The Predatory Price Cutting Bogeyman

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CIEL by the author from an essay first published in the July 1997 issue of FEE’s journal, The Freeman.

In the literature of anti-capitalism, the dominant bogeyman is unquestionably the big, private, profit-seeking company. Is there a sin imaginable that hasn’t been laid at the doorstep of those who own or manage large firms?

Defenders of capitalism have produced powerful arguments and voluminous evidence exposing much of the anti-capitalist literature as mythology—attacks that seem plausible on the surface but which dissolve when set against either economic principles or practical experience.

One of the more common attacks concerns a strategy that, according to the mythology, big companies employ often and successfully against their smaller competitors. It is known as predatory price-cutting, commonly understood as the practice of underselling rivals to bankrupt them, and then raising prices to take advantage of the absence of competition.

Recently, when an anti-capitalist professor raised this issue, I asked him if his state-subsidized university was engaging in this very thing by charging tuition that did not cover its instructional costs. Private colleges, I pointed out, can’t combat this competition by relying on taxes to level the playing field. My professor friend responded by arguing that predatory price-cutting assumes an evil intent, and no government really intends to drive private colleges from the market by establishing its own universities. Besides, he said, we must look at the actual effects: private colleges indeed exist and even thrive, in spite of the subsidized competition.

In referring to actual effects, the professor was unwittingly making a point that undermined his case. Predatory price-cutting is a theory that, more often than not, falls apart when it leaves the classroom and enters the real world. The fact is, in a free market, large firms rarely attempt it and when they do, they usually fail at it. Even large firms that have the power of government on their side find it much harder to succeed as predators than the theory at first suggests.

The early experiences of the Dow Chemical Company provide an interesting case in point. Dow—an industrial giant famous for its aspirin, chlorine products, and plastic wrap—was once a prey that many expected would not survive. I’m indebted to my friend (and senior historian at FEE) Dr. Burton Folsom for first acquainting me with this story.

Herbert Dow, the founder, had already started two other chemical companies by 1897: one went broke, and the other fired him. “Crazy Dow” was what the folks in Midland, Michigan called him. Like David fighting Goliath, he did battle head-on with large German chemical monopolies and eventually toppled them from world dominance. It was hard to tell, in the end, who was really the predator and who was really the prey.

Dow’s key product was bromine, which he could sell as a sedative or as a chemical to develop photographs. He invented a process to separate bromine from the sea of brine underneath the city of Midland. With gusto, Dow sold his bromine inside the United States, but not outside—at least not at first.

The Germans had been the dominant supplier of bromine since it first was mass-marketed in the mid-1800s. No American dared compete overseas with the powerful German cartel, Die Deutsche Bromkonvention, which fixed the world price for bromine at a lucrative 49 cents a pound. Customers either paid the 49 cents or they went without. Dow and other Americans sold bromine inside the United States for 36 cents. The Bromkonvention made it clear that the Americans were lucky to be allowed to sell at all, and that if they tried to sell outside America the cartel would flood the American market with cheap bromine and drive them all out of business.

By 1904, Dow was ready to break the rules: He moved to sell bromine in Europe and Japan at a price well below that of the cartel. Before long, the Bromkonvention went on a rampage. It poured bromides into America at 15 cents a pound, well below its fixed price of 49 cents, and also below Dow’s 36-cent price.

Was Dow the helpless little guy, about to be smashed by the evil German capitalists just like the predatory price-cutting theorists would have predicted? Quite the contrary, he was the quintessential entrepreneurial genius who gives capitalism its cutting edge. He had his agent in New York discreetly buy hundreds of thousands of pounds of German bromides at the cartel’s 15-cent price. Then Dow repackaged the German bromides and sold them in Europe—including Germany—at 27 cents a pound. “When this 15-cent price was made over here,” Dow said, “instead of meeting it, we pulled out of the American market altogether and used all our production to supply the foreign demand. This, as we afterward learned, was not what they anticipated we would do.”

Indeed, as Folsom revealed in his book, Empire Builders: The Vision and Influence of Michigan’s Early Entrepreneurs, the Germans were befuddled. They expected to run Dow out of business; and this they thought they were doing. But why was U.S. demand for bromine so high? And where was this flow of cheap bromine into Europe coming from? Was one of the Bromkonvention members cheating and selling bromine in Europe below the fixed price? The tension in the cartel was dramatic. According to Dow, the German producers got into trouble among themselves as to who was to supply the goods for the American market.

The confused Germans kept cutting U.S. prices—first to 12 cents and then to 10.5 cents a pound. Dow meanwhile kept buying these cheap bromides and reselling them in Europe for 27 cents. By the time the Bromkonvention finally caught on to what Dow was doing, it had lost the price-cutting war. Dow had secured new markets for his own company with his competitors’ product, and he was now in a position to build a chemical giant. He went on to beat foreign, government-subsidized cartels in dyes and magnesium. Consumers of ever cheaper and better products were the biggest winners.

The predatory price-cutting charge is most commonly applied to the early history of John D. Rockefeller’s Standard Oil Company. But here, too, the record departs from the rhetoric. Professor John S. McGee, writing in the October 1958 Journal of Law and Economics, showed conclusively that Rockefeller did not engage in the practice because he was smart enough to know that other entrepreneurs weren’t helpless nitwits who would take it lying down. (For a more complete explanation, see either McGee’s article or my own in the March 1980 issue of The Freeman, “Witch-Hunting for Robber Barons: The Standard Oil Story”: http://tinyurl.com/d3zrhe).

Anti-capitalist literature is rife with demons, monsters, and other assorted bogeymen, but so are fairy tales.

Character and Principles

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org. It is adapted from a 2007 essay by the author for the Center for the American Experiment in Minnesota.”

Playing a politician in a classic Marx Brothers comedy, the inimitable Groucho once declared, “Those are my principles! If you don’t like them, I have others!”

We laugh at Groucho’s line but it’s a flash of candor that too many of today’s politicians aren’t honest enough to say in public even though it describes the way they behave. I wish they would subscribe to a set of principles rooted firmly in truth and consistency, press for policies that advance those principles, and compromise only when it’s required to at least move the ball down the field in that direction. But before we can expect politicians to be so principled, we must insist they be men and women of character.

Character is what differentiates a politician from a statesman. Statesmen don’t seek public office for personal gain or attention. Like George Washington, they often are people who take time out from productive careers of accomplishment to temporarily serve the public. They don’t have to work for government because that’s all they know how to do. They stand for a principled vision, not for what they think citizens will fall for. When a statesman gets elected, he doesn’t forget the public-spirited citizens who sent him to office and become a mouthpiece for the permanent bureaucracy or some special interest that greased his campaign.

Because they seek the truth, statesmen are more likely to do what’s right than what may be politically popular at the moment. You know where they stand because they say what they mean and they mean what they say. They do not engage in class warfare, race-baiting or in other divisive or partisan tactics that pull people apart. They do not buy votes with tax dollars. They don’t make promises they can’t keep or intend to break. They take responsibility for their actions. A statesman doesn’t try to pull himself up by dragging somebody else down, and he doesn’t try to convince people they’re victims just so he can posture as their savior.

When it comes to managing public finances, statesmen prioritize. They don’t behave as though government deserves an endlessly larger share of other people’s money. They exhibit the courage to cut less important expenses to make way for more pressing ones. They don’t try to build empires. Instead, they keep government within its proper bounds and trust in what free and enterprising people can accomplish. Politicians think that they’re smart enough to plan other people’s lives; statesmen are wise enough to understand what utter folly such arrogant attitudes really are. Statesmen, in other words, possess a level of character that an ordinary politician does not.

In America’s first century, Americans generally were skeptical of the expansion of government power not because they read policy studies or earned degrees in economics but because they placed a high priority on character. Using government to get something at somebody else’s expense, or mortgaging the future for near-term gain, seemed dishonest and cynical to them, if not downright sinful and immoral.

One of the fascinating people in American history is Grover Cleveland. (see http://ciel.fi/en/blog/grover-cared/). He had no college education, no formal economics training and may have never read a policy paper before being elected president. Nonetheless, he almost always came to the right policy conclusions. That’s because he clearly saw the connection between character and the principles of a free society. Because he possessed the former, he became a champion of the latter.

Cleveland said what he meant and meant what he said. He did not lust for political office, and he never felt he had to cut corners, equivocate or connive in order to get elected. He was so forthright and plain-spoken that he makes Harry Truman seem indecisive by comparison. H.L. Mencken, who was known for cutting politicians down to size, wrote a nice little essay on Cleveland entitled “A Good Man in a Bad Trade.”

Cleveland thought it was an act of fundamental dishonesty for some to use government for their own benefit at everyone else’s expense. Accordingly, he took a firm stand against some early stirrings of an American welfare state. The country was in good hands when it was run by principled citizens like Cleveland.

So, you might want to know, how quick should elected officials be to compromise? I offer here no clear line of demarcation, just a suggestion that if we insisted first and foremost on character, this question would matter a whole lot less than it does today. I’d sooner trust a statesman than a politician to know when to compromise.

Home School Heroes

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CEIL by the author from an essay first published in the February 1997 issue of FEE’s journal, “The Freeman.”

Of all the ingredients in the recipe for education, which one has the greatest potential to improve student performance?

No doubt the teachers unions would put higher salaries for their members at the top of the list, to which almost every reformer might reply, “Been there, done that.” Teacher compensation has soared in recent decades at the same time every indicator of student performance has plummeted.

Other answers include smaller class size, a longer school year, more money for computers, or simply more money for fill-in-the- blank. The consensus of hundreds of studies over the past several years is that these factors exhibit either no positive correlation with better student performance or show only a weak connection. On this important question, the verdict is in and it is definitive: The one ingredient that makes the most difference in how well and how much children learn is parental involvement.

When parents take a personal interest in the education of their children, several things happen. The child gets a strong message that education is important to success in life; it isn’t something that parents dump in someone else’s lap. Caring, involved parents usually instill a love of learning in their children—a love that translates into a sense of pride and achievement as knowledge is accumulated and put to good use. Time spent with books goes up and time wasted in the streets goes down.

American parents were once responsible for educating their children. Until the late nineteenth century, the home, the church, and a small nearby school were the primary centers of learning for the great majority of Americans. In most Southern states before the Civil War, it was illegal under state laws for blacks to be educated, but many people (both black and white) provided education in secret defiance, producing a remarkably high literacy rate among oppressed blacks.

In more recent times, many American parents have largely abdicated this responsibility, in favor of the experts in the compulsory public school system. According to a 1996 report from Temple University in Pennsylvania, nearly one in three parents was seriously disengaged from their children’s education. The Temple researchers found that about one-sixth of all students believed their parents don’t care whether they earn good grades and nearly one-third said their parents had no idea how they are doing in school.

If anything has changed since 1996, it’s more likely to be in the wrong direction. The bitter fruit of a century of Americans “educated” to believe that education is a government job is now being harvested. And literacy and graduation rates in government schools in inner cities like Detroit are now so bad one can’t help but wonder if they’d be better if education were simply made illegal.

Amid the sorry state of American education today are heroes who are rescuing children in a profoundly personal way. They are the homeschoolers—parents who sacrifice time and income to teach their children themselves. Homeschooling is the ultimate in parental involvement.

Teaching children at home isn’t for everyone and no one advocates that every parent try it. There are plenty of good schools—many private and some government (“public”)—that are doing a better job than some parents could do for their own children. But the fact is that homeschooling is working—and working surprisingly well—for the growing number of parents and children who choose it.

That fact is all the more remarkable when one considers that these dedicated parents must juggle teaching with all the other demands and chores of modern life. Also, they get little or nothing back from what they pay in taxes for a public system they don’t patronize.

