, the regulation will have noimpact. In the far more frequentinstances where the decreed price is


either higher or lower than what themarket price would have been, undesirable consequences will result.

Wasteful Controls

In the cases where the controlledrate exceeds what would have beenthe market rate, traffic will be diverted to a second best alternative.This leads to inefficient use of resources, as the second best alternative will almost certainly be at ahigher cost. At the same time, theloss of revenue occasioned by thediversion will reduce the incentiveand capacity of the firm to produceand provide the first best alternative. This phenomenon is demonstrated when the regulatory authority prohibits rate reduction by insisting that a move must cover fullyallocated costs. Given the high proportion of fixed to variable costs typical in the railroad business, thisregulatory approach prevents therealization of certain economies ofscale, places the railroad at a competitive disadvantage, lowers totaleconomic output, and increases theaggregate expenditure of resources.

In cases where the controlled rateis less than what would have beenthe market rate, uneconomic demand for the service will be stimulated. If the rate control were theonly intervention, the suppliers ofthe service would seek to withdrawfrom the market. Unfortunately,further regulatory impositions usu-

ally prevent this from taking place.Railroads are frequently required toretain service which cannot earnenough to pay its own way. Theretention of such ((vital" services isnot without its attendant social cost.The resources expended at a loss arethereby unavailable for more usefulemployment.

Furthermore, the alternativemodes which could have providedeconomical service are preventedfrom making a contribution towarda net societal profit. This regulatoryapproach is especially insidious. Thepreservation of lightly traveledbranch lines is the readily observable effect. What is not seen is thesacrifice of more beneficial alternatives. In this case, certain diseconomies are enforced, leading to a weakening of other rail services, lowertotal economic output, and wastefulconsumption of scarce resources.

The 1940 Transportation Act instructed the Interstate CommerceCommission to preserve the inherent advantages of each mode underits jurisdiction. As anyone familiarwith economics knows, the market,left to itself, will promote efficiency.As resources seek the highest ratesof return, the ((inherent advantages"of any operation will most assuredlybe employed. Since the economy isdynamic, today's ((inherent advan-tages" may be tomorrow's outmodedtechniques. Instructing the ICC topreserve the inherent advantages of


each mode in 1940 has had the unhappy result of retarding progress.

That this preservation policy hasstifled innovation is demonstratedby the historical record. The ICC'spersistent adherence to full cost allocation, as exemplified in «RailForm A" costing rules, has killed offseveral rail car innovations. The required average cost basis for ratemaking would not permit rates lowenough to generate the volumeneeded to support the innovations.Interstate Commerce Commissionrigidity resulted in some classic instances of delay in the introductionof rail inventions, including retarding the spread of unit train technology for over 40 years. 5

Who's to Blame?

The railroad industry and itsmanagers have often been chided forlack of imagination. It is sometimesclaimed that the poor rates of returnenjoyed by the industry are a resultof this lackluster management. Butwhich is cause and which effect? Thepoor returns on investment are directly traceable to regulatory policy.In turn, poor investment return reduces the resources available for innovation. Finally, the necessity tohave changes in business operationsapproved by a group of politicallyappointed Commissioners mustfrustrate whatever innovative urgesmay arise. The fact that business isdynamic and forward looking, while

In studying the impact ofintervention in a particularind ustry, Throttling theRailroads, Dr. ClarenceCarson came to this conclusion: "As things stand,the future of the railroadsis bleak. So is the future ofconsumers of their services. Over a period ofabout ninety years, virtually every sort of intervention has been tried-intervention which has broughtus to the present pass. It istime for yet another experiment-an experimentwith freedom ..."

Throttling the Railroads,140 pages (1971), is available from The Foundationfor Economic Education,Irvington-on-Hudson, N.Y.10533. $4.00 cloth

$2.00 paperback

the process of regulation is deliberative and static, poses a seriousthreat to the survival of the railroadindustry.

The magnitude of the social cost ofrailroad regulation is enormous.One author called the welfare lossUhuge" and ((certainly greater thanall of the welfare losses from pureenterprise monopoly combined."6 In1969 the social cost of railroad regu-


lation was estimated at between$2.7 and $4.1 billion per year. 7

Given the rampant inflation of allcosts since that time, especially railinputs which have increased in costfaster than the more general consumer price index, a reasonable estimate of the current social cost ofrailroad regulation would rangefrom $5.5 to $8.0 billion per year.

Conclusion

There can be no question but thatregulation of the railroads has led tohigher overall transportation costs,serious resource misallocation, andsacrificed alternatives. Public policyhas made the economic pie smallerby its intervention into the transportation industry. That this resultcould be in the Hpublic interest"

seems ludicrous. Yet, promoting the((public interest" is the reputed goalof public policy. Two explanationscome readily to hand. It may be thatvarious ~~private interests" may manipulate public policy to their ownadvantage.8 Alternatively, it may bethat the makers of regulatory lawfail to anticipate the consequences oftheir actions.9

Wherever the truth may lie,the observable consequences ofeconomic regulation of the railroadindustry are demonstration enoughthat the current system not onlyimperils the railroads, but has anegative net impact on the generalwelfare. This in itself should be sufficient evidence that deregulationwill benefit both the railroads andthe U.S. economy. @

-FOOTNOTES-1Arizona Corporation Commission vs.

Southern Pacific, 87 AZ 310.2Northwest Pacific Railroad vs. ICC, 288 F.

Supp.690.3Alexander Morton, UNortheast Railroads:

Restructured or Nationalized?" AmericanEconomic Review (May, 1975), pp. 284'1.288.

4Stevan Holmberg, uInvestor Risk and Required Rate of Return in Regulated Industries," Nebraska Journal of Economics andBusiness (Autumn, 1977), pp. 61-74.

5Paul MacAvoy and James Sloss, RegulationofTransport Innovation (N.Y.: Random House,1967).

6George Hilton, The Transportation Act of1958 (Bloomington: Indiana University Press,1969).

7Ann Friedlaender, uThe Social Costs ofRegulating the Railroads," AmericanEconomic Review (May, 1971), pp. 226-234.

