Cafe Hayek

Price Controls and the Reign of Terror

In their 1975 book The Age of Napoleon, Will and Ariel Durant argue that the Reign of Terror during the French revolution was sparked, in part, by price controls.

The economy itself was a battlefield.  The price controls established on May 4 and September 29 [1793] were being defeated by the ingenuity of greed.  The urban poor approved the maxima; the peasants and the merchants opposed them, and increasingly refused to grow or distribute the price-limited foods; the city stores, receiving less and less produce from market or field, could satisfy only the foremost few in the queues that daily formed at their doors.  Fear of famine ran through Paris and the towns....

On August 30 a deputy pronounced the magic word: Let Terror be the order of the day.  On September 5 a crowd from the sections, calling for "war on tyrants, hoarders, and aristocrats," marched on the headquarters of the Commune in the Hotel de Ville.  The mayor, Jean-Guillaume Pache, and the city procurator, Pierre Chaumette, went with their delegation to the Convention and voiced their demand for a revolutionary army to tour France with a portable guillotine, arrest every Girondin, and compel every peasant to surrender his hoarded produce or be executed on the spot [pp. 62-63].

Capitalism Day

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich.  Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism."  Here are the central paragraphs:

Before refrigeration, people ran enormous risks of ingesting deadly bacteria whenever they ate meat or dairy products. Refrigeration has dramatically reduced the bacteria pollution that constantly haunted our pre-twentieth-century forebears.

We wear clean clothes; our ancestors wore foul clothes. Pre-industrial humans had no washers, dryers, or sanitary laundry detergent. Clothes were worn day after day without being washed. And when they were washed, the detergent was often made of urine.

Our bodies today are much cleaner. Sanitary soap is dirt cheap (so to speak), as is clean water from household taps. The result is that, unlike our ancestors, we moderns bathe frequently. Not only was soap a luxury until just a few generations ago, but because nearly all of our pre-industrial ancestors could afford nothing larger than minuscule cottages, there were no bathrooms (and certainly no running water). Baths, when taken, were taken in nearby streams, rivers, or ponds, often the same bodies of water used by the farm animals. Forget about shampoo, clean towels, toothpaste, mouthwash, and toilet tissue.

The interiors of our homes are immaculate compared to the squalid interiors of almost all pre-industrial dwellings. These dwellings’ floors were typically just dirt, which made the farm animals feel right at home when they wintered in the house with humans. Of course, there was no indoor plumbing. Nor were there household disinfectants, save sunlight. Unfortunately, because pre-industrial window panes were too expensive for ordinary families and because screens are an invention of the industrial age, sunlight and fresh air could be let into these cottages only by letting in insects too. Also, bizarre as it sounds to us today, the roofs of these dwellings were polluted with all manner of filthy or dangerous things. Here’s the description by historians Frances and Joseph Gies, in Life in a Medieval Village, of the roofs of pre-industrial cottages:

Roofs were thatched, as from ancient times, with straw, broom or heather, or in marsh country reeds or rushes. . . .  Thatched roofs had formidable drawbacks; they rotted from alternations of wet and dry, and harbored a menagerie of mice, rats, hornets, wasps, spiders, and birds; and above all they caught fire. Yet even in London they prevailed.

Peace and free trade.

The Great Mencken

I'm not ashamed to admit that I have heroes.  These include, in no particular order, Adam Smith, Richard Cobden and John Bright, Frederic Bastiat, France's Henry IV, Voltaire, John D. Rockefeller, Milton Friedman, Leonard Read, and (of course) F.A. Hayek.  Also on this list is the Bard of Baltimore, H.L. Mencken.  Today's edition of the Washington Post published this letter of mine on Mencken:

J. McDonald Kennedy's encomium for the Baltimore Sun [letters, Jan. 24] failed to mention what is perhaps the Sun's finest contribution not only to journalism but to American letters and wisdom: the great reporter H.L. Mencken.

Mencken's style and philosophy of vigorous journalism were on display when he wrote in 1942:

"In my day a reporter who took an assignment was fully on his own until he got back to the office, and even then he was little molested until his copy was turned in at the desk; today he tends to become only a homunculus at the end of a telephone wire, and the reduction of his observations to prose is commonly farmed out to literary castrati who never leave the office, and hence never feel the wind of the world in their faces or see anything with their own eyes."

DONALD J. BOUDREAUX

This quotation is from Mencken's 1942 memoir Newspaper Days.

Naomi vs. Milton

This is brilliant. Please share widely. Thank you, Copious Dissent. HT: Kids Prefer Cheese.

That '70s Show

Joel Kotkin, always thoughtful and provocative, does a nice job in today's Washington Post advising us denizens of the first decade of the 21st century not to take our fears too seriously.  Here are his opening paragraphs:

The country is in a funk. Oil prices are at record highs, and the dollar is plummeting. Foreigners are buying out leading U.S. business assets. Environmentalists say the world is headed toward an ecological crackup of biblical proportions.