“The number of home-schooled kids hit 1.5 million in 2007,” reports USA Today—“up 74% from when the Department of Education’s National Center for Education Statistics started keeping track in 1999, and up 36% since 2003.” USA Today says that “the percentage of the school-age population that was home-schooled increased from 2.2% in 2003 to 2.9% in 2007.” Those are still small numbers compared to government school enrollment, but they are up from a mere 15,000 in the early 1980s.

Parents who home school do so for a variety of reasons. Some want a strong moral or religious emphasis in their children’s education. Others are fleeing unsafe government schools or schools where discipline and academics have taken a backseat to fuzzy feel-good or politically correct dogma. Many home school parents complain about the pervasiveness in government schools of trendy instructional methods that border on pedagogical malpractice.

Home school parents are fiercely protective of their constitutional right to educate their children. In early 1994, the House of Representatives voted to mandate that all teachers—including parents in the home—acquire state certification in the subjects they teach. A massive campaign of letters, phone calls, and faxes from homeschoolers produced one of the most stunning turnabouts in legislative history: By a vote of 424 to 1, the House reversed itself and then approved an amendment that affirmed the rights and independence of home school parents.

Critics have long harbored a jaundiced view of parents who educate children at home. They argue that children need the guidance of professionals and the social interaction that come from being with a class of others. Homeschooled children, these critics say, will be socially and academically stunted by the confines of the home. But the facts suggest otherwise.

A 1990 report by the National Home Education Research Institute showed that homeschooled children score in the 80th percentile or higher, meaning that they scored better than 80 percent of other students in math, reading, science, language, and social studies. Reports from state after state show homeschoolers scoring significantly better than the norm on college entrance examinations. Prestigious universities, including Harvard and Yale, accept homeschooled children eagerly and often. Homeschooled children make headlines regularly as winners of spelling bees and for other impressive academic achievements.

And there’s simply no evidence that homeschooled children (with a rare exception) make anything but fine, solid citizens who respect others and work hard as adults. Have you ever heard anyone say, after a riot or a drug bust or a rowdy post-game altercation, “Oh, there go the homeschoolers again!”?

Homeschool parents approach their task in a variety of ways. While some discover texts and methods as they go, others plan their work well before they start, often assisted by other homeschoolers or associations that have sprung up to aid those who choose this option. Common to every homeschool parent is the belief that the education of their children is too important to hand over to someone else.

Writing in the July 1996 issue of Reason magazine, Britton Manasco argues that the growth of CD-ROMs, Internet services, and computerized educational networks is likely to make homeschooling even more attractive to parents. For a tiny fraction of what a printed version might cost, one software publisher is offering a classic books program that incorporates more than 3,500 unabridged literary works, complete with hundreds of video clips and illustrations. A support group in Ann Arbor, Michigan, provides inexpensive on-line help, resources, and evaluations for thousands of homeschool children worldwide. Another organization links first-rate instructors and homeschool students from all over the country via computer in a college preparatory program that includes a core curriculum for about $250 per course.

In every other walk of life, Americans traditionally regard as heroes the men and women who meet challenges head-on, who go against the grain and persevere to bring a dream to fruition. At a time when more troubles and shortcomings plague education and educational heroes are too few in number, recognizing the homeschool heroes in our midst may be both long overdue and highly instructive.

Grover Cared

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CEIL by the author from an essay first published in the March 2006 issue of National Review Online. The disaster in New Orleans from Hurricane Katrina occurred the previous August.

The year 1887 was a tough year in Texas. Day after day brought hot, dry winds that parched the land. Farmers saw their crops wither and their cattle grow weak from thirst. Spirits faltered as desperate Texans prayed for rain, seemingly to no avail. Eager to help (at least with other people’s money), congressmen pushed through a bill to provide federal aid in the form of seed, but one man stood in their way—America’s 22nd president, Grover Cleveland. At a time when the federal budget boasted a large surplus, he vetoed the bill.

What kind of man could say no to free seed for his salt-of-the-earth brethren in distress? Was Cleveland, son of a Presbyterian minister, a cold, cruel and heartless Scrooge? Could this be the same man who once taught at the New York Institute for the Education of the Blind and cultivated a passionate, lifelong devotion to helping the sightless?

Yes indeed, one and the same. But the president was no mean-spirited miser. He simply knew what almost no one in Congress today understands: He knew the decisive difference between government and everything else. If he were alive to witness the tragic antics of Federal Emergency Management Agency in the aftermath of Hurricane Katrina, he might be sorely tempted to say, “I told you so.”

A federal bureaucracy that shells out $438 per night to house New Orleans evacuees in a Manhattan hotel, blows $300 million on trailers that sit and rot many miles away from the intended recipients, stymies help from the Red Cross and other government departments, doles out $2,000 debit cards to just about anybody who needs a tattoo and a massage, and runs ice trucks to every corner of the country except where the ice is needed: These are not the fruit of the allegedly insensitive, laissez-faire 1880s. They are the product of our “compassionate” and gargantuan government, for which every need is an excuse to spend, grow, politicize and subsume.

In his veto of the Texas Seed Bill, Cleveland warned against a general disregard of the “limited mission” of the federal government. He didn’t think Congress or the president should torture the Constitution until it confessed that disaster relief was among the responsibilities of Washington, D.C. He felt that the country should heed the time-honored lesson that, as he put it, “Though the people support the Government, the Government should not support the people.”

The welfare-statists of our time have saddled us with $8 trillion in debt, a federal tax burden seven or eight times that of Cleveland’s day, and a legacy of handout programs that have yielded little more than dependency and dysfunctional families. Billions in corporate welfare have exacted a similar toll on American enterprise. Cleveland tried to tell us that government has nothing to give anybody except what it first takes from somebody, and that a government big enough to give us everything we want is big enough to take away everything we’ve got. But somewhere along the way we fooled ourselves into thinking that government can help our brothers and sisters better, more quickly, and more cheaply than we can help them ourselves. What a sorry mess of pottage we’ve mortgaged our children’s future for.

Nonetheless, Americans are still the most generous charity givers on the planet. The best evidence that we haven’t entirely lost the instincts Cleveland appealed to is the fact that when Americans want to donate money to help others, they don’t make their checks out to FEMA or any other government agency.

Cleveland didn’t say no to drought relief because he thought hurting farmers didn’t deserve relief. He urged Americans in general and members of Congress in particular to give from their own hearts and personal resources. His veto message noted, “The friendliness and charity of our countrymen can always be relied upon to relieve their fellow citizens in misfortune.” Aid from Washington, D.C., he wrote, only “encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character.”

Those farmers in Texas got their aid, all right—as much as 10 times or more in private assistance as the amount that Cleveland refused to launder first through a federal bureaucracy.

Just six years before in another example of monumental generosity, Americans came to the rescue of their fellow citizens through private means. In 1881, Clara Barton mobilized her newly formed American Red Cross in its first major disaster-relief effort, pouring a gusher of money, food, clothes and volunteers into Michigan after a raging fire destroyed much of four counties. American history is replete with similar stories of people helping people in the absence of largesse from Washington, D.C.

As the Katrina recovery continues, the federal government will do what the federal government does best. It will talk, squawk, and pontificate. It will hold hearings, point fingers, and proclaim its good intentions. It will learn nothing and change little, for that is the nature of the beast and a big reason our Founders wanted it kept small and constrained in the first place. It will, as one of Franklin Roosevelt’s cronies once said, “tax and tax, spend and spend, elect and elect.”

I suspect that meanwhile, in spite of the mind-numbing hurdles that big government puts in their way, the real heroes will be quiet folks who help their fellow citizens by what they give and by what they build. Grover Cleveland told us we could count on them because they, at least, have never let us down.

Of Meat and Myth

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CEIL by the author from an essay first published in the November 1994 issue of FEE’s journal, “The Freeman.”

Advocates of the spontaneous order of freedom and free markets are forever stomping out the fires of fallacious reasoning, anti-capitalist bias, and twisted history. It seems that as soon as we put out one fire, opponents of the market manage to ignite ten others.

We spend as much time explaining the workings of the market as we do debunking myths and clichés about it. Statists and interventionists spout an endless stream of put-downs and one-liners that pass as thorough critiques of the market, each one requiring a time-consuming, painstaking response and appeal to reason. We are constantly rewriting prejudiced accounts of history to match what really happened.

Nearly ninety years ago (note: now 105 years ago), muckraking novelist Upton Sinclair wrote a book titled The Jungle which wove a tale of greed and abuse that reverberates to this day as a powerful case against laissez faire. Sinclair’s focus of scorn was the meatpacking industry. The objective of his effort was government regulation. The culmination of his work was the passage in 1906 of the famed Meat Inspection Act, enshrined in most history books as a sacred cow (excuse the pun) of the interventionist state.

Were Sinclair’s allegations of a corrupt industry foisting unhealthy products on an unsuspecting public really true? And if so, should the free market stand forever indicted and convicted as a result? A response from advocates of freedom is long overdue. Here’s a healthy start.

The Jungle was, first and foremost, a novel. It was intended to be a polemic—a diatribe, if you will and not a well-researched and dispassionate documentary. Sinclair relied heavily on both his own imagination and on the hearsay of others. He did not even pretend to have actually witnessed the horrendous conditions he ascribed to Chicago packinghouses, nor to have verified them, nor to have derived them from any official records.

Sinclair hoped the book would ignite a powerful socialist movement on behalf of America’s workers. The public’s attention was directed instead to his fewer than a dozen pages of supposed descriptions of unsanitary conditions in the meatpacking plants. “I aimed at the public’s heart,” he later wrote, “and by accident I hit it in the stomach.” [1]

Though his novelized and sensational accusations prompted later congressional investigations of the industry, the investigators themselves expressed skepticism of Sinclair’s integrity and credibility as a source of information. President Theodore Roosevelt wrote of Sinclair in a letter to William Allen White in July 1906, “I have an utter contempt for him. He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth.” [2]

Sinclair’s fellow writer and philosophical intimate, Jack London, wrote this announcement of The Jungle, a promo that was approved by Sinclair himself:

Dear Comrades: . . . The book we have been waiting for these many years! It will open countless ears that have been deaf to Socialism. It will make thousands of converts to our cause. It depicts what our country really is, the home of oppression and injustice, a nightmare of misery, an inferno of suffering, a human hell, a jungle of wild beasts.

And take notice and remember, comrades, this book is straight proletarian. It is written by an intellectual proletarian, for the proletarian. It is to be published by a proletarian publishing house. It is to be read by the proletariat. What Uncle Tom’s Cabin did for the black slaves The Jungle has a large chance to do for the white slaves of today. [3]

The Jungle’s fictitious characters tell of men falling into tanks in meatpacking plants and being ground up with animal parts, then made into “Durham’s Pure Leaf Lard.” Historian Stewart H. Holbrook writes, “The grunts, the groans, the agonized squeals of animals being butchered, the rivers of blood, the steaming masses of intestines, the various stenches . . . were displayed along with the corruption of government inspectors” [4] and, of course, the callous greed of the ruthless packers.

Most Americans would be surprised to know that government meat inspection did not begin in 1906. The inspectors Holbrook refers to as being mentioned in Sinclair’s book were among hundreds employed by federal, state, and local governments for more than a decade. Indeed, Congressman E. D. Crumpacker of Indiana noted in testimony before the House Agriculture Committee in June 1906 that not even one of those officials “ever registered any complaint or [gave] any public information with respect to the manner of the slaughtering or preparation of meat or food products” [5]

To Crumpacker and other contemporary skeptics, “Either the Government officials in Chicago [were] woefully derelict in their duty, or the situation over there [had been] outrageously over- stated to the country.” [6] If the packing plants were as bad as alleged in The Jungle, surely the government inspectors who never said so must be judged as guilty of neglect as the packers were of abuse.