8Qeorge Stigler, uThe Theory of EconomicRegulation," Bell Journal of Economics(Spring, 1971); Sam Peltzman, uToward aMore General Theory of Regulation," Journalof Law and Economics (August, 1976), pp.211-240; and John Semmens, uRegulation ofthe Truckers, By the Truckers, For the Truckers," Reason (March, 1979), pp. 26-29.

9Robert Harbeson, uSocial Welfare andEconomic Efficiency in Transport Policy,"Land Economics (Feb., 1977), pp. 97-105, andWilliam Capron (ed) Technological Change inRegulated Industries (Washington, D.C.:Brookings Institution; 1971.)

P. Dean Russell

EDUCATIONand

GRADES

THE AWARDING of grades is often themost distasteful task faced by teachers on any level. To some extent, thegrading process automatically putsa barrier to learning between student and teacher. This is especiallytrue on the senior high school andcollege levels. The student mayhesitate to say what he thinks because the instructor may mark himdown for heretical ideas, i.e., disagreeing with the instructor. Thisfear is all too often based on thestudent's experience.

The student-teacher relationshipthat most appeals to me. is the onedeveloped a millennium or so ago bythe Saracens. We know those peopleas the ~~bad guys" in the Crusadecapers of our European ancestors.

Anyone who wanted to teach inthe old Saracen civilization could doso, if he could find someone whowanted him as a teacher and whowould pay for his services. Jew and

Professor Russell hands this essay on education toall students who take his course In Business Communications at the University of Wisconsin atLa Crosse.

740

Christian and Moslem, black andwhite, all participated. Race and religion were not barriers to entry intothis serious business of learning,either as a teacher or as a student.

The teacher was not licensed orcertified to be a teacher, and hedidn't license or certify anyone as astudent. There were no academicrequirements for admission into thislearning process. The student andteacher just made an arms-lengthbargain acceptable to both. If thestudent became dissatisfied with histeacher, he simply found anotherteacher who pleased him more, inmuch the same manner that you andI change swimming instructors orpiano teachers. When the studenthad learned as much as he wanted tolearn, he left. He, and he alone,made the decision, precisely as apresent-day student in a commerciallanguage school decides when hehas learned as much as he is willingto pay for.

No formal examinations weregiven in those ancient centers oflearning. No degrees were awarded.

EDUCATION AND GRADES 741

No academic records were kept.Thus the only power possessed bythe teacher in the old Saracen tradition of education was the power oflogic and persuasion. He didn't havea ttmagic marking pencil" loadedwith an unlimited number of A'sand F's as we instructors do today.

The students could hardly riotagainst the Saracen education establishment. There wasn't any. And,apparently, those centers of learning (universities) were generallyfree from supervision and control bygovernment. Nor were there anyacademic accrediting associationswhich, of course, cannot precede butmust necessarily follow the establishment of a formalized educationalsystem.

The physical plant (the actualbuildings) of those places of learningwere sometimes provided by the religious authorities, sometimes bygovernment, sometimes by commercial interests on a rental basis, sometimes by the same commercialinterests on a ttfor free" basis dictated by self-interest, sometimes byindividuals (teachers and others)who used their homes as classrooms,and sometimes the students andtheir teacher just met for discussions in some public coffee house.Sometimes the physical plant was acombination of all of these, locatedaround a library that had developedin much the same way as the rest ofthis center of learning or university.

The supporting services-food, lodging, medicine, social life, and soon-were provided by persons whoprofited directly from supplying theproduct or service.

Those universities continued togrow and develop over the centuriesinto renowned centers of learningwith, apparently, almost noacademic formality or authoritariansupervision. In some respects (butcertainly not in all respects) many ofthe medieval universities of Europewere patterned upon that old Saracen concept of education.

In today's world, there is not anyacademically successful arrangement that's quite like the ancientSaracen method of teaching andlearning. The concept of the ttUni_versity Without Walls" that showedmuch promise a few years ago wasbased somewhat on that philosophy,as was the ttOpen University" sponsored by the British government.While several educational institutions still endorse that concept invarious forms, most of the experiments seem inevitably to revert totraditional assignments and grading procedures. Only the mechanicalmethods of delivery deviate muchfrom the norm, e.g., teaching by TVor the mails or weekend classes oncampus and such. Also, morettnonaccredited" teachers may beused.

The closest development to the oldSaracen concept of education today

742 THE FREEMAN

is found in various educational ~~cen

ters" (for the study of something)which are supported by a combination of industry, foundations, universities themselves, religious organizations, and interestedindividuals-and sometimes by government, directly and indirectlybut which are not positively controlled by an ~~establishment"of anysort. In these communities of scholars, it is often difficult to determinewho is teacher and who is student,and they sometimes change positions overnight. The feature mostclosely akin to those old Saracenuniversities is the fact that noexaminations are given, no degreesare awarded, and the only academicrecords kept are the publications ofstudents and teachers.

Those few communities of scholars, however, are essentially outsideof the academic system typified byour degree-granting colleges anduniversities. I do not know of evenone accredited educational institution that does not, in one way oranother, grade the students who arecandidates for degrees; nor can Ivisualize any acceptable way ofavoiding this arrangement in today'sworld. The grade may be merelypass or fail. And it may be based onindependent study or classroomwork or various other possible arrangements. But always, whereacademic credit is involved, gradesare required. And we teachers-

with our inevitable magic markingpencils-are inescapably responsible for awarding the grade. We mustdecide-that is, we cannot possiblyavoid deciding-criteria for highgrades and low grades. There issimply no way around this arbitraryauthority of the teacher (me) overhis students (you) in our formalizededucational system.

Even so, if you would still like tostudy with my help, welcome. I assure you that I find students in general most stimulating, that I have arecognizable philosophy of living inour real world, and that I wouldenjoy sharing with you my extensiveexperiences (both successful and unsuccessful) in the business world, inthe writing and speaking world ofcommunications, and in studyingand living abroad and in varioussections of the United States. And,of course, I'll be pleased to react towhatever experiences and ideas youcare to share with me, publicly inclass or privately in my office.

