Archives: March, 2010

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 2001 issue of FEE’s journal, “The Freeman.” The author wishes the reader to know that the conditions he described in 2001 are no better a decade later and neither are the public policies that produced them.

Public (government) education in America costs a princely sum, and it isn’t getting any cheaper. But what taxpayers shell out for the government school monopoly doesn’t tell the whole story. What others in society must pay to correct the shortcomings of that failed monopoly is huge and a painful testimony to the need for a big dose of choice, competition, and private enterprise.

Because government schools perform on a par with government farms, government factories, and government stores in the typical socialized society, we have in America what is commonly called “remedial education.” The government school establishment doesn’t like the term because of its pejorative nature, so its minions have lately come up with their own: “developmental education.” I have nothing to cover up, so I’ll use the former.

Remedial education is what has to happen when students graduate from high school lacking basic skills in reading, writing, and mathematics. They have a diploma, but it doesn’t certify that they know anything; these days, the only thing you can be sure a diploma certifies is that lots of people paid through the nose for at least 12 years before the government was done with you. When employers and universities have to spend money to bring high school graduates up to speed—to do what the K-12 system did not do—that’s remedial education.

Getting a handle on the costs of this corrective work in Michigan was the purpose of a study released in 2000 by the Mackinac Center for Public Policy.

“The Cost of Remedial Education: How Much Michigan Pays When Students Fail to Learn Basic Skills” by education policy scholar Jay P. Greene, captured page-one headlines all across the state and shook the very foundations of the government school establishment. It made a lot of people rethink their longstanding, rarely questioned assumptions about government schooling.

First, it’s important to understand what the study did not count. It did not include the cost of college-level work that has been “watered-down” but not labeled either “remedial” or “developmental.” Talk to most university professors these days and you’ll know what I mean.

The study accounted for the expense of instructional services, but did not count expenditures on technology to accommodate the lack of basic skills. Increasingly, businesses are investing in software and gadgets to do, in effect, an end-run around workers who lack basic skills. Many businesses these days buy cash registers that make change for customers because employees can’t be relied on to count accurately. Some fast-food chains actually provide cash registers with pictures of the food items on them so adult employees who can’t read “cheeseburger” can still use them.

And finally, the study did not count the costs incurred personally by either high school dropouts or graduates who have been short-changed by the system: the later costs of tutors and self-study, and the cost of lower incomes.

This study looked only at Michigan and only at the costs of remedial education incurred just by businesses and universities in that state. At a minimum, one-third and probably something closer to one-half of all students graduating from Michigan public high schools lack basic skills. By using five different strategies for calculating these costs, Greene arrived at $601 million as a conservative estimate of what Michigan businesses and universities spend each year to remediate high school graduates lacking basic skills. That is a considerable sum on top of the $13 billion state and local governments spend on public education each year in Michigan, and yet it’s surely too low because of all the costs that were not part of the calculation.

The government school establishment is quick to suggest that the problem isn’t entirely the fault of the schools. Parents, they say, are partly to blame when they don’t prepare kids well or see that they do their homework. While it’s true that many parents have abdicated their responsibilities in the education of their children, it’s also true that many parents who do take education seriously find that they must constantly fight the public schools on matters of proper course content and academic rigor. Many parents believe the report cards their kids bring home, not realizing that grade inflation and poor teaching render the meaning of those report cards dubious. And schools, not parents, are the outfits that issue the diplomas that once implied a mastery of at least basic skills. If a student doesn’t have those skills, it’s deception when his school graduates him as if he did.

Janet Dettloff, chair of the Math and Sciences Division at Wayne County Community College in Detroit, says the remedial problem is acute and goes beyond a simple lack of knowledge: “Most of the students who come to us not only lack math and English skills, but they lack basic academic skills too. They have no idea what is expected of them at the college level. They don’t know how to take notes. They don’t read the assigned material. And many of them don’t even come to class.”

Others from both the business and university communities told the author what education reformers have long understood: government schools are doing a poor job of imparting critical thinking skills. Logic and reason have largely been supplanted by appeals to emotion. In place of rigorous analytical processes, students are asked to tell how they feel about a particular issue. The “self-esteem” craze that has swept public education essentially produces students by the boatload who don’t really know much, don’t know that they don’t know, but feel real good about their ignorance.