Some two million visitors came to tour the stockyards and packinghouses of Chicago every year. Thousands of people worked in both. Why is it that it took a novel written by an anti-capitalist ideologue who spent but a few weeks there to unveil the real conditions to the American public?

All of the big Chicago packers combined accounted for less than 50 percent of the meat products produced in the United States; few if any charges were ever made against the sanitary conditions of the packinghouses of other cities. If the Chicago packers were guilty of anything like the terribly unsanitary conditions suggested by Sinclair, wouldn’t they be foolishly exposing themselves to devastating losses of market share?

Historians with an ideological axe to grind against the market usually ignore an authoritative 1906 report of the Department of Agriculture’s Bureau of Animal Husbandry. Its investigators provided a point-by-point refutation of the worst of Sinclair’s allegations, some of which they labeled as” willful and deliberate misrepresentations of fact,” “atrocious exaggeration,” and “not at all characteristic.” [7]

Instead, some of these same historians dwell on the Neill-Reynolds Report of the same year because it at least tentatively supported Sinclair. It turns out that neither Neill nor Reynolds had any experience in the meatpacking business and spent a grand total of two and one-half weeks in the spring of 1906 investigating and preparing what turned out to be a carelessly-written report with preconceived conclusions.

Gabriel Kolko, a socialist but nonetheless an historian with a respect for facts, dismisses Sinclair as a propagandist and assails Neill and Reynolds as “two inexperienced Washington bureaucrats who freely admitted they knew nothing” [8] of the meatpacking process. Their own subsequent testimony revealed that they had gone to Chicago with the intention of finding fault with industry practices so as to get a new inspection law passed. [9]

As popular myth would have it, there were no government inspectors before Congress acted in response to The Jungle and the greedy meatpackers fought federal inspection all the way. The truth is that not only did government inspection exist, but meatpackers themselves supported it and were in the forefront of the effort to extend it!

When the sensational accusations of The Jungle became worldwide news, foreign purchases of American meat were cut in half and the meatpackers looked for new regulations to give their markets a calming sense of security. The only congressional hearings on what ultimately became the Meat Inspection Act of 1906 were held by Congressman James Wadsworth’s Agriculture Committee between June 6 and 11. A careful reading of the deliberations of the Wadsworth committee and the subsequent floor debate leads inexorably to one conclusion: Knowing that a new law would allay public fears fanned by The Jungle, bring smaller competitors under regulation, and put a newly laundered government stamp of approval on their products, the major meatpackers strongly endorsed the proposed act and only quibbled over who should pay for it.

In the end, Americans got a new federal meat inspection law. The big packers got the taxpayers to pick up the entire $3 million price tag for its implementation as well as new regulations on their smaller competitors, and another myth entered the annals of anti-market dogma.

To his credit, Upton Sinclair actually opposed the law because he saw it for what it really was—a boon for the big meatpackers. [10] Far from being a crusading and objective truth-seeker, Sinclair was a fool and a sucker who ended up being used by the very industry he hated.

Myths die hard.

What you’ve just read is not at all “politically correct.” But defending the market from historical attack begins with explaining what really happened. Those who persist in the shallow claim that The Jungle stands as a compelling indictment of the market should clean up their act because upon inspection, there seems to be an unpleasant odor hovering over it.

(An extended version of this essay, with additional information on Sinclair’s activities in the decades after publication of his book, was published in 2006 by Liberty magazine and is accessible here: http://libertyunbound.com/archive/2006_08/reed-meat.html.

Endnotes

1.     Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916 (Chicago: Quadtrangle Books, 1967), p. 103.

2.   Roosevelt to William Allen White, July 31, 1906, Elting E. Morison and John M. Blum, editors, The Letters of Theodore Roosevelt, 8 vols. (Cambridge: Harvard University Press, 1951- 54), vol. 5, p. 340.

3.   Mark Sullivan, Our Times: The United States, 19001925; vol. 2: America Finding Herself (New York: Charles Scribner’s Sons, 1927), p. 473.

4.   Stewart H. Holbrook, The Age of the Moguls (Garden City, N.Y.: Doubleday & Company, Inc., 1953), pp. 1 I0-11 I.

5.   U.S. Congress, House, Committee on Agriculture, Hearings on the So-called “Beveridge Amendment” to the Agriculture Appropriation Bill, 59th Congress, 1st Session, 1906, p. 194.

6.   Ibid.

7.   Ibid., pp. 346-350.

8.   Kolko, p. 105.

9.   Hearings, p. 102.

10.   Upton Sinclair, “The Condemned-Meat Industry: A Reply to Mr. J, Ogden Armour,” Everybody’s Magazine, XIV, 1906, pp. 612-613.

The Golden Calf of Democracy

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CEIL by the author from an essay first published in the December 2004 issue of FEE’s journal, “The Freeman.”

“Democracy,” journalist H. L. Mencken once said, “is the theory that the common people know what they want, and deserve to get it good and hard.” He also famously defined an election as “an advance auction sale of stolen goods.”

Mencken was not entirely hostile to democracy. He simply possessed a more sobering view of its limitations than today’s conventional wisdom.

Indeed, democracy may be the world’s single most oversold concept of political governance. Commonly yet erroneously romanticized, it is assumed in most circles to ensure far more than it possibly can. The Norman Rockwell portrait of engaged, informed citizens contending freely on behalf of the common good is the utopian ideal that obscures the messy details of reality.

Just how oversold democracy is came home to me recently as I listened to a group of college students debating farm subsidies. Advised that experience and economics underscore the folly of subsidies, the student consensus was nonetheless in support of “helping farmers.” Why? Because that’s apparently what the people wanted when they voted for the congressmen who gave us the handouts. To those students and a disturbing number of other citizens these days, the veneer of “democracy” somehow covers up a multitude of sins. It may even sanctify them. We need another dose of Mencken-esque reality—and that starts with a clearer view of what this thing is that enraptures so many.

Monarchy is easy to define. If you’ve got a king, you’ve got one. Military dictatorship is also stark in its manifestation. If one guy wears a uniform, has all the tanks, and tells everybody else what to do, you’ve got one of those. But what exactly is democracy?

Pure, undiluted democracy is unshackled majority rule. Everybody votes on everything, and 50 percent plus one decides every “public” issue—and inevitably, a whole lot of what ought to be private ones too. Perhaps ancient Athens for a brief time came closest to this, but no society of any size and complexity can practice this form of governance for long. For starters, it’s unwieldy and unworkable, endlessly contentious, and disrespectful of certain inalienable rights of individuals who may find themselves in the minority.

People like the sound of “democracy” because it implies that all of us have equal say in our government and that a simple majority is somehow inherently fair and smart in deciding all or virtually all issues. On closer examination it should become apparent that subjecting every decision of governance to a vote of the people is utterly impossible. Many decisions have to be made quickly; many decisions require knowledge that few people possess or have the time to become expert on; and many decisions don’t belong in the hands of any government at all. A pure democracy, even if possible, would quickly degenerate into the proverbial two wolves and a sheep voting on what to have for lunch.

Suppose someone says, “I just don’t like people with boats and jewelry. I think we should confiscate their property. Let’s have a vote on that.” A democratic purist would have to reply, “All in favor say aye.” A person interested in securing individual rights would have to say, “That’s not a proper function of government, and even if 99 percent of the citizens vote for it, it’s still wrong. There’s nothing about mob rule that makes such a decision legitimate.”

In common parlance, “democracy” has been stretched to mean little more than responsive government. Because of elections, government officials cannot behave in a vacuum. That fact is laudable, but it hardly makes a “democratic” government heavenly. In his penetrating book, Capitalism, Democracy, and Ralph’s Pretty Good Grocery, Ohio State University professor John Mueller writes that democracy “has been characterized by a great deal of unsightly and factionalized squabbling by self-interested, shortsighted people and groups, and its policy outcomes have often been the result of a notably unequal contest over who could most adroitly pressure and manipulate the system. Even more distressingly, the citizenry seems disinclined to display anything remotely resembling the deliberative qualities many theorists have been inclined to see as a central requirement for the system to work properly.”

Irrespective of presidential candidates’ singing interminable paeans to “our democracy,” America is thankfully not one and never has been. Our Founders established a republic, and a republican form of government modifies pure democracy considerably. It provides a mechanism by which almost anyone can have some say in some matters of government. We can run for office. We can support candidates and causes of our choosing. We can speak out in public forums. And, indeed, a few matters are actually decided by majority vote. But a constitutional republic founded on principles that are more important than voting—like individual rights—will put strong limits on all this. In its Bill of Rights, our Constitution clearly states, “Congress shall make no law. . . .” It does not say, “Congress can pass anything it wants so long as 50 percent plus one support it.”

Those democratic elements of our republic should be given their due. Elections are a political safety valve for dissident views, because ballots not bullets resolve disputes. But the saving grace of democracy is not that it ensures either good or limited government; it is nothing more than that the system allows for political change without violence—whether the change a majority favors is right or wrong, good or evil.

We should be thankful that we don’t have an absolute monarchy or a theocratic dictatorship or other truly objectionable forms of governance, but we should have no illusions about the harm that even a responsive government, whatever you want to call it, can still do.             Even the best and most responsive of governments, we should never forget, still rests on the legal use of force—an inescapable fact that requires not blind and fawning reverence but brave and determined vigilance. That calls for sober people who understand the nature of government and the importance of liberty.

Employer of Last Resort

By Hans Sennholz

Dr. Hans Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

During the 1984-85 school year American high school debaters have been weighing an important resolution:

Resolved: That the federal government should provide employment for all employable United States citizens living in poverty.

On the affirmative side students are expected to argue that the federal government shall strive to abolish poverty and, if necessary, act as employer of last resort; on the negative side they are likely to oppose the use of government for such ends.

High school students at last are catching up with the political debate that has animated their elders since the first New Deal. In 1935, President Franklin D. Roosevelt proposed to make the federal government the employer of last resort, proclaiming that “one third” of the American people were “underfed, under-clothed, and underhoused.” Thirty years later, President Lyndon B. Johnson declared his “war on poverty,” which was to liberate some twenty percent of the population. President Jimmy Carter, during his term of office, waged his special war on poverty. All three made the poverty of some 40 million Americans the central issue of their public pol icies. Indeed, all presidents have echoed a deep concern for the poor.

And yet, the poor are still with us. Their faces have changed, but their numbers hardly ever vary. Armed with poverty statistics, their spokesmen suggest that past government efforts were half-hearted and indecisive. The war, they argue, must be carried on with unrelenting vigor and dedication until victory is won. They would make government the employer of last resort.

Poverty in America

Other observers may draw entirely different conclusions. They may object that the poverty data itself may be erroneous and misleading. When compared with living conditions throughout the world there may be no poverty at all in the U.S. Most Americans have never seen the true face of poverty, which is visible in many other countries. It reveals hunger, disease and early death. In the U.S. even the least productive members of society live in relative abundance and comfort when compared with their counterparts abroad. Among his foreign peers the American pauper is an object of envy and the U.S. the target of pauper immigration.