Naturally, I will do whatever Ican to help you learn whatever youdesire to learn (or must learn) whileyou are fulfilling the academic requirements for your degree fromthis university. I will also do all Ican· to help you earn the highestpossible grades. That's importanttoo.

Finally, please remember that I'mnot so insecure that I need to putpeople down. So speak up. ,

Clarence B. Carson

PERMANENTDEPRESSION

MANY economists, journalists, andpublicists spread the view afterWorld War II that we now know howto prevent depressions. The claimwas that the government could prevent depression by manipulatingthe money supply, altering the taxstructure, providing employment,and ((stimulating" the economy. Ifthese, and like measures, were undertaken judiciously, depressionswere supposed to be avoidable.

The evidence is mounting thatsuch is not the case. The UnitedStates has been in the throes ofdepression for most of the 1970s, adepression which threatens to deepen and shows no signs of goingaway. All the devices which weresupposed to prevent depression have

Dr. Carson has written and taught extensively,specializing in American intellectual history. Hisrecent series in The Freeman, World in the Grip ofanIdea, is being published by Arlington House.

been extensively employed, but tolittle or no avail. In fact, there isgood reason to believe that the verymeasures supposed to prevent depression are prolonging and deepening it. But to grasp the full implications of this we need a new or different concept. I suggest we view whatis happening to us as ((PermanentDepression." And we may look toSoviet Russia, Communist China,Castro's Cuba to see where that roadleads.

Permanent Depression is thatcondition which exists when there isinvoluntary underemployment ofland, labor, and capital to satisfyhuman wants. Permanent Depression may be great or small. It maybe so small that its direct effectswould be experienced by only a fewpeople. Or, it may be so massive asto erupt in what will be recognizedas a Great Depression engulfing

743


peoples around the world. Butwhether massive or tiny, whetherapparent to everyone or knowableonly as potentiality, Permanent Depression exists wherever there areobstacles which result in involuntary underemployment of land,labor, and capital to satisfy humanwants. It is a depression because lessis produced than otherwise mighthave been. Goods are less plentifulthan they might have been. Pricesare higher than they might havebeen. Human wants go unsatisfied,and to the extent that the conditionis involuntary it is a depression.

Why not simply ~~underemploy

ment . . . , " it may be asked? It istrue that any underemployment ofresources would result in less thanfull production. But if the satisfaction of human wants is the goal ofthe activity, voluntary underemployment must be permitted. Saving, leisure, and possession for convenience and enjoyment are humanwants-any of which may occasionunderemployment. To formulate thematter otherwise would involve thecontradiction of sacrificing thewants of some to satisfy the wants ofothers. So long as the wants of allare in play, there is no reason fordescribing the resulting condition asdepression. Whereas, if the underemployment is involuntary, thesatisfaction ofwants is clearly beingreduced, Le., depressed.

This brings us, too, to the cause of

the Permanent Depression. Thecause is implicit in the word uinvoluntary." The cause is that forcehas been intruded into human activity so as to place obstacles in the wayof production. Force in one form oranother is the only plausible expla- 'nation of involuntary activity or inactivity. Although the use of forcemay be variously motivated and beused for any number of objects, itcan have only two origins. It musteither be exerted by outlaws orthrough the agency of government.Since it is the business of government to apprehend and restrain outlaws, the proximate cause of Permanent Depression is government,either through failure to perform itsfunction or by positive acts of compulsion.

Discouraging Production

Governments can and do causePermanent Depression. Indeed, theyare directly the usual cause and theonly bodies who could make it permanent. Nothing is easier to accomplish than for government tobring on Permanent Depression. Allit has to do is to adopt measureswhich have the effect of discouraging production. A review of the history of the world would show that assoon as any government has consolidated its power over a peoplegained a monopoly of power-it hasin one way or the other gone about

1979 PERMANENT DEPRESSION 745

the task of discouraging production.In our era, governments have notonly discouraged production but alsoencouraged consumption, thusdeepening and broadening the Permanent Depression. The movementto do this is now world-wide, but letus restrict our account largely to theUnited States.

For several decades now-indeed,for the better part of a century-theleaders of the United States havebeen acting on the basis of a profound economic error. It is not a newerror, but it has been given impressive academic credentials over thepast century. The error can be statedthis way, though it is not usuallyput so bluntly or directly: The way toprosperity and national felicity is todiscourage production and encourage consumption. Stated so generally and baldly, the fallacy of theproposition may show through. Butthat is not how we ordinarily confront it. It is usually advanced insome particular application, anddown where each of us lives, theproposition has great appeal.

Let me illustrate. Everyman isusually firmly convinced that heknows the solution to his economicproblem, if he has one. The problemis this, as he sees it: There are toomany producers of the goods he produces or too many providers of theservices he provides. Which of us isimmune to this notion? I knowdon't argue with me on this one-

that there are too many writers. Nodoubt, I would know with equal clarity if I were a real estate salesmanthat there are too many of those. Inlike manner, the managers ofChrysler Corporation can see thattoo many automobiles are beingproduced. Or, to turn the problemaround, there are too few customersfor the goods and services we have tooffer. The solution is obvious. Havegovernment discourage production-at least that of the others-andencourage consumption-at theleast of whatever it is I have tooffer.

Say's Law

The error in these beliefs is by nomeans obvious, certainly not in theparticular applications. Yet it is aprescription for Permanent Depression. That measures based on theerror would lead to depression waspointed out nearly two centuries agoby J. B. Say. The corrective to theerror was stated in what has come tobe known as Say's Law.

J. B. Say was a French economist,a contemporary, more or less, ofAdam Smith. His economic treatiseswere published in the early years ofthe nineteenth century. His worksnever attained the renown ofSmith's. Today he is remembered, ifat all, for the economic law which isjoined to his name. And even the lawhas fallen into disrepute amongmany economists, for reasons that


may be apparent when it has beenexamined. Various claims have beenmade to its refutation, but that iseasier said than done.

