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**Anonymouse** · 06-06-2004, 10:52 PM

The Power to Destroy

by William H. Peterson

[April 1, 2004]

Fifty years ago, a remarkable libertarian, personal friend, witty Georgite, then editor of Human Events, came out with a landmark book, The Income Tax: Root of All Evil (text and PDF). Its author was Frank Chodorov who saw raging about him�what�s new?�interventionism, welfarism, political mischief and corruption galore, an ongoing mangling of the limited government model of the Founding Fathers. Hence the "all evil" in his subtitle, which he described to me privately as "the rape of society."

But what was new, then and now, goes beyond many a neocon�s plea today for a renewed Taxpayer�s Bill of Rights or a flat-rate income tax. Instead, Chodorov called for radical surgery: outright repeal of the Sixteenth (Income Tax) Amendment of 1913. Then Uncle Sam was suddenly armed with a tax supercannon, one financing the federal takeover of America, one sinking states' rights mainly via "grants-in-aid" (read payola) to states and localities (further sunk by the Seventeenth Amendment, also of 1913�this amendment requiring popular election of U.S. senators formerly appointed by the state legislatures).

The Chodorov call for repeal of the Sixteenth Amendment was seconded by J. Bracken Lee, governor of Utah, who introduced the book and noted how the states were losing "more and more of their autonomy," how the federal income tax empowered Washington "to bribe the state governments, as well as its citizens, into submission to its will." Submission then and now, if now much more so.

For here in fiscal 2004, which began last October 1st, that bribery comes to a pretty penny. Commerce Department data show that transfer payments to citizens (in such forms as Social Security and Medicare) in the 3rd quarter of calendar 2003 came to $1000.4 billion, annualized, while transfers via "grants-in-aid" to states and localities amounted to $341.6 billion. Add to those totals, $51.9 billion for subsidies to farmers and others and you find that Uncle Sam is spending more than three-fifths of the federal budget, then at $2.2 trillion, in welfare "transfers"�or in "legal plunder," as Frederic Bastiat more honestly put it in his book, The Law, in 1848.

So does this Everest of taxpayer money talk, if not shout, to 200 million adult Americans, many of them bunched into special interests, as Uncle Sam cleverly seizes their money with one hand and then bribes them with it in the other, as he saps further and further the incentives to work and produce, save and invest, while politically sapping further and further the very republic that Founding Father Benjamin Franklin cited when asked outside Independence Hall in 1787 what kind of government the Founders were providing. His famous hedged answer: "A republic, if you can keep it."

How presient was Franklin with his iffy hedge. As Chodorov wrote: "Thus, the immunities of property, body, and mind have been undermined by the Sixteenth Amendment. The freedoms won by Americans in 1776 were lost in the revolution of 1913." For originally, as Chodorov reminds us, the Founders, smelling a rat, had wisely foreclosed an income tax in the Constitution where they stipulated in Article 1, Section 9:

"No capitation, or other Direct Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be undertaken."

To be sure, the Lincoln regime most arbitrarily declared its Civil War income tax to be but an "excise" tax. But that pretense is no longer necessary in view of the sweeping language of the Sixteenth Amendment in force today:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

Sweeping indeed. Chodorov held the absolute right of property, the very heart of a free society, was violated, that income and inheritance taxes imply loss of the integrity if not the very denial of private property, and so they differ radically in impact from all other taxes. The ability-to-pay doctrine, for example, breaks with the equality-before-the-law principle; it spells class warfare between the so-called "rich" and "poor." Yet, as Ludwig Mises notes in Human Action, the rich capitalist or entrepreneur is broadly the poor's best friend as he boosts capital formation.

No wonder, noted Chodorov, that Marx and Engels in their Communist Manifesto of 1848 urged on capitalistic countries like America "despotic inroads on the rights of property." So the Manifesto pushed a heavily progressive income tax as one of ten key ways to undermine the market order and advance the march toward socialism.

After all, capitalism swings almost entirely on the sanctity of private property rights so that capital creation and a market system of free entrepreneurship and market supply and demand can work its wonders of economic growth and higher living standards for society. On the question of human rights over property rights, Chodorov sagely held it was a false dichotomy, that at base human rights are private property rights, led by an individual�s innate human right to self-ownership. At last, such Chodorov wisdom is available again online in both text and PDF.

A monster tax and spending state? And how. Sheldon Richman, in his successor volume to Chodorov, eyes the IRS and you the taxpayer closely and asks: Who�s the master? Who�s the servant? To be sure, the taxpayer is under the protection of the Fourth and Fifth Amendments prohibiting unreasonable searches and seizures, and forced self-incrimination. But IRS Form 1040, assorted schedules, and submitted supporting evidence, such as cancelled checks and monthly credit card company lists of charges, has its limitations: The IRS, backed by the courts, is empowered to demand further corroboration and documentation. As it does, especially via a personal one-on-one audit. So, as Mr. Richman reminds us, the IRS arsenal of weapons is "awesome."

Chief Justice John Marshall thus had quite a point when he held that "the power to tax involves the power to destroy" in McCulloch v. Maryland in 1819. Vast political and economic destruction has ensued since 1913, as Frank Chodorov and Sheldon Richman attest. Both come up with a lasting�and perhaps the only�fiscal solution: Repeal the Sixteenth Amendment.

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Mr. Peterson is an adjunct scholar at the Mises Institute and a contributing editor to The Freeman.

**Anonymouse** · 06-06-2004, 10:55 PM

A Real Democracy

By William H. Peterson

[Posted November 7, 2000]

The word democracy is conspicuously absent in the Declaration of Independence, Constitution, and Bill of Rights. The framers feared it, and so limited federal power with checks and balances.

Yet in a real sense the Founding Fathers did provide democracy, a lot of it, but in the voluntary private sector. They left the vast bulk of the people's business to the people themselves. As a young Alexis de Tocqueville found in his 1831-32 tour here, virtually the entire economy thrived in a free, lively, fast-growing private sector that he included under the category of 'democracy.'

He saw no income tax, no farm subsidies, no welfare, no antitrust, no gun control, no rent control, no federal immigration control, no regulatory agencies such as the SEC or OSHA, no war on drugs, no Social Security, no Medicare. Schooling was mostly private. Freedom of association was widespread and growing.

"Americans of all ages, all conditions and all dispositions constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds," he wrote.

De Tocqueville did see that such associations, if tied to constitutional decay, could mean the rise of special interests, and thus the welfare state, of which he wrote prophetically: "The will of man is not shattered, but softened, bent and guided; men are seldom forced by it to act, but they are constantly restrained from acting."

"Such a power does not destroy...does not tyrannize, but it compresses, enervates, extinguishes and stupefies a people, till each nation is reduced to be nothing better than a flock of timid and industrious animals, of which the government is the shepherd."

A century later another rare thinker exerted an influence over America--Ludwig von Mises, a man who foresaw in 1920 the fall of Soviet socialism for its lack of economic calculation. He was an Austrian Jew who escaped Nazi Europe in 1940 and was the mentor of Friedrich Hayek, who co-won the 1974 Nobel Prize in economics.

Mises held that everyone in a market society is an entrepreneur in one degree or another. He said every human action takes place in time, involves uncertainty and risks loss. He observed that consumers and not producers control a market system and set individual income divergence, a healthy thing.

As he wrote in 1949, "The direction of all economic affairs is, in the market society, a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer.