American poverty statistics are built on levels of income. Families earning less than a stated dollar amount are defined as poor or poverty-stricken; families earning more are believed to be above the poverty line. A brief observation of the living conditions of the American poor, however, may suggest a different conclusion. It may reveal that forty percent of poor families own their own homes; eighty-six percent of these “very poor” homeowners have no mortgage debt. Some fifty percent have liquid savings of $500 or more. In Harlan County, Kentucky, the heartland of depressed areas, it was found that eighty-eight percent of the poor families have washing machines, sixty-seven percent have TV sets, forty-two percent have telephones, and fifty-nine percent own cars. (Newsweek,February 17, 1964, p. 20)

Most Americans now designated as poor and indigent would resent the label if they actually knew that the poverty warriors are talking about them. As a graduate student at New York University and a part-time accounting clerk, I never earned more than $1,500 a year, which sufficed to pay $35 tuition per credit and put me through school. Even as a young college instructor, the poverty definition included me. With all my heart I resent this supercilious and derogatory description of those important years of my life. It is obvious that the poverty politicians who are accustomed to spending billions of other people’s money have lost touch with economic reality and the meaning of life.

In every society some people are more prosperous than others, some are poorer than others. In the eyes of a critical observer, anyone who earns less than he does, may be poor. To a millionaire anyone with less than a million may be a pauper. To a poverty warrior anyone who belongs to the last 10 percent, 20 percent or 30 percent of income earners may be poverty-stricken. In fact, the concept of inequality of income and wealth always comprises the poor.

Government, Cause or Cure

Lengthy unemployment may impoverish a person and put him in a poverty bracket. More than seven million Americans are mostly unemployed, suffering declining incomes and living conditions. Alarmed at such statistics, the poverty warriors managed to pass the Humphrey- Hawkins Full Employment and Balanced Growth Plan Act of 1978. And yet, unemployment continued to rise. Defining “full” employment as no more than 3 percent adult (4 percent overall) unemployment, the warriors are now proposing to reach that level by using government as employer of last resort.

Most government programs seeking to alleviate poverty are treating the effects of unemployment; they never touch the causes. In fact, they completely reverse the cause and effect relationship by depicting the federal government as a source of employment rather than a primary cause of unemployment. They blame commerce and industry for the unemployment and call on government to correct the evil. They propose to grant more power to politicians, officials and bureaucrats and call for extensive government intervention. And yet, by confusing cause and effect they fail to accomplish their stated objectives and even make matters worse. During years of radical government intervention unemployment actually rises and levels of living usually fall.

The champions of government power and intervention are sadly unaware that government is the primary cause of unemployment. They do not understand that employment is a price and cost phenomenon, and that mass unemployment is the inevitable effect of any government measure that directly or indirectly raises labor costs. A law or regulation that boosts Social Security taxes, unemployment compensation taxes, workman’s compensation taxes, or in any way raises the cost of labor, reduces the demand for labor and creates unemployment. Boom and bust policies conducted by the Federal Reserve System may generate cyclical unemployment. Minimum wage legislation may deny employment to the least productive workers. Labor legislation that grants restrictive powers to labor unions may bring stagnation and unemployment to unionized industries.

Minimum wage legislation bars millions of young people from the labor market. Although they have limited training and experience, the federal government may issue an order that they be paid a minimum rate of $3.35 per hour. Moreover, it forces employers to pay a number of fringe benefits, from Social Security to national holidays, which may boost the worker’s employment costs to $5 or $6 per hour. If a person does not add this amount to production, if he fails to cover his employment costs, he is a candidate for unemployment.

Before the days of minimum wage legislation high school and college students were always welcomed by commerce and industry. From the first day of vacation to the last, young people used to work in offices and stores, workshops and factories, working their way through school or supplementing family income. Unfortunately, these ways of the past have given way to minimum wage legislation, which condemns young people either to remain in school, to join the armed forces, or be unemployed. At $5 or $6 an hour there may be no economic demand for their services.

Minimum wage legislation is the evil product of a political system that bestows favors and benefits on some classes of people at the expense of others. It favors the employment of skilled workers who are earning more than the minimum by denying employment to unskilled workers earning less. This is why labor unions representing skilled workers are fervent champions of minimum wage legislation.

Business Provides Employment

Poverty warriors like to depict business as the culprit behind poverty and unemployment. In reality, business is the only genuine source of production, employment, and income. It is bidding for labor in order to serve its customers. It eagerly employs labor as long as it is “productive,” that is, its net addition to output is positive. In other words, as long as it does not cost more than it is producing, labor is in great demand. When it costs more than it is adding to the production process, when it takes income from investors and entrepreneurs, when it becomes “destructive” to employers, it is discharged. In this case production is more productive without it.

Governments and unions are forever raising labor costs and thereby causing unemployment. Business is adjusting continually in order to prevent the unemployment. When the federal government raises its Social Security exactions and state governments boost unemployment compensation taxes, which may significantly raise the cost of labor and thus the rate of unemployment, business is straining to prevent the unemployment through cost adjustments. It may seek to offset the mandated costs with other cost reductions. In particular, it may reduce fringe benefits, delay inflation adjustments, elicit greater effort and draw out more efficient production. Whenever and wherever business is successful in offsetting the boost in labor cost it succeeds in preventing threatening unemployment. If laws, regulations and work rules prohibit the cost adjustment, business has no choice but to lay off loss-inflicting workers. Production is more productive with out them.

It is no coincidence that the strongholds of unions are also the centers of unemployment. In the steel and auto industries the union rates are more than double the market rates of industrial wages paid for similar labor throughout the American labor market. Union rules generally deny efficient use of labor and prevent cost adjustment. Ugly strikes by angry workers further increase labor cost. It cannot be surprising, therefore, that unionized industries are barely managing to stay afloat in an ocean of unemployment.

Job Programs Destroy Jobs

The unemployment generated by governments and unions is as severe and persistent as the force that is causing it. It is holding millions of Americans in its sinister grip and reducing them to poverty. To make government their employer of last resort is to put the culprit in charge and urge him to continue his transgressions. He will create more unemployment than he will provide jobs through a variety of make-work schemes. Facing mass unemployment, government may launch leaf-raking and snow-shoveling programs, build highways and public buildings, embark upon slum removal and urban renewal, or engage in any other economic activity. It may ostentatiously hire thousands of idle workers and become their employer of last resort. Unfortunately, the politicians who launch the programs and the poverty warriors who advocate them, are blissfully unaware of the consequences of their policies. They completely overlook two inevitable effects that tend to destroy more jobs than government can create:

1. When government appears on the labor market and engages idle labor it tends to support or even raise the labor costs that are causing the unemployment. It is removing the pressures for readjustment. By placing purchase orders for steel, automobiles, trucks and tanks it gives employment to idle steel and auto workers. But it also sustains their wage demands that exceed market rates, and thereby reinforces the cause of unemployment. Government tends to prolong and intensify the suffering of idle workers by encouraging them to cling to unproductive labor costs.

2. Government has no source of income and wealth of its own. Every penny spent is taken from someone. It may be exacted from taxpayers, borrowed from lenders, or snatched from inflation victims. If it takes $50,000 to give employment to one idle worker, taxpayers, lenders or inflation victims must be reduced by that amount. Their reduction consumes business capital, which in turn lowers labor productivity. Falling productivity, together with rigid labor cost, render more labor “unproductive” and cause it to be unemployed. And even if it were to consume no business capital, and labor productivity were to remain unchanged, the losses suffered by taxpayers and inflation victims would force them to curtail their consumption and the employment they would otherwise provide. While government may create one $50,000 job, which under bureaucratic conditions and circumstances would be a low-cost job, it probably destroys the jobs of two or three workers serving taxpayers and inflation victims.

Federal Assistance Reduces Levels of Living

Government reports are quick to point out that government assistance is sustaining those truly in need. According to one study, without any kind of assistance forty-one million people, or 18.8 percent of the population, would live below the poverty level. Cash assistance alone allegedly cut this number in hall If in-kind transfers are included, 13.5 million Americans are left in poverty. If medical care is included in the calculation, the poverty level includes only nine million people, or 4.1 percent of the population. (Press Release, Executive Office of the President, Office of Management and Budget, March 12, 1982)

In 1983 Federal cash programs supported 24.5 million elderly people living in retirement, 4.3 million disabled workers and their dependents, and 8.9 million survivors. They provided Medicaid and Medicare assistance to 47 million aged, disabled and needy Americans, ap proximately 20 percent of the total population and 99 percent of those over 65. They granted housing assistance to 3.4 million American households, and subsidized approximately 95 million meals per day, or 14 percent of all meals served in the country. They made available 6.9 million post-secondary awards and loans to students and their parents, and provided training for almost one million low-income disadvantaged people. They paid supplemental allowances to more than 7 million people, unemployment compensation to more than eight million, and granted food stamp assistance to 18.6 million individuals. Government sustained 3.5 million men and women on active military duty and their dependents, and some 27 million civilian employees and their dependents. Altogether, some 80 to 90 million Americans are dependent on tax dollars.

The Burden of Dependents

Whatever their numbers, the dependents weigh heavily on the economic well-being of their supporters, the taxpayers, lenders and inflation victims. Their inactivity and absence from economic production keeps society poorer than it otherwise would be. It visibly reduces the levels of living of the providers, discourages their productive efforts, and deprives them of the funds needed for productive investments. Surely, there cannot be any doubt that 80 to 90 million dependent Americans constitute a heavy burden on productive Americans.

Poverty warriors are encouraged by these transfer statistics. If 80 to 90 million Americans already are enjoying full support, another 7 to 10 million may not upset the transfer system. The warriors may be right. But they, too, must admit that there are limits to the burden the remaining producers can carry. All transfer systems have limits beyond which economic production is bound to decline and poverty is certain to multiply.

This article has been published with FEE‘s permission and has been originally published at The Freeman January 1985 • Volume: 35 • Issue: 1.

Prophets of Property

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay has been adapted for CEIL by the author from an essay first published in the July 2007 issue of FEE’s journal, “The Freeman.”

In 1800, fewer than 1 million people lived in London; a century later, well over 6 million. As the 20th century dawned, London had already been the most populous city on the planet for seven decades. Britain’s population as a whole soared from 8 million in 1800 to 40 million in 1900. In the previous 2,000 years, even a fraction of such population growth anywhere in Europe was usually nipped in the bud by famine, disease, falling incomes, and population retrenchment.

But Britain in the 19th century was a special place, the legendary “workshop of the world.” London had become the capital of capital, with private investment in agriculture and manufacturing burgeoning at a record-breaking pace in the latter half of the century. The year Victoria ascended to the throne, 1837, saw fewer than 300 patent applications for new inventions, but by the end of the century the number exceeded 25,000 annually. Per capita income on the eve of World War I was three times what it was a century before and life expectancy had risen by 25 percent. There were many more mouths to feed and bodies to clothe, but British entrepreneurship was feeding and clothing them better than the world had ever experienced. It was the greatest flowering of problem-solving creativity, ingenuity, and innovation in history.

Colin Pullinger, a carpenter’s son from Selsea, typified the 19th century British entrepreneur. He designed a “perpetual mousetrap” that could humanely catch a couple dozen mice per trap in a single night, and then sold 2 million of them. Perhaps Emerson had Pullinger in mind when he famously wrote, “If a man write a better book, preach a better sermon, or make a better mousetrap than his neighbour, tho’ he build his house in the woods, the world will make a beaten path to his door.”

As the 1800s drew to a close, the framework that made possible these extraordinary achievements — capitalism — fell under assault. As poverty declined massively for the first time, the very presence of the poverty that remained prompted impatient calls for forcible redistribution of wealth. Around the world, Marxists painted capitalists as exploiters and monopolists. In Britain, Charles Kingsley argued that Christianity demanded a socialist order, and the Fabian Society was formed to help bring it about. Many unscrupulous businessmen turned to the state for favors and protections unavailable to them in competitive markets. Would anyone come to the defense of capitalism with as much vigor and passion as those who opposed it?