Today's headlines? Well, yes. But for those of us old enough to remember, they could just as easily be bulletins from one of the grimmest decades in recent U.S. history: the '70s.

That decade, when all the promise of the 1960s fizzled into disappointment, holds up a mirror to our contemporary pessimism. Then as now, Americans felt uncertain about the present and insecure about the future. But we found a way out of the gloom -- and if that decade is our guide, we're likely to do it again.

I came of age in the 1970s, and I agree with Kotkin.

A Wonderful Anniversary. Drink Up!

Today is the 74th anniversary of the repeal of alcohol prohibition in the United States.  In this short article, University of Michigan law professor Adam Pritchard and I explain why prohibition began when it did and why it ended when it did.

Progressive Superstition

Here's a letter that I sent today to the Gray Lady:

Opposed to globalization, Jeff Milchen asserts that "The only truly sustainable path for business in the 21st century is localization" (Letters, November 23).  Mr. Milchen should learn some history.  He can begin with Fernand Braudel's 1981 book The Structures of Everyday Life, which details the living standards of ordinary Europeans during the late middle ages.  This era was emphatically one of localization: people consumed only locally grown foods and locally made clothing.  All building materials were local.   There were no highways, railways, or CO2-emitting engines to pollute the local atmosphere with greenhouse gases or with foreign goods and foreign ideas.

But paradise had its price.  Starvation was common, as was death by plague.  Giving birth was more dangerous for women than a game of Russian Roulette. People lived in tiny one-room dirt-floor huts without indoor plumbing. During the winter, some of the farm animals (all local!) shared these accommodations.

What little "business" there was during the long era of localization - subsistence farming - might have been sustainable, but human dignity and human life certainly were not.

Sincerely,
Donald J. Boudreaux

I googled "Jeff Milchen" and, not surprisingly, found that he frequently is identified with so-called "Progressives."  Ironic, isn't it, that "Progressives" advocate a return to the economic arrangements of the dark- and middle-ages?

Harold Berman: A Great Scholar

Probably no more than a half-dozen books have singly influenced my thinking as much as has Harold Berman's 1983 classic, Law and Revolution: The Formation of the Western Legal Tradition.  I was very sad to learn that Professor Berman died a few days ago.

In the early 1990s I spent several days with Prof. Berman and his charming wife at an Institute for Humane Studies seminar in Belmont, CA.  Organized by Leonard Liggio, the general subject of the seminar was the nature and origin of law.  Law and Revolution was the centerpiece of the readings.  And what a treat it was to have Harold Berman actively participating in all of the discussions!  I remember him as being deeply scholarly -- a man possessing as complete a command of his subject as is humanly possible and yet, simultaneously, unfailingly curious about different perspectives and open always to the possibility of changing his mind should he encounter sufficiently compelling facts or arguments.

Harold Berman was also genuinely kind, without a hint of pretentiousness.

The main lesson of Law and Revolution is that law can -- and certainly did in western Europe -- emerge unplanned from competition among different wannabe sovereign powers.  During the middle-ages and early modern era the Roman Catholic church sought absolute sovereignty.  So too, did various princes.  And these seekers of unalloyed sovereignty each had to compete for authority not only with each other, but also with the law-making processes that emerged in cities, on feudal manors, and -- importantly -- among merchants.

Sovereignty in the west, fortunately, was fractured.  The competition for absolute power -- the quests of the princes and of the church, of "caesar" and of "christ," each to wield absolute power prevented either of them from becoming absolute.  Competition is a grand thing.  And law is not so much the product of a sovereign, or of a law-giving genius, as it is the emergent outcome of countless instances of human interactions and struggles of each of us and of those who would rule us to carve out elbow room for ourselves and domains of authority.

I've yet to read the follow-up volume to Law and Revolution.  I'll do so soon.

Bob Higgs's fine tribute to Harold Berman is here.

Did Capitalism Cause the Great Depression?

The many comments, on this post, regarding capitalism's role in causing the Great Depression prompt me to reprise this June 2006 post on the work of the economic historian Robert Higgs.

George Will on the American Idea

The Atlantic asked several prominent people to offer their thoughts on the meaning of "the American idea."  Lots of ideas that are as mistaken as they are trite are served up by bright and talented people -- such as John Updike and E.O. Wilson, each of whom warns that our materialistic way of life is causing us to run out of resources, and that we must alter our behavior if we're to survive.  (Geez, I miss Julian Simon.)

George Will, in contrast, delivers wise counsel:

It is a good and very American idea to avoid the definite article in locutions like “the American idea.” “The”? There are many American ideas pertaining to liberty under a constitutional government of limited, delegated, and enumerated powers. The best of these ideas can be found in the Federalist Papers, which are agreeably untainted by monomania.

