the

FreemanVOL. 33, NO.5 • MAY 1983

Criminal' Liberty and Civil Liability:Can Free Enterprise Survive? Jane M. Orient 259

The sad consequences when our court system fails to control crime,but attempts to control everything else.

Hong Kong's Future Uncertain Henry W. Vanderleest 266The prospects if control of the Crown Colony reverts to the People'sRepublic of China.

Minimum Wages Hans R Sennholz 270How political attempts to boost wages tend to harm those most aptto be unemployed.

Robots! Russell Shannon 282Let us not condemn the tools that free us from drudgery.

The Trouble with Farming Clarence B. Carson 286A risky business at best, but now beset with the consequences ofmassive intervention.

From the Mouths of Babes Dennis L. Peterson 299By one's example do others learn the ways of freedom.

Economists and the Future Lawrence W. Reed 302Words of caution to those who bet heavily on the accuracy offorecasters.

Book Reviews: 313"The Strategic Metals War" by James E. Sinclair and Robert Parker"John Dickinson: Conservative Revolutionary" by Milton E. Flower"Stalin's Secret War" by Nikolai Tolstoy

Anyone wishing to communicate with authors may sendfirst-class mail in care of THE FREEMAN for forwarding.

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Some articles available as reprints at cost; state quantity desired. Permission granted toreprint any article from this issue, with appropriate credit.

Jane M. Orient

Criminal Liberty andCivil Liability:

Can Free Enterprise Survive?

A lame, gray-haired contractor com­plains that a lumber company em­ployee is dilatory in serving him. Theburly young man thereupon shoveshis customer down the stairs. Thepublic prosecutor doesn't think itworthwhile to press assault charges,so the culprit remains unpunished.

A domestic employee decides onher own to go down to the cellar, andfalls on the stairs. She claims shewas not warned of some hazardouscondition, and the court awards hera hefty sum, with a generous sharefor her lawyer.

A "sting" operation by the TucsonPolice Department, costing $60,000,led to the solution of hundreds of

Jane M. Orient, M.D., is in the private practice of med­icine in Tucson, Arizona. She also is adjunct assis­tant professor of internal medicine at the Universityof Arizona College of Medicine.

burglaries and the conviction of 34offenders. Fifteen were sentenced toprison; a few got short jail terms;thirteen received only probation,possibly with orders to pay restitu­tion ranging from $20 to $1871, to­talling $5129. 1

A 22-year-old woman suffered andrecovered completely from toxicshock syndrome in 1980, the firstyear in which this disease was widelyrecognized. A jury awarded her a$10.5 million judgment againstJohnson & Johnson, manufacturersof OB tampons, although the onlybrand implicated in causing a higherrisk of this condition was Rely, whichwas voluntarily withdrawn from themarket by Procter & Gamble. Themessage was supposed to be thatcompanies should "please test theirproducts before marketing them."2

259

260 THE FREEMAN May

The exact meaning of this admoni­tion was not specified; since the in­cidence of the disease is approxi­matelyone in 100,000 population peryear,3 no economically feasible testwould have detected it. The justifi­cation for the size of the award was"to slap Johnson & Johnson's handsreal good (siC.)."4

Nonproductive Versus ProfitableRisks

In 1912, Isaac Adler published atreatise on lung cancer, a previouslyrare disease, in which he speculatedthat tobacco smoke might be one ofthe causes. A controlled study inwhich cigarette smoking was shownto be associated with lung cancer waspublished in 1939. In 1964, the Sur­geon General's report cautioned thatcigarette smoking appeared to out­weigh all other factors in the causa­tion of lung cancer, increasing therisk by a factor of about ten, as wellas contributing to other serioushealth problems.5 No health benefitshave ever been described. No suitsare pending against the tobaccogrowers, but cigarette packages mustnow carry a warning on the label.

In 1907, the first report to suggestasbestos toxicity appeared, but themagnitude of the problem was notfully appreciated until the 1960s, dueto the long latency period before dis­eases manifest themselves. Heavyasbestos exposure increases the riskof lung cancer in nonsmokers by a

factor of five. 6 The material is widelyused in construction and shipbuild­ing for its insulating and fireproof­ing properties. No completely satis­factory substitute is available.Synthetic mineral fibers proposed toreplace this natural product may notbe safe; they have been found to in­duce tumors in animals. 7

Lawsuits against companies in­volved in any aspect of asbestos use(even just the paperwork) threatenmany with bankruptcy. One smallfirm, which up until 1970 used as­bestos in a few of its many insula­tion products, faces 13,000 suits.8 Ifcontinued at the present rate, asbes­tos litigation will amount to $38 bil­lion over the next 15 years, and mayforce large insurance companies todefault, leaving their policyholderswithout coverage.9 On the otherhand, school districts, which compelchildren to attend school in build­ings in which the decay of sprayeddecorative and insulative materialsexposes them to the carcinogenic fi­bers, are not similarly imperiled. Noris the U.S. government, which or­dered substantial quantities of thematerial for warships.

Identifying the Agent

In a criminal case, the prosecutionmust demonstrate beyond a reason­able doubt that the accused inten­tionally committed the act. Motive,means, and opportunity must beshown. So scrupulously are the rights

1983 CRIMINAL LIBERTY AND CIVIL LIABILITY 261

of the defendant protected that if apolice officer or the court makes aprocedural error, even an obviouslyguilty prisoner may be released.

In a civil court, the defendant lacksthe same advantages, and the stan­dard of proof is far different. A prop­erty owner need have no motive forinjuring a guest or employee, norprospect of benefiting from the mis­fortune. Failure to prevent a calam­ity caused by the law of gravity anda lapse of attention on the part ofthe victim may be punished moreseverely than breaking and enter­ing. Entrepreneurs are assumed tohave a motive, the seeking of profit.An intention to do harm need not bepresent. That workers and cus­tomers also share in the compensa­tory benefits of a product appears tobe irrelevant.

To prove that a certain productcaused an injury may be straightfor­ward in a few cases, such as septicshock resulting from bacterial con­tamination of intravenous fluids.However, guilt by association is moreusual. Tampons do not directly causetoxic shock, nor do they carry thebacteria that are implicated. Proba­bly, they facilitate in some way thegrowth ofa strain ofStaphylococcus,which became more prevalent inisolates from surgical wounds andburns around 1960. In 1979 or 1980,this strain underwent a geneticchange, increasing its virulence.Men, children, and women who never

use tampons can also be afflicted, buttampons were associated in about 85per cent of the reported cases. Theextensive publicity accompanying thediscovery (partly sponsored by Proc­ter & Gamble), alerted potential vic­tims, but also biased researchers.

In a criminal case, if a hypnotistsuggests to a witness that he mighthave seen a blue car, subsequenttestimony about a blue car must notbe admitted. A similar fallacy per­vades the epidemiological studies,which rely heavily on human mem­ory. A prominent statistician con­siders the case against tampons tobe still the Scottish one: not proved.10

Evidence linking occupational ex­posures to disease is also statisticaland largely circumstantial. For ob­vious reasons, one cannot do a con­trolled experiment, in which somehuman beings are deliberately ex­posed to a suspected toxin, and oth­ers not. One must look back on sit­uations in which this has alreadyoccurred in a "natural" experiment.Many pitfalls await investigators.Important issues are the selection ofan appropriate comparison group,elimination of bias, and proper han­dling of confounding factors (such asexposure to other carcinogens, no­tably cigarettes).

Establishing Responsibility

Even if an individual is known tohave committed a criminal act, hecannot necessarily be held respons.i-

262 THE FREEMAN May

ble for it. If psychiatrists testify per­suasively that the accused was un­able to exercise free will, due tomental disease, he must be acquit­ted. The criminal is often portrayedas the victim of society, perhapsthrough having unloving parents, orexperiencing poverty or social dis­cord. Compelled by his early influ­ences, he is not really free to choose.

In civil law, it is not necessary toidentify an act that directly causedinjury. Omissions (negligence) ratherthan commissions are generally atissue. Presumably, a manufactureris free to choose what he will make.One might argue that a worker isfree to decline employment, but ap­parently his freedom is to be consid­ered impaired if he is not fully in­formed of all the risks (even if theyare not fully known). A court mustinevitably try to evaluate risks inretrospect.

A worker afflicted with asbestosiswould probably say he wouldn't havetaken the job if he could have fore­seen his present condition. Yet, atthe outset, he might have made thesame decision if he weighed the riskof lung disease 25 to 30 years in thefuture against the drawbacks of un­employment or the chance of earlyviolent death faced by taxi drivers.Similarly, a woman who complainsafter her episode of toxic shock mightstill have elected to use tampons atthe point when illness was a slightrisk rather than a reality, just as 70

to 75 per cent of women in the mostsusceptible age group continue to do,despite the warning message in thebox. 11

Ability to Pay

Allocating responsibility is atreacherous task, but several prin­ciples seem discernible in court de­cisions. Ability to pay is a key qual­ification for assuming liability.Although hesitant to demand thatlawbreakers take the consequencesof actions which they perform, courtsreadily blame prosperous, well-in­sured individuals or corporations forforces over which they have littlecontrol. While the adjective "ob­scene" may be applied to profits re­sulting from useful production, it isnot used in the context of profits frombeing a victim or representing thoseperceived to be unfortunate.

That the producer bears greaterresponsibility than the consumer,and the owner than the worker, isjustified to some extent by the greaterknowledge and capability of theformer. However, the disproportionis increasing to the point that theproducer is supposed to be omni­scient, and the "little guy" feeble andstupid. For example, the desiccantin pill bottles is stamped "Do NotEat," lest someone try to swallow itdespite its large size and cylindricalshape. Although owners may be heldliable for not warning workers ofhazards of which even they were un-

1983 CRIMINAL LIBERTY AND CIVIL LIABILITY 263

aware, workers and union represen­tatives are not imagined to be capa­ble of asking a reference librarian ora competent physician for informa­tion about the dangers of theworkplace.

Who Pays?

The costs of crime are borne al­most entirely by the victims. Thelaw-abiding citizens may lose theirproperty or even their lives, and yetmust also support criminals in prisonand pay for the safeguards to theirrights. Less obvious is the fact thatthe penalties for the alleged mis­deeds of corporations are also borneby society. Bankruptcy may be mostpainful for the stockholders who losetheir investment (including retiredpeople dependent on pensions), butalso means fewer employment op­portunities. The costs of litigationand of increased premiums for lia­bility insurance must ultimately bepaid by customers. An incalculablecost is funds lost to research and de­velopment. How much of the legalexpenses of Johnson & Johnson willbe diverted from its investigationsof the Staphylococcus, a widespreadand lethal bacterium?

Besides the financial impact, amore serious consequence of unlim­ited liability for corporations is theprospect of unlimited jurisdiction forgovernment. Added to consumers'clamoring for protection is the cor­poration's plea for regulation. Com-

pliance with a legislative standardneatly shifts the responsibility fordisasters to the government. Thisdishonorable escape route may pos­sibly be justified as self-defense. Forwho would voluntarily sign such acontract as is implicit in many courtdecisions: The employee agrees towork for a predetermined sum; butif some misfortune befalls him dur­ing his lifetime that might be re­lated to the workplace, the corpora­tion must pay whatever com­pensation pleases the court up to thelimit of its assets.

Regulation naturally diminisheschoice. The price paid for avoidingresponsibility is forfeiting the rightto choose. (The converse of this prop­osition applies in criminal law: thecriminal who cannot choose is notresponsible.)

Does Diminished Freedom BuySecurity?

Loss of liberty might arguably beacceptable if traded for improve­ments in safety. Thus far, the inten­tions of government agencies haveoften had the opposite result. Her­bert Spencer gives many examples:despite the exertions of the BritishShipwreck Committee, the loss oflives and of ships worsened, as ad­ministrative expenses multiplied. 12

Since the legal system is designed toattribute blame, its ineptitude inanalyzing the cause of problemsshould·not be surprising. Though oc-

264 THE FREEMAN May

cupational hazards are in the lime­light, "lifestyle" factors are of muchgreater importance.

While the federal government paysbillions in compensation to coalworkers whose minimal x-raychanges of black lung disease do notcause any impairment in lung func­tion, the same government paysmillions in subsidies to the tobaccoindustry, whose product does cause30 per cent of the nation's cancer13

and most of the disabling chroniclung disease. While the NuclearRegulatory Commission keeps a rel­atively safe nuclear reactor shutdown in order to investigate its psy­chological impact, power plantswhich are a hundred times moredangerous substitute for its output.While being protected by the testingrequirements of the Food and DrugAdministration, victims of asthmaand coronary artery disease havewaited a decade for excellent drugswidely used in Europe.

Criminal Acts

Though regulation and litigationhave not been shown to save lives,they do assign taxpaying companiesthe status of criminals. One smallbusiness in Tucson was cited by theOccupational Safety and Health Ad­ministration (OSHA) for lacking acovered wastebasket in the restroomused by a single employee. However,OSHA has no jurisdiction over themost common causes of fatal occu-

pational injuries, motor vehicles andfirearms. In Maryland, 11 per centof the work-related deaths werecaused by shootings, mostly in hold­ups of small businesses and taxidrivers. 14

Our society has frequently beencharacterized as risk-averse, but thelabel is not quite precise. Few of thepeople killed while driving vehicleson the job were wearing seatbelts. 15

People continue to use productsknown to be hazardous, if they be­lieve that pleasure or convenienceoutweighs the risk. Many proposedremedies have the long-term effectof actually reducing safety, both di­rectly and indirectly in discouraginginnovation. Are they favored simplythrough shortsightedness, or do theyappeal to a deeper motive?

Courts are reluctant to hold mis­creants individually responsible fortheir deeds. Consumers and workersdeny their responsibility for prod­ucts or employment they select. Ifmisfortune strikes, whether throughcarelessness or chance, the primaryconcern is right to compensation.Those able to pay are presumed tobe guilty, in striking contrast to thecriminal's presumption of inno­cence. Individuals in our society arebest described as responsibility­averse, rather than risk-averse.

In the inevitable difficulties anddangers of life, people have often lostconfidence and courage, and turnedto authority. Today, they make their

1983 CRIMINAL LIBERTY AND CIVIL LIABILITY 265

plea to the legislatures and thecourts, despite the clearly visibleconsequences of surrendering theirself-reliance, because not just secu­rity, but relief from responsibility, isthe real goal. In the past, they re­ferred their problems to the church,for the same reason. As the GrandInquisitor understood: "They will beglad to believe our answer, for it willsave them from the great anxiety andterrible agony they endure at presentin making a free decision forthemselves."16 ,

-FOOTNOTES-

IMark Turner, "Burglary 'Sting' Yields over35 Convictions, Praise from Law," Arizona DailyStar, Dec. 25, 1982, p. 1C.

2Carrie Dolan and Paul Ingrassia, "ToxicShock Victim Awarded $10.5 Million InjuryVerdict Against Johnson & Johnson," Wall StreetJournal, Dec. 24, 1982, p. 24.

3Arthur L. Reingold, Nancy T. Hargrett,Kathryn N. Shands, et. al., "Toxic Shock Syn­drome Surveillance in the United States, 1980to 1981," Annals of Internal Medicine, vol. 96,1982, pp. 875-880.

4Dolan, op. cit.5Robert S. Fontana, Lung Cancer and Asbes­

tos Related Pulmonary Disease (Park Ridge, 11-

linois: American College of Chest Physicians,1981), pp. 2-5.

6Ibid., pp. 23-27.7Helen A. Dickie, '~sbestos and Silica: Their

Multiple Effects on the Lung," Disease-a-Month,vol. XXVIII, Sept., 1982.

8Laurel Sorenson, ''A Small Firm's Answerto Suits Over Asbestos," Wall Street Journal,Sept. 24, 1982,p. 27.

9W. Keith C. Morgan, "The Adversary Sys­tem: Cui Bono?" Annals of Internal Medicine,vol. 97, 1982, pp. 919-921.

lOMary Harvey, Ralph 1. Horwitz, and AlvanR. Feinstein, "Toxic Shock and Tampons: Eval­uation of the Epidemiologic Evidence," Journalof the American Medical Association, vol. 248,1982, pp. 840-846.

11Michael T. Osterholm, Jeffrey P. Davis,Robert W. Gibson, et. al., "Toxic Shock Syn­drome: Relation to Catamenial Products, Per­sonal Health and Hygiene, and Sexual Prac­tices," Annals ofInternal Medicine, vol. 96, 1982,pp. 954-958.

12Herbert Spencer, The Man Versus the State(Indianapolis: Liberty Classics, 1981), p. 95.

130ffice on Smoking and Health, "Smokingand Cancer," Morbidity and Mortality WeeklyReport, vol. 31, 1982, pp. 76-80.

14Susan 'Po Baker, Judith S. Samkoff, RussellS. Fisher, et. al., "Fatal Occupational Injuries,"Journal of the American Medical Association,vol. 248, 1982, pp. 692-697.