At least one group did: the Liberty and Property Defence League. Though its work has been largely forgotten, what the world learned about socialism in the following century surely vindicates its message. Its name derived from the members’ belief that liberty and property were inseparable and that unless successfully defended, both could be swept away by the beguiling temptations of a coercive state.

The founder of the League in 1882 was a pugnacious Scot by the name of Lord Elcho, later the 10th earl of Wemyss as a member of the House of Lords and thereafter known simply as “Wemyss.” Originally elected to parliament in 1841 as a protectionist Tory, he eventually embraced free trade and repeal of the Corn Laws by 1846. He later evolved into a full-throated advocate for what we today would call “classical liberal” ideas. At the organization’s third annual meeting in 1885, he expressed his hope that its efforts to educate the public would “cause such a flood as will sweep away, in the course of time, all attempts at state interference in the business transactions of life in the case of every Briton of every class . . . . No nation can prosper with undue state interference, and unless its people are allowed to manage their own affairs in their own way . . . .”

Wemyss and his friends rounded up spokespersons and financial support. They enlisted writers and public speakers. They published and circulated essays and leaflets. The organization operated as an activist think tank with a lobbying arm. The League attempted to mobilize public opinion against specific bills, functioning as a “day-to-day legislative watchdog” in the view of historian Edward Bristow. It even arranged testimony before parliamentary hearings. One League pamphlet attacked the introduction of “grandmotherly legislation” as a transgression against the freedom of contract. Armed with arguments provided by League members and sympathizers, Wemyss’ allies in Parliament killed hundreds of interventionist bills in the 1880s and 1890s.

Opponents often accused the League of being motivated by its members’ bottom line drive for profits, but in actuality its philosophical ideals were paramount. Among its members were some of the brightest intellects of the era, Herbert Spencer being perhaps the most notable. Author of the libertarian classic, “The Man Versus the State,” Spencer was the best-selling philosopher of his day and was nominated for a Nobel in literature.

Spencer saw liberty as the absence of coercion and as the most indispensable prerequisite for human progress. The ownership of property was an individual right that could not be morally infringed unless an individual first threatened the property of another. Spencer has been demonized as an apostle of a heartless “survival of the fittest” Darwinism by those who choose to ignore or distort his central message, namely that individual self-improvement can accomplish more progress than political action. One creates wealth, the other merely takes and reapportions it.

Auberon Herbert was a Spencer acolyte whose championship of voluntarism found fertile soil among fellow League members. His now century-old warning about the danger of state intervention is positively prophetic: “No amount of state education will make a really intelligent nation; no amount of Poor Laws will place a nation above want; no amount of Factory Acts will make us better parents . . . . To have our wants supplied from without by a huge state machinery, to be regulated and inspected by great armies of officials, who are themselves slaves to the system which they administer, will in the long run teach us nothing, (and) will profit us nothing.”

In a 1975 essay in The Historical Journal from Cambridge University Press, historian Bristow contended that the Liberty and Property Defence League changed the language in one important, lasting way. Prior to the 1880s, “individualism” was a term of opprobrium in most quarters, referring to “the atomism and selfishness of liberal society.” The League appropriated the word and elevated its general meaning to one of respect for the rights and uniqueness of each person.

But was the League successful in its mission to thwart the socialist impulse? In the short run, lamentably, no. By 1914, socialists had convinced large numbers of Britons that they could (and should) vote themselves a share of other people’s property. Two world wars and a depression in between seemed to cement the socialists’ claim that their vision for society was inevitable.

Good ideas, however, have a way of resisting attempts to quash them. Bad ideas sooner or later fail and teach a valuable lesson or two in the process. Britain and most of the world gave socialism in all its varieties one hell of a run in the 20th century. The disastrous results now widely acknowledged underscore the warnings of those who said that we could depart from liberty and property only at our peril.

The warriors of the Liberty and Property Defence League may have lost the battle in their lifetimes, but a hundred years later they offer prophetic wisdom to those who will listen.

Freedom Basics – transcript

Professor Paul Cwik spoke to students attending Freedom University in Irvington, NY during the summer of 2009. This is the transcript of the lecture (without the Q&A at the end).

(These guys get turned off, right? Turn them off.

You know it’s going to ring. And then you will be embarrassed and I will make fun of you. And I will. That’s why we have name tags. We write down your names… OK.)

I have been asked to give the first lecture on Freedom Basics. A lot of stuff has been written on freedom. Freedom is a word that has been argued over, fought over for centuries, and I have been asked to cover the basics in less than an hour. So I think that I might have to skip a point or two. Maybe.

When somebody says freedom, they could mean it in a couple of different ways. “The freedom to” and “the freedom from.” So think about this. Freedom to worship God in your own way, or not at all. Freedom to write what you want in your newspaper column or blog. Freedom to pick your own friends, to gather with them as you please.

Now contrast this with the freedom from want. The freedom from hunger. The freedom from illness.

There is a fundamental difference between these concepts. But the word “freedom” is used by both sides. Both sides of the debate. And that tends to make the debate rather confusing because both sides say: “We want freedom!” As a result many on our side, the good guys, right, they sometimes use the word liberty instead. Of course you can say without losing the meaning “the liberty to worship, the liberty to write, the liberty to assemble,” but it is rather awkward to say “the liberty from want, the liberty from hunger, the liberty from illness,” it’s a clunky phrase. It really doesn’t fly. So, language is important. I don’t want to loose another word to the collectivists. We have already lost the word “liberal” to them. That’s enough. They don’t get any more words. We’re keeping liberty.

The concept of liberty or “freedom to” is rather new idea. It’s a radical departure from earlier thinking. In fact, it’s a very radical idea. Ludwig von Mises, whom you might hear a little bit about this week. He argues that the idea of liberty is distinctively western. And that it came up in the western culture.

The idea that there are rights that belong to individuals and that they come before the creation of government is the opposite of the medieval law. It’s the opposite, the reverse of the medieval law.

The concept of liberty and freedom says that each individual is unique. And therefore there is worth and value in each and every individual.

F. A. Harper in his book Liberty: A Path to its Recovery

I have props. It looks like this. I stole it off the bookshelf and I will dutifully file it on the white table and not inserting it on the shelf.

Harper states it this way: “This concept of liberty rests on the supreme dignity of the individual.”  That’s fairly important distinction. It’s a radical thing. It says people matter. And if we look back the last 5 000 years of recorded human history, who are the serfs, the peasants, the peons – the nobodies?  They were the nobodies.  They were those that were sacrificed to the means, as means to some greater end at the whim of some king or emperor.

This line of thought has evolved – changed – and we can trace it through the works of John Locke, Montesquieu, Thomas Jefferson, Frederic Bastiat and Lord Acton.

What these guys argue is that government is created by individuals for the protection of individual rights.  That’s why we have government. The common element and the key to their reasoning is what we call, “Methodological Individualism.”

Here’s your first big college word.  Because it’s university…it’s freedom university…so we need college-type words here.

Methodological Individualism.

I’m going to talk a bit more about this in the lecture after the dinner. But I want to just touch on it now—what it means. We are looking methodology here. Any time we see the word “-ology” or “-ological” – it means the science of.

So, the methd-ology or methodology is the science of… and our science – scientific method – is basing it on its most elemental parts. And that’s the individual. We cannot break it down any further than that.

Today we suffer from the use of collective nouns and we personify them. It’s just the way that we communicate with each other. So, someone might say today General Motors filed for bankruptcy.

Well, General Motors is not a real person. General Motors is not a real general.

General Motors does not have a brain or a heart or a soul or anything like that. What is it?

It’s a collection of people, group of individuals working together that produce cars – that produce these other things financing and such.

So, we use these sort of collective nouns. EPA regulates… the United States has invaded… General Motors filed… but there really isn’t such a thing. These are only collective nouns. We have to be careful about these.

But methodological individualism says that we have to focus on the basic unit and that’s the individual.  And we will use that much more in the next lecture on the “Praxeology: Supply and Demand”. But back to freedom…

The path from individualism to rights and a theory of a free and prosperous society has taken many forms and many shapes from many authors. So, I have identified four different approaches.

And, are these categories the best categories? No, these are just sort of categories that came to me.

The first one is the “The Natural Rights approach.” Some authors that typify it are people like Frédéric Bastiat and Murray Rothbard.

And, basically what they say is that life is given to us by God. At least Bastiat does in “The Law”. Other prop… I will use that prop again….

From this position that life is given to us by God – from this position combined with the fact that there is scarcity in the world in other words we can’t have all the stuff that we want. We don’t have enough time to do all the things that we want.

And with the fact that we do not live in isolation, we can deduce the natural rights of life, liberty and property.

Some of you might say that supposed to be “the pursuit of happiness.”

Well, where do we find that actually: “Life, liberty and the pursuit of happiness”? –Declaration of Independence. Who wrote that?

Well, it was a committee. It was a committee. Jefferson was the primary author and he originally had “life, liberty and property”.  Took it right out of John Locke’s “Second Treatise on Government”.

They said: “People are going to pick up guns and fight the biggest war machine ever known on this planet – at that point in time … For life, liberty and property… we have to flower this up—get people’s passions going. So, they put in “the pursuit of happiness.” That’s what happened.

More on the natural law rights theory in just a little bit.

“The Utilitarian Approach”.

The utilitarian approach is basically following the idea of utility (and we talk a bit more about that in the next lecture). But it’s a level of happiness. It’s weighting plusses versus minuses and the more utility you have the happier you are.

So, the utilitarian idea says that freedom is better because we are rich; we are more wealthy; we are more prosperous; we have a higher standard of living; our utility is higher. This approach can be typified by the writings of Jeremy Bentham.

There is a lot of danger with this approach – at least I think there is – because if anyone supposes that another way, say communism, can produce more wealth, then freedom and liberty can be just tossed overboard.

So, I’m not a big fan of that. But I do think that freedom leads to higher levels of prosperity. Look at North and South Korea. Look at Hong Kong vs. Mainland China before they opened themselves up to trade. East and West-Germany…Example after example after example we see that freedom works.

The next approach is “the Objectivist approach”.

And this is characterized by the writings of Ayn Rand.

Now, what she does – she begins with the individual, methodological individualism, because only individuals have minds, again no collective nouns.

Since each individual is solely united with his own mind, there is no separation or divorcing of one’s own mind with his person.  Each person thus has full ownership over themselves.

The implication is that all individuals are on the same plane as, or on the same level as, or on par with each other in their own self-ownership. So, you own yourself, I own me, we all own ourselves.

As such, no one person for any reason can make any claim over another for any reason.

The concept of rights flows from this idea of self-ownership and follows closely with the Natural Rights approach.  It does so without the reference to God.  She was an atheist.

And, the last approach that I just put up here is “The Societal approach”.

We see this in the writings of William Graham Sumner: “What Social Classes Owe To Each Other” and the “The Forgotten Man” as two principal works he wrote.

Sorry, no props for this.  I have no book.

What Sumner said in his book “What Social Classes Owe To Each Other” blends a bit of the utilitarian and empirical with the notion of prior rights to show that there are rules for society that work and other rules that just don’t.  He was a pioneer in the field of sociology.  He argues that a society based on contract is the strongest form of society.

Here’s an example what Sumner has to say.

Sumner says: “In our modern state, and in the United States more than anywhere else, the social structure is based upon contract, and status is of” – and status like who are your parents… are you royalty or anything like that is of  – “the least importance. Contract, however, is rational—even rationalistic.  It is also realistic, cold, and matter-of-fact.  A contract relation is based on a sufficient reason, not on custom or prescription…A society based on contract is a society of free and independent men, who form ties without favor or obligation, and cooperate without cringing or intrigue.”