It has been often said that any idea is dangerous if it is a person’s only idea. Talk about “the” American idea is dangerous because it often is a precursor to, and an excuse for, the missionary impulse that sleeps lightly, when it sleeps at all, in many Americans. After all, if the essence of America can be distilled to a single idea, it must be supremely important, and there might be a moral imperative to export it.

In 1990, with the collapse of the Berlin Wall still reverberating around the world, Jeane Kirkpatrick wisely warned Americans: “There is no mystical American ‘mission,’ or purpose to be ‘found’ independently of the U.S. Constitution.” With the Cold War over, and the moral and military mobilization it demanded no longer necessary, Kirkpatrick wrote: “The time when America should bear such unusual burdens is past. With a return to ‘normal’ times, we can again become a normal nation.”

If, paradoxically, “the American idea” is that the definite article is definitely inapposite in that phrase, then the greatest challenge to it is the false idea that American patriotism is inextricably bound up with the notion that being a normal nation is somehow beneath America’s dignity. Belief in American exceptionalism is compatible with the idea of American normality: Our nation is exceptionally well-founded and exceptionally faithful to an exceptionally nuanced system of prudential political axioms. But one of those axioms—it is the crux of the Madisonian persuasion—is that no polity is exempt from the passions and failings that make governance problematic, always and everywhere.

Rating Postal Rates

One of my students at George Mason University recently asked about my thoughts on the U.S. Postal Service's government-granted monopoly on the delivery of first-class mail.  I told him that I see no justification for that monopoly privilege -- that, if I could, I would eliminate it immediately.

"But postal rates aren't outrageous," he challenged (in good and appropriately skeptical spirit, I add).  "Wouldn't a true monopoly charge much higher rates?"

This question recalled to mind the very first letter that I published in the New York Times, back in 1994.  (It is co-authored with my good friend, the University of Georgia's George Selgin.)

It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.

However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh.

Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.

Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically.

Americans do not oppose postal-rate increases because of their ignorance of history. 

Rather, opposition to these increases grows from the correct perception that a legally protected monopolist such as the United States Postal Service can keep prices higher, and service inferior, to what these would be under competition.

Regardless of how today's postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.

DONALD J. BOUDREAUX
G. A. SELGIN
Clemson, S.C., March 24, 1994

The writers are, respectively, an associate professor of legal studies at Clemson University and an assistant professor of economics at the University of Georgia, Athens.

The virtues of liberty

The transition from communism to freedom has been disappointing in many ways. Markets didn't grow overnight leading to instant prosperity for everyone. Thugs used government to gain privileges and so on.

But dislike of communism was always about more than just material well-being. The Lives of Others captures the essence of freedom and opression in an extraordinary movie. It's about much more than that—it's about art and love and the human heart and whether or not we can transform ourselves.

My other thought on watching the director discuss it afterward on the DVD is that he's an unbelievably talented man. This is his first film. It took him five years to research it, write it and film it. And I wondered what a man of his talent would have done 100 years ago. Probably a playwright. Maybe a novelist. Maybe a painter. But making a movie uses a vaster palette of visual and verbal skills than any one of those. Along with some other types of skills, too. What a world we live in that gives a talent like this such scope for his vision.

I hope I haven't ruined it for you by making it sound like a cross between Don Quixote, Hamlet and the Gates of Hell. You're almost certain to be disappointed. So let me make it clear—it's not the greatest film of all time. There are some contrived moments. But the acting and the language and cinematography and the themes make up for the flaws. It is worth renting. Watch it.

Shultz on economics and foreign policy

This week's EconTalk is an interview with George Shultz. He and Milton Friedman are the two most lucid folks in their late 80's I've ever spoken to. Maybe it is something in the water at the University of Chicago. Or something in the air. I like to think that staying mentally active holds off mental aging. Shultz remains physically imposing. He is tall and looks and moves like someone much younger.

You can tell from the interview that he's been interviewed a few times before. Any attempt to pin him down on a tough question is deftly parried. Listen to when I try and get him to discuss the tension in foreign aid between moral aims and narrow national self-interest.

The Politics of Prohibition

Why did the U.S. government prohibit alcohol starting in 1920?  And why did it end this ignoble "experiment" in 1933?  I have a theory.  (Hint: the reason for both the launch and the sinking of alcohol prohibition centers on tax revenue.)

What the founders understood

Here is some wisdom from John Baden occasioned by the 4th of July. Here's my favorite part:

The American Constitution fostered a productive, progressive society unburdened by an official, governmentally sanctioned religion. While some believe our Founders were divinely inspired, there is no test for this claim. However, were I to attribute one secular document with a divine source, it would be the Constitution with our Bill of Rights. Somehow, our Founders got design right.

Their work exemplified Enlightenment thinking and displayed heavy emphasis on reason and science. Our Founders well understood the potential for plunder and worked to minimize it. Their task was to create institutions strong enough to protect citizens in their person and property, while constraining politicians and special interests from exploiting and controlling others.