15Ibid.16Fyodor Dostoyevsky, The Brothers Kara­

mazov (New York: Modern Library, n.d.), p. 269.

IDEAS ON

LIBERTY

The Abandonment of Responsibility

IN proportion as each individual relies upon the helpful vigilance of theState, he learns to abandon to its responsibility the fate and well-beingof his fellow-citizens. But the inevitable tendency of such abandonmentis to deaden the living force of sympathy, and to render the naturalimpulse to mutual assistance inactive.

WILHELM VON HUMBOLDT

Henry W. Vanderleest

Hong Kong'sFutureUncertain

View of buildings in Central District (foreground) and theKowloon peninsula from Victoria Peak.

THERE is presently much concernamong those involved in interna­tional trade that the People's Re­public of China will decide againstrenewing Great Britain's lease overHong Kong when it expires in 1997.A decision by the PRC to reclaim amajor portion of Hong Kong will un­doubtedly lessen the Crown colony'spremier status as a free port andworld trading center.

Uncertainty surrounding the up­coming decision has already shakenthe confidence of many Hong Kongbusiness executives and govern­mental officials. Economic indica­tors, for example, as well as prices

Dr. Henry W. Vanderleest is Professor of InternationalMarketing at Ball State University, Muncie, Indiana,and a general partner in a firm of international mar­keting consultants.

266

on the Hong Kong stock exchangehave dropped markedly during thepast year. In addition, property val­ues in Hong Kong have declined onan average of nearly 30 per cent inthe last twelve months.

Another indicator of Hong Kong'suncertain future is that privateinvestors and government officialsrecently decided not to spend $8 bil­lion on a badly needed new airport.Both corporate and public investorsfeel a sense of urgency for a finaldecision because most loans are ar­ranged for fifteen years and wouldbe jeopardized if signed after July 1,1983. As the result of Hong Kong'suncertain financial climate, manylocal and international firms arechanneling their investment capitalto the United States as well as to

HONG KONG'S FUTURE UNCERTAIN 267

other developing Asian trade cen­ters such as Singapore.

Great Britain obtained Hong Kong,an area consisting of approximately400 square miles and a populationof about 5.5 million, from China af­ter Opium Wars between the twonations in the early 1840s. HongKong Island and the tip of the Kow­loon Peninsula on the mainland ofChina were ceded in perpetuity byChina to Britain by the Treaty ofNanking in 1842. By 1895, the Brit­ish had also obtained control overadditional land on the KowloonPeninsula, referred to as the NewTerritories, which also became partof the Crown Colony. It is only theNew Territories section of HongKong which is scheduled to revert tothe PRC under terms of a 99-yearlease signed in Peking in 1898.

Complex Political Issues

Of critical concern to Hong Kong'scurrent Governor who is appointedby Britain's Parliament is that theNew Territories accounts for nearly90 per cent of Hong Kong's land areaand contains the commercial life­blood of the colony. The area whichwould be left to Britain contains noairport, no agricultural land andvirtually no industries. A relatedproblem is that if the New Territo­ries is reclaimed, the remaining partof Hong Kong would be largely de­pendent upon China for food andwater.

Chinese Vice Chairman DengXiaoping has repeatedly told busi­ness leaders throughout the worldthat China would prefer to retain thestatus quo for the near future anddeal with the Hong Kong problemwhen the "time is ripe," that is, whenshe is ready. The time is not yet ripefor two reasons. In the first place,China regards Taiwan as the "prob­lem" which she wishes to settlebefore deciding on the Hong Kongsituation. Secondly, and more im­portant, is that the economic bene­fits generated by the existence ofHong Kong in its present form areimmense. The British colony, for ex­ample, accounts for approximately 35per cent of China's annual foreignexchange earnings. China also ben­efits from Hong Kong's financialservices, port facilities, interna­tional contacts, and skills in mar­keting Chinese-made products.

The situation is made more bi­zarre by the fact that many of HongKong's leading businessmen, own­ers of ships, banks and departmentstores, for example, are Commu­nists. What currently exists in a largesector of the Hong Kong businesscommunity is a massive paradox;administered capitalism in the ser­vice of the People's Republic ofChina.China would have everything to loseand little to gain by absorbing HongKong. PRC leaders particularly rec­ognize the potential difficulty ofhaving to govern and feed Hong

268 THE FREEMAN May

Kong's westernized Chinese resi­dents who are long accustomed toBritish influences.

From a political standpoint, someChinese leaders do not agree withDeng's status quo position. They be­lieve that it is imperative that HongKong revert to the PRC in 1997 so itdoes not appear that modern Chinahas "sold" out to foreigners as theChing Dynasty did when the origi­nallease was signed. It is feared thatother Asian and African nationswould look down upon any type ofcompromise, causing the Chinese tolose face. Many Chinese have neveracknowledged China's relinquish­ment of Hong Kong and have al­ways considered the colony to be apart of China. Others believe thatthe British are in Hong Kong tosimply administer a part of China,with no more than a very technicalsovereignty. There are also those whomaintain that the treaties signed inthe 19th century between China andBritain were "unequal" because theterms were dictated to a weakenedChina by an aggressive imperialistpower.

Despite the fact that Hong Kongis spiritually and emotionallyChinese, the vast majority of its res­idents also support the status quo.Although most do not philosophi­cally support their colonial status,they recognize the economics of thesituation. Hong Kong residents havegrown to appreciate that the fast-

paced laissez-faire business environ­ment that exists in the colony hasallowed them to enjoy one of thehighest standards of living in Asia.

Alternative Solutions Likely to BeConsidered

Although it is expected that manyformulas will be considered beforeHong Kong's international future isdetermined on or before July 1,1997,several alternatives short of a statusquo merit attention:

1. London could acknowledgeChinese sovereignty over all of HongKong. It could do so by accepting theposition that the original treatieswere invalid. In return, China wouldagree to allow Great Britain to con­tinue administering the territory.This alternative appears to be espe­cially workable because it would savethe political face of both Britain andChina but still allow both nations tohave a stake in Hong Kong's super­charged economy.

2. Short of reclaiming Hong Kong,China could declare the New Terri­tories to be a special economic zonewith British administrators hired torun it. Although this alternative ismet with some enthusiasm by mostChinese leaders, the plan is unac­ceptable to Parliament becauseBritain does not want to be involvedin mercenary operations. It is be­lieved that Britain will not allow it-

1983 HONG KONG'S FUTURE UNCERTAIN 269

self to be politically humiliated and experiment in capitalism that haswould probably sever all ties to Hong proven to be phenomenally success­Kong before agreeing to such an ful since beginning two years ago.arrangement.

3. Perhaps the most radical alter­native would be for China to includea clause in its new constitution thatwould allow for special administra­tive regions outside of the currentboundaries of the PRC. Hong Kong,Taiwan, and the nearby Portuguesecolony of Macau whose population isalso predominately Chinese could fallinto this category. This could be apolitically expedient, although eco­nomically damaging, move sinceChina would be able to incorpo­rate all its "problem areas"simultaneously.

4. Possibly the most logical movewould be for China to expand itsnewly created Western orientedShenzhen economic zone across theborder to absorb Hong Kong. Thiswould be a logical extension of an

Rule of Succession

Hong Kong is presently a politicalpawn in the game of Chinese powerpolitics. In fairness to both partiesof the original lease agreement,however, it was extremely difficultto imagine what the situation mightbe a century later. For those who ne­gotiated the lease in 1898 with aterminal date in 1997, future eventswere so far away as to be of rela­tively little concern. It is certain thatthere will be changes in Hong Kong'srelationship with China after 1997.Although the specifics are not clearat this time, it is suspected that theywill not be so drastic as to undercutHong Kong's usefulness to China.Unless the colony's long term futureis quickly settled, however, the con­fidence and trust that has made HongKong one of the most aggressive andsuccessful trading centers in theworld will disappear. ,

IDEAS ON

LIBERTY

AN economic "rule of succession" prevails in states where competitionis free. Imaginative and efficient managers are constantly rising to thetop, and being elected by customers to larger constituencies, while lessimaginative and efficient managers are voted out. But the managementof a nation's economy by civil servants discourages imagination, andhas no "built-in" mechanism for selecting the most efficient. The besto­wal of honors, it is sometimes argued, takes the place of the moneyincentive of private gain. But there is a vast difference. Honors arebestowed from above, by the "ins." They favor the conformist "Organi­zational man." HAROLD FLEMING, States, Contracts and Progress

Hans ~ Sennholz

MinimumWages

IN simple language, a mInImumwage law is nothing more than agovernment order that workers mustnot work lJ.nless they find jobs pay­ing at least the stated minimum. Itis an order to employers that theymust pay workers the minimum, ornot employ them at all. It is a directorder that is enforced by the coer­cive powers of the state.

The minimum wage movementcame into existence, in concert withthe union movement, as a conse­quence of severe criticism of "sweatshops" in the home-work system,which permitted employees to per­form manufacturing services at home

Dr. Sennholz heads the Department of Economics atGrove City College in Pennsylvania. He is a notedwriter and lecturer on economic, political and mone­taryaffairs.

270

rather than in a factory. The sys­tem, which enabled women and chil­dren to participate in simple produc­tion, constituted a major threat tothe union movement. To eradicatethis threat and all other competitionfrom low-cost labor, labor unions,since their very beginning, havecalled for government intervention.

Minimum wage legislation origi­nated in New Zealand in 1894 andcame to England in 1909, when Par­liament established trade boardswith the power to fix minimum rates.In the United States, the movementat first was confined to state legis­lation applicable to women and chil­dren only. The federal governmententered the field during the 1930swhen it passed labor laws with lim­ited application, such as the Bacon-

MINIMUM WAGES 271

Davis Act of 1931, the Walsh-HealeyPublic Contracts Act of 1936, cer­tain provisions of the U.S. HousingAct of 1937, the Sugar Act of 1937,and the Civil Aeronautics Act of1938. In the same year, the Fair La­bor Standards Act provided muchbroader coverage and established aminimum wage level of 25¢ per hour,covering employees of all businessesengaged in interstate commerce orin the production of goods for suchcommerce. Later amendments to theF.L.S.A. raised the minimum wageto the present level. 1

There is an infinity of political er­rors which, once adopted and en­acted, become principles of states­manship. Labor legislationsummarily disposed of the home­work system and then set out to raisewage rates and improve workingconditions by political force. To mostpolitical parties this is supremestatesmanship that takes prece­dence over all other considerations.But unfortunately, it is also the rootcause ofm~.ss unemployment that isinflicting immeasurable harm onmillions of innocent victims.

An unhampered labor market of­fers opportunities to anyone seekingemployment. The pressures of com­petition by both workers and em­ployers establish a wage rate atwhich everyone eager to work canfind a job, and every employer eagerto hire more help can find moreworkers. But when government sets

out forcibly to lift wage rates abovethose set by competition, chronicunemployment emerges. It causescountless economic distortions, re­duces economic output, lowers per­sonal incomes, and aggravates theplight of the poor.

A wage rate set above a person'sown productive contribution causeshis unemployment, pricing him rightout of the labor market. Surely,minimum wage legislation does notdirectly affect a worker whose train­ing and skills earn him a wage inexcess of the minimum. But it seri­ously jeopardizes the employment ofall those unskilled workers whoproduce and consequently earn lessthan the minimum. In the UnitedStates, minimum wage legislationdoes grievous harm to millions ofunskilled laborers, especially amongthe racial and ethnic minorities­Blacks, Puerto Ricans, Chicanos,Mexicans, and American Indians.

The Victims

Most critics of mInImum wagelegislation do not concern them­selves with the propriety and moral­ity of political intervention with theproduction process. They accept therationale of political supremacy andgovernment power, but lament theevil effects of unemployment on somehighly visible groups of victims, suchas young people, especially blackteenagers. Therefore, they are de­signing special programs for teen-

272 THE FREEMAN May

agers and other groups, calling formassive government expenditures ontheir behalf. Unfortunately they areoverlooking most of the affectedpopulation.

Recent research confirms that onlyabout one-third of low-wage earnersare teenagers, almost one-half aretwenty-five to sixty-four years of age.Two-thirds of the low-wage popula­tion are believed to be female, andsome ten per cent are individualssixty-five years old or older. Alto­gether they comprise some ten percent of American labor. Other esti­mates are even higher. Of course,these workers who are earning theminimum or near-minimum wagesare the very workers who tend to be,or are in danger of being, displacedby wage legislation.2

It is an unfortunate fact that manyminority youngsters with lower lev­els of education, training, and expe­rience than white youngsters, areoften less productive. In an unham­pered labor market they would notbe able to earn as high a wage astheir more productive competitors,but would find employment at lowerrates. When the minimum is raisedabove their productive ability, theyare likely to be dismissed, or not tobe hired. This explains why the un­employment rate of black youth inrecent years has ranged between 40to 50 per cent, which is double therate of white teenagers. If we addthose individuals who in frustration

and desperation have given up theirsearch for employment, the unem­ployment rate among black youthmay, in our estimate, exceed 70 percent.

Submarginal Workers

Other workers with similar limi­tations find it equally difficult to findemployment at the minimum rate.Unskilled women, students seekingsummer employment, and espe­cially unskilled service workers inhotels, restaurants, hospitals, laun­dries, automotive service stations,are living continuously with thedangers of unemployment due tominimum wage increases. It is true,not every minimum wage workerloses his employment when the min­imum rate is raised. Employers mayseek to offset the boost with econo­mies in other labor expenses orthrough exaction ofgreater effort andperformance by the covered work­ers. Wherever such adjustments areimpractical the submarginal work­ers are laid off, that is, all thoseworkers whose costs exceed the an­ticipated price of the incrementalgoods produced or services rendered.

Obviously unemployment is moresevere in industries employing agreat many unskilled workers thanin other industries relying mainlyon professional and highly skilledlabor. And it is more keenly felt incities with concentrations of un­skilled labor than in prosperous

1983 MINIMUM WAGES 273

suburbs. For the South with its mil­lions of unskilled black workersevery minimum wage boost is a ca­lamity. In Puerto Rico it is an un­mitigated disaster.

But no matter how tragic the eco­nomic effects may be on certaingroups of victims, we must not over­look the psychological harm and themoral wrong that are inflicted onthem. Condemned to idleness anduselessness in a highly productivesociety and barred from making theirown contributions, many in desper­ation are turning to vice and crime.The inordinate national crime rateattests to a moral decay that isworking evil in the centers of un­employment and public assistance.And let us not forget the productivemembers of American society whonot only must forgo the valuableservices which the disemployedworkers could render, but also areforced to support them through tax­ation and other exactions. In return,they are compelled to live in con­stant fear of crimes against theirpersons and property.

Benefits for a Few

It is true a few minimum-wageearners actually benefit from amandated increase. The law thatraises the minimum renders sub­marginal all those workers whoproduce and earn less than the newminimum. It withdraws them fromproductive employment and de-

prives economic production of theirservices, which affects the labormarket just like the conscription ofmillions of young men into militaryservice. Their withdrawal fromproductive employment raises themarginal productivity of the re­maining workers and, therefore, in­creases their wages. It also liftssome submarginal labor above thethreshhold of employability. If theminimum is raised from $5 to $5.50,the most productive among the ex­cluded workers will be lifted to thenew minimum in a declining orderof productivity, that is, first workerswho were earning $5.49, then othersearning $5.48, $5.47, and so forth.But consumer reluctance to bear thehigher labor costs usually sets anarrow limit to the lifting process,which consigns most subminimumworkers to the new army of theunemployed.

Political force may disrupt eco­nomic activity and forcibly benefitsome workers at the expense of oth­ers. It cannot stimulate productionand promote universal well-being bywithdrawing millions of able work­ers from economic production. If bylaw or decree a government actuallycould raise the wages and improvethe working conditions of all work­ers, it would be cowardly and irre­sponsible to be content with $2, or$3, or $4 minimums. Let us make it$10 per hour, or better yet, $100 anhour.

274 THE FREEMAN May

If a minimum wage law actuallycould improve the working and liv­ing conditions of all people, let usurge the governments of undevel­oped countries to imitate our exam­ple. Surely, it would alleviate thepoverty and suffering of the massesof India, China, and many Africanand Latin American countries. Ac­tually, it would create horrendousunemployment and jeopardize thevery survival of the poor. Neither theU.S. government nor foreign gov­ernments can improve generalworking conditions by law or decree;only rising production can bring itabout.

Fringe Benefits

Nor can a government grant so­cial benefits that do not reduce theworkers' take-home pay. The inci­dence of any and all benefits falls onthe wage earner. For an employerthe worker's take-home wage is justanother component of the total pricehe must pay for the services of aworker. He would not be an em­ployer for long if he were to ignoreall other employment costs, such asretirement and pension costs, paidholidays and vacations, healthcareinsurance, profit-sharing plans, wel­fare funds, or any other fringe ben­efits. And it does not matter to himwhether he may deduct the fringebenefit costs from the worker's payor must make direct payment to thirdparties. In both cases the burden falls

on the employee. The employer isconcerned only with the total pricehe must pay for the services of aworker.