"It is true, in the market the various consumers have not the same voting right. The rich cast more votes than the poor citizens. But this inequality is itself the outcome of a previous voting process. To be rich, in a pure market economy, is the outcome of success in filling best the demands of the consumers."

Consumer sovereignty in the democracy of the market is supreme over every producer, every farm, every for-profit and nonprofit organization, over every worker from the clerk to the CEO. The consumer votes them all up or down, in or out, so that every firm or affiliation, including religion, is subject to the individual voter's free assent.

In this democracy, the voter votes not just every other year, but also many times a day in an endless plebiscite. The market is a discovery process for consumers and producers, self-regulating under supply and demand. It is a "marvel," in Hayek's word.

The polling booths of the market are ubiquitous, many open 24 hours a day, with such handy means as a bank, law office, gas station, supermarket restaurant, cell phone and Internet, with many millions of Web sites--all freely, avidly seeking your vote.

It is this second democracy of, for and by the people that the next president must protect.

**Anonymouse** · 06-06-2004, 10:59 PM

Drumbeat Against Capitalism

by WILLIAM H. PETERSON

[Investor�s Business Daily, August 2, 1999]

Vice President--then senator--Al Gore criticized a Monsanto bovine hormone development (Posilac) to boost milk production as "a kind of thinking aimed at profits, not progress." Not progress?

The Gore remark reflects a long history of anti-profit literature. Look. Everybody knows that profits are rip- offs: ill-gotten, selfish, mean, exploitative, grasping, grudging, self- serving, uncharitable, greedy and anti-social in general.

America's culture encourages such slanted thinking. History texts often call the Andrew Carnegies and John D. Rockefellers ''robber barons.'' A politician orates that profits place property rights over human rights, that one man's profit means another man's loss, that capitalism is gross, a zero- sum game. A 19th-century proverb says: "Need makes greed." And Gordon Gekko, Oliver Stone's central character in the movie "Wall Street," proclaims: "Greed is good."

It gets worse. The Internal Revenue Code lists capital gains, corporate dividends and the like as "unearned income." Unearned?

It takes a Ludwig von Mises (1881-1973) to sort out the truth. He defined human action or, as he called it, praxeology, as "purposeful behavior." So when a person attains his purpose, he can be said to have gained; when he fails to do so, he has lost. Economics is part of the larger sphere of praxeology.

Praxeology involves the universal, essentially psychic, motivation of substituting a perceived better state of affairs for a lesser state, running the gamut of every human action, good and bad.

Yet in a market society, it generally advances social cooperation, connectedness, harmony. Too, this substitution involves a sort of cost-benefit calculus--a subjective weighing of cost against benefit, action by action.

In 1920, Mises keyed profit and loss to business accounting, as basic to ''economic calculation,'' without which socialist planners could not allocate scarce capital effectively. Misallocation doomed communism.

Economist Oscar Lange of the powerful Polish Politburo argued that economic calculation could still be adapted to central planning, that his fellow communists ought to show their gratitude and erect a statue in honor of Mises.

Mises held that such adaptation was impossible, and history proved him right. By 1991, the whole of Eurocommunism from East Germany to the Soviet Union slid into oblivion.

The Mises legacy goes beyond explaining why socialism fails. It tells why Western civilization and capitalism win, and it points to self-interest as a socially constructive force if held under a moral code and the rule of law.

Mises rejected the notion of Economic Man. He said man is hardly a pure materialist. Man can choose his means, master his impulses. He can, for example, control his will to live, is capable of dying for a cause. So his valuations do not boil down to dollars and cents but are subjectively arrayed in a dynamic hierarchy of priorities, as captured in Jefferson's Declaration of Independence phrase "the pursuit of happiness."

Mises saw that in a market economy it is the consumer, not the producer, who is in charge. The consumer has self-interest in the power of the purse, a power over every producer to press him to put his competitive foot forward.

Surely Thomas Edison and Alexander Graham Bell were aware of the market for the electric light and the telephone. Talk about progress!

Interest is then the force behind every human action for the honest and dishonest, the striver and laggard, and so on. Hence that need of virtue in a market society.

Mises once introduced a paperback version of Adam Smith's "Wealth of Nations," hailing it as "a great book." There Smith uncorked his secret of the market order: "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest."

Interest is it. Mises said it drives capitalism, provides incentives and, via the price system, coordinates a free economy into a positive- sum game. "The market economy...can apply to itself the words of architect Sir Christopher Wren's epitaph in St. Paul's Cathedral: Si monumentum requiris, circumspice (if you seek his monument, look around)," Mises wrote in Human Action.

Postscript: Posilac, blessed by the Food and Drug Administration, American Medical Association, World Health Organization and regulatory agencies in 39 countries, holds down or cuts the price of milk across much of the world, benefiting mankind--but, alas, reaping profits for Monsanto.

**Anonymouse** · 06-06-2004, 11:02 PM

The Press and the State

by William L. Anderson

[Posted May 6, 2002]

The "leftist slant" of the mainstream news media in the United States tends to be in the eye of the beholder. For example, when former CBS correspondent Bernard Goldberg claimed in his recent book Bias that mainstream news figures such as Dan Rather and others demonstrated outward leftist sentiments, the attacks upon him by his former colleagues were fierce and unremitting. Goldberg is a pariah in his business, and the denials by media figures continue.

As a former journalism graduate and newspaper reporter, I have always been intrigued by the issue of "liberal bias." The newspapers in Tennessee, where I spent my somewhat brief career, were quite conservative, and the editorial page of one of them was decidedly and predictably right-wing, so one could not accuse our paper of being slanted to the left, or so it seemed.

It has been nearly 25 years since I worked in a newspaper office, but my interest in journalism and the issue of "bias" has not abated. Three years ago, I wrote a doctoral dissertation on an economic approach to journalism, and I continue to use this topic as an academic research agenda. My conclusions (if academics are permitted to use that term) are that (1) Yes, Virginia, leftist dogma reigns supreme in the mainstream press, and (2) it is worse than most people believe.

The leftist bias of modern mainstream journalistic outlets such as the New York Times, the Washington Post, and CBS News is not simply based upon the journalists� view of the world, as left-wing as it is. The late Warren Brookes, one of the few journalists who actually understood the workings of a free society, said it best when he pointed out that the press is interested in the "statist quo." Government, he said, is the main beat of reporters, and it is in their interest to make it grow and grow.

A small but insightful example comes from my old haunts in Tennessee. Reporters had a number of coverage beats that ranged from general assignment to city hall. The prized beats were the political beats covering the state legislature and the congressional delegation, the county courthouse, the city police and county sheriff, and city government. The Federal Building was less favored if only because there were fewer "big cases" tried in federal district court.

All of us, however, despised the business beat. We considered it little more than a repository for self-serving handouts and press releases given by people who expected us to write their advertising copy for them. (The business reporter also covered the Tennessee Valley Authority, so all was not lost for him.) To a man, all of us saw business owners as nearly useless, except for the fact that they paid for our advertising, which was the major source of revenue for the newspaper. Thus, business coverage was a necessary evil, but an evil all the same.

Looking back at our attitudes, I cannot say I was surprised. Our disdain for the business beat came not so much from antibusiness fervor as it did from the fact that businesses are private entities whose owners are loathe to expose them to bad publicity, although I can also say that most of us there did carry antibusiness prejudices. However, I certainly can say that it was not as fun to cover the business beat as it was to cover a trial or a contentious county council meeting, not to mention a speech by the governor or another politician.