Getting the public to think about the high costs of remedial education is proving to be a catalyst for advancing real reform. If you favor more choice, competition, and private enterprise in education—irrespective of your preference for vouchers or tax credits or privatization and complete separation of school and state as a means to do that—the remediation problem provides new and powerful arguments: It vividly demonstrates that there are costs to not scrapping the status quo. People who are uncomfortable with the thought of change have some startling new numbers to wrestle with.

Apologists for government schooling love to spurn the arguments of reformers with the line, “You’re not being fair because, after all, public schools have to take all comers. They can’t pick and choose as private schools can.” Well, thanks to eye-opening studies like this one on the remedial problem, we know that whether public schools take everybody or not, it’s clear that atrociously high numbers of those they take are not getting educated.

by Butler Shaffer

This is chapter seven from Butler Shaffer’s recent book “Boundaries of Order: Private Property as a Social Order” (pdf-version).

Every thing that tends to insulate the individual to surround him with barriers of natural respect, so that each man shall feel the world is his, and man shall treat with man as a sovereign state with a sovereign state;—tends to true union as well as greatness.

— Ralph Waldo Emerson[1]

Because life is dependent upon the use and consumption of property, it is the nature of any property system—whether private or collective in form—to generate divisions between those who will, and those who will not, be entitled to the enjoyment of various resources. It is the entropic nature of life itself, not some belief system, that dictates such harsh realities. The competition that invariably exists among all living things for negentropic resources injects an element of conflict into the life process that cannot be wholly excised. There will also be disappointments or even hard feelings over the outcomes of such contests. Nothing in the holographic model of social systems suggests that billions of people will suddenly develop a collective mindset, and agree to allocate resources in a manner that reflects a cheerful unanimity. Such illusions of group-think are what have turned the dreams of utopian thinkers into the nightmares under which others have suffered and died. Society will become more peaceful and cooperative only as individuals transform the nature of their conduct with others. Such changes will arise marginally, at the boundaries where people transact their relationships and exchanges with one another. Like the young boy at the party chaperoned by my daughter, such individual transformations in consciousness are more likely to arise in an environment in which one’s claims to ownership are respected by others. As a means of harmonizing our needs for both self-centered activity and social cooperation, a system of private ownership allows us to experience the deeper meaning of being human.

Again, what is being proposed here is not a utopian ideology, in which humanity will miraculously march off together, in lockstep cadence, to yet another visionary millennium. Utopian thinking is premised on the delusion of universally shared preferences, as well as the idea of a fixed end state. But a creative and vibrant society is a continuously changing one, comprised of people with a multitude of varied tastes, preferences, ambitions, and skills. And as history has demonstrated, creative change is not necessarily favorable to all mankind. There were many contemporaries for whom the Renaissance or the Industrial Revolution were not beneficial. The Luddite riots, for instance, were greatly influenced by the reaction of many artisans to the threats that industrialization posed to their established economic interests.

Regardless of the form of the social or political system under which we live, it is unavoidable that each of us will be entitled to use and consume particular resources to the exclusion of everyone else. This is but a fact of existence. Again, we witness the interrelatedness of apparent opposites: both individual liberty and social order depend upon a system grounded in the division that inheres in the nature of property. But lest any be inclined to treat this only as a paradoxical feature of privately owned property, it must be noted that collective ownership fosters the same divisiveness, but without a concomitant benefit to our sense of individuality, a topic to be explored more fully in chapter nine. Whether we live in the most ideologically repressive Marxist state, with its insistence upon state ownership of all productive property, or in a stateless community of cooperative, uncoerced individuals, some method will have to be arrived at for determining the answer to the question: who gets to make decisions about what resources? Whether the process involves voluntary, marketplace negotiations among competing interests, or the arbitrary determinations of bureaucratic agencies, the use of a given item of property will be enjoyed by some to the exclusion of others.

Given the nature of property, there must be some arrangements for deciding who gets to stand or sleep or work or play within a given space and period of time, and who gets to consume what resources to the exclusion of everyone else, in our efforts to sustain ourselves. One thing is clear: all five billion of us cannot sleep in one bed at the same time, or eat the same hamburger. Whether I decide—by my act of asserting a claim to and taking control of previously unowned resources, or by purchasing the claim of another—where I am to live and sleep, or whether this decision is imposed upon me by some state bureaucrat, the inescapable fact remains that I will end up someplace, if only by default, and to the exclusion of everyone else on the planet. What this means is that any method of making such decisions will always separate the “occupier” or the “consumer” from the “non-occupier” or “non-consumer,” the best intentions of the market participants or the noblest state housing commissar to the contrary notwithstanding.