The minimum wage as set by gov­ernment must not be confused withthe total employment costs of aworker, which in every case greatlyexceed the former. Corporations thatoffer equal benefits to all their em­ployees may grant fringe benefitsthat amount to 35 per cent of exec­utive pay and to 100 per cent or moreof a minimum-wage-earner's pay.But even without any such contrac­tual privileges, the benefits man­dated by government do add consid­erably to total costs. There are SocialSecurity exactions and heavy leviesfor unemployment and workmen'scompensations. The .$3 minimumwage may actually amount to $5minimum cost, and the $5 minimumwage to $10 minimum cost. It is,therefore, misleading to speak of a"small" boost of the minimum wagerate as if the mandated and contrac­tual benefits would remain un­changed. The small minimum boostmay actually amount to a sizable in­crease in total labor cost.

For an employer it is irrelevantwhether he allocates 5 per cent ofemployee wages to fringe benefits or95 per cent. His only concern is thetotal price he must pay to secure theservices of a worker. If governmentforces him to pay more than theworker is expected to contribute to

1983 MINIMUM WAGES 275

production he can be expected to dis­miss the worker. And again it doesnot matter whether governmentmandates an increase of take-homepayor of fringe costs. A $1 boost inthe rate of minimum wages has thesame ill effect on employment as a$1 rise in the levies forSocial Secu­rity and workmen's compensation.

Through their labor, workers payfor all of the fringe benefits they arereceiving. They also make good fortheir on-the-job training by receiv­ing low wages that allow for the ex­penses of their training. When theminimum wage is raised employersmay react to the boost in labor costby reducing their expenditures onbenefits. In particular, they may re­spond by reducing the amounts spentfor on-the-job training.

The Opportunity to Acquire Skillsand Knowledge

For young people the most impor­tant fringe benefit is the opportu­nity to acquire new skills andknowledge, which enhances theirproductivity in the future. Most jobsoffer an opportunity to learn throughformal training programs or infor­mal learning by experience. On-the­job training not only imparts basicskills, but also stimulates motiva­tion, nurtures a sense ofresponsibil­ity, and generally prepares youngpeople for rewarding roles in pro­ductive society. If they fail to ac­quire the experience, training, com-

petencies and credentials in theirformative years, they will have dif­ficulty holding regular jobs in theiradult years. Any barrier to on-the­job training inflicts serious harm onthem.

Millions of young workers who aredisemployed by the minimum wagemay never acquire the generaltraining and specific skills that makethem useful members ofsociety. Theymay never learn the basic disciplineand ethos of labor that are so essen­tial in our society. Instead, pro­longed unemployment so early in lifemay prepare them for a precariousand bitter existence on public wel­fare. More millions may remain em­ployed at or near the minimum, buttheir on-the-job training may be re­duced or eliminated as a result ofmandated minimum increases, whichmay keep them marginally produc­tive throughout life. And their morecreative fellowmen not only mustforgo their valuable cooperation, butmay even be called upon to assistthem and their dependents.3

Extension of Coverage

Federal minimum wage legisla­tion had its beginning more thanforty-five years ago as part of the1938 Fair Labor Standards Act. Fromits very inception it erected insur­mountable barriers to the employ­ment of unskilled workers, espe­cially in the South and in PuertoRico. Since then it has grown into

276 THE FREEMAN May

the most calamitous instrument ofgovernment intervention that den­ies productive employment to mil­lions of willing and able Americans.No other policy conducted by the U.S.government has more tragic effectson the daily lives of so many peoplethan does this legislation.

Several amendments to the Act notonly pushed the rate to ever morerestrictive levels, but also extendedthe coverage to include ever moreemployees. At the beginning the ba­sic minimum as a percentage of av­erage manufacturing wage was es­timated at 41.7 per cent; for 1981 itamounted to 51.9 per cent. In 1938the percentage of covered workersstood at 43.4 per cent; in 1981 it wasestimated at 83.8 per cent.4 If thecoverage provided by various statelaws is added to the federal cover­age, the combined rate may exceedninety per cent of all non-supervi­sory workers.5

It is rather natural for govern­ment to expand its sphere of controland power. If it is called upon to se­cure minimum wages for someworkers it may want to extend thebenefits to all workers. If govern­ment can serve the public good bysetting the wage rates for someworkers it may serve it better yet bysetting the wage rates for all work­ers. The ninety-per cent coverage,therefore, can only be an interim stepon the way to total coverage.

Unfortunately, this gradual ex-

tension of coverage tends to multi­ply the unemployment effect until,with full coverage, it invokes themaximum rate of unemployment. Aslong as the minimum applies only toa small number of occupations, theworkers displaced from covered jobscan seek employment in uncoveredproduction. They shift to uncoveredindustries and employers, whichtends to depress those wages throughincreased job competition. When thecoverage is extended, the shift acce­lerates from covered unemploymentto uncovered jobs, which widens thewage differential in direct propor­tion to the coverage. A small cover­age generates a small difference inwage rates, a large coverage bringsforth a large difference. Total cov­erage obviously eliminates the dif­ference, but creates maximumunemployment.

Minimum wage legislation pro­vides a beautiful example of theprinciple that government interven­tion not only makes matters worse,but also tends to breed ever moreintervention. The minimum wagecovering a few workers causes wagerates to decline in uncovered em­ployment, which invites the exten­sion of coverage to more workers,which in turn brings forth ever widerwage differences calling for morecoverage, until all workers arecovered and the difference iseliminated. Unfortunately, totalcoverage guarantees maximum un-

1983 MINIMUM WAGES 277

employment, which brings forth thegreatest conceivable income differ­ence-between the workers still em­ploye~ and the army of unemployed.

Indexing the Minimum

Minimum wage legislation can beharmless if the rates are set belowthe unhampered market rates. Butthat, after all, is not the intent of itspolitical sponsors who seek to inter­fere with the market process. Andyet, the ominous effects of minimumwages set above the rates estab­lished by the market may be alle­viated by two other factors: risinglabor productivity which may liftmore workers above the minimumbarrier, and soaring inflation whichlowers minimum wages in terms ofpurchasing power. The former mayhave lessened the impact of the le­gal minimum during the 1960s whenlabor productivity managed to rise alittle. But it began to aggravate therestrictive effect of the legal mini­mums during the 1970s when U.S.government deficits consumed pro­ductive capital en masse and real la­bor incomes began to decline.

Throughout this period soaringinflation greatly lowered the realcosts of labor, including the realminimums, which permitted thetemporary employment of someworkers who previously had beenunemployable. The opposing effectsof legislative mandates raising theminimum and the inflation depre-

ciating it, is causing large swings inthe effective minimum. According toFinis Welch, they ranged between30 per cent of the manufacturing­wage average in 1949 and 55 per centin 1968.6

Observing the depreciation of theirmandated minimums the sponsorsdeem it necessary frequently toreadjust the minimum to soaringgoods prices. From 1961, when infla­tion began to accelerate in earnest,until 1981 Congress enacted elevenadjustments which raised the mini­mum from $1 per hour to $3.35 anhour. To simplify the adjustmentprocess and prevent the silent nul­lification of Congressional efforts byinflation, some sponsors propose toindex the federal minimum by tyingit permanently to the average in­dustrial wage. The 1977 amend­ment, which established a Mini­mum Wage Study Commission,therefore called for an investigationof minimum wage, indexation.

Indexing wages, rents, interestrates, and goods prices obviouslymeans government control overwages, rents, interest rates, andprices. It aims at freezing presentconditions, preventing all futurechanges and adjustments unless ap­proved by political authority. Mini­mum indexation would seek to pre­serve the Congressional effort byfreezing the real minimum at 55 percent and thus eliminating the infla­tion swings. This means, unfortu-

278 THE FREEMAN May

nately, that unemployment would bestabilized at its highest possible ratedetermined by the minimum. Itwould permanently deny millions ofunemployed workers a longed-forreprieve provided temporarily byinflation.

Offsets

In a sagacious monograph7 WalterJ . Wessels makes the cogent pointthat employers tend to react to min­imum wage increases by seeking tooffset the added expendituresthrough reductions in other laborcosts. They may cut year-end bo­nuses, re-define the worker's sharein profit sharing, and reduce com­missions and work guarantees. Theymay moderate non-wage expendi­tures, commonly called "fringe ben­efits," such as paid vacations and sickleave, pensions and other retire­ment benefits, life, accident andhealth insurance, or training pro­grams and educational allowances.They may even reduce expenditureson proper supervision and manage­ment, which tends to impair and ag­gravate working conditions. Theymay insist on more effort and appli­cation. As fewer jobs are available,employers may exact greater pro­duction from their minimum-wageworkers. They may assign less de­sirable working hours and condi­tions for which they otherwise wouldpay higher rates. In short, they canbe expected to react by making ad-

justments in order to offset the min­imum-wage boost.

But even if some employers shouldbe able to offset the higher costs of amandated minimum, Wessels ar­gues, it nevertheless impairs theconditions of all covered workers.They may have preferred the fringebenefits over the pay boost, the paidvacations or the major medical in­surance over the cash paymentmandated by Congress.

Where employers are unable tooffset fully a minimum wage boost,which tends to lead to disemploy­ment, the idled workers will seek jobsthat are not covered by the mini­mum wage. Or they may join the"underground economy" where la­bor summarily ignores the law byworking for wages below the mini­mum. But their appearance on theuncovered labor market or the un­derground market, which econo­mists estimate to exceed 30 per centof minimum wage labor,8 tends toreduce further those wages. All af­fected labor, therefore, tends to beworse off than before.

Surely, employers do react tomandated minimum wage in­creases. But we must not underesti­mate the great difficulties they en­counter in lowering other labor costs.Once benefits have been granted itis nearly impossible to rescind them.To reduce benefits is to invite uni­versal resistance and hostility, whichmay impair labor productivity and

1983 MINIMUM WAGES 279

thus raise production costs. More­over, it is virtually impossible in theallocation of fringe benefits to dis­criminate against minimum wagelabor. This is why most employersoffer identical benefits to all theirworkers regardless of position andincome. To ignore minimum wagelabor, or even slash its given bene­fits, is to invite resentment, conflictand strife. It is generally much eas­ier and also more economical to dis­miss the labor made submarginal bythe mandated minimum boost thanto seek adjustment through fringe­cost economies.

Inspiring Performance

For superior management it maybe possible to lead and exhort laborto higher productivity. There is anuntapped reservoir of productivityeven in the best-run office and plant.Brilliant management seeks to tapthis reservoir through guiding andteaching by example. It imparts thelove of work and inspires enthusi­asm for work well done. And, aboveall, it exemplifies that there is nowork so base that man may not ex­alt it, no work so dull that he maynot enliven it. There is no minimumlabor that may not lead to maxi­mum position and income.

Most business managers, unfor­tunately, are incapable of exactingmore effort and application from theiremployees, which is casting doubt ontheir ability to offset mandated wage

boosts. But even if they were able toadjust, the number of affected work­ers would be rather small. Offset­ting adjustments cannot create jobsfor those millions of unskilled work­ers whose·usefulness and productiv­ity lie below the legal minimum. Thehigh school dropout from The Bronxwho may contribute one dollar perhour of work remains unemployableat $3.35 per hour no matter how dil­igently employers are readjustingtheir labor expenses.

Offsetting adjustments do not af­fect the vast majority of Americanworkers who are presently earning

\more than the minimum. They mayat best involve only a small numberof people who are presently earningthe legal minimum and are contrib­uting an amount sufficient to coverthis minimum and other employ­ment-related costs. In many casesthese other costs are also mandated,which clearly makes them unadjust­able. In fact, they actually rise to­gether with the minimum wage.

Employer contributions to SocialSecurity and Workmen's Compen­sation do rise and further raise thecosts of the minimum wage boost.They may also add to the adminis­trative expenses of accounting,withholding, declaring and disburs­ing the additional funds to the ap­propriate government authority.While such costs may be negligiblein a smoothly functioning account­ing department, they are very bur-

280 THE FREEMAN May

densome and highly disruptive for asmall businessman considering theemployment of a few minimum-wagelaborers.

The offset possibilities must not beoverstated. They are narrowly lim­ited to contractual benefits that maybe adjusted by agreement betweenthe contract parties. But in somecases these benefits are negligible.They may be less valuable than amandated wage boost together withthe mandatory fringe adjustment,which precludes any offset. If theyare equal to the ordered raise, allcontract fringes would have to beeliminated in order to effect any off­set. But such a withdrawal of allcontract fringe benefits would beeven more detrimental to amicablelabor relations than their mere re­duction. It surely would impede la­bor productivity and raise produc­tion costs.

From the World of Politics

Every well-known economist hasvoiced his concern about minimumwage legislation,9 and yet, it is sur­viving sober reasoning and cogentarguments and living on in thesphere of political incentives. FewAmericans actually believe thatminimum wage legislation is trulyin the workers' interest, that it in­creases purchasing power and re­duces poverty. And yet, many sup­port it for political reasons. Laborunions and their members benefit

significantly from a legal elevationof wages paid by competing indus­tries using low-productivity, low­wage workers. It hampers theircompetition with union labor andlimits consumer preference for goodsproduced and services rendered bylow-wage labor. Similarly, capital­intensive industries using relativelyskilled labor may want to redirectconsumer choices by raising the costsof low-wage industries.

Most of the support for minimumwage legislation comes from groupsthat are fully aware of its unem­ployment effects. Many Americansin the industrial states of the Northand Northeast use it knowingly as abarrier to the industrial migrationfrom their states to the South. SinceWorld War II many companies haveleft the North to take advantage oflower labor costs and other advan­tages in the South. To prevent thisindustrial migration and to stifleemerging Southern competition theNorthern politicians usually favorhigh minimum wages.

Other supporters who are awareof the harm done to unskilled work­ers are convinced that the beneficialeffects, as they see them, tend tooutweigh the ill effects. Their blindfaith in political action leads themto believe that the ill effects can bealleviated by new governmental ef­forts, such as neighborhood youthcorps, job corps, public works pro­grams, and the like.

1983 MINIMUM WAGES 281

But the most vociferous support ofminimum wage legislation comesfrom the professional spokesmen ofthe poor. Some may actually wel­come unemployment among minor­ities because it breeds other politicaland economic effects and, above all,creates a political power base for theminority champions. When jobs arescarce they are likely to be rationedand allocated according to govern­ment plans and programs. Ration­ing bestows benefits to political con­stituents and thus confers prestigeand power to the program propo­nents. 1O Some are also aware thatunemployment tends to give rise tonew demands for radical govern­ment intervention, for central con­trol and planning, which may pavethe way for an all-round politicalcommand system, called socialism.Mass unemployment, they are hop­ing, will lead voters to support theirultimate objective. i

-FOOTNOTES-

1For a detailed chronology of minimum wagelegislation from thirteenth century France tothe 1930s in the U.S., cf E. R. Nichols andJ. H. Baccus, Minimum Wages and MaximumHours, H. W. Wilson Co., New York, 1936, p. 41et seq; for an American history, cf. U.S. Dept.of Labor, The Development of Minimum WageLaws in the United States, 1912 to 1927, Wash­ington, 1928.

2Cf. Finis Welch, Minimum Wages, AmericanEnterprise Institute, Washington, D.C., 1981,p. 13; also Edward M. Gramlich, "Impact of

Minimum Wages on Other Wages, Employmentand Family Incomes," Brookings Papers onEconomic Activity, 2, 1976, pp. 409-451.

3Cf. Masanori Hashimoto, Minimum Wagesand On-the-Job Training, AEI, Washington,1981.

4Cf. Finis Welch, ibid., p. 3.5Most states have complex minimum wage

legislation of their own, with rates typically be­low the federal rate. In a few states-Alaska,California, the District of Columbia, and NewYork-the rates usually exceed the federalminimum. In other states the differential hasbeen shrinking in recent years.

6Ibid., p. 6.7Walter J. Wessels, Minimum Wages, Fringe

Benefits, and Working Conditions, AmericanEnterprise Institute for Public Policy Research,Washington, 1980.

80rley Ashenfelter and Robert S. Smith,"Compliance with the Minimum Wage Law,"Journal of Political Economy, April 1979, pp.333-350.

9Ludwig von Mises, Human Action (1949),3rd ed., Henry Regnery Co., 1966, pp. 769-777;Arthur Burns, The Business Cycle in a Chang­ing World, National Bureau of Economic Re­search, New York, 1969, pp. 216-219; MartinFeldstein, "The Economics of the New Unem­ployed," Public Interest, Fall 1973, pp. 14-16;Milton Friedman, Capitalism and Freedom,University of Chicago Press, 1962, pp. 180, 181;George J. Stigler, "The Economics of MinimumWage Legislation," American Economic Re­view, June 1946, pp. 358-365; Walter Wil­liams, Youth and Minority Unemployment, Re­port for the Joint Economic Committee, July 6,1977; even Paul Samuelson must admit thatminimum wage rates "often hurt those they aredesigned to help." Cf. Economics, Eleventh Edi­tion, McGraw-Hill Book Co., New York, 1979,p.369.

lOKeith B. Leffler, "The Unanswered Ques­tion: Why are Minimum Wages Popular withthe Poor?" in The Economics ofLegal MinimumWages, AEI, Washington, 1981, pp. 531-534.