In a word, government was our lifeline, and while there was somewhat (but only somewhat) of an adversarial relationship between news reporters and government officials, as I look back, I see that government and the press were and are mutually dependent upon each other. Thus, it is in the interest of the press not only for government to be big and intrusive, but also for it to grow. For all of the vaunted talk of the press being the "watchdog" of government, if anything, the modern news media is government�s lapdog, and the implications for a free society are enormous. The famous free and independent press that the founders of the USA believed would serve as a check on the power and expansion of the state has now become the biggest cheerleader for the modern Leviathan.

This is not accidental, for the modern press is not so much an artifact of the post-colonial era, when the First Amendment was conceived and written, but rather of the progressivism of the late 19th and early 20th centuries. The famous "Muckrakers" of the progressive era who dominated journalism all were advocates for government expansion. Furthermore, it was the "progressive press" dominated by the newspaper empires of William Randolph Hearst and Joseph Pulitzer that successfully whipped the nation into war fever, leading to the Spanish-American War and American imperialism, something for which we are still paying. It is an ominous sign of modern journalism that the top awards given to journalists are named after Pulitzer.

Even the so-called Canons of Journalism that were adopted in 1922 did not change the "progressive" focus of journalism. In fact, the fa�ade of "objectivity" actually has made things worse, as journalists can now claim not to be biased when, in fact, their work is solidly antienterprise and antifreedom.

The Great Depression did nothing to engender modern journalism to freedom of enterprise and private property rights. First, like most other Americans, most reporters saw the depression as a "failure of capitalism." Second, and more important, the charming Franklin D. Roosevelt cut a much better political figure than the staid Herbert Hoover, and personal contact in journalism, especially in political journalism, is very important. Given the "progressivist" bias of the press by the 1930s, there was little doubt that the semi-socialistic FDR had more answers than the supposedly "rugged individualist" Herbert Hoover.[i] Furthermore, as part of his Works Progress Administration (WPA) programs, Roosevelt made sure that numerous unemployed journalists were on the payroll. This "masterstroke" ensured that journalists would be writing pro-Roosevelt propaganda for many years to come.[ii]

Whatever hope there was for modern journalism to support a constitutional order was lost after World War II. As the U.S. government joined the efforts to make college education available to more and more people through subsidies and the like, newspapers began to require that reporters have college degrees.

Today�s typical reporter, while a college graduate, is relatively poorly educated, especially in economics. Our journalism curriculum at my alma mater, for example, required a year of economic principles, which, I recall, was basically a set of lessons in Keynesianism and other mainstream follies. In other words, I entered journalism school as an economic illiterate and left J-school with even greater economic illiteracy. Multiply this by the number of journalism graduates, and one can see just a small picture of the problem.

The extent of the problem was recently highlighted by Michael Gartner�s USA Today column in which he excoriated people who thought our taxes were too high. Gartner is a "well-respected" journalist who used to be president of NBC News. However, in 1993, NBC�s "respected" news show "Dateline" staged a fake incident in which the show�s principles tried to make it look as though certain General Motors trucks were prone to catching fire in side crashes.

Unfortunately for "Dateline" and Gartner, it was later clearly shown that the entire exercise was a fraud, and that the people at NBC knew it. Gartner resigned from NBC, and the show had to issue a public apology to GM. Today, Gartner is still "well-respected" and "Dateline" is an award-winning show, which also tells us something about integrity within the Fourth Estate.

Last, but not of least importance, is the fact that journalists today remain what they have been throughout most of our history: political operatives. While I have no problems with people who are politically oriented, and newspapers and broadcast media can do what the owners want, I do have a problem with dishonest claims to "objectivity."

Furthermore, to demonstrate the symbiotic relationship between the modern political classes and journalism, one has only to see the current "revolving door" in Washington, D.C. The gaggle of former government staffers working as "journalists"--from Chris Matthews to George Stephanopolous--demonstrates beyond a doubt what is happening in journalism today.

In short, for all of the promotion of freedom of speech given by our modern media, we also lose greatly by the Fourth Estate�s slavish devotion to the growth of government. As Ludwig von Mises pointed out, there ultimately is no freedom of speech without freedom to own and use private property. Unfortunately, the modern journalist is part of the great assault upon property. Unless there is a change somewhere, the press, in the end, will be part of the undoing of freedom of speech itself.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.

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[i] As Murray N. Rothbard points out repeatedly in America�s Great Depression, Hoover was anything but a free enterpriser, but the myth that the press and historians fostered during the 1930s lives on.

[ii] For example, Studs Terkel, who is well known for his hostility to private property and private enterprise, was one of FDR�s WPA minions.

**Anonymouse** · 06-06-2004, 11:20 PM

Smoking and Property Rights

by William L. Anderson

[Posted June 19, 2003]

A week ago I received an email that was part of a mass mailing by an anti-smoking activist who was championing all of the new "smoke-free" legislation that is being churned out by state, local, and national governments around the world.

Although I am not a smoker, I must admit to having more than a passing interest in the recent assault on tobacco companies and individuals who use tobacco. (See the recent article by Candice Jackson and me on tobacco litigation.) For the most part, when I receive emails from people and organizations that I believe are anti-freedom, I discard them, but in this case I answered and the director and I then followed with an interesting exchange of emails. From what I read both in his responses to my question, and to the questions that he asked, I was able to look into what I can only say is a totalitarian mindset.

Yes, the activists claim they are only protecting public health and keeping individuals from unwanted intrusions into their "private space," but the methods that they employ only can be successful when government seizes private property�with no compensation for the owners, of course.

After successfully forcing tobacco companies to finance government spending schemes, along with advertisements that use propaganda methods in an attempt to convince people not to smoke, the next step has been to ban smoking in "the workplace." While most of us tend to think of workplaces as offices and the like, the definition that the activists use is much wider, and especially includes establishments like bars and restaurants, which traditionally have been favorite haunts of smokers.

The smoking ban in bars and restaurants in New York City received publicity when a smoker became so enraged after being told to leave a bar that he killed the bouncer. Although anti-smoking activists have jumped on the situation as an example of why smokers are dangerous people, the incident does little to tell us that the real problem with the bans is that they are a form of state theft.

Advocates for "smoke-free workplaces" contend that since nonsmokers work in bars and restaurants, and that since even second-hand smoke contains so-called Class A carcinogens that in large doses can cause cancer, people should be entitled to "safe" places wherein to work. In other words, by banning smoking in these places, government simply is protecting the "rights" of workers.

On the surface, such arguments may sound good, but when one barely scratches the surface, they not only are specious, but downright dangerous. Such laws amount to a confiscation of property. Whatever governing body makes the ruling is using force to limit behavior that can occur on private property, yet it is the owner who is liable for enforcing the rule�on pain of losing the property and perhaps even his or her freedom. Property owners, who in a free market would be able to decide on their own whether or not they want to permit smoking, have that right taken away from them by the state.

One forgets that people who either are employees or patrons of a bar or restaurant are there by choice. To put it another way, those individuals who decide either to work at such an establishment or to eat and drink there freely have made the decision to spend time at that place. No restaurant or bar owner can force anyone to work or eat at his or her establishment, so at best, the state is "rescuing" people from their own free choices, which means that the political authorities�and the activists cheering them on�are in effect also coercing those workers and patrons into making choices that meet state approval.

Much has been made of nonsmokers being "victims" of passive smoke created by smokers. Those of us who are nonsmokers on occasions have complained about breathing the smoke of others, to be sure, and there have been times when I have not gone to certain places where people were smoking. However, it is one thing for me to refuse to patronize a place where people are smoking; it is quite another to employ the state as a vehicle to impose my desires upon others.