I mean people will gladly become garbage men or work on a cleaning staff if you pay them enough.

Sumner continues: “A society based on contract, therefore, gives the utmost room and chance for individual development, and for all the self-reliance and dignity of a free man. That a society of free men, cooperating under contract, is by far the strongest society which has ever yet existed; that no such society has ever yet developed the full measure of strength of which it is capable; and that the only social improvements which are now conceivable lie in the direction of more complete realization of a society of free men united by contract, are points which cannot be controverted.”

So, Sumner is saying, “Look, you’re born in this position. You’re king, you’re Lord of the Manor – you’re born in that position. So, therefore you must serve.”

That’s a weak relationship, because people are not happy having to serve.
The rulers take it for granted. They don’t have the society of the realms best interest at heart.

But if you compare – contrast – that with a contractual relationship where you have to offer someone enough to make it worth their while to become the member of the cleaning staff or garbage man or mine coal under the ground, they will do this quite happily.

And you see the difference in those types of societies: some rules are just better than others for societies.

So, what’s the analysis so far?

Well, The analysis so far is this:

  1. We are individuals and as such we have worth.
  2. This value cannot be sacrificed by others (non-owners) for their ends.
  3. The first right is Life…

..but when we say that we mean the right not to be hit, murdered, raped or anything like that. It is not a right to a standard of living or even the right to violate others’ rights to maintain your own life.  In other words, you cannot steal bread even if you are hungry and will die without that bread.

Ok. You can’t just steal someone else’s bread.

Now, the corollary to this is that with freedom comes responsibility.  If no one else is responsible for you, you have to take care of yourself.

And that’s a pretty scary thing. You have to be responsible for yourself – I know!

Coming from that right you can see where this leads then, since we are talking about responsibility, is that of liberty.

Each of us has faculties and talents that we can use to preserve, develop and perfect our lives.

It is the freedom to think as we think, to perceive the world as we perceive it, and to express ourselves as we wish. These are what constitute the right of Liberty.

A hermit does not care about the right of Liberty.  Why is that?  There is no one to impose any limitations on him.

It is because we live in society that we need to make distinctions between who can do what with which items.  This leads us to the development of the third right—Property.

Property rights are at the core of Freedom – of a free society.  They protect and allow for cooperation.  Their source stems from individual action.

And, Harper – this guy, actually here’s a picture of him. They call him baldy. There’s a bit of hair. I think it’s kind of unfair. – But in this book here he says this: “The only method consistent with liberty is the one that distinguishes between mine and thine according to the rule that the producer shall have the right to the product of his own labor. This foundation of economic liberty is important above all other considerations. By this concept, the right of ownership arises simultaneously with the production of anything; and ownership resides there until the producer-owner chooses to consume the product or transfer its ownership to another person through exchange, gift or inheritance.  The right to produce a thing thereby becomes the right to own it.”

So, if you have the right to make it then you have the right to own it. Those are inseparable.

“…and to deny one right is, in effect, to deny both.  This concept specifies that no part of production shall properly belong to a thief, or to a slave master or to a ruler by whatever title.”

If I make it, it’s mine. I don’t care what the majority of people voted for.  It’s mine; I made it.

Murray Rothbard in his book “The Ethics of Liberty” essentially says the same thing.

These rights are intertwined with each other and the loss of one – life, liberty, property – means that we lose all of them.

Back to Bastiat. OK. If I have the Greats I’m going to use the Greats. I like these guys.

So, Bastiat says: “Each of us has a natural right—from God—to defend his person, his liberty, and his property. These are the three basic requirements of life, and the preservation of any one of them is completely dependent upon the preservation of the other two. For what are our faculties but the extension of our individuality? And what is property but an extension of our faculties?”

What is it that makes us, us?

If we are to be able to constantly protect each of these rights constantly/continuously, then we can group together to constantly protect these rights.

Again Bastiat: “If every person has the right to defend—even by force—his person, his liberty, and his property, then it follows that a group of men have the right to organize and support a common force to protect these rights constantly. Thus the principle of collective right—its reason for existing, its lawfulness—is based on individual right. And the common force that protects this collective right cannot logically have any other purpose or any other mission than that for which it acts as a substitute. Thus, since an individual cannot lawfully use force against the person, liberty, or property of another individual, then the common force—for the same reason—cannot lawfully be used to destroy the person, liberty, or property of individuals or groups.”

If I can’t steal from someone, then the collective also does not have that right. Why is that? Because rights precede government and rights precede statutes.  They come before.

Our individual rights do not come from government, they are not granted us by a constitution or a Declaration of Rights.

Recall the Declaration of Independence, it says this (and you have the copy of this in your books): “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”

Now pay special attention to the next part: “That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.”

So the rights come first. When government separates us or violates our rights – separates us from our property, violates our rights – then the government is behaving unlawfully.

But what if they pass a law then it is legal, right? Yes, it’s legal. But it is still plunder. (Get to that in a moment.)

Back to the Declaration of Independence. Later on it says, “But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”

The Declaration of Independence is absolutely radical. This perspective overturns thousands of years of human thinking. Many revolutions have since used this language to justify their fight for freedom.

So what then is freedom? [We’re so many minutes into our talk…] What’s freedom? We haven’t even defined it yet.

Mises point out that “Freedom always means: freedom from arbitrary action on the part of the police power.”  Liberty is NOT the freedom to do anything like rob and kill, riot and loot.  Start swinging in your arms so that you punch someone in the nose.  It can only exist when it is circumscribed by the rights described above.

Many wish to extend these rights and convert them into “the freedom froms” that I talked about at the beginning. Freedom from want, freedom from hunger, freedom from illness.

The concept of Legal Plunder is very useful for refuting these false freedoms.  Since no individual can violate rights and since the government derived from individuals’ rights then it cannot have any extra powers – doesn’t have any extra rights or superior rights.

So, I got these rights: life, liberty property. That means what? It means that I cannot take a gun, come up to Jay (How do I know he is Jay?  He’s got a name tag, that’s why we have to wear name tags) – and say: “Give all you money!” Why? That’s stealing.

Now, if I take all you money and I go out and buy a pad of paper, charcoal pencil and I give it to Jonathan over here – it’s still stealing!

Even if you call it the National Endowment for the Arts – it’s still stealing!

I can’t do that. So, the government which is the collection of us also does not have that power. Where would it get that power from if it derives all its power from us?

If I should not steal, then neither should the government.  When government passes a law making its actions “legal” – oh, we passed a law, it’s legal; We can do it – it is still violating rights, it is still plundering.  So Bastiat uses the phrase “Legal Plunder.”

He says this: “But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”
This is why I use the Greats, because it is so clear. Could you take it from her? Yeah. It’s stealing, but we voted on it. Still stealing.

Bastiat says: “Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it” – such as, I like this list – “ tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on.”

Bailouts.

“All these plans as a whole—with their common aim of legal plunder—constitute socialism.”

Now, let’s take a step back. I can take a step back. You can still sit.

The law is force.  Government is force.  It is coercion. At its root – that’s what it is. It is to threaten to violently reduce people’s options. You don’t want to do that? Well, you’re going to jail. We are violently reducing your options when you’re in jail.

If you don’t believe me try not paying your taxes.

Before government can do anything, it must first take.  And so the goal of the law should not be to promote justice or to cause justice to reign. “It ought to be stated that the purpose of the law is to prevent injustice from reigning.” (Bastiat) Notice the slight distinction. Instead of trying to reach an impossible ideal of perfect justice, what we should be trying to do is reduce the amount of injustice.

And, both the right and the left agree on this. They say yes, we want to reduce injustices.  However, we cannot violate rights to promote justice.  In order for government to stop the injustice of starving people – people are starving; that’s injustice; we want to prevent this – government would first have to take from others, which in itself is a violation of rights and an injustice.  We cannot move any closer to justice by creating injustices.

Do you see, what is going on here? Curing one injustice by creating another injustice.

So, all we can do then is remove injustices such as government’s wealth redistribution plans, etc.  It is by the negation of these injustices that we move closer to Justice. So if I am negating these takings – these stealings – then we move closer to Justice. But, we cannot actively pursue Justice. We have to sort of think of it as a negative concept.

Unfortunately, the way in which society perceives itself has changed – changed over the last hundred years. Specifically the argument has historically stemmed from the perspective that we are fallen beings.  We need limits because of our flawed nature – original sin.  But how does the idea of liberty change when we view ourselves as risen apes? We are not flawed but have conquered – we are better than every other species. We have the power to pull ourselves out of the primordial ooze, and so why shouldn’t we also have the power to plan a society? Such hubris is what Friedrich Hayek called the “Fatal Conceit.”

This idea that we have all the smarts, all this knowledge, that we can use to plan a society. (And we will be talking later on this week about what knowledge is actually out there that might be inarticulate knowledge or tacit knowledge that cannot be communicated or observed directly – cannot be collected directly by a central planning board.)

So, what we seen is that if people believe that we can shape society as an artist can shape clay. Whereas Adam Smith said we move pieces on a chess board. We think we can then shape and change society to the better because we studied this, we are sociologists and we know now.

But when we do this – now we start looking at the basic things – and we see that people ask… they don’t even ask the question anymore. Do we have a “right” to education?  Sheldon Richman later this week is going to talk about an education system that is not run by the government.

Do we have a “right” to water? (Or Mountain Dew…hmm…yummy and delicious. I will use this as a prop for the next lecture.) Because without water how can I have life? Without education, how can I have liberty or property?

What about right to healthcare?  Think about this. A right to healthcare. So, if I was standing on a street corner and there was a MD (medical doctor) standing next to me and we are chatting… la, la, la… Actually, that would be singing. Chatting blah, blah, blah. And I was so engrossed in that I wasn’t paying any attention, and I stepped into the street and bam, get hit by a car. There I am, laying on the street, bleeding, dying, not all happy… Do I have a right to healthcare?

Now, what does it mean to have a right to healthcare? That means that I can turn to my friend and go: “Give me healthcare!” …probably gurgling with blood and… but “Give me healthcare!”

I right to healthcare means that he must use his property, his talents, his time to help me out. Think about his relationship that we have. Who’s commanding who? Are we equals?

No. If I have a right to his time, his skills, his property, his labor. That makes me master, superior. It puts me on a higher plane. It makes him subordinate. You say, but you are dying. You need help. Otherwise you will die. That’s true! Absolutely true!

But should he help? That’s a different question. Should he help? Does he have a moral obligation? That’s a different question of whether or not I have a right. Because when I claim a right to his labor. I’m enslaving him to my purposes – to that degree.

If he has a moral obligation where does that come from? What is it? That’s compassion. Where does compassion come from? Comes from the human heart.

But remember, if I am forcing him, if I have a right, that means the government will force him to help me. That’s all government is, coercion. Here’s a gun. Help him! Well, help me.

If someone is pointing a gun in your heard are you being terrible? Is the doctor being compassionate?  Is he being charitable if someone points a gun into him and says: “Fix this person up!”?

No. Does he even have the opportunity to be compassionate and charitable? His ability to decide to be charitable has been taken away from him, because the decision has been forced upon him. Now he is no longer acting morally.

If I see someone who wants food or clothing or something, and I give him some money. It comes from my heart. I’m being compassionate – being charitable. But you are not being compassionate or charitable when you are paying taxes. When you go up to the Pearly Gates and you see Saint Peter and he says: “Have you served your fellow man, have you been compassionate and acted charitably to your fellow man. And you say: “Look at my 1040-form!”

He is not going to take that, is he? He’s like – no, you did not get signature on that. No!