Say's Law is usually stated thisway: ((Production creates its owndemand."! I know of no general lawmore infelicitously stated. It is subject to all sorts of misinterpretations. It must be immediately qualified in order to get to its meaning.To wit: The act of production doesnot create demand. It is only whenwhat has been produced is offered inthe market that it becomes demand.Even that is not obvious. Moreover,not just anything that is producedand offered in the market becomesdemand. Only those commodities orthat labor which is wanted will become demand. Nonetheless, thatproduction creates its own demandmay be the most direct and effectiveway to state the law.

Some propositions which undergird Say's Law need to be stated inorder to establish its validity. Themost important is this. In the absence of a medium of exchange, ormoney, ifyou will, supply is demandand demand is supply. This can bereadily demonstrated by a simplebarter situation. Suppose that Igrow tomatoes and my neighborgrows bell peppers. My family having set up a clamor for bell peppers, Iapproach my neighbor with the proposal that I will give him twelve ofmy tomatoes for twelve of his pep-

pers. He consents, and the exchangeis made. Clearly, my supply of tomatoes constituted the demand forhis peppers. In like manner, hissupply of peppers constituted hisdemand for my tomatoes. It is notdifficult to see, either, that it wasmy production of the tomatoes thatcreated the effective demand for thepeppers.

The Use of Money in Trade

It was Say's contention that theuse of money in effecting exchangesdoes not fundamentally alter thesituation. Fundamental they maynot be, but there can be no doubtthat the use of money changes somethings. When money is used intransactions, supply and demandassume separate guises. It becomespossible to calculate price levels.Demand comes to be expressed asmoney and supply as goods. Anopening occurs for monetarist illusions that demand can be increasedby increasing the money supply.Even so, Say maintained that it isonly an illusion that money is everanything more than a mediumthrough which goods are exchangedfor goods. He put it this way:((Money performs but a momentaryfunction in this double exchange;and when the transaction is finallyclosed, it will always be found, thatone kind of commodity has been exchanged for another."2

John Stuart Mill noticed that


there is another difference whichcomes into play when money is used.There is, he said, ((~his difference-that in the case ofbarter, the sellingand buying are simultaneously confounded in one operation; you sellwhat you have, and buy what youwant, by one indivisible act, and youcannot do the one without doing theother. Now the effect of the employment of money, and even the utilityof it, is, that it enables this one act ofinterchange to be divided into twoseparate acts or operations; one ofwhich may be performed now, andthe other a year hence, or wheneverit shall be most convenient." Theseller ((does not therefore necessarily add to the immediate demand forone commodity when he adds to thesupply of another."3

The Timing of Trade

What occurs may be described thisway. The demand which arose froma product at some time in the past istransferred into money in which itmay be said to reside until anotherpurchase is made. But this is a neverending process, so long as the moneyremains in circulation, so that atany given time some of the demandresides in the medium throughwhich exchanges are made. None ofthis changes the validity of the fundamental axiom, as Mill affirms:UNothing is more true than that it isproduce which constitutes the market for produce, and that every in-

crease of production . . . creates, orrather constitutes, its own demand."4

Say's Law impressed and was accepted by many of the greatesteconomists ofthe past two centuries.David Ricardo affirmed and appliedit. John Stuart Mill, as just noted,accepted it as axiomatic. Say'sworks provided an important part ofthe foundation for Frederic Bastiat'swriting. Amongst our contemporaries, William H. Hutt has declared ((that the Say Law standsonce again inviolate as the basiceconomic reality in the light ofwhich all economic thinking is illuminated."5 Moreover, it is a selfevident truth whose validity may betested and proved by all who havesome understanding of the world inwhich we live.

((Production creates its own demand." We have now arrived at thepoint, perhaps, where we can affirmthe importance of the word ((production" in the statement of the law.However misleading it may be onfirst encounter it is nonetheless thekey to the significance of Say's discovery. Production is the road toprosperity, the law informs us. Ifthere is a fall off in demand, the wayto increase it is to increase production. If supply is declining the wayto signal demand is by production.6

The only limit on the degree of potential prosperity, Say was tellingus, is whatever limits there may be


to productivity of what is wanted.The way to create Permanent De

pression can now be restated. It is toact on the premise of the reversal ofSay's Law. Reversed, it can be statedthis way: Consumption creates itsown supply. Although no one to myknowledge has phrased the proposition that way, it is the necessarypremise for much that is believed.The notion of a general overproduction of goods is premised upon it. Inlike manner, it is the underlyingpremise of all notions that theeconomic problem is to stimulateconsumption. So far as programs todiscourage production and encourage consumption have an economicpremise, it is the one arrived at byreversing Say's Law.

Barriers to Commerce

Even a brief survey of governmentprograms will give some indicationof how deeply involved the UnitedStates is in discouraging productionand encouraging consumption. Indeed, such policies are not entirelynew in this country. The protectivetariff was a fixture in the UnitedStates in the latter part of thenineteenth century. Although proponents of the protective tariff haveoften advanced it as a device to encourage production, it does not havethat effect. So far as it works, itdiscourages domestic production bydenying some of the foreign marketto American products. If domestic

producers are enabled to supplantforeign producers as a result of thetariff the true significance is thatAmericans produce less, and athigher cost, than if their resourceshad been directed to that productionwhich Americans could do most efficiently. Foreign loans, much used inthe twentieth century, have theeconomic effect of encouragingforeign consumption at the eXPenseof domestic, and discouraging production for the domestic market.

But it is in the twentieth centurythat so many devices have beenadopted to encourage consumptionand discourage production. Since itwould take a massive catalogue todetail them all, it will be possiblehere to touch only on some of thebroad categories.

All redistributionist programs,whatever the motives for enactingthem, have the effect of encouragingconsumption and discouraging production. This is so whether it isschool lunch programs, food stampprograms, urban renewal projects,CETA, government operated educational institutions, welfare payments, or what have you. Redistribution takes away from potentialsaving and investment and allotsthe money where it is likely to besPent for consumption. Thus, it discourages production by making itmore difficult to accumulate capitalwith which to produce. The progressive income tax is not only a redis-


tributionist measure but also onewhich patently discouragesproduction and, depending on how it isspent, encourages consumption. Allpayments made to the idle have theeffect of discouraging productionand making the recipient a consumer only.