The anti-smoking policies in effect give disaffected persons (along with politicians and activists) de facto property rights, something I pointed out to the activist. His response was as follows: "I think ALL Group A carcinogens should be prohibited in the workplace, to the extent possible."

The "Class A Carcinogens" argument, while at first sounding good, is yet another rhetorical trick. According to cancer researchers, tobacco smoke carries the "Class A" carcinogens, and these supposedly also have an effect upon nonsmokers. Given the political motivation of much anti-tobacco research, one must take these results with a very large bag of salt. (For example, the media recently trumpeted a "study" which claimed that smoking bans could cut heart attacks in half. Jacob Sullum of the Reason Foundation clearly debunks that and other studies.

However, as I pointed out in my responses, there are many hazards in this world, and his reasoning would give unhappy people an absolute veto power over nearly everything. For example, if one is able to walk into any establishment and demand people stop smoking, would not someone who is offended by "R" rated movies have the right to order the theater to stop showing that particular film? For that matter, all of us are quite aware of the dangers of alcoholic beverages, and if it is dangerous for people to smoke, it certainly can also be dangerous for them to drink.

That being the case, one would expect the political authorities to be so concerned about alcohol abuse that they order bars and restaurants to stop serving such beverages, or at least permit anyone to enter a bar and declare that all drinking must be stopped.

In fact, if one really wants to get at the source of most cancers, there is the sun. If these public health cancer fighters truly were serious about keeping Americans from being exposed to the dangers of cancer, then they would demand legislation that either would prevent the sun from shining or at least require that we block all windows during the day and venture out only at night, something reminiscent of Frederic Bastiat's "Petition of the Candlemakers."

However, my activist email partner emphasized time and again that he wanted only the "Class A" carcinogens to be eliminated from the workplace. That is not as easy a task as one might think, even if all tobacco smoke is eliminated. Carcinogens, you see, come in all places, including clothing and carpet. It is nearly impossible to go through life without coming into contact with such things.

Thus, the safety issue is nothing more than a red herring, or yet another version of the "Camel's Nose." Anti-tobacco activists most likely will not stop until we have something akin to the 1920s version of Prohibition, this time tobacco being the target, the failures of alcohol and drug bans not affecting them in the least.

While many libertarians have fashioned the argument as a contest between the rights of smokers and nonsmokers, it is a mistake to stop there. There are no doubts that conflicting rights exist here, but legislation targeting tobacco use is not the answer. The real issue here is not whether the law will be used as a mediation device between smokers and nonsmokers, but rather the fact that activists are using the state as a vehicle to hijack private property rights and to take choices away from individuals who are quite capable of thinking for themselves.

"If one abolishes man's freedom to determine his own consumption, one takes all freedoms away," writes Mises.

The decision of whether or not to ban smoking on private property should be solely left up to the property owner, period. Furthermore, individuals who choose to work or patronize such places should not be permitted to claim later that secondhand smoke made them sick (and then have a jury make them multimillionaires).

For all of the "halo-effect" that supposedly surrounds anti-smoking activists, they are little more than closet thieves. Yes, free speech dictates that they should be able to say what they want in a proper forum. And, yes, private property rights should also dictate that they mind their own business when it comes to the property of others.

**Anonymouse** · 06-07-2004, 09:51 AM

The Human Impact of Factor Mobility

by Clifford F. Thies

[Posted June 7, 2004]

That some factors of production are mobile, says the new protectionist, "proves" that free trade is not as attractive as (supposedly) David Ricardo argued. But factor mobility is not new. It has long been accepted by economists that either goods or people (and other factors of production) move. Indeed, part of the argument for free trade between Mexico and the US is that there would be a reduced problem of illegal immigration.

Economics predicts that, subject to the costs involved, resources as well as goods will flow from where they are in relative abundance to where they are in relative scarcity. This means that people will tend to flow ("migrate") from poor countries to rich, and capital will tend to flow from rich countries to poor, all in addition to goods flowing based on comparative advantage.

As more and more countries establish the rule of law, giving foreign investors some confidence that they will enjoy their profits, if profits are realized from the risks they undertake in these countries, capital will flow from rich to poor countries. And, while there are countervailing considerations resulting in some reverse capital flow, in net, the direction of capital flow is from rich to poor countries.

If there were no costs involved, there would be an inexorable tendency for the returns both to capital and to labor to equalize on a global basis. Capitalists in rich countries would certainly benefit from being able to put their money into the most profitable investments. Workers in poor countries would certainly benefit from increased capital-to-labor ratios, increasing their productivity, wages and standards of living.

But, for workers in rich countries and for capitalists in poor countries there are offsetting considerations. Regarding workers in rich countries, they are benefited from increased total factor productivity but they are hurt by decreased capital-to-labor ratios in their countries. The converse is true for capitalists in poor countries. They too benefit from increased total factor productivity but they are hurt by increased capital-to-labor ratios in their countries.

While the general welfare is definitely improved for all, and especially for the poor among us, it may be in the narrow, or "special interests" of workers in rich countries (and capitalists in poor countries) to oppose free trade.

As Ludwig von Mises, the foremost advocate of free trade of the twentieth century, said:

"If we assume there are no institutional barriers preventing or penalizing the transfer of capital goods, workers, and commodities from one place or area to another and that workers are indifferent with regard to their dwelling and working places, there prevails a tendency toward a distribution of population over the earth�s surface in accordance with the physical distribution of the primary natural factors of production and the immobilization of inconvertible factors of productions effected in the past. There is, if we disregard the cost component, a tendency toward an equalization of wage rates for the same type of work all over the earth."

The only thing different today from what Mises said is that, today, it is increasingly feasible to outsource work. Therefore, workers do not have to distribute themselves over the earth�s surface in the manner described by Mises. Rather, work can be sent to them via the internet (and via other innovations in communication and transportation technologies).

Economics does not predict that free trade is an unalloyed blessing to all people in the countries involved. Focusing on rich countries, when comparative advantage is driven by different capital-to-labor ratios, economics predicts that free trade will benefit capital and hurt labor. With regard to types of labor, for example, skilled labor relative to unskilled labor, we could say that free trade tends to benefit skilled labor (as skilled labor imbeds capital) and to hurt unskilled labor. However, this tendency may not apply to all kinds of skilled and unskilled labor in any given short run. Economics also predicts that, in net, free trade will benefit rich countries, so that the winners in the rich countries will be able to compensate losers.

To be sure, compensation of losers is a tricky thing. First of all, minimizing the loss to losers must involve the shifting of labor from the shrinking to the expanding sectors in the economy. This will not happen if jobs are protected. Currently, the government attempts to compensate losers with job retraining programs and with grants to disproportionately-impacted communities.

Even those who back these programs must admit that they don�t work very well. These programs are, at best, political sops to a few Congressmen who might not otherwise support free trade. They hardly compensate those who lose their jobs to free trade. Mostly, they make jobs for government bureaucrats. As Shakespeare once put it, "�tis kind to be cruel." The best policy is to make it clear that each of us has to adapt himself to changing circumstances and not wait around, unemployed, hoping that the government will revive the past.

Notice that the gains from free trade presume the shifting of resources from shrinking to expanding sectors. This is always a difficult proposition, and is particularly difficult when the economy is in recession. In normal years, the unemployment rate at any given time is about 5 percent, and about 20 percent of workers leave their old jobs (in many cases voluntarily), and find new jobs. In other words, the ratio of people unemployed at any one time to total changeover in the course of a year is about four to one. Another way of expressing the same phenomenon is that for every one net new job, there are about five new jobs created and about four old jobs lost.