While perfection eluded our Founders due to the compromises necessary for ratification (consider neglect of women, slaves, and Indians), it was a marvelous beginning. They limited government’s ability to transfer wealth and opportunities; otherwise, as is Europe, benefits would flow to the powerful and well connected. Here, individuals had incentives to improve their lot by being productive rather than predatory. Americans’ surest path to self-improvement came from moving human and natural resources to ever-higher values. As a result of our focus on productivity not plunder, we became rich beyond belief.

Today, our challenge is not wealth creation, but rather living well, ethically, and with sensitivity to others and our environment. This is a great accomplishment, one really quite amazing—and under appreciated.

More on Smoot-Hawley

Seventy-seven years ago today President Herbert Hoover signed the Smoot-Hawley tariff bill; he and the Congress thereby raised tariff rates to unprecedented heights.  Here's a summary:

But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

Protectionism doesn't achieve even its own nonsense goal of increasing  exports.  A revealing, specific example involves eggs.  Smoot-Hawley raised the tariff on egg imports into the U.S. from eight cents to ten cents per dozen.  This higher tariff caused eggs imports from Canada to fall by 40 percent.  In response, Canadian authorities increased the tariff on U.S. eggs exported to Canada; this tariff went from three cents per dozen to ten cents per dozen.  The result was that American eggs exports to Canada fell by 98 percent – from 11 million annually just before Smoot-Hawley to a mere 200,000.   (I found this tidbit in Jeffry Friedan's 2006 book Globalization.)

An Ominous Anniversary

Seventy-seven years ago today, the U.S. House of Representatives passed the Smoot-Hawley tariff.  Seventy-seven years ago tomorrow the knaves in the Senate followed suit, and seventy-seven years ago on June 17th the ludicrous President Herbert Hoover signed it into "law," thus helping to mire the world for years in a Great Depression.

How foreigners view the President

Here is how one newspaper described a recent speech by the Republican in the White House:

"The cheek of every American must tingle with shame as he reads the silly, flat and dishwatery utterances of the man who has to be pointed out to intelligent foreigners as the President of the United States."

The newspaper: the Chicago Tribune.
The President: Abraham Lincoln
The utterances: the Gettysburg Address

Growing up, I always loved the grandeur of the Gettysburg Address and very much enjoyed Garry Wills's masterful discussion of its significance. But now that I know a little bit more about the Civil War and how many people died and what they thought they were dying for, my opinion comes closer to the Trib's. Here is the last majestic sentence of the Address:

It is rather for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom — and that government of the people, by the people, for the people, shall not perish from the earth.

A new birth of freedom? Democracy? That isn't the cause those soldiers fought and died for. They fought to preserve the Union. Not to get rid of slavery, though mercifully, the war achieved that end. And by the election of 1864, the North was disenchanted enough to give McClellan 45% of the vote.

I spent a day at Gettysburg last week with my family. It's a powerful, depressing, and poignant experience. In the cemetery Lincoln dedicated, many of the graves are unmarked. They are simply numbered. They are so close together that the graves must have been dug as long trenches where the dead were laid shoulder-to-shoulder.

If Lincoln had survived the attack by Booth, I wonder whether his luster today would burn so brightly.

On the flip side, had the war not happened, who knows how long slavery might have endured? Ten years? Fifty? At least some unintended consequences are beneficial.

On Attitudes Toward Immigrants

From a review, by Jonathan Yardley, in today's Washington Post Book World of Peter Quinn's new book Looking for Jimmy:

Today the Irish are so thoroughly assimilated into the larger American society that it is difficult for anyone to remember how harshly and unforgivingly they were greeted as they arrived in the great wave that began in the mid-1840s and lasted for a decade, but white America equated them with blacks and stereotyped them accordingly as "childlike buffoons, lazy, superstitious, given to doubletalk, inflated rhetoric, and comic misuse of proper English.
....
White Anglo-Saxons who regarded themselves as "native Americans" gave the newcomers a frosty welcome. In Boston, employers famously posted signs that read: "No Irish Need Apply." Irish women, who outnumbered men, "worked in factories and mills. Irish maids became a fixture of bourgeois American life. Domestic service became so associated with the Irish that maids often were referred to generically as 'Kathleens' or 'Bridgets,' " just as black railroad porters were universally, and equally patronizingly, called "George."

Thus, often, are attitudes toward poor immigrants from poor countries.

In that age (mid-19th century) before the welfare state, how did these poor, poorly educated, and hated Irish immigrants survive and prosper in America?  Involvement in politics was certainly one way.  But hardly the only way.  According to Yardley, Quinn relates how this "immigrant group" "built its own far-flung network of charitable and educational institutions," and how the Catholic Church also played a major, positive role.

See this earlier post for references to some important scholarly research on the history of private means of providing charity and mutual aid.

For Free Men and Women

The latest issue of The Freeman -- the venerable (almost-)monthly magazine published by the Foundation for Economic Education since 1956 -- has three especially fine articles.