Inflationary Distortions

The effects of inflation-increaseof the money supply-are somewhatmore complex. On the face of it,much of the increased money supplyis an encouragement to production,for it may be spent on plants,machinery, and productive equipment. But this is misleading. Inflation encourages the consumption ofcapital or productive equipment, notproduction as such. It sends falsesignals into the market by leadingto a general rise in prices, leading toindiscriminate increases in production, many of which are unwarranted. Inflation, then, tends to encourage consumption, encourage indiscriminate production, and henceto discourage the concentration onproducing what is most wanted,which is that portion of productionwhich contributes most to prosperity.

Price controls have the generaleffect of encouraging consumptionand discouraging production. Andsuch controls are rampant in theUnited States today. Minimumwages, whether established by law

or by unions, whether calledminimum wages or salaries orwages prescribed in a civil servicestructure, are price controls.Moreover, wage price controls discourage production. They do so, inthe first place, by reducing thenumber who might be employed inproduction-causing unemployment. In the second place, where theunemployed are paid, either in unemployment compensation or aswelfare, there is an encouragementto consumption unmatched by production. Maximum prices are widespread today, on domestic oil, onmuch of transportation, on milk, ongas, and for hundreds of other goodsand services. So far as these pricesare below what they would be in afree market, they discourage production and encourage consumption.

Many sorts of government controls discourage production withoutthemselves encouraging consumption. Government monopolies discourage production. The monopolywhich the United States Postal Service has over the delivery of firstclass mail, for example, preventsothers from entering the field andproviding the service. The virtualmonopoly which governments haveof schooling discourages others fromentering that field. Indeed, all government licensure and franchisingdiscourages production. ~~Licen

sure," Milton Friedman has said, ~~is

a special case of a much more gen-


eral and exceedingly widespreadphenomenon, namely, edicts thatindividuals may not engage in particular economic activities exceptunder conditions laid down by a constituted authority of the state."7Such activities are usually justifiedon the grounds that they protect thepublic by maintaining standards,but whether they do or not, by restricting entry they discourage production.

Costly Regulations

Government regulation of industry, whatever its aim, discouragesproduction. Quality controls, environmental controls, safety regulations, prescriptions for labeling, andso on are Just so many difficulties inthe way of producing goods. Government prescribed record keepingand reporting to government arediscouraging to production. Theyraise the cost of producing and keepfrom the market myriads of products.

Generally speaking, governmentsin the United States do not avowedly aim to discourage productiontoday. For a while in the 1930s, andto a lesser extent in the 1940s and1950s, there was a conscious effortto limit production. Nowadays, however, production, per se, is not theavowed object of government control. It is even usually admitted,perhaps reluctantly, to be a goodthing. But the government does

often avowedly encourage consumption and by so doing proclaims thatconsumption, in effect, creates itsown supply and leads to prosperity.

J. B. Say wrote precisely to thepoint. He said ((that the encouragement of mere consumption is nobenefit to commerce; for the difficulty lies in supplying the means,not in stimulating the desire of consumption; and we have seen thatproduction alone, furnishes thosemeans.... For the same reason thatthe creation of a new product is theopening of a new market for otherproducts, the consumption or destruction ofa product is the stoppageof a vent for them."8 He goes on topoint out, of course, that the consumption of a product is not an evil,for it is the end for which the production was done. But then, neitherdoes the consumption itself contribute one whit to any further commerce.

It is an evil, however, he said,when consumption begins to exceedproduction. What then happens:Uthe demand gradually declines, thevalue of the product is less than thecharges of its production; no productive exertion is properly rewarded;profits and wages decrease; theemployment of capital becomes lessadvantageous and more hazardous;it is consumed piecemeal ... becausethe sources of profit are dried up.The labouring classes experience awant of work; families before in tol-


erable circumstances, are morecramped and confined; and those before in difficulties are left altogetherdestitute."9

That is an apt description of whatis happening in the United Statestoday, though it was written nearlytwo hundred years ago. We •are inclined to ascribe our difficultiestoday to inflation. Undoubtedly, inflation is an important part of ourdifficulty, but it is not at the root ofthe trouble. Our trouble stems fromacting as if consumption creates itsown supply, from turning Say's Lawupside down. We have been encouraging consumption and discouraging production. Every effortin that direction contributes to thebreadth and depth of a PermanentDepression. When restrictions onproduction have proceeded farenough Permanent Depressionemerges as the kind of depressionwe recognize from the past. Except,the underlying Permanent Depression may have been transmuted intoa visible permanent depression.

Say's Law points away from Permanent Depression. It points toward, if not Permanent Prosperity,at least to as great prosperity as ispossible for man. What is government's proper role in this prosperity? John Stuart Mill put it thisway: ~~The legislator has to look solely to two points: that no obstacleshall exist to prevent those whohave the means of producing, from

employing those means as they findmost for their interest; and thatthose who have not at present themeans of producing, to the extent oftheir desire to consume, shall haveevery facility afforded to their acquiring the means, that, becomingproducers, they may be enabled toconsume."lO In short, governmentshould remove its obstacles to production and take what measures areappropriate to it to facilitate production. Then, all may consume at will,and as they will, what they haveproduced themselves, or acquiredfrom others with their production.'

-FOOTNOTES-1For a more complete statement of its impli

cations, see Henry Hazlitt, The Failure of theNew Economics (New Rochelle, N.Y.: Arlington House, 1973), pp. 35-37.

2J. B. Say, uOf the Demand or Market forProducts" in Henry Hazlitt, ed., The Critics ofKeynesian Economics (New Rochelle, N.Y.: Arlington House, 1977), p. 15.

3John Stuart Mill, cCOn the Influence ofConsumption on Production" in ibid., pp. 41-42.

4Ibid., p. 44.5Svetozar Pejovich and David Klingaman,

eds., Individual Freedom: Selected Works ofWilliam H. Hutt (Westport, Conn.: GreenwoodPress, 1975), p. 141.