Our increasing wages and standard of living result not from working longer hours or working harder. Rather, they result from a combination of increasing labor productivity and increasing total factor productivity which, in turn, depend on increasing saving and investment, from innovations and inventions, and from increasing specialization.

This means that our increasing standards of living depend on policies conducive to the accumulation of capital, to risk-taking, and to free trade. Our interest in increasing wages and standards of living are such that we accept that each of us must continuously maintain our edge in a very competitive global economy which means, among other things, that many of us will have to change jobs on a periodic basis.

But, this process of change does not work so well during recessions. And, the people most hurt are those who are unskilled, who lose their jobs involuntarily, and who have the most difficulty finding new employment. While the unemployment rate today is not very high from an historical perspective, and has even been falling during the past few months, the rate of long-term unemployment has continued to go up.

During the past year, four of my friends have had to deal with some really tough job situations. Two have landed on their feet. A third has secured an extension of a temporary job, but is still looking for a permanent job. And the fourth found a job that proved not to last very long and is now again out of work. When economics predicts there will be losers as well as winners from free trade, I know what this means. I can visualize the meaning of the economic statistics with which I work.

I would like to speak to the two examples commonly cited of workers negatively impacted by free trade. The first is computer programmers, who complain that their jobs are being outsourced. Their salaries soared during the dot com boom, and many people were drawn to this as a profession, but now they are struggling to compete. But protectionism is no solution to the worldwide glut of programmers.

If we were to restrict American companies to only hire American programmers, in order to protect American programmers� jobs, the obvious response of the rest of the world would be to forbid American companies from selling their software and related products and services to their consumers. We would suffer a collapse of exports, and we would wind up "protecting" only a diminished number of jobs for American programmers.

And, isn�t it demeaning to programmers to say that they need government protection? Programmers are smart, have math and science-type skills, and are very well able to choose either to stay in the industry they are in, and ride out this period of over-supply, or else to shift to another sector of the economy.

The other example commonly cited of jobs being outsourced is radiological technicians. Cheaper technicians overseas are said to be able to read Cat scans and MRIs. Well, I am not a doctor of medicine, but when�two years ago�my daughter had a Cat scan to investigate the cause of her continued dizziness following a fall, I was as able as any medical professional to see the tumor in her brain. At that time, I didn�t care one wit about the nationality of the medical professionals who were to attend to her. I was just so happy that I was able to choose the best.

The same medical team at the University of Virginia Medical Center that operated on Christopher Reeve operated on my daughter. While there, I looked at the line-up of physicians and technicians they had on staff in their neurosurgery unit. The people looked as though they had been brought together from all over the world. I trusted that the only criterion for their selection was that they were the best.

In addition to our educational program in computers, we have a number of educational programs in the health professions at the university at which I work. I therefore happen to know that there are times of "boom and bust" in specific health professions. Job offers and enrollments that were strong in certain fields a few years ago are now a bit soft. Today�s hot specialties might not be tomorrow�s. The ups and downs sometimes make things tough for our graduates. But, aligning supply with demand for the many thousands of jobs out of which a modern economy is comprised isn�t easy to do, and�almost all of the time�we are able to deal with the problem of misalignment.

It is a relatively easy job to advocate the cause of liberty during good times. But, during tough times, populist nostrums gain favor. We must always remember to think of these issues from the point of view of the consumers, which is to say, the whole of society, not just one small slice of it. I should mention that all is fine with my daughter.

-----

Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah University ([email protected]). This article appears in the May 2004 issue of the Free Market. Comment on the Blog.

**Anonymouse** · 06-07-2004, 09:53 AM

Does Wal-Mart Destroy Communities?

William L. Anderson

[Posted May 31, 2004]

In a recent poll on the CNN website, viewers were asked the "poll" question of whether or not they believed that Wal-Mart stores were "good" for the "community." Perhaps it is not surprising that a large majority answered "no."

Now, this by itself does not mean much, since these online "polls" are not scientific and reflect only the views of the moment by people who choose to participate. What is more significant, however, was the anti-Wal-Mart content of a speech recently given by Teresa Heinz Kerry, John Kerry's wife and an influential person in her own right. Speaking at a Democratic Party rally, Mrs. Kerry declared that "Wal-Mart destroys communities."

Indeed, Wal-Mart bashing is in vogue. Whether one journeys to the sight of Sojourners Magazine or reads even mainstream news publications, the charges against Wal-Mart abound. According to the consensus of the critics, Wal-Mart is guilty of the following:

-Paying low wages to workers, and generally abusing them.

-Intimidating shoppers by having them "greeted" by an elderly person at the door. (As one writer said, the real purpose of that greeter is to let shoppers know that they are being watched.)

-Putting small stores out of business, as shoppers stop patronizing the little "mom-and-pop" boutiques for the big box, thus "destroying" the look of "Main Street" in small towns and cities.

-Purchasing low-priced goods from abroad, which puts American workers out of jobs.

-Contributing to that allegedly harmful disease known as "consumerism," in which Americans are constantly purchasing goods that the Wal-Mart critics insist that they really don't need. As the bumper sticker of one of my faculty colleagues proclaims: "Mal-Wart: The Source of Cheap Crap."

Of course, what really bugs the critics is that people choose to shop at Wal-Mart instead of the places where they would want people to spend their money. (Activists on both left and right often will invoke the name of the "people" when their real goal is to restrict the choices of those "people.") Yet, while up front I question the real motives of the Wal-Mart haters, it still behooves us to answer the charges using economic logic, since many of the arguments against this chain store also appeal to economics.

In a recent article, "Always Low Wages," Brian Bolton declares that Jesus would not shop at Wal-Mart, since the company's employee pay scale is not up to Sojourners' standards. Furthermore, he all but declares it a "sin" for Christians to patronize the store because it imports cheap goods made by people who make even less money than Wal-Mart employees. As Bolton writes, "lower prices equal lower wages."

Nearly all of us would accept higher payment for our services, and Wal-Mart employees are no exception. Yet, that condition alone hardly makes a company's pay scales illegitimate, as Bolton and other critics contend. If my employer were to double my pay tomorrow (which is highly doubtful), I doubt I would object, although I'm sure that most of my colleagues would see the event in a different light. That Frostburg State University does not make that offer to me does not make my current salary illicit, nor does it make my employer the second coming of Silas Marner.

The point is this: payment for services involves mutually agreeable exchanges. They are not manifestations of power, as some would say. No one is forced to work at Wal-Mart; people who choose to work there do so because they prefer employment there to other circumstances.

At the local Wal-Mart where I shop (contrary to Bolton, I do not believe that shopping at Wal-Mart violates the Holy Scriptures), I have noticed that many employees have stayed with that company for a long time, and there does not seem to be much turnover there. Furthermore, from what I can tell, they seem like normal people, not the oppressed slaves that the critics claim fill the ranks of Wal-Mart workers.

Now, my personal observations hardly constitute proof that Bolton and the other Wal-Mart critics are wrong, but unless they can repudiate the opportunity cost argument, they have ground upon which to stand. Wal-Mart is not engaged in a grand conspiracy to push down wages in any given market, and twisted logic cannot prove otherwise.

For example, Bolton writes that part of the problem faced by recent striking union grocery store workers in Southern California was that Wal-Mart super centers in the area paid lower wages, which placed pressure on the other grocery stores. Thus, he reasons, it was Wal-Mart that ultimately kept workers from receiving "just wages" for their work.