One is by historian Steve Davies, who wonders how our sense of history would be different if, instead of marking history by important dates in politics and war, we marked it by the dates of important commercial and industrial events that proved to have enormous impact on our lives (such as the advent of container shipping).

The second is by Max Borders who argues, wisely, that "government solutions to climate change are wrong-headed."

In the third, economist David Henderson offers a friendly critique of Russ Roberts's assumption (made in an article appearing in an earlier edition of this magazine) that government generally does provide security.

Some Economic History

George Mason University's Department of Economics has just hired economic historian Gary Richardson.  Gary -- along with economic historian John Nye -- will join our ranks in the Fall.  Here's an abstract of one of Gary's latest papers.

Eight states established deposit insurance systems between 1908 and 1917. All abandoned the systems between 1921 and 1930. Scholars debate the costs and benefits of these policy experiments. New data drawn from the archives of the Federal Reserve Board of Governors demonstrate that deposit insurance influenced the composition of bank suspensions in these states. In typical years, suspensions due to runs fell. Suspensions due to mismanagement rose. During the penultimate year of each system, the bank failure rate rose to an unsustainable height and the system ceased operations.

Good stuff!

State, Society, and Unemployment Insurance

Perhaps the difference that most fundamentally separates true liberals and libertarians from others is that, to one degree or another, true liberals and libertarians are, unlike non-liberals and libertarians, dutiful sons and daughters of the Scottish Enlightenment.  And one of the great lessons of that remarkable intellectual movement is the refinement of the understanding that state and society are not the same thing.  Society is not created by the state, and the state's activities not only do not define those of society but often diminish society's activities.

I thought of the distinction between state and society when I read this passage in Paul Krugman's column from this past Friday's edition of the New York Times:

For the fact is that F.D.R. faced fierce opposition as he created the institutions — Social Security, unemployment insurance, more progressive taxation and beyond — that helped alleviate inequality.

Did Franklin Roosevelt "create" unemployment insurance?  His administration did champion legislation that created government-provided unemployment insurance.  But Mr. Roosevelt emphatically did not create such insurance.  Here's a letter that I sent to the Times in response:

Paul Krugman mistakenly credits Franklin Roosevelt with having "created" unemployment insurance ("On Being Partisan," Jan. 26).

Private unemployment insurance was offered long before the New Deal.  As Professor Michael Rappaport found, starting around 1910 companies began selling such insurance to railroad workers.  Alas, seeking to offer such coverage to other workers, private insurers were consistently blocked by state governments.  And when New York's legislature in 1931 finally approved the expansion of private unemployment insurance, the bill was vetoed by none other than Gov. Franklin Roosevelt.

Sincerely,
Donald J. Boudreaux

The Rappaport paper is "The Private Provision of Unemployment Insurance," Wisconsin Law Review, Vol. 61 (1992).   (I cannot find a non-gated version of this paper on line.)  A summary of some of the key points of the paper is found in this Regulation article by George Leef.

Private, voluntary actions supplied unemployment insurance in yet other ways.  My friend Steve Ziliak wrote, after I sent him a copy of my letter:

As I and David Beito have independently found, fraternities, sororities, lodges, and mutual aid societies had been offering private unemployment insurance in the United States throughout the second half of the 19th century and in the early years of the 20th.  Also: sickness insurance, death insurance, worker injury insurance, and temporary charitable aid.  Fred's and Barney's membership in the Royal Order of Water Buffalo Lodge "back in the Stone Ages" isn't much of a fiction.

Steve also offers these cites:

David T. Beito, From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, 1890-1967

S. T. Ziliak (with Joan Hannon), "Public Assistance: from Colonial Times to the 1920s," Historical Statistics of the United States (Millennial Edition, Cambridge University Press, 2006). S. Carter, et al., eds.

S. T. Ziliak, "The End of Welfare and the Contradiction of Compassion," The Independent Review Vol. 1 (1996).

I suspect that unemployment insurance would today be much more efficiently supplied, with greater attention to the individual needs and circumstances of workers and their families, had the state not pre-empted and prevented society from creating this beneficial institution.

F.D.R. clearly did not create unemployment insurance.  It's closer to the truth to say that he helped to destroy it.

"The Prohibitory System"

When I taught at Clemson University I had an office that was literally a stone's throw from John C. Calhoun's study at his estate of Fort Hill.  At Fort Hill, on July 26, 1831, Calhoun delivered (or was it, just wrote?; I can't tell) a famous speech -- his Fort Hill Address -- aimed chiefly at justifying State nullification of national-government legislation and dictates that States believe to violate the U.S. Constitution.

These arguments are intriguing, but they're not what ignites this post.  What I write about here is part of Calhoun's justification for reducing tariffs on manufactured goods.  (The specific national-government measure that prompted Calhoun to write his Fort Hill Address was, indeed, the tariff -- what Calhoun called "the prohibitory system.")