6N0 one is relieved by Say's Law from applying intelligence to production, of course. It isnecessary to determine what is wanted and togo about producing it efficiently if productionis to become effective demand and profitable.

7Milton Friedman, Capitalism and Freedom(Chicago: University of Chicago Press, 1962),p.138.

8Say, op. cit., pp; 20-21.91bid., p. 22.lOMill, op. cit., p. 26.

Barbara H. Bryan

Interventionist?Who me-Free Market Mama?Confession being good for the soul,

I'll have to admit that I almostslipped-consciously at that-intoan interventionist role.

And, candidly, had the reverseorder of the following story occurred,I would have.

It happened when a 25·cent toystamper (it inked pairs of black feeton any surface it touched) wentthrough a price rise ofsome 1100 percent within a few hours in our home.

The stamper was given to JimDixon by his grandmother. His buddies were enchanted when he decorated them with little black feet.

Barbara Hauser Bryan Is a mother "mostly" andfree-lance writer in Roanoke, Virginia.

752

Their mothers may have beensomewhat less delighted, but JimDixon was a trendsetter with fellowfirst graders. Therefore, the itemhad even more appeal.

Jim is a special friend and favoriteof my three sons. They are with himin Sunday School and around theneighborhood. Last year he and Callan were in kindergarten together.Russ (Callan's twin) was in firstgrade with him this year. BigBrother Eason, a second grader, alsothinks Jim is cool. The stamper represented the last word to all of them.

So when Russ came home andannounced that he had just purchased the stamper for one dollar, Inoted that he had made a willingexchange in a nseller's market." He

FREE MARKET: ELEMENTARY, MY CHILD 753

Left to right, Callan, Mom, Russ (standing)and Eason.

could not have been happier. Jimrealized he had struck a good bargain, so we all grinned.

About an hour later, Callanemptied his piggy bank and told methat he had to have enough moneyfor 28 pieces of bubble gum. He saidhe only had enough ~~cents" for 23pieces.

Assuming that he wantedeveryone (20 classmates, hmmm?)in his class to have a piece, I offeredhim a window-washing job for adime. Using the best of Tom Sawyertechnique, he engaged Nicky andWilson forthwith and managed itwith great dispatch.

Soon he left with his full complement of cash. The story extendsslightly because the conveniencestore clerk quite accidentallyshortchanged him. With his finesteyes-just-above-the-counter aplombhe returned to the store and evened

the score. Soon the bubble gum hadbeen turned over to its new owner.

That person, it turned out, was hist~;vin brother Russ, who for the bubble gum and two one-dollar billsreleased title to the stamper.

The story might have ended there.Nobody was interested in my suggestion that we telephone Jim'sgrandmother to ask where she hadbought the feet stamper. BigBrother, usually shrewd and definitely well-heeled, entered the picture.

Simply because of his status asfirst-born, he had amassed a muchfatter passbook savings accountthan his siblings. And, frankly, hegets a little horsey about his coupleof hundred extra dollars.

Anyway, supply and demandbeing what they were that day, heand Callan wound up in a fascinating trading session. When we satdown to dinner, they had alreadyagreed that Eason would fork overthree dollars for the one-of-its-kind(at least in our house at that minute) item.

Knowing beyond question that heheld all the cards, Callan savoredhis rare upper hand by playingwishy-washy. He said he mightchange his mind. He thought aboutupping the ante. He even said hemight trade back with Russ and gethis money returned.

We noted with three dollars hecould repay himself and buy more

754 THE FREEMAN

than 28 pieces of gum. Eason wasbecoming nervous.

(At that point they counted thebubble gum and Russ The Casuallearned that he had been shorted bythree pieces which Callan admittedto sharing with his fellow windowwashers.)

My only intervention was to compliment them on their practice offree market economy. We did discuss supply and demand-and rampant inflation. And, I did suggestthat a bargain struck should be honored. Translated: Callan shouldn'tweasel out if Eason really wanted topay that exorbitant figure-with hiseducated eyes open.

Had the reverse occurred-Easonpreying upon Callan who wouldhave hoodwinked Russ who wouldfoist the stamper off on Jim-Iwould have envisioned all kinds ofrepercussions. And I probably would

have intervened to save my face andto keep peace with the Dixons.

As far as I can tell, all four boys inthe story are still smiling.

Jim's banker father must be proudof him. Russ and Callan haveworked out a rental agreement withEason so that they still have accessto the black feet-for 10 cents anhour. Eason guards the thing withhis life.

And Mom?Well, so far I've found black feet

stamped all over my car's Virginialicense plate, the top of our livingroom fan, our back door neighbor'susually spotless child's face (HHesaid he wanted it there!") and thefront of the bathroom door.

Perhaps I may end up paying forpermitting that demonstration of~~free" enterprise.

If we can get the point across withelbow grease, scrub on! @

IDEAS ON

UBERTY

If You Make a Promise, Keep It

SoCIAL chaos has no better ally than broken promises. Children notbrought up to keep their word will be the authors of treaties written not tobe observed; they'll run for office on bogus platforms, cancel goldcontracts, use the political means to expropriate property; they'll selltheir souls to gain fame or fortune or power. Not only will they fail to behonest with their fellow men; they will not even heed the dictates oftheir own conscience. On the other hand, children brought up to keeptheir promises will not go back on their bond. Integrity will be theirmark of distinction!

LEONARD E. READ

A REVIEWER'S NOTEBOOK

THE•••• FREEDOM

e FREEWAY

LEONARD E. READ

IT must bring Leonard Read a lot ofquiet satisfaction to see that themethods he has extolled in his manybooks have had their effect. He believes in the power of theexample-in his new book, TheFreedom Freeway (Foundation forEconomic Education, $6.00), hequotes Albert Schweitzer: HExampleis not the main thing in influencingothers. It is the only thing." TheRead example is to work on theperfection of his own understandingand to carryon from· there in bothwriting and speaking. He says ourtimes demand statesmen, but heleaves active politics to others. Theaverage politician is not a primemover; it is the man of ideas, working for the long pull, who is the finalinfluence on government.