No doubt, Bolton can appeal to the anti-capitalist mentality of many people, but his work stands economic logic upon its head. By paying lower wages, Wal-Mart makes grocery stores like Vons and other places that pay union scale more attractive to workers (although labor unions do not exactly welcome some potential employees with open arms). The success of Wal-Mart does not have to do with the pay scale of its employees, but rather with the perception by consumers that the store will have the goods they want at an affordable price.

Bolton claims that Wal-Mart can charge lower prices and still be profitable because it pays its employees less than do other companies. As anyone with even cursory training in Austrian Economics knows, such an argument is false. As Murray Rothbard points out in Man, Economy, and State, economic profit exists because of temporarily underpriced factors of production. Over time, as the owners recognize their position, they will either refuse to sell their factors at current prices and look to other options, or accept the current price because the opportunity costs of selling to other buyers may be higher than they wish to incur. If it is the latter, then one cannot say that these particular factors are even underpriced, as their owners are not able or willing to do what is necessary to gain higher prices for their employment.

In places like Southern California, where there are numerous employment opportunities, to say that workers are "forced" to work at Wal-Mart for "slave wages" is ridiculous. As noted before, the fact that workers there would be willing to accept higher pay is not evidence that they are enslaved. That they would prefer more to less simply means that they are normal, purposeful human beings.

One can easily dismiss the charge about the "greeter" at the door�unless one truly is intimidated by the presence of a diminutive 60-year-old grandmother. (What I have found is that if I select merchandise and actually pay for it, then no one there bothers me at all. If activists are upset that Wal-Mart does not like individuals to steal goods from their shelves, then they are advocating theft, and one does not have to pay attention to their arguments at all.)

The "Wal-Mart destroys the community" charge, however, needs more attention. It goes as such: Wal-Mart enters a geographical area, and people stop shopping at little stores in order to patronize Wal-Mart. The mom-and-pop stores go out of business, the community is left with boarded-up buildings, and people must leave the small businesses and accept lower wages at Wal-Mart. Thus, while a shiny new store full of inexpensive goods is in the locality, in real terms, most everyone actually is poorer.

Again, these kinds of arguments appeal to many people. For example, all of us have heard of the theoretical owner of the small, independent hardware store who had to close his shop when Wal-Mart or Home Depot moved into his community, then suffer the indignity of having to go to work at the very place that put him on the streets. The former owner has a lower income than before, which is held up as proof that the "big boys" create and expand poverty.

A few items need to be put in order. First, no one forced the hardware owner to close his shop; he closed it because it was not profitable enough for him to keep it open. If the new chain store meant that many of his former customers had abandoned him, that is not the fault of the new store. Instead, consumers faced with choices and lower prices that they had not previously enjoyed freely chose to patronize the new store.

Second, while the owner of the smaller store has suffered a loss of income, everyone else has gained. Third, if the employees of the smaller store go to work at the new chain store, it is almost guaranteed that their pay will be higher than before and they will enjoy new benefits that most likely had not been available to them previously.

Third, the presence of Wal-Mart means local consumers will pay lower prices for goods than before, and also will benefit by having a wider array of available items than they had previously. (And they save on time by being able to stay under one roof while shopping for different items.) Whatever the reason, we can safely assume that consumers in that particular locality are exercising their free choices, choices that they perceive will make them better off than they were before the store existed. Activists may not like their reasoning, but that is irrelevant to our analysis.

Having dealt with the "Wal-Mart" creates poverty argument, we now turn to the more nebulous claim that the chain store "destroys" communities. Now, I have never seen a place that has been severely damaged or "destroyed" by Wal-Mart. (I have seen places that have had their quality of life spoiled by rent controls, "urban renewal," and other statist interventions that so-called activists have championed, but that is another story for another time. Suffice it to say that activists are unhappy that individuals freely choose to shop at Wal-Mart, and they want to restrict their choices in the name of "community.")

In fact, I would like to make a reverse argument; Wal-Mart and stores like it add to the quality of life in large and small communities because they provide consumer choices that otherwise would not be available. Take the area near Cumberland, Maryland, where I live, for example.

Cumberland is something of a time warp, a place that 50 years ago was a manufacturing center and was the second-largest city in Maryland. Today, most of the large factories are long shut down and the population is less than half of Cumberland's heyday numbers. Furthermore, the area has a relatively high unemployment rate and many jobs do not pay very well.

The presence of Wal-Mart and Lowe's (a large hardware store), along with some large grocery chains, however, means that people here can stretch their incomes farther than we would if those stores did not exist. If they suddenly were to pull out, one can be assured that our quality of life here would not improve in their absence. Furthermore, the fact that Wal-Mart and other large stores are willing to locate in smaller and poorer communities also makes these areas more attractive for people who wish to live here but do not want to have to give up all of the amenities of living in a larger city.

Others on this page and elsewhere have dealt with the charge that Wal-Mart destroys American jobs by purchasing goods from abroad, where the goods often are manufactured in what activists call "oppressive" conditions. (In fact, Sojourners elsewhere has openly stated that Third World peoples should simply be supported by American aid, and that the West should do all it can to make sure that the economies of these poor nations do not grow, all in the name of environmentalism. In other words, none of us are poor enough to satisfy the anti-Wal-Mart activists whose real goal is to eviscerate our own standards of living and "turn back the clock" to an era when life expectancy was lower and people generally were more deprived.)

The last objection�that Wal-Mart helps create "mindless" consumerism�is easily refuted by Austrian economics. The very basis of human action is purposeful behavior; to call human action "mindless" is absurd. Consumers at Wal-Mart and other chain stores are not zombies walking aimlessly through the building with glassy stares. They are human beings with needs and desires who perceive that at least some of those desires can be fulfilled through the use of goods purchased at Wal-Mart.

In a free society, activists would have to try to convince other individuals to change their buying habits via persuasion and voluntary action. Yet, the very history of "progressivist" activism in this country tells us a story of people who use the state to force others to do what they would not do given free choices. Yesterday, Microsoft was in their crosshairs; today, it is Wal-Mart, and tomorrow, some other hapless firm will be declared guilty of providing customers choices that they had not enjoyed before. A great sin, indeed.

------

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.

**Anonymouse** · 06-07-2004, 10:07 AM

The Myth of Efficient Government Service

By Murray N. Rothbard

[This excerpt from Man, Economy, and State, with Power and Market (Mises Institute, 2004), posted March 18, 2004, is an explanation and elaboration of points first made in Mises's Bureaucracy�and provides an excellent example of how Murray Rothbard's treatise built on Mises's to employ and extend the core analytical framework. The footnotes have been shortened. The excerpt is from pages 1260-1272]

The well-known inefficiencies of government operation are not empirical accidents, resulting perhaps from the lack of a civil-service tradition. They are inherent in all government enterprise, and the excessive demand fomented by free and other underpriced services is just one of the many reasons for this condition.

Thus, free supply not only subsidizes the users at the expense of nonusing taxpayers; it also misallocates resources by failing to supply the service where it is most needed. The same is true, to a lesser extent, wherever the price is under the free-market price. On the free market, consumers can dictate the pricing and thereby assure the best allocation of productive resources to supply their wants. In a government enterprise, this cannot be done. Let us take again the case of the free service. Since there is no pricing, and therefore no exclusion of submarginal uses, there is no way that government, even if it wanted to, could allocate its services to the most important uses and to the most eager buyers. All buyers, all uses, are artificially kept on the same plane. As a result, the most important uses will be slighted, and the government is faced with insuperable allocation problems, which it cannot solve even to its own satisfaction. Thus, the government will be confronted with the problem: Should we build a road in place A or place B? There is no rational way by which it can make this decision. It cannot aid the private consumers of the road in the best way. It can decide only according to the whim of the ruling government official, i.e., only if the government official, not the public, does the "consuming." If the government wishes to do what is best for the public, it is faced with an impossible task.