The basic facts are these.  The southern U.S. states (which include, of course, Calhoun's home state of South Carolina) were at that time chiefly agricultural and dependent for large parts of their incomes on sales of staple agricultural goods to buyers on world markets.  The northern states were increasingly manufacturing.  Tariffs were on manufactured goods.

Now here's Calhoun:

If we turn from the past and present to the future, we shall find nothing to lessen, but much to aggravate the danger. The increasing embarrassment and distress of the staple States, the growing conviction, from experience, that they are caused by the prohibitory system principally, and that, under its continued operation, their present pursuits must become profitless, and with a conviction that their great and peculiar agricultural capital cannot be diverted from its ancient and hereditary channels without ruinous losses—all concur to increase, instead of dispelling, the gloom that hangs over the future. In fact, to those who will duly reflect on the subject, the hope that the disease will cure itself must appear perfectly illusory. The question is, in reality, one between the exporting and non-exporting interests of the country. Were there no exports, there would be no tariff. It would be perfectly useless. On the contrary, so long as there are States which raise the great agricultural staples, with the view of obtaining their supplies, and which must depend on the general market of the world for their sales, the conflict must remain, if the system should continue, and the disease become more and more inveterate. Their interest, and that of those who, by high duties, would confine the purchase of their supplies to the home market, must, from the nature of things, in reference to the Tariff, be in conflict. Till, then, we cease to raise the great staples, cotton, rice, and tobacco, for the general market, and till we can find some other profitable investment for the immense amount of capital and labor now employed in their production, the present unhappy and dangerous conflict cannot terminate, unless with the prohibitory system itself.

I've highlighted the especially important passages.  Note that Calhoun, in arguing against tariffs on manufactured goods, uses as one of his arguments the fact that such tariffs will cause loss of profits to some domestic producers (namely, southern planters).

Now I have little sympathy for antebellum southern planters, but what's interesting is that one of the principal arguments that modern protectionists use to justify protection -- namely, that the cost and difficulty of transitioning from economic activity protected by tariffs to whatever economic activities would thrive under free trade are too high and onerous to justify lowering tariffs -- was used by Calhoun to argue against tariffs.  Calhoun correctly noted that higher tariffs will reduce demand for U.S. exports (southern-state staple commodities) and, hence, require these producers to find other lines of employment for their efforts and capital.  And such efforts are, naturally, troubling.

The deep lesson here is that, just as moving to freer trade does indeed upset some economic apple carts, so, too, does protection upset some economic apple carts.  Given that both free trade and protection cause some specific job and business losses, protection cannot be justified -- as so many try to justify it -- by pointing to people whose economic expectations will be upset by freer trade.  Free-trade advocates can counter with similar accounts.

Of course, free trade's justification cannot, then, be found in the fact that protection upsets some economic expectations.  Free trade's proper economic justification is, in part, this: given that both free trade and the "prohibitory system" "destroy" some jobs and "create" others, it's best to let commerce and industry be guided by market signals and consumer sovereignty so that each producer is more likely than under protection to specialize in that occupation for which he, she, or it has a genuine comparative advantage.  Thus will grow the wealth of nations.

In the Long-Run, We're All Living Better (Where A Culture of Enterprise and Honesty Prevails)

Reflecting on this empirical finding reported in Gregory Clark's forthcoming book, Tyler Cowen rightly asks "What's a small recent blip in the data?":

...unskilled male wages in England have risen more since the Industrial Revolution than skilled wages, and this result holds for all advanced economies.  The wage premium for skilled building workers has declined from about 100 percent in the thirteenth century to 25 percent now.

The book is A Farewell to Alms: A Brief Economic History of the World, and it will be published by Princeton University Press.  The quotation above is from page 298 of the book's first draft.  I am very eager to read it!

Being forever bombarded, as we are, by the huffing and puffing and pontificating and posturing of politicians and pundits who see disaster looming in every downward bounce in the data -- especially when these bounces occur when their party is out of power -- it's important to keep in mind the enormous benefits that open, entrepreneurial, competitive markets have delivered to humankind.  And because even the most wisely defined and carefully collected data ceaselessly blip up and down from their trends, the burden of proof for allegations that any current downward blips signal a departure from the trends of the past few centuries in market-oriented economies should be placed squarely and very heavily on the shoulders of those who make such allegations.

Don't miss Tyler's column in today's New York Times, in which he elaborates more on Greg Clark's forthcoming book.

Happy Birthday, Thomas Babington Macaulay

Today is the 206th birthday of Thomas Babington Macaulay.

I admire this man's work so much that Karol and I named our son, in part, after him.  (The other inspiration for our son's name are the late Hugh Macaulay and his wife, Pinky.)  Our son's name is Thomas Macaulay Boudreaux.

Here's the always-eloquent Wally Olson, writing a few years ago in Reason, on Macaulay.  And here's Jim Powell's fine essay on Macaulay.

Most importantly, here's Macaulay's 1830 essay "Southey's Colloquies on Society" -- perhaps the greatest essay ever penned in the English language.