Russell Shannon

ROBOTS

ALONG many modern assembly lines,agile arms reach deftly out to soldermetal parts, hang heavy doors onslowly moving auto frames, and ac­complish a myriad of other tasks re­quired to fabricate an automobile.One can readily imagine Henry Fordlooking proudly on, observing witha smile that the process he begannearly 80 years ago still flourishes.

But, of course, one element hasradically changed. Those arms per­forming intricate assembly opera­tions are not all human; more andmore they are mechanical. Steel hasreplaced sinew; electricity substi­tutes for blood. Where once men andwomen toiled and perspired, gleam­ing robots now hum and whirr.

Managers may rejoice that theirrobots don't take coffeebreaks, strike,or go on vacation, but others take adifferent view. They lament theplight of workers whose jobs haveall been "lost." High and rising un-

Professor Shannon teaches in the Economics De­partment, Clemson University.

282

employment rates seem to demon­strate that many loyal workers arebeing ruthlessly replaced.

So people start to wonder, as themachinery is oiled and dusted, whowill feed and clothe American work­ers and their families? Just as we'vealready done with women, blacks,and other smaller groups, will it nowbecome necessary for us to institutean affirmative action program to as­sure equal employment opportuni­ties for human beings?

President Mitterrand of Franceaddressed concerns about technolog­ical displacement at last year's eco­nomic summit at Versailles. AndHobart Rowen, economics writer forthe Washington Post, has stressed the"need for governments to playa ma­jor role in integrating new technol­ogy with the working population andsociety in general."l

For those who worry that robotsmay ultimately eliminate our chanceto work, it is worth noting thatthe word "robot" itself became pop-

ROBOTS! 283

ular largely due to a ·play called-"R. U. R." (for Rossum's UniversalRobots) written in 1920 by the Czechplaywright Karel Capek. And "ro­bota" is the Czech word meaningwork. 2

In the play, Rossum's robots­which are rather more human thantheir current counterparts-becomeoverproduced to the point that theyrise up to overthrow human civili­zation. During the last act, the man­agers of the robot factory, contem­plating their plight, manifest theirmotives.

One character, the clerk of theplant, blames science and engineer­ing. But they are benign, inanimatetools, as incapable of purposive, ma­licious designs as assembly-lineequipment. The underlying fault, theclerk suggests, is surely humangreed. "We're all, all guilty," he cries."For our own aggrandisement, forprofit ..."3 In this charge he echoesKarl Marx, who saw the lure of profitas a fatal peril.

Such profit-which Marx called"surplus" and which he believedrightfully belonged to workers-wasspent by capitalists to acquire moreand more equipment. It would inev­itably be used, Marx forecast, to re­place labor, so it engendered a grow­ing "reserve army of unemployed"which spelled capitalism's doom. 4 Notanticipating a robot rebellion, Marxpredicted that the exploited, alien­ated, and unemployed workers would

rise up to overthrow the capitalistsystem.

Of course, Marx, while perhapspartly perceptive about the purposeof profits, was largely a flop as aprophet. Certainly, today we do haveincreasing numbers of machines. Butwe also have more and more jobs, asshown not only by the general growthof population but also by women'sspectacularly increased participa­tion in the labor force. 5 Whatever itsdefects, the pursuit of profit by"greedy" entrepreneurs has de­monstrably not been detrimental tothe overall level of employment.

In fact, another character in Ca­pek's drama takes a dramaticallydifferent view. The managing direc­tor of the robot plant asks: "Do yousuppose that the manager controlsthe output? It's the demand thatcontrols the output. The whole worldwanted to have its Robots. Good Lord,we just rode along on this avalancheof demand ..."6

The manager sees producers suchas himself simply as servants. Trueenough, profit may be their personalgoal and gain, but don't they earn itby satisfying the expressed desiresof society? If they are guilty of any­thing, isn't it that they are just re­sponding to the wishes of their cus­tomers? This is what Adam Smithmeant back in 1776 when he said an"invisible hand" causes each pro­ducer "to promote an end which wasno part of his intention."7

284 THE FREEMAN May

In an equally perceptive but lesspublicized remark Smith wrote inWealth of Nations, "It is not themultitude of ale-houses that occa­sions a general disposition to drunk­enness among the common people;but that disposition arising fromother causes necessarily gives em­ployment to a multitude of ale­houses."8 One may well question thesocial desirability of having peoplepurchase ale or robots-or hand­guns or abortions, for that matter.But one must also grant that, just asit takes "two to tango," it takes bothbuyer and seller to make a volun­tary transaction. The motive of theseller is but one element. Concertpianists and brain surgeons may bewracked by greed, while pot ped­dlers may believe they provide hu­manity noble services. We shouldneither condemn nor applaud an actbased on the seller's motives alone.

Relief from Drudgery

In fact, so far as robots are con­cerned, the motives of both produc­ers and purchasers may be very high,indeed. Though it was Adam Smithhimself who touted the virtues of as­sembly-line production, he also rec­ognized specialization's drawbacks.Toward the end of Wealth ofNationshe laments that "the man whose lifeis spent in performing a few simpleoperations ... generally becomes asstupid and as ignorant as it is pos­sible for a human creature to be-

come. The torpor ofhis mind rendershim, not only incapable of relishingor bearing a part in any rationalconversation, but of conceiving anygenerous, noble, or tender senti­ment, and consequently of formingany just judgment concerning manyeven of the ordinary duties of pri­vate life."9

Seen from this perspective, robotsbecome a boon. They are relievingus from unwelcome work. Women areno longer slaves to their householdsnor men to their machines. That isthe beneficent view of a centralcharacter in Capek's play. "It wasnot an evil dream," he says, "toshatter the servitude of labor. Of thedreadful and humiliating labor thatman had to undergo. The uncleanand murderous drudgery."l0 Who canargue with that? Any person whowould abolish robots to assure worksuggests implicitly that we wouldalso be better off without vacuumcleaners, refrigerators, and toasters!Or without lathes, ladders, and li­notype machines.

It is also enlightening to recallthat, after all, robots aren't free.Their prices run well into the thou­sands of dollars. What justifies theircost to producers? Labor's cost hasrisen, so workers have now becomerelatively even more expensive. Whydid that occur?

Obviously, workers now find moreand more that they can escape as­sembly-line drudgery and move to

1983 ROBOTS! 285

more meaningful and remunerativework. They are no longer tied to jobsthat induce "torpor" in their minds.So employers discover they must paymore to retain their workers-or elseresort to robots.

There is, of course, the possibilitythat the use of robots may inducesome technological unemployment.But John Maynard Keynes, in hisessay on "Economic Possibilities forOur Grandchildren," predicted in1930 that such unemployment wouldbe "only a temporary phase of mal­adjustment."ll He foresaw that, in theend, the new machines would so en­hance our productive capacity thatmankind would eventually solve thefundamental economic problem ofscarcity. Then, Keynes said, peoplewould have to worry only about howto use their leisure. Keynes clearlydid not foresee the advent of videogames!

Perhaps Keynes took too blithe aview. But the characters in Capek'splay, along with the arguments ofSmith, Marx and Keynes, all makeone fact abundantly clear. The atti­tude we take toward our metalworkers depends very much on ourmental framework. Rather than at­tack robots for making work impos­sible, why not welcome them formaking it unnecessary? Instead ofbeing doomed to engage in endlessdrudgery, men and women have be­come increasingly free to cultivatetheir artistic talents and enjoy more

and more of what we call the "finerthings in life."

The assembly line that Henry Fordinaugurated may have undergone aradical change. But the end result ofits process is basically the same. Itis a machine which replaces bothhorse power and human power.Rather than rickshaws, we ride inReliants and Renaults. Instead ofConestoga wagons, we cruise in Ca­pris and Caprices. Next time you'redriving to your job in an air-condi­tioned, automated office, or rollingalong the highway toward a week­end at the beach, think about that! ®

-FOOTNOTES-

IHobart Rowen, "We Need to Deal with Tech­nology," Greenville News, June 10, 1982, p. 4A.

2Robert W. Corrigan (ed.), Masterpieces oftheModern Central European Theater (New York:Collier Books, 1967), p. 217.

3Karl Capek, "R. U. R" in Corrigan, p. 276.4Karl Marx, Capital (New York: Modern Li­

brary, n.d.), Chapter XXV, esp. pp. 689ff.5Civilian employment as a percent of our to­

tal noninstitutional population rose from 54­56 percent in the period 1950-1960 to 59.3 per­cent in 1979. Economic Report of the President(Washington: U.S. Government Printing Of­fice, 1981), p. 267.

6Capek, p. 279.7Adam Smith, An Inquiry into the Nature and

Causes of the Wealth of Nations (New York:Modern Library, 1937), p. 423.

8Ibid., p. 343.9Ibid., pp.734-35.lOCapek, p. 274.llJohn Maynard Keynes, "Economic Possibil­

ities for Our Grandchildren," reprinted in Es­says in Persuasion (New York: W. W. Norton &Co., 1963), p. 364.

Clarence B. Carson

THE TROUBLEWITHFARMING

THIS past December, I traveled withmy family through north centralMississippi and across the rivernorthwestward into south centralArkansas. The portion of the trip thatmade the deepest impression on mewas that which took us through whatis called the Mississippi Delta.

The Delta stretches for the betterpart of 100 miles inland on eitherside of the Mississippi river in thisarea, though somewhat wider on theMississippi than the Arkansas side.The land is table flat, and the roadwe were on was arrow straight,bending only so much as was neces­sary to put it through the next town.

Dr. Carson has written and taught extensively, spe­cializing in American intellectual history. He is theauthor of several books and is working at present onA Basic History of the United States to be publishedby Western Goals, Inc.

286

The road was raised three or fourfeet above the surrounding country­side, which was fortunate for us. Thecountryside was flooded by unusu­ally heavy winter rains, and theflooding was enhanced by a blindingrain squall as we drove through oneof the more remote regions. Whenthe ground is too full to soak up thewater, there is no place handy for itto go.

This is farming country, though itwas dormant at this season. More, itis row-crop farming country. Few, ifany, cattle or hogs were to he seen,and woodland was rare. Twenty-fiveor thirty years ago, it was predomi­nantly cotton country. Cotton is stillgrown extensively-many stalkswere still standing, with traces of linthanging from the empty bolls-butthe growing of grains, especially

THE TROUBLE WITH FARMING 287

soybeans, has widely supplantedcotton.

The Mississippi Delta belongsgeographically to a much vasterfarming region, extending fromMinnesota in the north to Louisianain the south and from western Ohioin the east to eastern Colorado inthe west. It is a vast fertile region,much of it low lying to flat countrywith deep soil, well-suited in this ageto commercial farming.

It is the Mississippi valley, the lowlying area through which the waterswhich begin in the western Appala­chians and the eastern Rockies flowinto the Mississippi, and thence tothe sea. The region of the valleynarrows from north to south as themountains recede in height and fanout into foothills which channel thewater along other courses to the Gulfof Mexico. The Mississippi valley issometimes called the heartland ofAmerica. It is certainly the bread­basket, for most of the grain thatfeeds America is grown there.

The Mississippi Delta throughwhich I traveled has undergone amajor change in the past two or threedecades, a change that was verynearly completed by 1970, say. Al­though vast acreages of land are un­der cultivation now, the country issparsely inhabited. Houses are usu­ally located a considerable distancefrom one another; often, they areseparated by a mile, or more, offarmland. Usually, a single family

dwelling sits alone, with the me­chanical equipment for farmingnearby.

An Agricultural Revolution

Twenty-five or thirty years ago itwould not have been possible for sucha small number of farmers to tillthese great acreages. This Missis­sippi Delta was one of the major cen­ters of cotton growing in the UnitedStates. Cotton required intensivecultivation-it had to be hoed sev­eral times by hand-and many hu­man hands to harvest any consider­able amount of it. Two majordevelopments altered these require­ments. One was the development ofherbicides to get rid of unwantedweeds and grass. The other was thedevelopment of a mechanical cottonpicker. Along with this, there wasincreasing use of mechanical plant­ers and fertilizer distributors whichcould be extended across a wide car­rying frame to plant many rows.There also were larger cultivators.The reduction of hands used wasfurther accelerated in the 1960s bythe extension of the minimum wageto cover farm laborers.

So it is that a countryside oncedotted with houses of small land­owners, tenants, and dwellings forhired laborers is now sparsely set­tled by farmers who rely almost ex­clusively upon heavy equipment todo the work. I looked in vain for rel­ics of these buildings. I noted none.

288 THE FREEMAN May

There were reports in the 1960s thatthey were burned to be rid of them.

A similar change or transforma­tion has occurred in farmingthroughout the United States,though less dramatic than in cottonfarming in most instances. Here andthere are still enclaves of farmingwhich require intensive human careand human hands and decisions inharvesting, such as in tobacco grow­ing or in the production and har­vesting of some fruits and vegeta­bles. By and large, though, theextensive use of machines, the shiftaway from intensive use of labor, andthe cultivation of large acreages bysingle farm families has been thetrend throughout most of Americanagriculture.

Fewer Farms-and Farmers

Statistics tell much of the story inabstract terms. According to censusfigures, the total number of farms inthe United States has declined from6,102,000 in 1940 to 2,808,000 in1980. The most drastic decline forany decade was in the 1950s, whenthe number of farms dropped from5,388,000 in 1950 to 3,962,000 in1960. The number of farms appearsto have stabilized over the pastdecade or so.

The total farm population de­clined from 30,547,000 in 1940 to8,864,000 in 1980. Again, the larg­est drop in farm population occurredin the 1950s, when it declined from

23,048,000 in 1950 to 15,635,000 in1960. The number of hired farmworkers (average) in 1920 was3,391,000; in 1940, 2,679,000; in1980, 1,303,000. The largest drop inhired farm workers occurred in the1960s, which coincides with the ap­plication of the minimum wage tothem. Farms have been increasingin size over the same period, ofcourse, and it might go without say­ing that they have generally beenincreasing precipitately in value.

The main conclusion to be drawnfrom these facts is that fewer andfewer people are farming more andmore land (per farmer) by the use ofmore and more equipment. Or, informal economic terms, there hasbeen a dramatic shift away from la­bor in the economic mix to land andcapital, especially capital.

Moreover, not only are fewer peo­ple farming more land with moreequipment, but also they are pro­ducing more of many commoditiesthan ever before. For example, hereis a description of production in 1981:

The corn crop of 8,080,000,000 bush­els, or 205 million metric tons (t), wasthe largest on record and 22% greaterthan the 1980 crop. All feed grain pro­duction . . . was 240 million t, up 21%from ... 1980. Also the soybean crop of2,110,000,000 bushels was the secondlargest crop on record and ... 18% largerthan the 1980 crop. The U. S. wheat cropwas a record 2,750,000,000 bushels ...,377 million bushels more than in 1980.

1983 THE TROUBLE WITH FARMING 289

Cotton production of 14.8 million baleswas 33% greater than in 1980. Hay pro­duction increased 5% over 1980, whilepasture and range conditions were 22%better than in 1980. Due to lower live­stock prices during the first half of 1980,the number of hogs raised, the numberof cattle fed for beef, and the number ofchickens raised were down slightly.(American Annual [Grolier, 1982], p. 78)

The production achieved by Ameri­can farmers by way of this headyshift to capital is surely little shortof being one of the wonders of themodern world. Moreover, the pricesof farm products to consumers shouldgenerally be reckoned as a bargain,compared to the prices of many othergoods in an era of rising prices.

Signs of Distress

But there is a rather large wormin the apple of this farming Eden,which brings us to the subject of thisessay, the trouble with farming.Discontent among farmers has beenwidespread and, perhaps, increas­ingly strident in recent years. Therehave been tractorcades to some statecapitals and to the national capital,confrontations with sheriffs at fore­closure sales, and dark threats of vi­olence if something is not done tohelp farmers.

The most common complaint isthat farm prices are so low that largenumbers of farmers cannot makeends meet. Stories surface after eachcrop year of farmers who lost large

sums of money. Nor are the difficul­ties restricted to farmer~ in anyonesection of the country or producersofparticular farm goods. They rangefrom dairy farmers to chicken andegg producers to grain and fiberfarmers to cattle growers.

Farmers are not noted, of course,for boasting about their great prof­its. Who is? Those who work andproduce rarely complain that theyare overpaid or admit that they areadequately compensated for theirefforts. It could be, too, that whenfarmers gather in the winter, brag­ging rights sometimes belong to thefarmer who had the largest lossesduring the year. But there is naughtof exaggeration or humor in the in­ability of farmers to make paymentson their debts or the ensuing bank­ruptcies and foreclosures. These lastare widespread and increasing by allaccounts. Moreover, precipitatelymounting farmer indebtedness sig­nifies something of the extent of thedifficulties.