At the recent European regionalmeeting of the Mont Pelerin Society

JOHN CHAMBERLAIN

in Spain, Leonard Read, a thoughtful observer who limited himself to asingle succinct speech about privateeducation, had the living endorsement he wanted for his way of exercising social leverage. The finalMont Pelerin session was an impromptu discussion of MargaretThatcher's chances for turning England back to the freedom philosophyof Cobden and Bright and AdamSmith. Mrs. Thatcher, who campaigned for the restoration of incentives, has her opportunity to transcend politics for statesmanship. Butshe would never have become PrimeMinister on a freedom philosophyplatform if it hadn't been for fourindividuals who happen to be MontPelerin members and devotees of theRead mode of conduct. They are,respectively, Professor FriedrichH:ayek who was the Mont Pelerinfounder, Antony Fisher, Ralph-orLord-Harris, and Arthur Seldon.They were all in the room togetherat the Madrid and Salamanca sessions in Spain.

Over the years the four hadformed a Readean chain. In 1946,when the British were turning theirbacks on Winston Churchill in favorof adopting the Labor Party

755


socialism of Major Clement Attlee,Antony Fisher, then out of the RoyalAir Force, went to Professor Hayekfor advice about getting into politics.Hayek, fresh from writing The Roadto Serfdom, gave Fisher some thingsto think about that seemed paradoxical. The way to affect politics, hesaid, was to stay out of politics.Work on ideas, Hayek told Fisher;get them into the marketplace.

Ideas at Work

So Fisher worked on ideas. Hefirst took the practical precaution ofmaking a considerable sum ofmoney in the chicken business, oneof the few businesses that had beenoverlooked by Attlee's planners.Then he subsidized an organizationcalled the Institute of Economic Mfairs in London, putting the effervescent Ralph Harris in charge tooverwork himself until he managedto find a compatible sidekick, Arthur Seldon. For the better part ofthirty years Harris and Seldon issued a stream of freedom philosophypublications. The lEA pamphletsoften seemed to fall on stony ground.But Margaret Thatcher read them,and so did Sir Keith Joseph, nowEngland's Secretary of State for Industry ~ lEA ideas became the newConservative agenda. And one ofthefirst things Mrs. Thatcher did onattaining office was to make RalphHarris a Lord.

It was as iffour men had acted out

the sequence that is suggested in theessay on ((Resolution: A FreedomImperative," which is one of themany good ones in the new Readbook. ((In what respect is freedom aprQplem?" Read asks in this essay.((Personal experience has given methe answer. For 45 years my principal aim has been to understand andexplain how freedom works its wonders ... The dedicated aim-resolution-of many people working forfreedom has resulted in thousands oftiny break-throughs...." And, aftersome characteristically humblewords about how little he knows,Read says what he does know: uOurend-the Blessings of Freedom-isbut the flower of good seeds weplant; our objective has no othermeans of attainment. Your and myrole? Exemplarityl (Example is theschool of mankind; they will learn atno other.'"

Like most of us in this benightedtwentieth century, Leonard Readhad to come by his wisdom the hardway. He seldom gets personal, butonce in a while autobiography intrudes in a Read essay. He confesses:in uPerseverance: A Key to Free·dom," that in 1929 he was taken illby Herbert Hoover's demand fOJwage and price controls. That wafRepublican doctrine at the time. IIthe subsequent New Deal days, wherFranklin Roosevelt acted orHoover's advice, Read, as Manage]of the Western Division of the U.S

1979 THE FREEDOM FREEWAY 757

Chamber of Commerce, supportedthe N.R.A., with its wage and pricecontrols in all the big industries thathad enrolled under· the banner ofGeneral Hugh ~~Iron Pants"Johnson's Blue Eagle. It was Fascism of a peculiarly American sort,but the U.S. Chamber of Commerceand the National Association ofManufacturers accepted it. ((CopycatRead!" so the Old Self Read says ofthe Young Self Read of 1933.

Copycats of Socialism

Leonard Read mentions some ofhis fellow copycats of the early Thirties. One of them, described as a(~brilliant economic thinker" in general, advocated rent control-UAnaive position he later overcame."Another, a ((so-called conservativePresident of the United States," endorsed the Harvard professor, a((mentor" of the younger Read, whowrote: ((Government must do for thepeople that which they cannot do forthemselves." ((This specious coun..;sel," says the mature Read,uspawned countless copycats andmade a substantial contribution tothe socialistic mess we are now experiencing." Few people, so Read reflects, can do much of any singlething for themselves. But the division of labor steps in to make government action quite unnecessary.The mature Read wonders how ((the16,000,000 elected or appointedofficials-federal, state and local-

who doubtless know even less thanthe rest of us, will do for us what wecannot do for ourselves! If this isn~t

politico-economic balderdash, praytell, what is?"

It is characteristic of LeonardRead that when he quotes an intelligent remark or bit of poetry orpertinent aphorism, he alwaysnames the person he is quoting. Thename index ofThe Freedom Freeway'would do justice to a Ph.D. in philosophy. But when Read tells us abouthis fellow copycats of New Dealsocialist days, he mercifully fails toidentify them. Read doesn't believein getting people's backs up. Goodpsychology suggests to him that ifyou attack a person by name, orotherwise subject him to embarrassment of any kind, it. is moredifficult to convert him to what Russell Kirk calls Right Reason.

So Leonard Read's books becomesoft sells. The quality of hisphraseology is not strained, it falleth as the gentle rain from heaven.Read follows what is an operationally sound technique, one which, inthe hands of his British counterparts, has brought the Conservatives-really, the classical liberals-back into the seats ofpower. The same technique will, intime, send the necessary signals toW'ashington, D.C.