Whether property is to be controlled privately by individuals, or collectively by the state, tells us much about our existential sense of being. Are human beings ends in themselves, or only means to the ends of others? Do we regard ourselves as unique individuals, or as undifferentiated parts in some giant piece of social machinery? Are our individual interests to be considered inviolate, or subject to preemption by those who enjoy power?

Private property, as a system of social order, reflects the extent to which we are willing to acknowledge one another’s autonomy and to limit the range of our own activities. Private property is the operating principle that makes real Immanuel Kant’s admonition: “Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only.”[2] It is a tenet that not only diffuses authority in society, but helps us reconcile our seemingly contradictory natures as self-seeking individuals who, at the same time, require some form of social organization in order to survive. Such a system of social individualism reflects the paradoxical nature of reality, in which self-interest finds expression in cooperation with others.

Respecting the inviolability of the boundaries that enclose our neighbors’ property claims accords them our respect for the autonomy that is essential to any meaningful form of individual expression. In acknowledging one another’s realms of unimpeded activity, we not only confirm our sense of their self-justifying existence but, in so doing, dissolve the barriers of distrust that separate us. Only in a condition of such mutual respect can we expect to find a reasonable basis for social harmony. Knowing that our claims to immunity from trespass are likely to be respected, and being aware of the advantages of cooperation, we are more inclined to organize ourselves in peaceful and productive ways than we are when, as now, organization tends to be grounded in fear and the violent and divisive assumptions of coercive power.

The property principle operates as a buffer, separating the realm of your decision making from mine. We need to have our will free of coercion, and the inviolability of our sense of self acknowledged, before we will feel comfortable enough to cooperate with others and feel safe within groups. Our social organizations must reflect these qualities with a sense of wholeness and integrity before we can live in harmony with our neighbors, instead of the counterfeit forms offered by the state. It is only within systems in which each of us enjoys the unrestrained autonomy to act in furtherance of our individual interests that our personal and social interests can merge. When decision-making is decentralized into a system of privately owned property, individual self-interest and cooperation coalesce to maximize personal liberty and social harmony. With authority diffused into the hands of individuals, each of us enjoys control over some portion of the world within which we can pursue our interests in our own way. What we share in common are our individual needs for a sphere of action in which we can be as autonomous, spontaneous, arbitrary, self-indulgent, and as unanswerable to others as we care to be, without being subject to any coercive preemption by others. At the same time, cooperation with others is premised upon sharing or exchanging with one another that which belongs to each of us (e.g., our personal energies or our material resources).

The decentralization of decision-making that is implicit in a system of privately-owned property provides another instance of the unity that inheres in apparent opposites. By distributing authority widely rather than narrowly, private property provides a greater flexibility allowing individuals to voluntarily join with others in concentrated communities in which they can choose to associate with others in pursuit of shared interests. The Silicon Valley, artists colonies, Detroit automobile manufacturing, Hollywood film production companies, and religious communes, are just a handful of examples of the interrelated dynamics of decentralized and concentrated activity.

Whether our relationships with others will be increasingly based upon state-driven coercion, or will find a more creative expression in agreements, depends upon our attitudes about the inviolability of property claims. When we acknowledge property boundary lines, rather than statutes or court decisions, as confining the range of our personal actions, mutual respect for one another’s boundaries integrates our individual and social needs and, as a consequence, generates liberty and order in society.

One need not rely on hypotheticals or theoretical analyses to demonstrate the social, or transactional, negotiation for property claims. There is an emerging field of study in law regarding the role played by social norms—enforced informally by interpersonal pressures rather than coercive state power—in maintaining peaceful and orderly behavior. The Amish have used such methods for decades to provide for an orderly, productive, and mutually-supportive society.[3] In Northern Ireland, a nation bloodied by political and religious divisiveness, many of those desiring to end such violence have taken to publicly shaming the participants into changing their ways.[4]