Total farm real estate debt out­standing stood at slightly over $7billion in 1953. At the end of 1981,it stood at over $92 billion. Therewas a steady, though not particu­larly dramatic, rise in farm real es­tate debt during the 1950s and 1960s.It began taking off in the 1970s andalmost doubled between 1975 and1981. Closer analysis shows, too, thatthe least well secured-most precar­ious-portion ofthe indebtedness was

290 THE FREEMAN May

increasing even more rapidly. In­debtedness to the Farmer's HomeAdministration, the lender of lastresort for farmers, almost doubled inthe period 1979-1981. These figuresdo not include the indebtedness forshorter terms secured by farmequipment or "rollover" debts, notcompletely retired from year to yearbecause the proceeds from the saleof produce were insufficient. Theseadd substantially to the overall debt.

Contributing Factors

A good many contributory reasonscan be enumerated for short termdifficulties of farmers in general andthose of individual farmers here andthere in particular. Most likely, somefarmers who go bankrupt or havetheir farms foreclosed are ineffec­tive managers. Some are what econ­omists call marginal, or on their wayto becoming sub-marginal, farmers.

More broadly, there have beenfluctuations and changes which hadan impact on farmers generally. Onewas the oil embargo of the Arabcountries and the subsequent steeprise in oil prices. This developmentnot only drove fuel prices up but alsothe prices of such things as fertil­izer, pesticides, and herbicides. An­other development has been thesharp rise in interest rates in recentyears. Embargoes on grain ship­ments to communist countries haveaggravated the situation for graingrowers also. It can be added that,

of course, farming is a. risky busi­ness, and the vagaries of weather, ofpests, and diseases contribute to thefluctuations in farm production.

These, and like, explanationsmight suffice if the trouble withfarming were temporary or episodic.But some of the signs, especiallymounting indebtedness, point topersistent and increasing difficulty.Moreover, ifit were simply a marketphenomenon, we might expect thatfarmers would make the necessaryadjustments of production to de­mand to get prices that would en­able those who stayed in the busi­ness to prosper: But it is not simplya market phenomenon, certainly notof the free market anyway. None ofthe developments discussed abovewere simply responses to the freemarket: not the dramatic shift fromextensive labor toward capital, notthe enlargement of farms, not thebuying of ever larger and more ex­pensive farm equipment, not themounting indebtedness.

All these occurred in a frameworkof government tampering, interven­tion, restriction, subsidization, andtacit inducement. Farmers have beenpropelled, as it were, in the directionthey have taken, including produc­ing more than could be profitablysold, by government programs overthe years. That is not to say thatsome of the developments, such asthe shift toward capital by the useof large and specialized machines,

1983 THE TROUBLE WITH FARMING 291

would not have taken place, sooneror later, without the intervention.But it is most unlikely that thechanges would have occurred soswiftly, so dramatically, or so exten­sively if the market had been thesole prompter of them. That is a wayof saying that it is most unlikely thatfarmers would have been caught intheir present bind by the workingsof a free market. At any rate, that isnot the way it happened.

Although there have been manygovernment programs over the yearswhich affected farming more or lessin a variety of ways, I want to focuson three categories of programswhich have the most direct bearingon the present situation. They are:price supports, crop and productionrestrictions, and easy credit. Whileeasy credit is at the heart of thepresent farmer difficulties, otherprograms provide an essential partof the background and highlightsome of the fallacies which underliethem.

Price Supports

Farmers have long and often be­lieved that their problems, when theybecame acute, were caused by lowprices for their production. Over thepast century, they, or those whoclaimed to speak for them, haveidentified a number of villains whoeither contributed to or caused thelow prices. Among these were hightransportation costs, extortionate

rates for storage facilities, moneyshortage, the fact that farmers oftensold their crops at the time whenprices were lowest, protective tariffson manufactured goods, middlemanprofits, and, belatedly and occasion­ally, their own overproduction. Cou­pled with this has been a sentimen­tal attitude toward farmers andfarming, which goes back at least toThomas Jefferson and was vigor­ously intruded into the political sceneby William Jennings Bryan in thelate 1890s. There were sporadic po­litical attempts to "aid" the farmerby making easier money availableand regulating rail rates over theyears.

However, it was not until the 1930sthat the federal government made aconcerted effort to raise farm prices.The New Deal devised a variety ofprograms designed to accomplish thisresult. Among them were programsto increase the money supply, makeloans on crops stored in warehousesuntil prices rose, subsidies, govern­ment guarantees, and governmentbidding up of prices. Some one, com­bination, or all of these efforts didsucceed in raising farm prices, orsome of them.

It happens, however, that one ofthe most important economic func­tions of price is to signal what iswanted. Higher farm prices tend tospur farmers to produce more of thegoods for which prices are rising. (Notall farm products had price sup-

292 THE FREEMAN May

ports.) If the New Dealers did notknow this at the beginning, therewould soon be bountiful evidence toprove it. In any case, they were in­tent on raising prices, and they didunderstand that the way to do thatwas to reduce the supply on themarket. Sometimes, they, or theirsuccessors in government, limited theamount of particular crops that couldbe sold at support prices. But themain device by which governmenttried to limit production over theyears was by acreage restrictions oncontrolled crops. Farmers were as­signed crop allotments for crops thathad price supports, usually for theircommercial or "money" crops.

Distorted Signals

The combination of price supportsand acreage (or production) restric­tions bent or distorted the market inopposite directions. On the one hand,price supports, so far as they suc­ceeded in raising prices above whatthey would have been on the mar­ket, signaled farmers to increaseproduction. On the other hand,acreage allotments limited theamount of land that could be plantedto those crops. That did not meanthat farmers gave up in their effortsto increase production of supportedcrops. It did mean, however, that theywould have to shift the economic mixfrom labor toward capital. In theory,they might have cultivated the com­mercial supported crops more in-

tensely in the hope of increasingproduction. But that was hardlypossible, even if it would haveworked.

The government program was setup in a way that discouraged theconcentration of labor on the con­trolled crop. Allotments were basedon the total amount of land undercultivation on a given farm. (Gov­ernment favored diversified farm­ing.) Thus, on a farm, only an estab­lished percentage of the land couldbe planted to the controlled crop. Inorder to get his maximum allot­ment, a farmer had to keep a maxi­mum amount of his land in cultiva­tion. He could, of course, concentratehis capital expenditures for fertil­izer, improved seeds, pesticides, andthe like, on the commercial and con­trolled crops. Many, probably most,farmers did. More, when they could,farmers increased their capital ex­penditures for these over what theyhad done, for it was a route to in­creasing production.

Beyond that, however, farmers whosurvived generally had to bring moreland under cultivation, rent it or buyit (or buy allotments, as was some­times done in the 1950s and 1960s)to make a living. The record is clearthat most of those on small farmscould not make a go of farming. Themass exodus from farming got underway in earnest in the mid-1930s andcontinued to the late 19608, whenfarm population tended to stabilize.

1983 THE TROUBLE WITH FARMING 293

The main path taken by farmers wasto increase farm holdings. Since thenumber of hired farm workers wasgenerally declining during this per­iod, the main approach taken to thecultivation of these larger acreageswas to buy mechanical farm equip­ment, i.e., tractors, trucks, planters,cultivators, and harvesters. Thus, theshift from labor toward capital wascompleted, so far as it has been.

From Whence the Capital?

Where did the farmers get thecapital? More bluntly, where did theyget the money to buy the machines,the fertilizer, the pesticides, the her­bicides, the improved seeds, irriga­tion systems, and the like? In addi­tion, where did they get the moneyto buy or rent additional land? Thereis no need to generalize too broadlyhere.

Most likely, there have beenfarmers who financed their expan­sion over the years in a business­like and sound financial way. Theyextended their land holdings fromprofits, savings, inheritances, and soforth, and bought additional landonly as it became available at at­tractive prices. Such people mightwell have bought new and largerequipment from similar sources,supplemented by prudent borrow­ing. If so, and if they have managedwell, they are probably succeedingin farming even today. In any case,we are looking for the sources of the

difficulties of farmers in trouble.More, we are looking for what, inaddition to support prices, has en­abled farmers to get the capital toproduce in such quantity that theycannot survive in farming with suchprice supports as still exist.

The source of much of the moneyfor farm capital and land is no greatmystery. It has been borrowed. It hasbeen made available by easy credit.The easy credit is a result of the pol­icies and programs of the UnitedStates government. The farm move­ment that got underway in the lat­ter part of the nineteenth centurywas early penetrated with the ideathat easy money, or inflation, was apanacea for the problems of farmers.

This easy-credit idea achieved po­litical expression in the Green­backer and silverite movement, waspropounded by the Populists in the1890s, and entered the Democraticparty by way of William JenningsBryan and his followers in 1896. Itbegan to bear fruit when the nextDemocrat, Woodrow Wilson, waselected to the presidency in 1912. TheFederal Reserve Act was passed in1913. The banks authorized under itwere to become engines of inflation,for they were empowered to issuecurrency on the security of commer­cial and agricultural paper. That is,they could expand the credit by re­discounting notes held by banks, thusmaking more money and creditavailable.

294 THE FREEMAN May

The Federal Reserve system, then,has been the main fount ofeasy creditin the United States generally sincethat time. It is important to empha­size, however, that farm credit is abreed all its own. Otherwise, it mightbe supposed that farm financing isdone in the same way as for otherbusinesses. True, commercial farm­ing is a business, and farm enter­prises are often referred to as agri­business. But much of farm financ­ing is not done under such restraintsas apply to business concerns.Farming is an especially risky busi­ness, yet much of the risk capital isobtained as loans rather than frominvestors who knowingly share in therisk. Also, much of farm land is fi­nanced by borrowing.

The Farm Credit System

How has this come about? Mainlyby the operation of what has cometo be called the Farm Credit System.Since little is known about this sys­tem generally, and since those whoknow of one or more of its agenciesmay not be aware of the governmentconnections or the strange organi­zational modes, some little explana­tion of it may be in order.

First, the Farm Credit System wasgovernment inspired, governmentauthorized, has had initial and oc­casional government financial help,and is government controlled! Thebasic system was authorized by theFederal Farm Loan act of 1916. The

Federal Land Banks, probably thebest known ofthe organizations, werefirst organized in 1917, pursuant tothis act. There have been changes inthe system from time t<? time by con­gressional acts. The following re­marks are about the system as it wasauthorized by the Farm Credit Actof 1971.

According to the U.S. Govern­ment Manual, the system is orga­nized in this way:

The Farm Credit Administration, anindependent agency, supervises and co­ordinates activities of the cooperativeFarm Credit System. The system is com­prised of Federal land banks and Federalland bank associations, Federal inter­mediate credit banks and productioncredit associations, banks for coopera­tives. Initially capitalized by the UnitedStates, the entire System is now ownedby its users.

Some of the above information couldbe misleading, however. The FarmCredit Administration is "indepen­dent" in the sense that it does notfall under the authority of any reg­ular department of the government.Otherwise, it is a governmentagency, as are all the others underits authority, and the governingboard is politically appointed: 12members by the President of theUnited States and one by the Secre­tary of Agriculture.

This is a nationwide system ofcredit for farmers, the central banksbeing distributed about over the

1983 THE TROUBLE WITH FARMING 295

country in much the same way asare Federal Reserve banks. TheFederal Land Banks make long term(5 to 40 year) loans to farmers se­cured by real estate. Although por­tions of the loans may be. used forother purposes, they are made basi­cally for the acquisition of farm land.The Intermediate Credit Banks arediscount banks, serving mainly Pro­duction Credit Associations. Theirmain purpose is to discount inter­mediate term notes, such as wouldbe needed for the purchase of farmequipment. Production Credit Asso­ciations make mainly what shouldbe called risk capital loans to farm­ers. The loans may be for periods ofup to 7 years. Banks for Coopera­tives are, as the name implies, banksfor associations of farmers.

Specialized Loan Companies

None of these organizations arebanks in the usual meaning of theterm. They are neither depositoriesof money nor issuers of currency.They might better be called loancompanies, for that is their function,loan companies established by theUnited States government. But theword "company" may be misleading,if by that term we mean an organi­zation owned and operated by inves­tors for profit. The organizations inthe Farm Credit System do not fitthat description. The investors haveno control over the organizations;investment is separated from own-

ership; hired managers operate them;and the profits, if any, go to the bor­rowers. Basic policy is set by politi­cal appointees or by law. Financingcame initially from the Federal gov­ernment, and ongoing financingcomes from consolidated bonds soldto investors and backed by the notesfrom borrowers. (The United Statesgovernment does not guarantee thesebonds, but that may be only atechnicality.)

The borrowers hold the votingstock in the basic organizations forthe duration of their indebtedness.They are required to purchase thestock in order to obtain loans, andwhen the loans are repaid they musteither relinquish the stock, or, insome cases, accept non-voting stockin return. The voting stock servesbasically as a means of choosing themembers of the committee whichapproves or disapproves loans. Suchprofits as may be made are, in effect,paid out as reductions of interestrates to current borrowers.

The point of these arrangementsmay be easier to get by conceivingthe matter in figurative language.The government has contrived tobring into being and caused to beplanted and grown a vast cabbagepatch, i.e., credit, for rabbits, i.e.,farmers. The rabbits have beenplaced in charge of distributing thecabbages under guidelines laid downby politicians or their appointees. Mypoint is that a vast system of easy

296 THE FREEMAN May

credit to enable farmers to buy landand get risk capital has been madeavailable by government. But toround out the account of credit insti­tutions one more needs to be in­cluded. It is the Farmer's Home Ad­ministration (known as the F.H.A.in rural circles).

The ~H.A.

The Farmer's Home Administra­tion is a backup organization to pro­vide easy credit, mainly for farmers,who cannot meet the requirementsofother lenders. (Applicants for loansare usually expected to submit evi­dence that they have been turneddown by other lending institutions.)Its basic authority stems from an actof Congress passed in 1921. It oper­ates within the Department of Ag­riculture, and it is financed by pro­ceeds from the sale of Treasurycertificates. It makes loans to "payfor equipment, livestock, feed, seed,fertilizer, other farm and home op­erating needs; refinance chatteldebts; provide operating credit to fishfarmers;" for the purchase of land,houses, and other sorts of things forrural inhabitants and farmers. Termsof repayment and interest rates areadjusted to the financial situation ofthe borrowers.

None of this is meant to suggestthat farmers borrow exclusively fromgovernment agencies. They, or someof them at least, borrow from regu­lar banks, from insurance compa-

nies, from equipment dealers, andfrom private as well as other publicsources. But there is every reason tobelieve that the major source of theeasy credit which has many of themnow swamped with debts are thegovernment agencies.

While I was in the midst of writ­ing this article there was an accounton television of a farmer in Ohio whowas trying to prevent the auctioningof his farm to pay his debts, or atleast those secured by it. Accordingto the television announcer, the manhad 199 acres of land, and he owed$400,000 to a Production Credit As­sociation and $200,000 to a FederalLand Bank.

Much more generally, the break­down of the lenders to whom wereowed the more than $92 billion out­standing farm real estate debt in

, 1981 confirms the preponderance ofthese agencies. The largest portion,nearly $36 billion, is owed to theFederal Land banks. Nearly $8 bil­lion is owed to the Farmer's HomeAdministration. Life insurancecompanies had loaned nearly $13billion, and commercial bankssomewhat under $9 billion. The otherlenders were not enumerated.

Here is a synopsis of an Associ­ated Press release (published in theBirmingham News, January 2, 1983,p. 21A) which illustrates the easewith which farmers could borrowmoney and the consquences of debtfor one man. It is about a man who

1983 THE TROUBLE WITH FARMING 297

was a farmer in Missouri. He beganfarming in 1965 with 68 acres of landand $600. By 1970, he was planting900 acres and feeding several hun­dred hogs. This expansion was builtupon a mountain of debt; it eventu­ally totaled nearly $400,000.Drought, a disease which decimatedhis hog population, and inadequateprices drove him to the wall. TheProduction Credit Association, whichhad been supplying the risk capitalfor his operation, could carry him nolonger. He turned to the Farmer'sHome Administration, but that aiddid not last long. His farm was soldat auction, but many of the debts re­main unpaid.

In retrospect, this farmer under­stands what happened to him thisway. He believes

he still would be farming had he not ex­panded with such zeal. Had his appetitefor money not been so voracious. Had thatmoney not been dished out so readily.

"They made a feather bed for me to lieon ...," [he] said of the lenders. "Youknow, I could basically sit down at mykitchen table and write out a loan. It wasjust too simple."