So, the law cannot force compassion. And the Law is not being charitable. Government is not being charitable. But, we have to bail out General Motors. Why? Because all these people will lose their jobs. That’s sad. That’s sad. But don’t chalk it up as charity that we are trying to keep this people in jobs. Absolutely not – it’s anything but.

I and the rest of you have been forceably made co-owners, what ever that means.

So back to Bastiat, one last time, “It is not true that the function of law is to regulate our consciences, our ideas, our wills, our education, our opinions, our work, our trade, our talents, or our pleasures. The function of law is to protect the free exercise of these rights – life, liberty and property, and to prevent any person from interfering with the free exercise of these same rights by any other person.

“Since law necessarily requires the support of force, its lawful domain is only in the areas where the use of force is necessary. This is justice.

“Every individual has the right to use force for lawful self-defense. It is for this reason that the collective force—which is only the organized combination of the individual forces—may lawfully be used for the same purpose;” – right, it is only for self-defense –  “and it cannot be used legitimately for any other purpose.”

You can use it for other things, clearly. Look at the society we are living. When you define inside as standing under a little awning or something…

So is all that government does some type of plunder?  Should we even have a government?

When we go down that road and I have several friends who are down that road they call themselves anarcho-capitalists. Anarchy, but not like the bad anarchy, this is capitalist anarchy.

Harper – one last time, this guy; good book; I’m very pleased with this book  –addresses the anarcho-capitalism question in this way, he says: “Based on all that has been said, one might easily conclude that government is an entirely negative force so far as liberty is concerned. He might conclude that anarchy…would be the ideal society, and that liberty would be complete under anarchy.  That would be true if all persons were perfect.  But they are not.”

And this comes back to the question how do we perceive ourselves. Are fallen beings or are we risen apes?

“With human frailties as they are, anarchy affords the opportunity for certain powerful and tyrannical individuals to enslave their fellow men, to the extent of their power to gain and keep control over others. So some degree of governmental function…is necessary if liberty is to be at a maximum; violators of liberty must be restrained so that the rights of liberty will be protected for those who respect them and play the game of society according to the rules of liberalism.”

The good liberalism – the classical liberalism.

“Thus at one extreme the absence of government allows anarchy to rob the people of their liberty, whereas at the other extreme the government itself becomes the robber of liberty. The task in a liberal society, therefore, is to find that point where all the people will enjoy the greatest possible degree of liberty.”

Personally, I am really close to anarcho-capitalism. I buy a lot of their arguments. I see a whole bunch of them.  I think that we should all strive to reduce plunder and expand liberty as much as we can.  And when we get to that little Minarchist state – that last little tiny state– maybe then I can decide whether we should abolish the last little bit of government or so.

But that’s not really the debate that we need. Because we are so far from that

point right now. It’s sort of like how many angles are dancing on the top of the Mountain Dew bottle?  It’s kind of pointless. What we need to do is pull in one direction and pull hard, not fight with each other.

My thoughts on what the right size of government is right now is… Imagine your own personal worst enemy. You know who that is.  And they can be placed in charge of the government and you would be okay with it.

Because right now if my own worst personal enemy was placed in position of power and they control the courts, IRS and other taxing, regulatory authorities then my life would be miserable.

But if we can reduce the government to the size where you can take your own personal worst enemy and put them in charge of all the things that the government does and you are okay with it. That’s a pretty good size government.

I have asked many questions. I have raised many questions that each of us is attempting to answer.

There are some answers: communism – bad. But the task set before us is to find that “greatest possible degree of liberty” for society.  This week is “Freedom University.”  What we should do is explore what exactly that means through good discussion and deep thinking.

So, I’m really excited about this week.

The Stateless Society: An Examination of Alternatives

by Stefan Molyneux

Stefan Molyneux is the host of ‘Freedomain Radio‘, the largest and most popular philosophy show on the Web.


If the Twentieth Century proved anything, it is that the single greatest danger to human life are the thugs of the centralized political State, who extinguished more than 170 million souls during the bloodiest rampage in recorded history. By any rational standard, modern States are the last and greatest remaining predators – and that the danger has not abated with the demise of communism and fascism. All Western democracies currently face vast and accelerating escalations of State power and centralized control over economic and civic life. In almost all Western democracies, the State chooses:

  • where children go to school, and how they will be educated
  • the interest rate citizens can borrow at
  • the value of currency
  • how employees can be hired and fired
  • how more than 50% of their citizens’ time and money are disposed of
  • who a citizen’s doctor is
  • what kinds of medical procedures can be received – and when
  • when to go to war
  • who can live in the country
  • …just to touch on a few.

Most of these amazing intrusions into personal liberty have occurred over the past 90 years, since the introduction of the income tax. They have been accepted by a population helpless to challenge the endless expansions of State power – and yet, even though most citizens have received endless pro-State propaganda in government schools, a growing rebellion is brewing. State predations are now so intrusive that they have effectively arrested the forward momentum of society, which now hangs before a fall. Children are poorly educated, young people are unable to get ahead, couples with children fall ever-further into debt, and the elderly are finding State medical systems collapsing under the weight of their growing needs – and State debts continue to grow.

Thus, these early years of the twenty-first century are the end of an era, a collapse of mythology comparable to the fall of fascism, communism, monarchy, or political Christianity. The idea that the State is capable of solving social problems is now viewed with great skepticism – which foretells a coming change. As soon as skepticism is applied to the State, the State falls, since it fails at everything except increasing its power, and so can only survive on propaganda, which relies on unquestioning faith.

Yet while most people are comfortable with the idea of reducing the size and power of the State, they become distinctly uncomfortable with the idea of getting rid of it completely. To use a medical metaphor, if the State is a cancer, they prefer medicating it into an unstable remission, rather than eliminating it completely.

This can never work. A central lesson of history is that States are parasites which always expand until they destroy their host population. Because the State uses violence to achieve its ends – and there is no rational end to the expansion of violence – States grow until they destroy civilized interaction through the corruption of money, contracts, honesty, family, and self-reliance. As such, the cancerous metaphor is not misplaced. People who believe that the State can somehow be contained have not accepted the fact that no State in history has ever been contained.

Even the rare reductions are merely temporary. The United States was founded on the principle of limited government; it took little more than a century for the State to break the bonds of the Constitution, implement the income tax, take control of the money supply and the educational system, and begin its catastrophic expansion. There is no example in history of a State being permanently reduced in size. All that happens during a tax or civil revolt is that the State retrenches, figures out what it did wrong, and plans its expansion again. Or provokes a war, which silences all but fringe dissenters.

Given these well-known historical facts, why do still people believe that such a deadly predator can be tamed? Surely it can only be because they consider a slow strangulation in the grip of an expanding State somehow better than the quick death of a society bereft of a State.

Why, then, do most people believe that a society will crumble without a coercive and monopolistic social agency at its core? There are a number of answers to this question, but generally they tend to revolve around three central points:

  • dispute resolution;
  • collective services; and,
  • pollution.

Dispute Resolution

The fact that people still cling to the belief that the State is requires to resolve disputes is amazing, since modern courts are out of the reach of all but the most wealthy and patient, and are primarily used to shield the powerful from competition or criticism. In this writer’s experience, to take a dispute with a stockbroker to the court system would have cost more than a quarter of a million dollars and taken from five to ten years – however, a private mediator settled the matter within a few months for very little money. In the realm of marital dissolution, private mediators are commonplace. Unions use grievance processes, and a plethora of other specialists in dispute resolution have sprung up to fill in the void left by a ridiculously lengthy, expensive and incompetent State court system.

Thus the belief that the State is required for dispute resolution is obviously false, since the court apparatus is unavailable to the vast majority of the population, who resolve their disputes either privately or through agreed-upon mediators.

How can the free market deal with the problem of dispute resolution? Outside the realm of organized crime, very few people are comfortable with armed confrontations, and so generally prefer to delegate that task to others. Let’s assume that people’s need for such representatives produces Dispute Resolution Organizations (DROs), which promise to resolve disputes on their behalf.

Thus, if Stan is hired by Bob, they both sign a document specifying which DRO they both accept as an authority in dispute resolution. If they disagree about something, and are unable to resolve it between themselves, they submit their case to the DRO, and agree to abide by that DRO’s decision.

So far so good. However, what if Stan decides he doesn’t want to abide by the DRO’s decision? Well, several options arise.

First of all, when Stan signed the DRO agreement, it is likely that he would have agreed to property confiscation if he did not abide by the DRO’s decision.[1] Thus the DRO would be entirely within its right to go and remove property from Stan – by force if necessary – to pay for his side of the dispute.

It is at this point that people generally throw up their arms and dismiss the idea of DROs by claiming that society would descend into civil war within a few days.

Everyone, of course, realizes that civil war is a rather bad situation, and so it seems likely that the DROs would consider alternatives to armed combat.

What other options could be pursued? To take a current example, small debts which are not worth pursuing legally are still regularly paid off – and why? Because a group of companies produce credit ratings on individuals, and the inconvenience of a lowered credit rating is usually greater than the inconvenience of paying off a small debt. Thus, in the absence of any recourse to force, small debts are usually settled. This is one example of how desired behaviour can be elicited without pulling out a gun or kicking in a door.

Picture for a moment the infinite complexity of modern economic life. Most individuals bind themselves to dozens of contracts, from car loans and mortgages to cell phone contracts, gym membership, condo agreements and so on. To flourish in a free market, a man must honour his contracts. A reputation for honest dealing is the foundation of a successful economic life. Now, few DROs will want to represent a man who regularly breaks contracts, or associates with difficult and litigious people.[2] (For instance, this writer once refrained from entering into a business partnership because the potential partner revealed that he had sued two previous partners.)

Thus if Stan refuses to abide by his DRO’s ruling, the DRO has to barely lift a finger to punish him. All the DRO has to do is report Stan’s non-compliance to the local contract rating company, who will enter his name into a database of contract violators. Stan’s DRO will also probably drop him, or raise his rates considerably.

And so, from an economic standpoint, Stan has just shot himself in the foot. He is now universally known as a man who rejects legitimate DRO rulings that he agreed to accept in advance. What happens when he goes for his next job? What if he decides to eschew employment and start his own company, what happens when he applies for his first lease? Or tries to hire his first employee? Or rent a car, or buy an airline ticket? Or enter into a contract with his first customer? No, in almost every situation, Stan would be far better off to abide by the decision of the DRO. Whatever he has to pay, it is far cheaper than facing the barriers of existing without access to a DRO, or with a record of rejecting a legitimate ruling.

But let’s push the theory to the max, to see if it holds. To examine a worst-case scenario, imagine that Stan’s employer is an evil man who bribes the DRO to rule in his favour, and the DRO imposes an unconscionable fine – say, one million dollars – on Stan.

First of all, this is such an obvious problem that DROs, to get any business at all, would have to deal with this danger up front. An appeal process to a different DRO would have to be part of the contract. DROs would also rigorously vet their own employees for any unexplained income. And, of course, any DRO mediator who corrupted the process would receive perhaps the lowest contract rating on the planet, lose his job, and be liable for damages. He would lose everything, and be an economic pariah.

However, to go to the extreme, perhaps the worst has occurred and Stan has been unjustly fined a million dollars due to DRO corruption. Well, he has three alternatives. He can choose not to pay the fine, drop off the DRO map, and work for cash without contracts. Become part of the grey market, in other words. A perfectly respectable choice, if he has been treated unjustly.

However, if Stan is an intelligent and even vaguely entrepreneurial man, he will see the corruption of the DRO as a prime opportunity to start his own, competing DRO, and will write into its base contract clauses to ensure that what happened to him will never happen to anyone who signs on with his new DRO.[3]

Stan’s third option is to appeal to the contract rating agency. Contract rating agencies need to be as accurate as possible, since they are attempting to assess real risk. If they believe that the DRO ruled unjustly against Stan, they will lower that DRO’s contract rating and restore Stan’s.