A very good intellectual biography of Macaulay is by John Clive (1973).

Feudalism Sparked by Rome's Regulations

On pages 642-643 of Will Durant's remarkable book Caesar and Christ (1944) he discusses Diocletian's economic policies. (Diocletian reigned from 282 to 305 A.D.)

In years of peace Diocletian, with his aides, faced the problems of economic decay.  To overcome depression and prevent revolution he substituted a managed economy for the law of supply and demand....  To ensure the supply of necessaries for the cities and the armies, he brought many branches of industry under complete state control, beginning with the import of grain; he persuaded the shipowners, merchants, and crews engaged in this trade to accept such control in return for government guarantee of security in employment and returns....  In 301 Diocletian and his colleagues [joint rulers of an administratively divided empire] issue an Edictum de pretiis, dictating maximum legal prices or wages for all important articles or services in the Empire.... The Edict was until our time the most famous example of an attempt to replace economic laws by governmental decrees.  Its failure was rapid and complete.

Durant goes on to explain how these economic regulations, combined with higher taxes, caused people to engage in unprecedented levels of hiding their productive activities from the state and in to fleeing Rome. Medieval feudalism, Durant argues, finds its chief root in the restrictions that Diocletian and his successors imposed as they attempted to tie people to the land in order to prevent them from fleeing:

It was probably to check this costly mobility, to ensure a proper flow of food to armies and cities, and of taxes to the state, that Diocletian resorted to measures that in effect established serfdom in fields, factories, and guilds" [p. 644].

Durant concludes this discussion with the sorrowful observation that relatively few Romans protested, as they apparently were hoodwinked into believing that in exchange for their freedom they were gaining greater security.

A telling tale.

Macaulay on Free Trade

Thomas Babington Macaulay (1800-1859) was a great champion of free markets and free trade.  He is the author of my favorite essay of all time: "Southey's Colloquies on Society."  Although written in 1830, this stunningly insightful essay's lessons remain relevant today.

In another essay ("Corn Laws") -- this one a speech delivered in Edinburgh in December 1845 as debate raged throughout Great Britain on whether or not to free that country's citizens of the tariffs that burdened their purchases of grain -- Macaulay spoke forcefully for free trade:

Two parties are ranged in battle array against each other.  There is the standard of monopoly.  Here is the standard of free trade; and by the standard of free trade I pledge myself to stand firmly.

(Here's a link to a site containing this essay; you have to scroll down about two-thirds of the way to find the essay.)

One of the most interesting passages from this essay is the one I paste below; it's almost as if Macaulay had seen ahead 154 years to the ignoramuses and greedy interest groups who coalesced in Seattle in December 1999 to riot against free trade.

They [the opponents of free trade] constantly tell us that the cry against the corn laws [protectionist tariffs that the British government put on grain in order artificially to increase the wealth of British landowners] has been raised by capitalists; that the capitalist wishes to enrich himself at the expense both of the landed gentry and of the working people; that every reduction of the price of food must be followed by a reduction of the wages of labour; and that, if bread should cost only half what it now costs, the peasant and the artisan would be sunk in wretchedness and degradation, and the only gainers would be the millowners and the money changers. It is not only by landowners, it is not only by Tories, that this nonsense has been talked. We have heard it from men of a very different class, from demagogues who wish to keep up the corn laws, merely in order that the corn laws may make the people miserable, and that misery may make the people turbulent. You know how assiduously those enemies of all order and all property have laboured to deceive the working man into a belief that cheap bread would be a curse to him. Nor have they always laboured in vain. You remember that once, even in this great and enlightened city, a public meeting called to consider the corn laws was disturbed by a deluded populace. Now, for my own part, whenever I hear bigots who are opposed to all reform, and anarchists who are bent on universal destruction, join in the same cry, I feel certain that it is an absurd and mischievous cry; and surely never was there a cry so absurd and mischievous as this cry against cheap loaves  [emphasis added].

Change "cheap loaves" to "cheap goods and services," and Macaulay's argument applies in full against both those who disparage the right of consumers freely to purchase imports and those who today hyperventilate in anger against Wal-Mart.

Pristine Existence

Jacqueline Massey found this cartoon a while back on Patri Friedman's site and -- knowing my interest in pre-industrial history -- sent it to me by e-mail.  It's a classic -- and one that contains a vital lesson for people today who worry that industrialization and markets pose huge health risks for humanity.

 

Sowell on the Middle East

Here.

FDA Turns 100

A couple of weeks ago, the Food and Drug Administration turned 100 years old.  This fact is hardly a cause for celebration.  Mercatus Center intern Satya Thallam has this nice op-ed to commemorate.

Why China Stagnated

In his compelling lead article in the Spring 2006 issue of the Journal of Economic Perspectives, economic historian David Landes wonders why the industrial revolution didn't happen first in China.  His answer is unequivocal: although it had lots of genius, China had neither the institutions nor the culture to transform this genius into widespread prosperity.