"The road to hell," it has been said,"is paved with good intentions." Theroad to trial and tribulation forfarmers is paved with governmentprograms. Undoubtedly, farmerswould have a full quota of trouble ifthere were no government interven­tion. Commercial farming is a busi­ness, and it is beset with all the pit-

falls of other businesses. Somebusinesses prosper, others fail. Thatis the story of all business in goodtimes and bad, and especially in bad.Beyond that, farmers face some riskspeculiar to their undertaking. Thus,however unfortunate it may be,farming is unlikely ever to be a uni­versally prospering undertaking forall who venture into it.

Conclusions

But the conclusions toward whichthis article has been moving arethese. Government intervention hasgreatly aggravated the lot of thefarmers. Price supports inducefarmers to produce more. That, pluscrop restrictions, promoted the ex­pansion of land holdings and the shiftfrom labor toward capital. Despitethe fact that this was risk capital,the government set up a vast creditmechanism to supply much of it.

Price supports, crop restrictions,and easy credit sent misleading sig­nals into the market. The crop re­strictions have generally been aban­doned over the past couple ofdecades,not, however, before millions of peo­ple had been driven from farmingand the pattern had been set for thosewho remained to expand their landholdings and rely more and more oncapital. Price supports, while not soobtrusive as they once were, stillserve to stimulate production.Meanwhile, farmers go deeper anddeeper in debt in a desperate effort

298 THE FREEMAN

to produce more and more in the hopethat they can pay off the debts whichare threatening to crush them. Manyare falling by the way. Others, per­haps most, are having a hard timedue to the lower prices resulting fromthe increasing production.

Many farmers are raising the cryfor government aid once again. Butthe hair of the dog that bit them willno more solve their problems than itwill cure alcoholism. Neither eco­nomic theory nor historical experi­ence support any such notion. It isgovernment intervention which hasbent, strained and distorted themarket to produce the current mess,

Government Lending

as well as a number of earlier ones.The unhampered market provides

the guides for how much to producein order to survive in an undertak­ing. The free market price is thesurest guide to what to produce andin what quantity. When credit is onlyavailable from those who hope toprofit from lending the scarce moneyavailable, there is little likelihood ofoverexpansion of landholdings orovercapitalization. Not so long asthese are dependent on credit. Andthe farmers who are in desperatestraits today are those being crushedby a mountain of debt. i

IDEAS ON

LIBERTY

IN the sense that each borrower undertakes to repay out of the revenuesproduced by his work, all government lending is lending to financeenterprise. Where there is no enterprise, there is no prospect of repay­ment. In this broad sense, where enterprises and enterprisers are dis­cussed in these general comments, the terms are used to apply to farm­ers and working people as well as to businessmen, partnerships, andcorporations.

The theory of government lending is that it produces economic activ­ity which otherwise would not occur. This means that if the governmentoffers to pay the bills, now or later, homes will be built, factories will beconstructed and outfitted, minerals will be mined, crops will be grown,electric power and telephone lines will be erected, goods will be exportedfor sale abroad, employment opportunities will be created, and manyother business transactions will be undertaken, even if in each case itwould have been unattractive or financially impossible for the peopleconcerned to undertake the transaction unassisted.

(Extracted from the February 1955 report by the Task Force on Lending Agencies, prepared forthe Hoover Commission on Organization of the Executive Branch of the government.)

I sat at my desk in the classroom,mulling over a stack of bills writtenby the students in preparation forour Mock Congress. As I glanced ateach one, checking for proper for­mat, neatness, and appropriatenessof the action proposed, a wave of dis­couragement swept over me.

Only two units earlier we hadspent several days discussing theprinciples of the Declaration of In­dependence. I had tried to explain insimple terms the formal writing ofThomas Jefferson. I had placed spe­cial emphasis on the importance ofthe truths deemed "self-evident to allmen."

Even as the discussion proceeded,I had begun to detect that these self­evident truths and inalienable rightswere indeed foreign to many of theyoungsters. The very idea that themain purpose of government was thedefense of individuals' lives, liber­ties, and properties seemed entirely

Mr. Peterson of East Greenville, Pennsylvania, teacheseconomics and history in junior high school.

Dennis L. Peterson

From theMouths of

Babes

new to many of them. This was con­firmed when I rhetorically asked,"What is the purpose of govern­ment? Is it to provide jobs? Set prices?Build homes?" The overwhelmingresponse was, "Yes, that is govern­ment's job."

The explanation that followedcorrected their fallacious think­ing-or so I thought. They even didwell on the test, parroting back thefreedom philosophy I had so ex­pertly taught them.

Now, as I read the bills they hadproposed for their Congress, I real­ized the truth-they had not reallylearned the philosophy of freedom.The big brother philosophy wasfirmly and unmistakably embeddedin their young minds.

Two bills proposed severe inter­national trade restrictions. Two oth­ers demanded long-term, low-inter­est loans for farmers and students.Another mandated involuntary autoseat restraints. Still another recom­mended a guaranteed annual in-

299

300 THE FREEMAN May

come. One even suggested that thegovernment enter the fruit-growingbusiness.

It is true that one could simplydismiss such proposals as the un­thinking work of junior high schoolstudents. But it is not that simple.From these bills I quickly realizedthat the students were learning wellthe philosophy of government soprevalent today. Their bills merelyreflected proposals they hear dis­cussed on television. Their bills, witha little spit and polish, refinement,and professional legal terminology,are the very issues being debated inthe halls of Congress.

These students knew of nothingelse to propose. Throughout theirlives they have been hearing adults,especially the government "ex­perts," discussing the efficacy ofgovernment regulation and inter­vention. Practically every proposaloffers some form of government con­trol. And usually such proposals aredesigned to benefit some unfortu­nate individual or group, thus ap­pealing to their desire to help othersin need.

Many of the students had at­tended public school for several years,where they had received the govern­ment's philosophy of control underthe guise of preparing them for free­dom. Those who had attended pri­vate school had either not been ex­posed to the freedom philosophy orhad not truly come to accept it for

themselves. None of them had readliterature written by proponents oflimited government.

As I sat at my desk, dejected anddefeated, I thought back to my ownearly schooling. Even then severalsocial studies teachers had espousedcollectivist ideas. The literature wasfilled with them. But at home I sawin my parents hard work, rugged in­dividualism, sound personal econ­omy, and a fear of government in­terference. It was about that timethat I began receiving The Freemanand "Notes From FEE." I still recallmy excitement when a book writtenby Leonard Read arrived in the mailand the elation I felt upon turningto the dedicatory page and reading,"To Frederic Bastiat...." Hand­penned following these printed wordswere, "... and Dennis L. Peterson."It was autographed by Mr. Read. Atthat time I knew of no greater honor.It encouraged me in learning morefully the freedom philosophy.

Slowly I have realized that thefreedom philosophy is not some­thing that can be taught in a fewclass periods. It cannot become a partof one's life through a mere intro­duction in school. It must be con­stantly nurtured, strengthened, andsustained. It must be shown to workon a day-to-day basis. It must be re­inforced in real life in the home, inthe church, and in the very halls ofgovernment. In short, it is some­thing that can be discouraged and

1983 FROM THE MOUTHS OF BABES 301

destroyed or encouraged andstrengthened by others, but it mustbe learned through self-discovery.

The way of freedom must betaught, not by deriding the socialis­tic fallacies, but by accentuating therighteousness of freedom. As Mr.Read so clearly stated in Accent onthe Right, "When we accent what isright, we put ourselves in the realmof the positive; our message becomesattractive, for it is one of hope ratherthan despair. This approach alsostrips the wrongdoing of its plausi­bilities and without any declama­tion on our part-leaves it bare, na­ked, and exposed."

A Lifetime Challenge

In reflecting on the lessons learnedfrom my students, I nQw understandthat teaching freedom to others isnot the work ofa'semester, but ratherthe work of a lifetime. It will requiremany lessons, not one lecture; muchreinforcement, not mere regur­gitation.

A proponent of freedom should bea perpetual student. No one can bea teacher who is not at the same timea student himself. "Everybody is ig­norant," Will Rogers said, "only ondifferent subjects." Students willadvance in their learning only to thedegree their teacher is advancing inhis own education. Samuel Smilessummed up this point in his bookThrift when he wrote, "Every man'sfirst duty is to improve, to educate,

and elevate himself, helping for­ward his brethren at the same timeby all reasonable methods."

He should live his life in such away that others will see the desir­ability of individual freedom. Heshould beware of developing a repu­tation as a ranting fanatic who isalways negative in his attitude.Rather, he should be an exemplaryproponent of the positive, emphasiz­ing the benefits offreedom. He shouldillustrate how good freedom is, nothow bad collectivism is.

Now I am asking myself what oth­ers are seeing in me. Will my youngdaughters learn the freedom philos­ophy from my life the way I learnedit from my parents? If they do not, Ihave only myself to blame. ,

Special Issue of The Freemanon The Renewal of Freedom

Reprints of historic documents andother suggested readings on Con­stitutional Government in America.

Copies of this July 1981 issueavailable in quantities of 10 or moreat $.25 each. (Minimum order 10copies.)

Order from:The Foundation for Economic

Education, Inc.Irvington, New York 10533

Lawrence W. Reed

Economistsand theFuture

IN September, 1981, an economistfrom a major university in Michiganmade known his economic forecastfor 1982. His prognostications werewidely publicized; perhaps somebusiness or government decisionswere based on them. According tothe economist, the sluggish condi­tions of 1981 would give way to re­covery early in 1982. Auto saleswould improve to an annual rate of9.7 million vehicles by the secondquarter. Unemployment would "sta­bilize" at about the 8 per cent level.Economic expansion would spread toall major sectors, with the overall"rate of growth" doubling by the endof the year. Price rises would remainabout as strong as they were in 1981.Many of his predictions were ex­pressed in precise mathematicalquantities.

What a difference a few monthscan make! Anyone who was awake

302

last year knows that this particularforecaster entirely missed the mark.And yet, he employed one of the mostsophisticated mathematical modelsmoney can buy.

What does an economist do, hav­ing erred so grievously? Quietly re­treat into the shadows of academe?Not at all! Undaunted, he will wipethe egg from his face, resume hisplace in the crowded fraternity ofeconomic soothsayers, and beginwork on next year's prediction forGross National Product-to thenearest tenth of a per cent. In thewelter of fallacious forecasts, hardlya soul will single him out anyway.

The dismal record of the forecast­ing profession led one economicsprofessor at the State University ofNew York to conclude recently that

Mr. Reed is Chairman of the Department of Econom­ics at Northwood Institute in Midland, Michigan, andDirector of the college's annual Freedom Seminars.

ECONOMISTS AND THE FUTURE 303

non-economists on balance are bet­ter at seeing the future than are theprofessional forecasters. Perhaps itis time for the professional sooth­sayers to re-examine their premisesand methods.

What is it about the future thatmakes it so hard to describe? Theanswer is at once both simple andprofound: it hasn't happened yet!

Human hindsight is often "20-20"but it is beyond human mental lim­its to really know with much preci­sion what tomorrow will bring. Nopalm reader, no fortune teller, noastrologer, no forecaster, not even aneconometrician, can ever dispel theuncertainty of the future. Austrianeconomist Ludwig von Mises, inHu­man Action, tells us:

If it were possible to calculate the fu­ture state of the market, the future wouldnot be uncertain. There would be neitherentrepreneurial loss nor profit. Whatpeople expect from the economists is be­yond the power of any mortal man. 1

So it is that the existence of un­certainty is a commentary on thenature of the human condition it­self. It is what Murray Rothbardterms "a fundamental implicationderived from the existence of humanaction." In his monumental work,Man, Economy, and State, Rothbardexpounds:

This must be true because the con­trary would completely negate the pos­sibility of action. If man knew future

events completely, he would never act,since no act of his could change the situ­ation. Thus, the fact of action signifiesthat the future is uncertain to the actors.This uncertainty about future eventsstems from two basic sources: the unpre­dictability of human acts of choice andinsufficient knowledge about naturalphenomena. Man does not know enoughabout natural phenomena to predict alltheir future developments, and he can­not know the content of future humanchoices. All human choices are contin­ually changing as a result of changingvaluations and changing ideas about themost appropriate means of arriving atends. This does not mean, of course, thatpeople do not try their best to estimatefuture developments. Indeed, any actor,when employing means, estimates thathe will thus arrive at his desired goal.But he never has certain knowledge ofthe future. All his actions are of neces­sity speculations based on his judgmentof the course of future events. The om­nipresence of uncertainty introduces theever-present possibility of error in hu­man action. The actor may find, after hehas completed his action, that the meanshave been inappropriate to the attain­ment of his end.2 (emphasis Rothbard's)

There Is a Need to JUdgeWhat the Future May Bring

To say that the future is uncer­tain, however, does not mean the endof the matter. Surely, entrepreneurswho assemble the tools of productiontoday, as Rothbard points out, mustmake decisions based upon what theythink the future will hold. They make

304 THE FREEMAN May

it their business to grapple withquestions such as: What will thegeneral state of business be nextyear? How much will materials costand will they be available? Whatwage rate will be required to attractand keep the kind of employees weneed? What will be the effect on salesif we change our prices? What areour competitors likely to do? Wherewill the best markets for our prod­ucts be? Is this a good time to seekoutside financing or will interestrates decline in coming months?Should we be working down our in­ventories? What will the politiciansdo that might affect our business?

Consumers, securities investors,government policymakers, and, ofcourse, economics professors on thelecture circuit, join businessmen inthe search for information about thefuture. The real question is, what canwe reasonably say about tomorrowand what methods enable us to sayit? A review of the more prominentmethods of economic forecasting isnow in order.

A. Simple Trend Projection

This approach relies upon pureextrapolation of previous trends insome economic activity and as suchoffers little more than a pretense tobeing scientific. It works only inso­far as current trends continue. It doesnot begin to account for, let aloneincorporate, any significant changesor turning points. Professor James

B. Ramsey terms it "naive predic­tion" and offers this critique:

Either the predictor estimates somerelationship and assumes that the sameresults will hold in the future; or he pre­dicts values by using currently observedtrends in economic variables over time,for example, he says next year's incomewill be equal to this year's plus 5 percent. There is no attempt to provide atheoretical model in order to understandthe observed relationships.· There is noconcern for identification and little forseparating out the individual effects ofexogenous variables.3

Thomas Malthus, early in thenineteenth century, used a kind ofsimple trend projection to forecaststarvation and over-population. Morerecently, the so-called "Club ofRome"relied on the same approach to pre­dict the same thing. In Malthus' case,the Industrial Revolution interferedwith his projection rather deci­sively. The Club of Rome's pro­jection did not foresee the declineof birth rates in industrializedcountries.

To the extent that forecasters em­ploy simple trend projection (andmany of them do), they are walkingon ice so thin you can hear it crack­ing as they go.

B. Gross National Product Models

The concept of GNP purports toexpress the total value of all goodsand services produced during a givenperiod of time. It is the consumma-

1983 ECONOMISTS AND THE FUTURE 305

tion of "national income account­ing"-the process of identifying andadding up all the components whichcomprise the economy.

Basically, GNP is "determined"either by (a) summing the total ex­penditures on the "final product"goods and services produced duringa period or (b) summing the total costincurred as a result of producing thegoods and services applied during theperiod.4

GNP is probably the most widelyused "measure" of total economic ac­tivity and is the statistic which mostconventional analysts use to expresstheir predictions of business perfor­mance. Its many components sup­posedly. comprise a "model" of theeconomy which can be a foundationfor economic forecasting.

What on the surface appears to bemassively profound turns out to besomething much less. GNP, being themost "aggregate" of statistical ag­gregates, is riddled with problemsand errors and, what's worse, prob­lems and errors of unknownmagnitude.

Those problems and errors stemfrom both the complexities of statis­tical measurement and the difficul­ties of basic conception (what to in­clude). What follows is an accountingofjust a few.

1. Errors of estimation. SimonKuznets himself, the "father" ofGNP,suggested once that assuming an

average margin of error for nationalincome estimates (a prime compo­nent of GNP) of about 10 per centwould be reasonable! Yet, someeconomists routinely predict quar­terly GNP figures in tenths of oneper cent. Congress often makes pub­lic policy based upon those compu­tations which, even if accurate, con­jure up what Roger Garrisondescribes as "the vision of a dieti­cian who weighs a locomotive bothbefore and after the crew boards it,then uses the difference between thetwo weighings as the basis for pre­scribing a diet for the whole crew."5

2. Incentives for collectors of thedata to fabricate or twist the sta­tistics for personal or politicaladvantage. We know that economicstatisticians in communist and ThirdWorld countries are notorious forthis. Is it really unreasonable to as­sume that some twists or fabrica­tions happen here too? In a recent,rather blatant example, the govern­ment decided to quietly start count­ing the 1.7 million members of thearmed forces in this country as partof the work force for the first time.That at least will make the officialunemployment figures look better forthose in public office.

3. Incentives for individuals pro­viding the statistics to report in­correct figures. Such distortionsoccur as individuals attempt to guard

306 THE FREEMAN May

trade secrets, evade taxes, or mis­lead competitors.