Government can either deliberately subsidize by giving a service away free, or it may genuinely try to find the true market price, i.e., to "operate on a business basis." This is often the cry raised by conservatives�that government enterprise be placed on a "business footing," that deficits be ended, etc. Almost always this means raising the price. Is this a solution, however? It is often stated that a single government enterprise, operating within the sphere of a private market, buying from it, etc., can price its services and allocate its resources efficiently. This, however, is incorrect. There is a fatal flaw that permeates every conceivable scheme of government enterprise and ineluctably prevents it from rational pricing and efficient allocation of resources. Because of this flaw, government enterprise can never be operated on a "business" basis, no matter what the government's intentions.

What is this fatal flaw? It is the fact that government can obtain virtually unlimited resources by means of its coercive tax power. Private businesses must obtain their funds from investors. It is this allocation of funds by investors on the basis of time preference and foresight that rations funds and resources to the most profitable and therefore the most serviceable uses. Private firms can get funds only from consumers and investors; they can get funds, in other words, only from people who value and buy their services and from investors who are willing to risk investment of their saved funds in anticipation of profit. In short, payment and service are, once again, indissolubly linked on the market. Government, on the other hand, can get as much money as it likes. The free market provides a "mechanism" for allocating funds for future and present consumption, for directing resources to their most value-productive uses for all the people. It thereby provides a means for businessmen to allocate resources and to price services to insure such optimum use. Government, however, has no checkrein on itself, i.e., no requirement for meeting a profit-and-loss test of valued service to consumers, to enable it to obtain funds. Private enterprise can get funds only from satisfied, valuing customers and from investors guided by profits and losses. Government can get funds literally at its own whim.

With the checkrein gone, gone also is any opportunity for government to allocate resources rationally. How can it know whether to build road A or road B, whether to "invest" in a road or a school�in fact, how much to spend for all its activities? There is no rational way that it can allocate funds or even decide how much to have. When there is a shortage of teachers or schoolrooms or police or streets, the government and its supporters have only one answer: more money. The people must relinquish more of their money to the government. Why is this answer never offered on the free market? The reason is that money must be withdrawn from some other use in consumption or investment�and this withdrawal must be justified. This justification is provided by the test of profit and loss: the indication that the most urgent wants of the consumers are being satisfied. If an enterprise or product is earning high profits for its owners, and these profits are expected to continue, more money will be forthcoming; if not, and losses are being incurred, money will flow out of the industry. The profit-and-loss test serves as the critical guide for directing the flow of productive resources. No such guide exists for the government, which has no rational way to decide how much money to spend, either in total, or in each specific line. The more money it spends, the more service it can supply�but where to stop?[1]

Proponents of government enterprise may retort that the government could simply tell its bureau to act as if it were a profit-making enterprise and to establish itself in the same way as a private business. There are two flaws in this theory. First, it is impossible to play enterprise. Enterprise means risking one's own money in investment. Bureaucratic managers and politicians have no real incentive to develop entrepreneurial skill, to really adjust to consumer demands. They do not risk loss of their money in the enterprise. Secondly, aside from the question of incentives, even the most eager managers could not function as a business. Regardless of the treatment accorded the operation after it is established, the initial launching of the firm is made with government money, and therefore by coercive levy. An arbitrary element has been "built into" the very vitals of the enterprise. Further, any future expenditures may be made out of tax funds, and therefore the decisions of the managers will be subject to the same flaw. The ease of obtaining money will inherently distort the operations of the government enterprise. Moreover, suppose the government "invests" in an enterprise, E. Either the free market, left alone, would also have invested the same amount in the selfsame enterprise, or it would not. If it would have, then the economy suffers at least from the "take" going to the intermediary bureaucracy. If not, and this is almost certain, then it follows immediately that the expenditure on E is a distortion of private utility on the market�that some other expenditure would have greater monetary returns. It follows once again that a government enterprise cannot duplicate the conditions of private business.

In addition, the establishment of government enterprise creates an inherent competitive advantage over private firms, for at least part of its capital was gained by coercion rather than service. It is clear that government, with its subsidization, if it wishes can drive private business out of the field. Private investment in the same industry will be greatly restricted, since future investors will anticipate losses at the hands of the privileged governmental competitors. Moreover, since all services compete for the consumer's dollar, all private firms and all private investment will to some degree be affected and hampered. And when a government enterprise opens, it generates fears in other industries that they will be next, and that they will be either confiscated or forced to compete with government-subsidized enterprises. This fear tends to repress productive investment further and thus lower the general standard of living still more.

The clinching argument, and one that is used quite correctly by opponents of government ownership, is: If business operation is so desirable, why take such a tortuous route? Why not scrap government ownership and turn the operation over to private enterprise? Why go to such lengths to try to imitate the apparent ideal (private ownership) when the ideal may be pursued directly? The plea for business principles in government, therefore, makes little sense, even if it could be successful.

The inefficiencies of government operation are compounded by several other factors. As we have seen, a government enterprise competing in an industry can usually drive out private owners, since the government can subsidize itself in many ways and supply itself with unlimited funds when desired. Thus, it has little incentive to be efficient. In cases where it cannot compete even under these conditions, it can arrogate to itself a compulsory monopoly, driving out competitors by force. This was done in the United States in the case of the post office.When the government thus grants itself a monopoly, it may go to the other extreme from free service: it may charge a monopoly price. Charging a monopoly price�identifiably different from a free-market price�distorts resources again and creates an artificial scarcity of the particular good. It also permits an enormously lowered quality of service. A governmental monopoly need not worry that customers may go elsewhere or that inefficiency may mean its demise.[2]

A further reason for governmental inefficiency has been touched on already: that the personnel have no incentive to be efficient. In fact, the skills they will develop will not be the economic skills of production, but political skills�how to fawn on political superiors, how demagogically to attract the electorate, how to wield force most effectively. These skills are very different from the productive ones, and therefore different people will rise to the top in the government from those who succeed in the market.

It is particularly absurd to call for "business principles" where a government enterprise functions as a monopoly. Periodically, there are demands that the post office be put on a "business basis" and end its deficit, which must be paid by the taxpayers. But ending the deficit of an inherently and necessarily inefficient government operation does not mean going on a business basis. In order to do so, the price must be raised high enough to achieve a monopoly price and thus cover the costs of the government's inefficiencies. A monopoly price will levy an excessive burden on the users of the postal service, especially since the monopoly is compulsory. On the other hand, we have seen that even monopolists must abide by the consumers' demand schedule. If this demand schedule is elastic enough, it may well happen that a monopoly price will reduce revenue so much or cut down so much on its increase that a higher price will increase deficits rather than decrease them. An outstanding example has been the New York subway system in recent years, which has been raising its fares in a vain attempt to end its deficit, only to see passenger volume fall so drastically that the deficit increased even further after a time.