Almost every element usually regarded by historians as a major contributory cause to the Industrial Revolution in north-western Europe was also present in China [some 500 years before the wealth explosion that began in Europe in the 18th century].

So why, specifically, was there no industrial revolution in China?

Why indeed?  Sinologists have put forward several partial explanations.  Those that I find most persuasive are the following:

First, China lacked a free market and institutionalized property rights.  The Chinese state was always stepping in to interere with private enterprise -- to take over certain activities, to prohibit and inhibit others, to manipulate prices, to exact bribes [p. 6].

And as Landes points out on page 7, the Ming dynasty's attempt to prohibit all trade overseas certainly didn't help matters.

Landes goes on to criticize severely the Chinese state's -- and people's -- ignorant belief that their culture was so superior to others that they had nothing much to learn from others.

Note that such a belief is truly ignorant and fatal -- not just of and for the Chinese centuries ago, but of and for any people at any time and at any place.

Challenging a Depressing Myth

At last, a book that I've long awaited has been published: Robert Higgs's Depression, War, and Cold War (Oxford University Press, 2006).

As compelling, informative, and important as are his chapters on the military-industrial-congressional complex, my favorite chapter is the first: "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War."  (Here's an earlier version.)

Higgs's thesis in this chapter, which is backed by data (including interesting data on bond yields from the mid-1920s through the mid-1950s), is that the Great Depression was prolonged and deepened by the "regime uncertainty" created by FDR and the New Deal.  As it turns out, Uncle Sam never engaged in wholesale nationalizations and other whacky central-planning schemes -- but no one in the 1930s knew what the future held.  For investors back then to believe that any investments they made in the U.S. might be confiscated or regulated to smithereens was not unreasonable, given the rhetoric of the time and the shift in policy brought by FDR and his "brain trust."

This "regime uncertainty" stifled investment, keeping the economy stagnant.

Higgs's analysis complements -- but adds significantly to -- many of the prevailing insights about the Great Depression.  For example, speaking about theories -- such as that of Friedman and Schwartz -- that focus on the contractionary monetary policy of the era, Higgs says

I do not claim [that these theories] are wrong, only that, even if they are correct as far as they go, they are insufficient.  If property rights are seriously up for grabs, no amount of pumping money into a depressed economy can bring about genuine complete economic recovery [p. xi].

And as for the Great Depression being cured by America's entry into WWII, Higgs masterfully casts grave doubt on that popular claim.

Growing Fast and Getting Nowhere

My colleague David Levy, along with his co-author Sandy Peart, have discovered a rather amazing error extending over various editions of Paul Samuelson’s famous textbook, Economics (now in its 18th edition).  The following is reported in their paper "The Fragility of a Discipline When a Model has Monopoly Status," in the Review of Austrian Economics, 2006, pp. 125-136.

In the 1961 edition, Samuelson offers a graph showing the projected growth rates, from the year 1960 to 2000, of the economies of both the United States and the U.S.S.R.  The U.S. economy starts off, in 1960, with (according to Samuelson) real GNP twice that of the U.S.S.R. But the U.S.'s projected rate of economic growth over the next forty years was depicted as lower than that of the U.S.S.R.

Indeed, a range of growth rates for both countries was shown. But even the most pessimistic growth-rate projection for the U.S.S.R. was higher than the most optimistic growth-rate projection for the U.S.  If you were Premier Krushchev looking at this graph in 1961, you would have been pleased to see that the most famous economist in the English-speaking world predicted that Soviet real GNP would start to surpass America’s real GNP as early as 1984 – or, if things went as well as possible for both the Americans and the Soviets, no later than 1997.

That is, Samuelson predicted in 1961 that if the Soviets achieved their maximum possible economic growth over the next four decades, they would have to wait no more than 36 years for their output to surpass that of America's. 

In the 1970 edition of the textbook a similar graph is displayed, this time showing projected rates of growth for the two countries from 1970 to 2010.  As with the graph in the 1961 edition, projected Soviet economic growth is substantially higher than projected U.S. growth. And as with the 1961 graph, U.S. real GNP starts off as twice that of the Soviet Union - but this time, remember, the starting year is 1970, rather than 1960.

The 1970 graph shows that if the Soviets achieved their maximum possible economic growth over the next four decades, they would have to wait no more than 35 years – to 2005 – for their output to surpass that of America's.

In short: Samuelson’s readers were told in 1961 (and shown in a graph) that the economy of the Soviet Union was growing, and would continue to grow, significantly faster than the American economy.  Nine years later, readers were told the very same thing – even though, according to Samuelson’s own 1970 graph, the ratio of Soviet GNP to U.S. GNP in 1970 was the same as it was in 1961.

A Soviet miracle: its real GNP grew faster than America's real GNP without ever getting closer to America's real GNP.

J.K. Galbraith (1908-2006)

John Kenneth Galbraith has died.  This Boston Globe account of his life is nicely done.