4. No account is made for the ac­tivities of the "subterraneaneconomy." Giving Caesar the sliphas become common practice asAmericans are called upon to digdeeper in their pockets for whatCaesar claims is his. Undergroundtransactions, which totally escape thetax and data collectors, probablyamount to hundreds of billions ofdollars and probably are rising.

5. Things not exchanged for dol­lars are not included. Paint yourown house and the value of the workperformed is not calculated by thestatisticians; hire a painter and hiswages become a part of GNP. Like­wise, if a man divorces his wife andthen hires her as a cook for $100 aweek, GNP will increase by $5200annually.

6. Government spending raisesGNP. When government spendsmore, it diverts funds away frommore efficient allocation by the mar­ket. One economist suggested-withsome sincerity-that it might bemore in line with reality if govern­ment expenditures were subtractedfrom GNP!

7. Inappropriate depreciation al­lowances. These are determined byoften unrealistic assumptions un-

derlying the tax laws. Inflation inrecent years, for instance, has ren­dered depreciation allowances quiteinadequate.

8. Changing quality of goods notreflected. GNP would not rise if animprovement in a product did notresult in a higher price.

9. Exclusion of leisure. Leisure isvery much an economic good (sub­jectively valued and incapable ofquantification) and people often optto "consume" more of it and to con­sume less of the more "traditional"goods and services.

10. Frequent revIsIons. Thisshortcoming is related to the first onecited above. GNP statistics are con­stantly subject to revision. Thoseadjustments are often significant andsometimes come months or years af­ter the initial calculation. In short,by the time we have a statistic whichwe can reasonably assume is "final,"it may have long since lost any fore­casting value, if indeed it had any inthe first place.

Reliance on Gross National Prod­uct models as tools for accurate fore­casting has repeatedly led econo­mists astray. It seems that, at best,such models say something about thepast, and nothing about the future.Professor Kenneth Boulding's refer­ence to GNP as "one of the great in­ventions of the twentieth century,

1983 ECONOMISTS AND THE FUTURE 307

probably almost as significant as theautomobile,"6 goes down as a gro­tesque exaggeration.

C. Econometrics

Many of the problems of simpletrend projection and GNP models arepresent in the more sophisticated,heavily quantitative, econometricmodels. These constructs, whichmany once thought to be quitepromising, often comprise hundredsof mathematical equations that pur­port to represent relationships amongthe major aspects of economic activ­ity. Expensive, high-speed comput­ers churn out the meticulous fore­casts of the econometrician.

The record of these models hasbeen dismal indeed. Mistakes ineconometric forecasts have often beenso bad that merely changing theirsigns from positive to negative ornegative to positive would have putthem significantly closer to the mark.Business Week for March 30, 1981provides a case in point:

The big econometric models began sig­nalling a downturn early in 1979 andconstrued the second-quarter dip as the'onset of a potentially serious recession.After the third-quarter recovery, theykept betting that the next quarter wouldturn negative. Then, when last spring'sdrop was already under way, they turnedbriefly optimistic until the worseningstatistics convinced them that their ini­tial pessimism had been correct. Theywere wrong once again, because theeconomy picked up during the summer

and was still running strong at the endof the year. "They were not only consis­tently wrong, they constantly changedtheir forecasts in the wrong direction,"notes Stephen K. McNees, an economistat the Federal Reserve Bank of Bostonwhom the econometricians themselvesrely on as an arbiter. 7

These errors certainly do not oc­cur because the practitioners of thismethod do not try. They are simplyemploying inappropriate assump­tions-assumptions that if rejectedwould lead to the virtual termina­tion of econometric models as weknow them.

Economics as a science is best an­alyzed qualitatively, not quantita­tively. There are no truly constantrelationships in human action, whichmeans that most of the relationshipspostulated in the equations of econ­ometric models are invalid. "Gar­bage in, garbage out," as they say incomputerese.

Economists have acknowledged fordecades that the function of the en­trepreneur is to anticipate changesin the marketplace. Once the entre­preneur has made a decision, he thenexposes his wealth and income byarranging factors of production insuch manner that he may satisfy fu­ture consumer demand. If he antici­pates correctly, he will earn entre­preneurial profits; if his judgmentsare wrong he will incur losses. Anynumber of variable and unforeseenelements may arise to affect the out-

308 THE FREEMAN May

come: changes in fashion and tech­nology, government policy, laborunion activities, competition, prices,and even the weather. None of theseelements is entirely predictable; nonecan be accurately determined by pastperformance. Attempts to mathe­matically estimate these elements inadvance or to attach numerical sig­nificance to the subjective judg­ments of the entrepreneurs them­selves are pure folly. They aredoomed to suffer the failure whichlies in gross simplicity andimprecision.

Not a Precise Measure

It is ironic that econometricsstrives for the exactness of numbersand yet bogs down in static equa­tions which necessarily cannot be­gin to account for all the relevantfactors and their interrelationships.Economist Henry Hazlitt tells us thatif a mathematical equation is notprecise, it is worse than worthless;it is a fraud:

It gives our results a merely spuriousprecision. It gives an illusion of knowl­edge in place of the candid confession ofignorance, vagueness, or uncertaintywhich is the beginning ofwisdom.8

Perhaps Mises said it best whenhe wrote:

The fundamental deficiency implied inevery quantitative approach to economicproblems consists in the neglect of thefact that there are no constant relationsbetween what are called economic di-

mensions. There is neither constancy norcontinuity in the valuation and in theformation of exchange ratios betweenvarious commodities. Every new datumbrings about a reshuffling of the wholeprice structure.9 (emphasis mine)

The equations of econometricmodels profess complexity, yet theyreally represent a feeble, simplistic,and futile effort to mirror the infi­nitely more complex network of hu­man actions we call "the economy."They fail to account for many un­foreseen economic variables andmake little effort to recognize theinteraction between economic andnoneconomic variables. Their static,impersonal, and aggregative ap­proach leaves acting man out of thepicture, replaced by lifeless equa­tions ofoften dubious value. The oneway they could be reliably predic­tive would be if people ceasedchanging and became robots; thenthe econometrician could "get ahandle" on them.

One observer recently commentedthat to predict economic events, onemust first predict political events.Unfortunately, there is much truthin that statement. Today, it is notenough to consider endogenous mar­ket forces when contemplating thefuture. One must reckon with theexogenous influence on the marketof colossal, erratic government. Pol­iticians and their bureaucratic footsoldiers throw their weight aroundlike bulls in a china shop. Predicting

1983 ECONOMISTS AND THE FUTURE 309

the outcomes of the political processis like trying to forecast which vasesthe witless bulls will break next.Econometric models are incapable offoreseeing such events.

The failure of econometric fore­casting should come as no surprise.But it would be surprising were itspractitioners to admit failure.

D. Statistical Indicators

This approach utilizes measure­ments of economic activity whichsupposedly "lead," "coincide with,"or "lag" the business cycle.

A list of leading indicators gener­ally includes the money supply,housing permits, stock prices, rawmaterials prices, inventories, andcorporate profits.

Roughly coincident indicators in­clude industrial production, factorycapacity, retail sales, and personalincome.

Unemployment, bank rates onshort-term business loans, labor costper unit ofoutput in manufacturing,and new capital appropriations areconsidered key lagging indicators.

Obviously, the group which issupposed to have the most predic­tive value is the group of leading in­dicators. The Commerce Depart­ment compiles the monthly"Composite Index of Leading Indi­cators," a widely followed statistic.Just how reliable is it?

The index's lead time in signal­ling the onset of recessions has

ranged from four months to nearlytwo years, which makes it a shakyguide for anyone trying to plan foreconomic swings.

The index's performance in call­ing the upturns is only marginallybetter. On several occasions, it hassignalled booms or busts which nevermaterialized.

Statistical indicators, regardless oftheir category, often have substan­tial inherent weaknesses. Many ofthose weaknesses are akin to thosedescribed above with regard to GNP,itselfviewed as "roughly coincident"to the business cycle.

The Producer Price Index, for in­stance, measures changes in chargesby firms that make goods. It is basedlargely on returns from sellers, whotend to report list prices. Not recordedare the many trades that take placeat discounts or at premiums.

The Consumer Price Index is themost-watched "cost of living" figure.It assumes that families buy itemsin the same proportions as they didin the base year of 1972-73, eventhough changes in lifestyles havesince taken place. For one thing, itseems that an increasing number ofAmericans today are keeping theircars longer than they did ten yearsago, so the purchase of a new carcarries much less weight in a fami­ly's budget.

Also, the CPI vastly overweightsaverage housing costs and does nottake into account the fact that peo-

310 THE FREEMAN May

pIe tend to buy more of a substitutewhen the price rises on their firstchoice. They buy more chicken, forexample, when beef prices go up.

Official figures on unemploymentare an important factor in govern­ment planning. But the figures, basedon household surveys, are deceiving.For example, some able-bodied peo­ple cannot get certain types of wel­fare unless they are actually lookingfor work, so they may facetiously tellsurvey takers that they are jobhunting. They then become offi­cially unemployed.

Assuming it possible to assembleaccurate statistics which indicatewhat they are supposed to and donot require later revision, we mighthave a sketchy picture of where "theeconomy" was or perhaps where itpresently is. But we still couldn't sayfor certain, based on the figures,where it is heading.

Educated Speculation

Having said all that, it nonethe­less stands to reason that if we areto be able to say anything at all aboutthe economic future, we probablyshould know something about theeconomic present and past. That'swhere reliable statistics might playsome part, not as a basis for simpletrend projection, but merely as de­scriptions of economic activity al­ready behind us or underway. Eventhe finest and most accurate statis­tics, though, should only be ingredi-

ents in a more fundamental ap­proach now to be examined. For wantof a more descriptive title, I shallcall it Educated Speculation.

This approach is characterized bythe following:

1. A clear recognition of the un­certainty of the future with no "leapsof logic" or mindless extrapolations.

2. Careful use of only the mostmeaningful statistics, understand­ing all of the limitations of such ag­gregates discussed above. This im­plies a task of "de-aggregating"aggregates-of analyzing economicactivity as it results from acting, de­cision-making, welfare-maximizingindividuals.

3. A sound understanding of basiceconomic principles and of the polit­ical process.

4. A thorough grasp of the causesand consequences of the businesscycle.

With these tools, an economist canproceed to say something about thefuture and have some reasonablegrounds for saying it. He still mustbe wary, though, of how far he cango. Brian McAndrew, writing in theCato Institute's Policy Report forNovember 1981, clarifies this point:

If forecasters recognized the limita­tions of economic theory and empiricalinformation, they would realize that themost an economist can hope to do is ex­plain the likely consequences of differentpolicies. An economist can show, for in­stance, that a minimum wage tends to

1983 ECONOMISTS AND THE FUTURE 311

cause unemployment because it alterssupply and demand conditions in the la­bor market. An economist cannot say ex­actly when, where, and by how much un­employment will rise (Le., he cannotforecast the unemployment rate), but hecan say that if a minimum wage law isinstituted unemployment will tend to in­crease. In addition, he can, by combinin§.theory with empirical information, get a

rough idea of the amount of unemploy­ment caused by the minimum wage atdifferent times in the past, but he cannotsay what this amount will be in thefuture. 10

The Austrian Theory

In this world of radical interven­tionism, correct business cycle the­ory is crucial to our ability to sayanything about the future. Cycletheories abound, but the one whichfully integrates an explanation of thecycle and its features with an anal­ysis of the entire economic system isknown in various circles as the"Austrian malinvestment theory."

Propounded first by Ludwig vonMises and later enlarged by Nobellaureate Friedrich von Hayek, theAustrian theory holds that the sourceof the cycle lies in money and creditexpansion orchestrated by centralauthoritip,s and proceeds to explainits effects. It is the theory which en­abled Mises during the subtle infla­tion of the 1920s to warn ofa comingdepression. Few believed him untilit happened. I direct the interestedreader to more detailed accounts

found in the works of Mises, Hayek,and Rothbard.

In the final analysis, the art of en­trepreneurship is the art of "edu­cated speculation." It is upon theshoulders of the entrepreneur in themarket economy that the burden of"educated speculation" rests. Forhim, it is, in the words of Rothbard,"a matter of intuition, 'hunch,' anddeep insight into the slice of themarket that the entrepreneur knowsand is dealing with."ll Entrepre­neurship remains a vital, creativetalent which economists would dowell to spend more time examining.(See two works by Israel M. Kirzner:Competition and Entrepreneurshipand Perception, Opportunity, andProfit.)

"Educated speculation," as I havetermed it, is really economics broughtdown to earth. It may not be as fancyas econometrics or GNP modeling,but neither is it as pretentious. Itsays simply that an economist shouldbe an economist, not an aspiringprophet.

The reader who began this essayhoping to discover a crystal ball maybe disappointed that I have reallyoffered nothing of the kind. Instead,what I have attempted to show isthat much of what is commonly re­ferred to today as "economic fore­casting" goes far beyond the realabilities of economists to predict thefuture. Rothbard offers us this so­bering reflection:

312 THE FREEMAN

As Ludwig von Mises used to point outto those who were tempted to succumb tothe razzle~dazzleof economic forecasting:If someone were really able to forecastthe economic future, he wouldn't bewasting his time putting out market let­ters or econometric models. He'd be busymaking several trillion dollars forecast­ing the stock and commodity markets.Let it be a reminder to anyone temptedto partake of, or give credence to, thismodern form of soothsaying. 12 @'

-FOOTNOT~S-

1Ludwig von Mises, Human Action: A Trea­tise on Economics (3rd revised ed.; Chicago:Henry Regnery Company, 1966), p. 871.

2Murray Rothbard, Man, Economy, and State(Los Angeles: Nash Publishing, 1970), pp. 5-6.

National Income

3James B. Ramsey, Economic Forecasting­Models or Markets?, Cato Paper No. 10 (SanFrancisco: Cato Institute, 1980), pp. 37-38.

4James D. Gwartney and Richard Stroup,Economics: Private and Public Choice (2nd ed.;New York: Academic Press, 1980), p. 116.

5See p. xii of Garrison's Foreword to NationalIncome Statistics by Oskar Morgenstern, CatoPaper No. 15 (San Francisco: Cato Institute,1979).

6Gwartney and Stroup, p. 128.7"Where the Big Econometric Models Go

Wrong," Business Week, March 30, 1981, p. 70.8Henry Hazlitt, The Failure of the "New Eco­

nomics" (Princeton, N.J.: D. Van NostrandCompany, Inc., 1959), p. 99.

9Mises, p. 118.lOBrian McAndrew, "The Failure of Econo­

metric Forecasting," Policy Report, November1981, p. 6.

uSee p. xi of Rothbard's Foreword to Ram­sey's Economic Forecasting.

12Ibid., p. xii.

IDEAS ON

LIBERTY

WE can raise our national income to any figure we want simply bydepreciating the dollar enough to raise prices to reach that income.

In Germany, in 1923, the national income (in marks) actually rose tohundreds of billions of times higher than its previous level, because thepaper mark was depreciated to one-trillionth of its former purchasingpower.

To be sure, when explicitly taxed with the point, economic plannerswill say that their goal is a national income of x billions "in dollars ofpresent purchasing power." But they forget this qualification in actualpractice. They are always citing the latest national income figures interms of the latest and most inflated dollar. They do not stop to remindus, or even themselves, how much the national income would have to bewritten down to reflect the price level of, say, twenty years ago.

"The national income approach" has become one of the importantincitements to inflation. For the easiest and surest way to get constantlybigger national income figures is not by increasing output and consumersatisfactions, but by constantly shrinking the measuring rod, by con­stantly depreciating the dollar.

HENRY HAZLITT, The Failure of the "New Economics"

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN

The Strategic Metals War

WHEN the fates, in the guise ofwhatever forces guide the shifting ofthe earth's tectonic plates, picked thesouthern African plateau and SovietSiberia as the home sites of at leastfifty rare metals, they acted with lit­tle regard for either social or ethnicrealities. The results confound mo­rality, make a mess of industrialchoreography, and guarantee aschizophrenic dimension to what­ever passes for statecraft both insideand outside the UN.

The whole big blooming mess de­mands some intricate charting if wehope to make a stab at predictingfuture world history. Seemingly, weare caught between two inexorablemovements. The capitalist West,with its "hi-tech" economy, dependson a steady flow of all sorts of hard­ening alloys. The Big Four of cobalt,chromium, platinum and man­ganese are absolutely essential. TheWest needs cobalt for jet aircraft, forcomputers, for space shuttles, and formost electronic equipment. It needschromiurn for roller and ball bear­ings, for automobile connecting rods,for high speed drills and dies. It needs

platinum for catalytic action in au­tomobile exhaust systems. And itneeds manganese-the remainingrare metal in the Big Fou!-for thesimple reason that no one knows howto make steel without it.

The Soviets have their own chromeand other rare metals. But the west­ern world must have Zaire and Zam­bia for cobalt. It must have Zim­babwe (Rhodesia) and South Africafor chrome. Some of the platinumgroup of metals come from Canada,but South Africa is the big supplier.The fates were more liberal withtheir distribution of manganese(there is a lot of it on the floor of theoceans, and Brazil has been a bigsource of it). But, again, it is SouthAfrica that is the world's leadingsupplier of highly processedferromanganese.