Thus it is inconceivable that violence would be required to enforce all but the most extreme contract violations, since all parties gain the most long-term value by acting honestly. This resolves the problem of instant descent into civil war.

Two other problems exist, however, which must be resolved before the DRO theory starts to becomes truly tenable.

The first is the challenge of reciprocity, or geography. If Bob has a contract with Jeff, and Jeff moves to a new location not covered by their mutual DRO, what happens? Again, this is such an obvious problem that it would be solved by any competent DRO. People who travel prefer cell phones with the greatest geographical coverage, and so cell phone companies have developed reciprocal agreements for charging competitors. Just as a person’s credit rating is available anywhere in the world, so their contract rating will also be available, and so there will be no place to hide from a broken contract save by going ‘off the grid’ completely, which would be economically crippling.

The second problem is the fear that a particular DRO will grow in size and stature to the point where it takes on all the features and properties of a new State.

This is a superstitious fear, because there is no historical example of a private company replacing a political State. While it is true that companies regularly use State coercion to enforce trading restrictions, high tariffs, cartels and other mercantilist tricks, surely this reinforces the danger of the State, not the inevitability of companies growing into States. All States destroy societies. No company has ever destroyed a society without the aid of the State. Thus the fear that a private company can somehow grow into a State is utterly unfounded in fact, experience, logic and history.

If society becomes frightened of a particular DRO, then it can simply stop doing business with it, which will cause it to collapse. If that DRO, as it collapses, somehow transforms itself from a group of secretaries, statisticians, accountants and contract lawyers into a ruthless domestic militia and successfully takes over society – and how unlikely is that! – then such a State will then be imposed on the general population. However, there are two problems even with this most unlikely scare scenario. First of all, if any DRO can take over society and impose itself as a new State, why only a DRO? Why not the Rotary Club? Why not a union? Why not the Mafia? The YMCA? The SPCA? Is society to then ban all groups with more than a hundred members? Clearly that is not a feasible solution, and so society must live with the risk of a brutal coup by ninja accountants as much as from any other group.

And, in the final analysis, if society is so terrified of a single group seizing a monopoly of political power, what does that say about the existing States? They have a monopoly of political power. If a DRO should never achieve this kind of control, why should existing States continue to wield theirs?

Collective Services

Roads, sewage, water and electricity and so on are also cited as reasons why a State must exist. How roads could be privately paid for remains such an impenetrable mystery that most people are willing to support the State – and so ensure the eventual and utter destruction of civil society – rather than cede that this problem just might be solvable. There are many ways to pay for roads, such as electronic or cash tolls, GPS charges, roads maintained by the businesses they lead to, communal organizations and so on. And if none of those work? Why, then personal flying machines will hit the market!

The problem that a water company might build plumbing to a community, and then charge exorbitant fees for supplying it, is equally easy to counter. A truck could deliver bottled water, or the community could invest in a water tower, a competing company could built alternate pipes and so on. None of these problems touch the central rationale for a State. They are ex post facto justifications made to avoid the need for critical examination or, heaven forbid, political action. The argument that voluntary free-market monopolies are bad – and that the only way to combat them is to impose compulsory monopolies – is obviously foolish. If voluntary monopolies are bad, then how can coercive monopolies be better?

Due to countless examples of free market solutions to the problem of ‘carrier costs’, this argument no longer holds the kind of water it used to, so it must be elsewhere that people must turn to justify the continued existence of the State.

Pollution

This is perhaps the greatest problem faced by free-market theorists. It’s worth spending a little time on outlining the worst possible scenario, and see how a voluntary system could solve it. However, it’s important to first dispel the notion that the State currently deals effectively with pollution. Firstly, the most polluted resources on the planet are State-owned, because State personnel do not personally profit from retaining the value of State property (witness the destruction of the Canadian cod industry through blatant vote-buying). Secondly, the distribution of mineral, lumber and drilling rights is directly skewed towards bribery and corruption, because States rarely sell the land, but rather just the resource rights. A lumber company cannot buy woodlands from the State, just the right to harvest trees. Thus the State gets a renewable source of income, and can further coerce lumber companies by enforcing re-seeding. This, of course, tends to promote bribery, corruption and the creation of ‘fly-by-night’ lumber companies which strip the land bare, but vanish when it comes time to re-seed. Auctioning State land to a private market easily solves this problem, because a company which re-seeded would reap the greatest long-term profits from woodland, and so would be able to bid the most for the land.

Also, it should be remembered that, in the realm of air pollution, governments created the problem in the first place. In 19th century England, when industrial smokestacks began belching fumes into the orchards of apple farmers, the farmers took the factory-owners to court, citing the common-law tradition of restitution for property damage. Naturally, the capitalists had gotten to the State courts first, and had more money to bribe with, employed more voting workers, and contributed more tax revenue than the farmers – and so the farmers’ cases were thrown out of court. The judge argued that the ‘common good’ of the factories took precedence over the ‘private need’ of the farmers. The free market did not fail to solve the problem of air pollution – it was forcibly prevented from doing so through State corruption.

The State, then, is no friend of the environment – but how would the free market handle it? One egregious example often cited is a group of houses downwind from a new factory which works day and night to coat them in soot.

When a man buys a new house, isn’t it important to him to ensure that it won’t be subjected with someone else’s pollution? People’s desire for a clean and safe environment is so strong that it’s a clear invitation for enterprising capitalists to sweat bullets figuring out how to provide it.

Fortunately, since we have already talked about DROs and their role in a free market, the problem of air pollution can be solved quite easily.

If the aforementioned group of homeowners is afraid of pollution, the first thing they will do is buy pollution insurance, which is a natural response to a situation where costs cannot be predicted but consequences are dire. Let’s say that a homeowner named Achmed buys pollution insurance which pays him two million dollars if the air around or in his house becomes polluted in some predefined manner.[4] In other words, as long as Achmed’s air remains clean, the insurance company makes money.

One day, a plot of land upwind of Achmed’s house comes up for sale. Naturally, his insurance company would be very interested in this, and would monitor the sale. If the purchaser is some private school, all is well (assuming Achmed has not bought an excess of noise pollution insurance!). If, however, the insurance company discovers that Sally’s House of Polluting Paint Production is interested in purchasing the plot of land, then it will likely spring into action, taking one of the following actions:

  • buying the land itself, then selling it to a non-polluting buyer;
  • getting assurances from Sally that her company will not pollute;
  • paying Sally to enter into a non-polluting contract.

If, however, someone at the insurance company is asleep at the wheel, and Sally buys the land and puts up her polluting factory, what happens then?

Well, then the insurance company is on the hook for $2M to Achmed (assuming for the moment that only Achmed bought pollution insurance). Thus, it can afford to pay Sally up to $2M to reduce her pollution and still be cash-positive. This payment could take many forms, from the installation of pollution-control equipment to a buy-out to a subsidy for under-production and so on.

If the $2M is not enough to solve the problem, then the insurance company pays Achmed the $2M and he goes and buys a new house in an unpolluted neighbourhood. However, this scenario is highly unlikely, since the insurance company would be unlikely to insure only one single person in a neighbourhood against air pollution – and a single person probably could not afford it!

So, that is the view from Achmed’s air-pollution insurance company. What about the view from Sally’s House of Polluting Paint Production? She, also, must be covered by a DRO in order to buy land, borrow money and hire employees. How does that DRO view her tendency to pollute?

Pollution brings damage claims against Sally, because pollution is by definition damage to persons or property. Thus Sally’s DRO would take a dim view of her polluting activities, since it would be on the hook for any property damage her factory causes. In fact, it would be most unlikely that Sally’s DRO would insure her against damages unless she were able to prove that she would be able to operate her factory without harming the property of those around her. And without access to a DRO, of course, she would be hard-pressed to start her factory, borrow money, hire employees etc.

It’s important to remember that DROs, much like cell phone companies and Internet providers, only prosper if they cooperate. Sally’s DRO only makes money if Sally does not pollute. Achmed’s insurer also only makes money if Sally does not pollute. Thus the two companies share a common goal, which fosters cooperation.

Finally, even if Achmed is not insured against air pollution, he can use his and/or Sally’s DRO to gain restitution for the damage her pollution is causing to his property. Both Sally and Achmed’s DROs would have reciprocity agreements, since Achmed wants to be protected against Sally’s actions, and Sally wants to be protected against Achmed’s actions. Because of this desire for mutual protection, they would choose DROs which had the widest reciprocity agreements.

Thus, in a truly free market, there are many levels and agencies actively working against pollution. Achmed’s insurer will be actively scanning the surroundings looking for polluters it can forestall. Sally will be unable to build her paint factory without proving that she will not pollute. Mutual or independent DROs will resolve any disputes regarding property damage caused by Sally’s pollution.

There are other benefits as well, which are almost unsolvable in the current system. Imagine that Sally’s smokestacks are so high that her air pollution sails over Achmed’s house and lands on Reginald’s house, a hundred miles away. Reginald then complains to his DRO that his property is being damaged. His DRO will examine the air contents and wind currents, then trace the pollution back to its source and resolve the dispute with Sally’s DRO. If the air pollution is particularly complicated, then Reginald’s DRO will place non-volatile compounds into Sally’s smokestacks and follow them to where they land. This can be used in a situation where a number of different factories may be contributing pollutants.

The problem of inter-country air pollution may seem to be a sticky one, but it’s easily solvable. Obviously, a Canadian living along the Canada/US border, for instance, will not choose a DRO which refuses to cover air pollution emanating from the US[5]. Thus the DRO will have to have reciprocity agreements with the DROs across the border. If the US DROs refuse to have reciprocity agreements with the Canadian DROs – inconceivable, since the pollution can go both ways – then the Canadian DRO will simply start a US branch and compete.

The difference is that international DROs actually profit from cooperation, in a way that governments do not. For instance, a State government on the Canada/US border has little motivation to impose pollution costs on local factories, as long as the pollution generally goes north. For DROs, quite the opposite would be true.

Finally, one other advantage to DRO’s can be termed the ‘Scrabble-Challenge Benefit’. In Scrabble, an accuser loses his turn if he challenges another player’s word and the challenge fails. Given the costs of resolving disputes, DROs would be very careful to ensure that those bringing false accusations would be punished through their own premiums, their contract ratings and by also assuming the entire cost of the dispute. This would greatly reduce the number of frivolous lawsuits, to the great benefit of all.

The idea that society can only survive in the absence of a centralized State is the greatest lesson that the grisly years of the Twentieth Century can teach us. Our choice is not between the free market and the State, but between life and death. Whatever the risks involved in dissolving the central State, they are far less than the certain destruction which will result from its inevitable escalation. Like a cancer patient facing certain demise, we must open our minds and reach for whatever medicine shows the most promise, and not wait until it is too late.

Notes
[1] For the sake of simplicity, the assumption is that there is no appeal process, which is admittedly highly unlikely.
[2] More accurately, DRO’s will be happy to deal with such people – just as car insurance companies will insure even terrible drivers – but the cost of representation will be very high.
[3] This is also why existing DRO’s will be so vigilant in rooting out corruption. Faster than any other single factor, corruption will breed competition.
[4] Naturally, the insurance company would have to deal with the problem that it is cheaper for Achmed’s neighbour to let Achmed buy the insurance, which could be dealt with by descending group rates and so on.
[5] Of course, the idea of ‘countries’ may be somewhat anachronistic by this time…

This article has been published with the author’s permission.