There is a well-documented history of the respect accorded to property and contract rights along the overland trails in nineteenth-century America. In a harsh and uncertain environment in which there were no courts, judges, prisons, administrative agencies, or other government law enforcement officials, emigrants freely and peacefully negotiated with one another over claims to all kinds of chattels and intangible property interests. High levels of respect were accorded the property claims of both acquaintances and total strangers, even in situations in which scarcity existed. Such negotiated rights were sometimes so sophisticated as to provide for contract terms designed to benefit future wagon trains. In one such case, a wagon train had built a raft for use in fording a river. Upon completion of its crossing, the wagon train company sold the raft to the next wagon train, with the understanding that it would later be sold to subsequent trains at a price no higher than that agreed to by the original contracting parties. When a much later wagon train tried to sell the raft to its successor at a higher price than the original one, the successor was able to successfully invoke the terms of the initial contract to which neither group had been a party.[5] Such an example attests not only to the power of social respect for property interests, but to the effectiveness of information systems, even on the undeveloped frontier, in communicating terms of agreements to unknown strangers!

A more recent study involves residents of Shasta County, California and their methods for dealing with damage done to farmers’ lands by ranchers’ cattle. Some parts of this agricultural county were legally defined as “open range,” and other parts were designated “closed range” territories. In open range areas, cattlemen were lawfully free to allow their livestock to wander freely, without being legally responsible for damages that might accrue to the crops of neighboring farmers. If the farmers wanted to prevent such trespasses, they would be expected to build fences to keep out the offending cattle. In closed range areas, by contrast, the cattlemen had the legal duty to fence in their cattle, and would be liable for damages done to neighboring property owners should the fences not keep their animals in.

Those trained in purely positivist definitions of proper behavior would intuit that, if X’s cattle got off his property and wandered onto Y’s land and did damage, the question of X’s liability would depend upon which legally defined area was implicated. It did not. The residents of this county had their own understanding of the rights and obligations of property ownership totally apart from what the formal legal system dictated. It was understood, both by the cattlemen and the farmers, that if X’s cattle caused damage to Y’s property, X was obligated to compensate Y for his loss, even though, in an open range district, he would not have any legally enforceable duty to do so. Because such expectations were contrary to formal legal requirements, the residents developed their own informal, nonviolent ways of enforcing these community standards upon the occasional recalcitrant cattleman. Subtle methods of communication, informal accounting practices, and economic inducements, helped provide the social pressures to keep this system working.[6] These examples illustrate how peaceful, long-term systems of order can be voluntarily maintained, not only in the absence of state rules, but in spite of them.

Nowhere was the order produced through mutual respect for property claims more vivid than in the early gold mining camps in the western states. So prevalent was the regard for one another’s property interests that miners’ gold, bank deposits, and even gambling stakes could be freely left in the open by their absent owners without fear of loss. One early scholar observed:

The miners needed no criminal code. It is simply    and literally true that there was a short time in California, in 1848, when crime was almost absolutely unknown, when pounds and pints of gold were left unguarded in tents and cabins, or thrown down on the hillside, or handed about through a crowd for inspection. . . . Men have told me that they have known as much as a washbasinful of gold-dust to be left on the table in an open tent while the owners were at work in their claim a mile distant. . . . There was no theft, and no disorder; few troublesome disputes occurred about boundaries and water-rights.[7]

A writer from that period, Sarah Royce, stated: “I had seen with my own eyes, buckskin purses half full of gold-dust, lying on a rock near the road-side, while the owners were working some distance off. So I was not afraid of robbery.”[8] Based upon his personal experiences, an Idaho attorney from this period declared that “life was safe, property was safe” in the mining camps.[9]

Although another student suggested that widespread honesty among the miners was brought about by a respect for “the summary justice likely to be dispensed by the crowd,”[10] such presumed fears did not seem to dissuade the criminal types who swarmed into California following the discovery of new gold fields in 1849. The divergent behavior of the early miners and the plunderers was more likely due to dissimilarities in character of the two groups, as is reflected in the observation of one contemporary that the latter group “were a different kind of people; more of the brute order.”[11] Such behavior differences demonstrate, as Carl Jung and others have insisted,[12] that the quality of life in any society is the consequence of the character of the people who comprise it—that social order is a product not of the fear of punishment, but of the respect neighbors accord one another’s interests. In our dealings with the state, we do not negotiate from the position of an uncoerced free will, but are compelled by threats of violence to our interests. In contrast, our informal, social negotiations are premised upon a mutuality of respect for our individualities.