So the "Z's"-Zambia, Zaire, Zim­babwe-have it, along with theirethnic enemies, the beleagueredwhite rulers of "apartheid" SouthAfrica. If economics, the economicsof the market, ruled men's minds,the "Z" problem would bother no­body. But African politics, with many

313

314 THE FREEMAN May

a nudge from the Soviet Union andits sidekick ofCastro's Cuba, threat­ens the market. A race war in SouthAfrica, coupled with an OPEC-typeprice conspiracy of the "Z's" and aninvasion of Southwest Africa (Na­mibia) by the 20,000 Cubans nowstationed in Angola, would bring allthe high-tech nations of the westernworld to their knees.

A Study in Political Economy

In a book that was originally pro­jected as an investment guide, TheStrategic Metals War, authors JamesE. Sinclair and Robert Parker (NewYork, Crown, 185 pp., $17.50) foundso many warning signals that whatthey started as a compendium forstock market advisers becomessomething else again. This is not onlyan investment guide, it is a primework in modern political economy.

The authors are inevitably com­pelled to be geopolitical experts. Theyraise all sorts of inconvenient ques­tions. With Admiral Mahan (TheInfluence of Sea Power on History)looking over their shoulders, theyindicate the importance of control ofthe oceans around the Cape of GoodHope at the southern tip of Africa.Ships carrying oil from the PersianGulf to North European and Carib­bean-Gulf of Mexico destinationsneed support from safe harbors inSouth Africa. So do the ore freight­ers that bring fifty rare metals fromthe mines of the South African pla-

John Chamberlain's book re­views have been a regular fea­ture of The Freeman since 1950.We are doubly grateful to Johnand to Henry Regnery for nowmaking available John's autobi­ography, A LiffJ with the PrintedWord. Copies of this remarkableaccount of a man and his times­our times-are available at$12.95 from The Foundation forEconomic Education, Irvington­on-Hudson, New York 10533.

teau (including the "Z" nations) tothe unloading points for factories inthe West German Ruhr and inPennsylvania.

n is easy to scoffat those who thinkthat politics can permanently over­whelm markets. The libertarianswho trust markets to prevail have apoint when they tell us that recentoil discoveries in Mexico, Alaska andthe North Sea have helped break theback of OPEC and so made the Per­sian Gulf less important to the Westthan it was in 1973. But franticsearch for cobalt, 'chrome and plati­num (along with germanium, tan­talum, vanadium and antimony)hasn't resulted in strikes with a dis­tribution comparable to the newsources of oil all around the world.The three "Z's" and South Africa,along with Siberia, still maintain

1983 THE STRATEGIC METALS WAR 315

their near monopoly of the more im­portant rare metals.

Wars Over Cobalt

The history that is recounted inThe Strategic Metals War is one ofnarrow escapes. In 1978 some 3,000men of the Marxist-leaning CongoNational Liberation Front based inAngola (where they were trained byCubans) passed through Zambianterritory and took over the miningcenter of Kolwezi in the Zaire prov­ince of Shaba. The invaders encoun­tered no resistance from the army ofZaire. They first ordered the closingof the Kolwezi mines. Then theyherded the white women into a hoteland forced them to dance on a smallstage before being raped and shot.More than 90 whites and 750 Afri­cans were murdered by the invad­ers.

Meanwhile the price of cobalt inworld markets started jumping. TheSoviets, who had advance notice ofthe invasion, had been buying upavailable cobalt at the pre-invasionprice of $6.85 a pound. When the in­vasion hit the world headlines co­balt went all the way up to $49 apound.

With cobalt mining in Shaba to­tally suspended, President Mobutuof Zaire put in a hurry call to Presi­dent Valery Giscard d'Estaing ofFrance. With help from U.S. mili­tary aircraft a rescue force of Frenchforeign legionnaires and Moroccan

troops were flown into Shaba. TheMarxist invaders, who had floodedthe mines, were quickly driven overthe border into Zambia and Angola.It took fifty days to restore normaloperations in the mines. In 1979 and1980 cobalt had to be ferried out ofShaba by air at a cost of $1.50 akilogram.

What the West must face is thatit may take force to keep suppliesfrom the three "Z's" moving. It cer­tainly takes a nimble diplomacy. Therailways running from Zaire andZambia direct to the Atlantic andIndian Oceans are only intermit­tently operative. The "Z" nations arecompelled to cooperate with the hatedSouth Africans in order to get theirmetals to market by way of Capeports.

In Zimbabwe, at the moment,tribal troubles are threatening min­ing operation. There is no reason tosuppose that the tribal rivalries willcompletely disrupt the chrome mar­ket-after all, South Africa haschrome to sell, too, and there is noimmediate difficulty in getting blacksto do the mining. But Mr. Sinclairtells us that, since the Shaba trou­bles in Zaire, it has become increas­ingly difficult to attract westerncapital into African mining. Miningequipment is wearing out.

And so the metals war goes into a"cold" stage. It could get hot againtomorrow. Stockpiling in the West isin order. @

316 THE FREEMAN May

JOHN DICKINSON:CONSERVATIVEREVOLUTIONARYby Milton E. Flower(University Press of Virginia, P.O. Box3608, Charlottesville, VA 22903), 1983338 pages • $27.50 cloth

Reviewed by Gottfried Dietze

THIS attractive volume contains awell-written biography of one of thegreat founders of the United States,known as the "penman of the Revo­lution," and a symbol of that event.

In the New World, the AmericanRevolution was another dimensionof the English Revolution of the pre­ceding century. After Montesquieuhad classified Britain as republicanin substance, Americans made theirgovernment republican also in form.The United States became the onlycountry founded in the year of thepublication of The Wealth of Na­tions, in which Adam Smith urgedfree enterprise for the good of man­kind. After the adoption of popularforms ofgovernment, Americans soonbecame aware of the major problemof democracy, namely, to what de­gree the ruling majority should berestricted for the sake of the rightsof the individual, among which thoseof property ranked highly. All thisshows that the American Revolu­tion was a conservative revolution.

John Dickinson was a conserva-

tive revolutionary. According to Mr.Flower, "Dickinson's approach wasa crystallization of the whig theorythat dominated the thinking ofAmerican leaders." Dickinson, whomVoltaire compared to Cicero, wasborn in 1732 in Talbot County,Maryland, and died in 1808 in Wil­mington, Delaware. He studied lawat the Middle Temple in London andhad an outstanding career, as a law­yer and a public figure. This corre­sponded with the words of Tacitushe had recorded in his commonplacebook, "To despise fame is to despisethe Virtues by which it is acquired."

Aside from occupying importantpositions in Delaware and Pennsyl­vania, Dickinson played a major roleon the American level. He repre­sented Pennsylvania in the StampAct Congress of 1767 and drafted theDeclaration of Rights and Griev­ances. In 1767-68, he published theLetters from a Farmer in Pennsyl­vania, to the Inhabitants of the Brit­ish Colonies. They reached a wideaudience so that prior to indepen­dence, Dickinson, with the excep­tion of Benjamin Franklin, wasprobably the American known tomore colonists than any other. Theyhelped turn public opinion againstthe Townshend Act, under which newduties were to be collected to pay forthe salaries of British officials in thecolonies.

Flower writes that Dickinson was"the first native political hero: the

1983 OTHER BOOKS 317

outstanding harbinger of Americanprotest against arbitrary Britishmeasures and a true defender of lib­erty," who up to the convening of theSecond Continental Congress wasrecognized as the chief spokesmanfor American rights. Dickinson wasa delegate from Pennsylvania in theFirst Continental Congress. In theSecond Continental Congress, he wasthe principal author of the Declara­tion, setting forth the causes and ne­cessity of taking up arms. He helpedin the preparation of the first draftof the Articles of Confederation. Asigner of the United States Consti­tution, Dickinson worked for itsadoption and defended it in a seriesof letters signed "Fabius," the mas­tery and dignity of which won thepraise of George Washington.

Dickinson's concept of freedom wasa comprehensive one. "Men cannotbe happy," he declared, "withoutfreedom; nor free without security ofproperty; nor so secure, unless thesole power to dispose of it be lodgedin themselves." He feared big gov­ernment and denounced govern­mental regulations from unfair tax­ation to restriction of manufacturingto the control of the shipment ofgoods, and so forth. He wanted lib­erty to be protected not only fromthe English, but also from represen­tatives Americans had elected. In1769, Dickinson wrote that he hadbeen incensed at the PennsylvaniaAssembly's permitting "the vilest

acts ofdespotism." Similar fears werevoiced by Dr. Benjamin Rush, whofounded Dickinson College in hishonor.

His love of liberty did not makeDickinson favor anarchy or politicalturbulence. He was convinced that"the Cause of Liberty is a cause oftoo much dignity to be sullied byturbulence and tumult." He be­lieved in the rule of law, which tohim was the guardian of the individ­ual's rights from arbitrary govern­ment as well as the protector of theserights from infringements by fellowmen: "The law delights in certaintyand quiet because, without these,there can be no liberty." A contem­porary of Adam Smith, ImmanuelKant and Thomas Jefferson, Dick­inson had a strong sense of moralsand virtue. When in 1782 an oldfriend had voiced strong approval ofhis gubernatorial proclamationagainst vice and immorality, Dick­inson replied that he was convinced"that the happiness of men in thislife as well as in the next depends onthe prevalence of piety and virtueamong them."

The penman of the American Rev­olution believed that "every friendto mankind must rejoice, in contem­plating the actual and probable con­sequences of our revolution to othernations." Never bending to publicopinion if he felt it to be wrong,Dickinson urged Americans to favorfree government; "As for me, I will

318 THE FREEMAN May

assuredly contend for that gloriousplan of Liberty handed down to usfrom our ancestors; but whether mylabors shall prove successful or invain, depends wholly on you, my dearCountrymen."

Mr. Flower's work furnishes a de­tailed description not only of the po­litical life of Dickinson, but also ofhis private life. It is a well organizedscholarly study, supplied with acareful bibliography and a long in­dex. When Charles J. Stille pub­lished his biography of Dickinson in1891, less than a quarter of theDickinson Papers had been avail­able to him. Mr. Flower was fortu­nate to draw on a vast collection ofsources and write what in alllikeli­hood will be the definite descriptionof the life of a great American. Itmakes good reading. ,

STALIN'S SECRET WARby Nikolai Tolstoy(Holt, Rinehart and Winston, 383 MadisonAvenue, New York, NY 10017), 1981463 pages. $18.50 cloth

Reviewed by Bettina Bien Greaves

IN his 1944 classic, The Road toSerfdom, Nobel Laureate, economistF. A. Hayek explained "why theworst get to the top." And now inStalin's Secret War, Nikolai Tolstoyshows how "the worst" stay on toponce they get there. Dictator of all

the Russias for almost three decades,Joseph Stalin was certainly one of"the worst," and the tactics he usedto stay on top were brutal andbarbaric.

Nikolai Tolstoy describes Stalin asphysically unattractive-short, "onlyfive feet four inches high, ... thin,swarthy and heavily pock-marked."As he aged, "his hair greyed andthinned considerably and his bellybegan to hang within the loose-fit­ting uniforms he affected. His pock­marked features appeared more li­ned and pitted than hitherto, hismoustache was scrawny andstreaked, and his teeth blackenedand stained." He spoke in a "monot­onous" tone and "with a harsh Geor­gian accent."

However, physical appearances arenot crucial. It is character that in­fluences action. Stalin was ruthless,a characteristic his predecessor andidol, Lenin, apparently appreciated.He helped to finance the "revolu­tion" by robbing banks. When im­prisoned by the Tsarist regime, heassociated, not with the "politicals,"but with the common criminals. Hewas vicious and crude. NikitaKhrushchev, Stalin's successor asSoviet dictator, described him as"brutish ... harsh ... coarse andabusive with everyone." Yet he feltinsecure; he had an inferiority com­plex, and this, according to NikolaiTolstoy, led to fear and paranoia. Hebecame obsessed with the belief that

1983 OTHER BOOKS 319

he was surrounded by enemies. Themethods he used to stay on top,therefore, are explainable by hischaracter-his ruthlessness, his re­spect for gangster types, his fears andhis paranoia.

Ambition plus ruthlessness en­abled Stalin to rise to power overTrotsky and all other contenders. Intime he came to hold sway over mil­lions and "virtually owned the So-

. viet Union in as absolute a sense asproperty can acquire." The country'sfairly proper constitution, code oflaws and regulations were largelyignored by Stalin and his gangster­type associates; they were above thelaw. "No real property rights existedin the Soviet Union except Stalin's;he could literally do as he chose withanything." Any who dared to hint,or who was suspected of hinting, atopposition was effectively silenced bythe secret police. Yet these very po­lice-state methods added to Stalin'sfears for his own personal safety. Hetrusted no one.

Stalin admired his fellow-despot,Adolf Hitler. He was apparently de­lighted when the German-SovietNon-aggression Treaty was signed(1939), leading to the partition ofPoland between their two countries.Stalin considered Hitler a friend. Itwas with complete disbelief that helearned, on June 22,1941, that Ger­man military forces had attackedRussian soldiers stationed along theircommon border in the middle of Po-

land. Warnings of a possible Ger­man attack had reached Stalin fromU.S., British and Russian intelli­gence sources, but he had chosen toignore them. As a result, the Rus­sians were utterly unprepared andchaos reigned. When his men at thefront reported to Moscow they wereunder fire, they were told, "You mustbe feeling unwell," or "Do not givein to provocation, and do not openfire!" According to Nikolai Tolstoy,"There was in fact no battle-plan;only Stalin could issue instruc­tions." And Stalin apparently pan­icked. His Foreign Minister, Molo­tov, announced the German attackto the Russian people.

Stalin had become a prisoner ofhis own paranoia. It was not untiltwo weeks after the German attackthat he came out of seclusion tobroadcast to the Soviet nation. Ac­cording to Tolstoy, Stalin appearedmore fearful of assassination, an up­rising in Russia and the possibleoverthrow of his own governmentthan he was of the German inva­sion. These fears led to his "secretwar," the war against his own peo­ple. In one chapter, "War on TwoFronts," Tolstoy describes Stalin'stwo bitter struggles-one against theGermans at the fighting front andthe other against the Russians be­hind the front.

As Stalin trusted no one, his se­cret police were ordered to arrestanyone suspected ofopposition to him

320 THE FREEMAN

or his government. He especiallyfeared persons with leadership qual­ities. Purges were carried out inRussian-occupied territories, and alsoin Russia, against military officers,professionals and intellectuals. Toforestall a Polish uprising, thou­sands of Poles were arrested shortlyafter partition; many were executed,often after having been cruelly tor­tured. His henchmen were no lessruthless in their treatment of Rus­sian nationals.

Stalin's insecurity persisted evenafter the fighting stopped. He wasstill fearful of domestic uprisings anddetermined to liquidate all potentialopposition before trouble could start.In his view, anyone who had ob­served life outside the Soviet Unionmight have acquired foreign ideasand thus become a threat to the So­viet regime. As the Yalta Agree­ment called for the repatriation of"Soviet citizens," that Agreementbecame the grounds for the Sovietgovernment's demand that thethousands of refugees from the eastwho were in Allied hands at war'send be "repatriated." With Alliedhelp and without adequate screen­ing, therefore, many thousands, in­cluding many non-Soviet citizens,were tricked into railroad box carsand lorries and then forcibly cartedoff to imprisonment, torture anddeath in the U.S.S.R. One importantchapter in this book is devoted to thissad event in history.

This post-World War II forced­transport of refugees to Russia wasnot without precedent in Russianhistory, a precedent which drew itto Nikolai Tolstoy's special atten­tion. Petr Tolstoy (1645-1729), anancestor of Nikolai's, was an ambi­tious and unscrupulous aide to theRussian Tsar, Peter the Great. Whenthe Tsar wished to change the suc­cession, he commissioned Petr Tol­stoy to bring the Tsar's son, Alexius,back to Russia against his will. Petrdeceived Alexius, returned him toRussia, where his father had himimprisoned, tried and eventuallytortured to death.

Shakespeare wrote of Henry IV,"Uneasy lies the head that ·wears acrown." Although Stalin wore no ac­tual crown, his power was more ab­solute and his reign more ruthlessand cruel than that of most kings.So his uneasiness was more pro­found and his position more precar­ious. This insight makes Stalin'sfears, his paranoia and his ruthlesstactics comprehensible. It helps usto conclude with Nikolai Tolstoy that"Stalin was not mad." As Adam Ulamwrote in Stalin: The Man and HisEra: "The madness lay in the sys­tem that gave absolute power to oneman and allowed him to appease ev­ery suspicion and whim with blood."

Stalin's Secret War is a remark­able book, not a pleasant one, butone that reveals a great deal aboutthe nature of one-man government.@