Many "criteria" have been offered by writers as guides for the pricing of government services. One criterion supports pricing according to "marginal cost." However, this is hardly a criterion at all and rests on classical economic fallacies of price determination by costs. For one thing, "marginal" varies according to the period of time surveyed. Furthermore, costs are not static, but flexible; they change according to selling prices and hence cannot be used as a guide to those prices. Moreover, prices equal average costs�or rather, average costs equal prices�only in final equilibrium, and equilibrium cannot be regarded as an ideal for the real world. The market only tends toward this goal. Finally, costs of government operation will be higher than for a similar operation on the free market.

Government enterprise will not only hamper and repress private investment and entrepreneurship in the same industry and in industries throughout the economy; it will also disrupt the entire labor market. For (a) the government will decrease production and living standards in the society by siphoning off potentially productive labor to the bureaucracy; (b) in using confiscated funds, the government will be able to pay more than the market rate for labor, and hence set up a clamor by government job seekers for an expansion of the unproductive bureaucratic machine; and (c) through high, tax-supported wages the government may well mislead workers and unions into believing that this reflects the market wage in private industry, thereby causing unwanted unemployment.

Moreover, government enterprise, basing itself on coercion over the consumer, can hardly fail to substitute its own values for those of its customers. Hence, artificially standardized services of poorer quality�fashioned to governmental taste and convenience�will hold sway, in contrast to those of the free market, where diversified services of high quality are supplied to fit the varied tastes of a multitude of individuals.

One cartel or one firm could not own all the means of production in the economy, because it could not calculate prices and allocate factors in a rational manner. This is the reason why State socialism could not plan or allocate rationally either. In fact, even two or more stages could not be completely integrated vertically on the market, for total integration would eliminate a whole segment of the market and establish an island of calculational and allocational chaos, an island that would preclude optimal planning for profits and maximum satisfaction for the consumers.

**Anonymouse** · 06-07-2004, 10:08 AM

continued...

In the case of simple government ownership, still another extension of this thesis unfolds. For each governmental firm introduces its own island of chaos into the economy; there is no need to wait for socialism for chaos to begin its work. No government enterprise can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner. No government enterprise can be established on a "business basis" even if the desire were present. Thus, any government operation injects a point of chaos into the economy; and since all markets are interconnected in the economy, every governmental activity disrupts and distorts pricing, the allocation of factors, consumption/ investment ratios, etc. Every government enterprise not only lowers the social utilities of the consumers by forcing the allocation of funds to ends other than those desired by the public; it also lowers the utility of everyone (including, perhaps, the utilities of government officials) by distorting the market and spreading calculational chaos. The greater the extent of government ownership, of course, the more pronounced will this impact become.

Aside from its purely economic consequences, government ownership has another kind of impact on society: it necessarily substitutes conflict for the harmony of the free market. Since government service means service by one set of decision-makers, it comes to mean uniform service. The desires of all those forced, directly or indirectly, to pay for the government service cannot be satisfied. Only some forms of the service can or will be produced by the government agency. As a result, government enterprise creates enormous caste conflicts among the citizens, each of whom has a different idea on the best form of service.

In recent years, government schools in America have furnished a striking example of such conflicts. Some parents prefer racially segregated schools; others prefer integrated education. Some parents want their children taught socialism; others want antisocialist teaching in the schools. There is no way that government can resolve these conflicts. It can only impose the will of the majority (or a bureaucratic "interpretation" of it) by coercion and leave an often large minority dissatisfied and unhappy. Whichever type of school is chosen, some groups of parents will suffer. On the other hand, there is no such conflict on the free market, which provides any type of service demanded. On the market, those who want segregated or integrated, socialist or individualist schools can have their wants satisfied. It is obvious, therefore, that governmental, as opposed to private, provision of services, lowers the standard of living of much of the population.

The degrees of government ownership in the economy vary from one country to another, but in all countries the State has made sure that it owns the vital nerve centers, the command posts of the society. It has acquired compulsory monopoly ownership over these command posts, and it has always tried to convince the populace that private ownership and enterprise in these fields is simply and a priori impossible. We have seen, on the contrary, that every service can be supplied on the free market.

The vital command posts invariably owned monopolistically by the State are: (1) police and military protection; (2) judicial protection; (3) monopoly of the mint (and monopoly of defining money); (4) rivers and coastal seas; (5) urban streets and highways, and land generally (unused land, in addition to the power of eminent domain); and (6) the post office. The defense function is the one reserved most jealously by the State. It is vital to the State's existence, for on its monopoly of force depends its ability to exact taxes from the citizens. If citizens were permitted privately owned courts and armies, then they would possess the means to defend themselves against invasive acts by the government as well as by private individuals. Control of the basic land resources�particularly transportation�is, of course, an excellent method of ensuring overall control. The post office has always been a very convenient tool for the inspection and prohibition of messages by heretics or enemies of the State. In recent years, the State has constantly sought to expand these outposts. Monopoly of the mint and of the definition of money (legal tender laws) has been used to achieve full control of the nation's monetary system. This was one of the State's most difficult tasks, since for centuries paper money was thoroughly distrusted by the people. Monopoly over the mint and the definition of monetary standards has led to the debasement of the coinage, a shift of monetary names from units of weight to meaningless terms, and the replacement of gold and silver by bank or government paper. At present, the State in nearly every country has achieved its major monetary goal: the ability to expand its revenue by inflating the currency at will. In the other areas�land and natural resources, transportation and communication�the State is more and more in control. Finally, another critical command post held, though not wholly monopolized by the State, is education. For government schooling permits influencing the youthful mind to accept the virtues of the government and of government intervention. In many countries, the government does not have a compulsory monopoly of schooling, but it approaches this ideal by compelling attendance of all children at either a government school or a private school approved or accredited by government. Compulsory attendance herds into the schools those who do not desire schooling and thus drives too many children into education. Too few youngsters remain in such competing fields as leisure, home study, and business employment.

One very curious governmental activity has grown enormously in the present century. Its great popularity is a notable indication of widespread popular ignorance of praxeological law. We are referring to what is called "social security" legislation. This system confiscates the income of the poorer wage earners and then presumes to invest the money more wisely than they could themselves, later paying out the money to them or their beneficiaries in their old age. Considered as "social insurance," this is a typical example of government enterprise: there is no relation between premiums and benefits, both changing yearly under the impact of political pressures. On the free market, anyone who wishes to invest in an insurance annuity or in stocks or real estate may do so. Compelling everyone to transfer his funds to the government forces him to lose utility.

Thus, even on its face, it is difficult to understand the great popularity of the social security system. But the true nature of the operation differs greatly from its official image. For the government does not invest the funds it takes in taxes; it simply spends them, giving itself bonds, which must be later cashed when the benefits fall due. How will the cash then be obtained? Only from further taxes or inflation. Thus, the public must pay twice for "social security." The social security program taxes twice for one payment; it is a device to permit palatable taxation of the lower-income groups by the government. And, as is true of all taxes, the proceeds go into governmental consumption.

In weighing the question of private or governmental ownership of any enterprise, then, one should keep in mind the following conclusions of our analysis: (1) every service can be supplied privately on the market; (2) private ownership will be more efficient in providing better quality of service at lower cost; (3) allocation of resources in a private enterprise will better satisfy consumer demands, while government enterprise will distort allocations and introduce islands of calculational chaos; (4) government ownership will repress private activity in noncompeting as well as competing firms; (5) private ownership insures the harmonious and co-operative satisfaction of desires, while government ownership creates caste conflict.

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Murray N. Rothbard (1926-1995) contributed mightily to the edifice of the Austrian Schoool. Read more about him and buy his economics treatise.

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