When he has finally achieved hisaim and no longer has any worriesabout getting people's backs up, I


hope Leonard Read will write an autobiography that names names. Hecan tell fascinating stories aboutpeople who have made gaudy mistakes in judgment. He tells aboutkeeping a journal. Does he namenames in that? For one, I would liketo know. Meanwhile, I am quite content to absorb Leonard Read on suchsubjects as the ((socialization" of sin(socialism itself), and the (~menace ofmeddlers." Read may not name hissinners or his meddlers, but he issurely convincing about the evil ofthe unnamed culprits' deeds. @

RESTORING THE AMERICANDREAMby Robert J. Ringer, with a Foreword byWilliam E. Simon(Published by QED; distributed by Harper & Row, Publishers: New York) 1979320 pages. $12.50 cloth

Reviewed by Roger R. Ream, Director ofSeminars, The Foundation forEconomic Education, Inc., Irvingtonon-Hudson, New York

HORROR stories about waste andfraud in government are nothingnew. Proponents of a free marketeconomy have always been the mostvocal in explaining the destructivenature of government intervention,be it printing press money, regulation of business, tariffs, or whateverelse government does beyond its

proper role of protecting every individual's right to life, liberty, and property. Still, it is always encouragingwhen someone lucidly exposes theemperor without his clothes.

Recently, we have had severalsuperb accounts warning of the dangerous power the state has amassedduring the 200 years since ourFounding Fathers created a government oC~limitedand enumeratedpowers." One such warning was ATime For Truth (reviewed in TheFreeman, August, 1978), formerTreasury Secretary William E. Simon's candid account of his experiences in Washington.

The latest warning of the threatpresented by a concentration of governmental power comes from RobertJ. Ringer in his new book, RestoringThe American Dream. Ringer, author of two previous bestsellers, seesin today's government many resemblances to the collectivist statesof George Orwell's 1984, AldousHuxley's Brave New World, and AynRand's Atlas Shrugged. ~~Today onefeels the ether of these books in theair," he writes. HRational peopleknow that there is somethingwrong. There is tension and uncertainty. There is ill will. There isfear.... Government-inspirednothink and doublethink have desecrated the American Dream."

The book is frightening, but con·tains a glimmer of hope. It isfrightening when Ringer forcefully

1979 OTHER BOOKS 759

describes the grim realities and consequences of the transition fromgovernment by the people to government for the benefit of those inpower. He exposes the tactics usedby government to maintain and expand control over people: U. • • democracy, though it has many disadvantages for powerholders, seems tobe the most practical way to maintain control, because it gives theillusion of consent."

There are various ways, Ringerpoints out, by which a democraticgovernment may reinforce its control; the most successful being inflation. Government can hide the costsof the generous benefits it grantspotential voters by creating newpaper money rather than levyingdirect taxes. Government officialsthen blame workers and businessmen for the unpleasant conse<quences of this inflation-higherprices and a lower standard of living. This enables the politician tohave his cake and eat it too-hetakes credit for granting benefits tovoters (even though consumers areforced to pay for them in the form ofhigher prices) while continuallypointing the finger at business andlabor for the painful consequences ofinflation. As Ringer says, u ••• inflation is the one government scheme,above all others, that must be demystified if the American Dream isto be restored."

Ringer's reason for hope is bor-

rowed in part from Simon's book. Itis the belief that the American people would insist upon positivechange ((if they understood the situation." Therefore, Ringer's objectiveis to explode the myths of statism ina manner which enables the laymanto understand the basic principles ofindividual liberty and the threatpresented by collectivism.

With respect to inflation (although I believe Ringer would assert the same in regard to the wholeinterventionist mess) he states, H •••

the only hope that remains is that agreat majority of Americans willcome to understand the colossal inflation swindle for what it is andinsist upon reform. To say the least Irate that a long shot. But at least it'sa shot." We must hope Ringer iswrong on the method, for if ourtask is to get a majority to understand the situation, it will be a mostdifficult battle to win. In fact,Ringer calls himself ((a pessimisttrying hard to be an optimist."Fortunately, we have writers ofRinger's ability to state the case ina manner which those outside theintellectual community can comprehend.

By writing for a general audience,however, Ringer has made an unnecessary sacrifice of thephilosophical justifications for someof his statements. This is unfortunate, since Ringer has demonstratedan ability to explain complex argu-

760 THE FREEMAN

ments in a lively and understandable manner. As it is, there aresome claims that need either further clarification or additional support to give them legitimacy.

At times Ringer needs to be moreprecise. It appears as if he has letsentences slip in that cause confusion and seem to be contradicted bypassages that follow. For example,Ringer puts great emphasis on whathe calls a Natural Law: «each manowns his own life and therefore hasthe right to do anything he wisheswith that life so long as he does notforcibly interfere with the life of anyother man" and refers to it throughout the book. However, when firstdiscussing the concept, he developsit as merely «an opinion" which hechose-seemingly out ofthin air-ashis initial premise. Yet, he goes onfrom this point and the reader discovers this «opinion" to be a «nocompromise principle."

Furthermore, this Natural Lawinvolves morality. If we seek an endwhose «attainment requires a violation of the rights of even one man,then the end has been achievedthrough immoral action." Butwait. Upon further reading we findRinger slipping a sentence into hisdiscussion on welfare that states,«Rational men realize that there isno such thing as absolute morality."The reader is left asking whetherthis concept of Natural Law is an

absolute moral principle and, if so,_how Ringer arrived at it. This confusion is unfortunate, since NaturalLaw is the foundation for the freedom philosophy Ringer develops.Because this concept is so important, Ringer should clarify what hemeans by «absolute morality" anddevelop the justification for his«Natural Law" premise. This is particularly important if he hopes thelay audience for which he is writingwill grasp this basic premise.

These shortcomings, however, aremore than outweighed by the clarity, excitement, and provocative nature of the book. You wish everygovernment bureaucrat would readit. Ringer offers a variety of suggestions of what can be done to restore the American Dream. Themost important is to «... be consistent on the issue ofhuman freedom.':In other words, don't give up free·dom for the tempting handouts offered by expedient-minded politi·cians.

Bill Simon dedicated his book, iIpart, «to my children, so that the)can never say, at some future time(why weren't we told?'" Ringer, likESimon, has cleared away the camouflage disguising government's· truenature. The message is clear. Because we have books like Restorin~

The American Dream we can nevesay at some future date, «(Wh:weren't we told?" @

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