Such examples provide evidence of how individual liberty, social harmony, and responsible behavior are measured by the respect we accord to one another’s property interests. Likewise, tyranny, social disorder, and irresponsible conduct derive from property violations, which become formalized as the modus operandi of all political systems.

If we are to learn to live responsibly, we must begin by understanding that the “wrongs” others perpetrate upon us, and from which we desire protection, are nothing more than trespasses to our property interests. A peaceful social order consists, in major part, of men and women conducting their affairs without causing injury to one another, an end that requires us to focus our attention on understanding the social implications of property. Such crimes as murder, rape, assault and battery, and kidnapping, are not—despite the pronouncements of government officials—wrongs committed against an amorphous, collectively-defined “society,” but violent trespasses against the property interest the victim has in his or her person. When we declare such actions to be “crimes against the state,” we are implicitly recognizing the state’s claim to the ownership of our person.[13] Likewise, acts of burglary, theft, embezzlement, arson, forgery, and shoplifting, are not offenses against the state, even though the state brings the criminal action against the accused, but invasions of the real or personal property interests of an owner.

It is the distinction between crimes in which there are property trespasses, and those in which such trespasses do not occur, that constitutes the difference between “victimizing” and “victimless” crimes (once again, a failure to heed Pynchon’s warning about the adverse consequences of asking the wrong questions). So accustomed have we become to blurring the meaning of property in our lives that we have reduced the distinction to a vague abstraction that begs the question of what kinds of acts these are. Stated in property terms, a victimless crime (e.g., drug use, gambling, prostitution, pornography, smuggling, etc.) is one in which the state, for reasons of its own, chooses to criminalize conduct that would not otherwise amount to a property trespass against another. Criminalizing such conduct, in fact, violates the property interests of the purported criminal as well as his customers by depriving them of the legal right to exercise control over their own property.

The same analysis can be applied to other types of injuries. The tort of injuring another through the negligent operation of an automobile, for instance, amounts to a trespass to the boundaries of the victim, as well as to other interests (e.g., the victim’s car) damaged by the defendant’s act. The defendant’s wrong was not that he had been driving in a negligent or reckless manner—even though such behavior may have produced the injury—but that he had failed to control his property in such a way as to prevent a trespass upon the interests of his victim. A world organized on the principle of the inviolability of property interests is a world that reduces injuries to others. Responsible behavior is thus encouraged, as the scope of one’s liberty to act ends at his or her property boundaries.

Likewise, a breach of contract action arises out of an alleged violation of a property interest. A and B enter into an agreement by which A is to sell B her claim to the ownership of a new television set, and B agrees to pay A $500 for the set. When it comes time to perform, A delivers B a used television set. Because a contract is nothing more than an agreement to transfer ownership claims, B has not received the ownership claim for the agreed upon property.

Most of our societal problems arise from a failure to stay out of one another’s way. Schools interfere with children’s learning, not only by thwarting their wills, but in replacing intellectually significant learning with politically-based indoctrination; government agencies impede our lives by economic regulations that increase production costs which, in turn, generate higher prices and increased unemployment and, as a consequence, foster greater tendencies toward concentration that accelerate entropic processes;[14] state-licensed medical professions and the Food and Drug Administration dictate what health care services we may lawfully select, and what treatments and medications we may consume; governments hinder the free expression of ideas and lifestyles; and countless coveys of people-pushers demand legislation mandating standards of personal behavior ranging from child-rearing practices to smoking, to the kinds of food and other substances we may ingest, to our safety, to our bodily weight, to how we speak to one another, to whether we can own guns, and other practices that are regularly added. This madness has gone so far as to produce a bill in the California legislature making it a crime punishable by as much as a one-year prison sentence to spank a child.[15] Whether as parents, or in social relationships, or in efforts to make the world better, we insist on getting in one another’s way because we have not learned that most important of social graces: respecting the inviolability of one another’s boundaries. Like young puppies, most of us are not housebroken. We babble our bromides about the insignificance of property principles, because to do otherwise would limit our ambitions to control the lives of others and reveal our mutual contempt for one another’s independence.

Such attempts to micromanage the daily lives of others seem to be part of the continuing effort by adherents to the vertically-structured social model to maintain its established position. As suggested earlier, the continuing process of change that is bringing about decentralized, horizontal networks poses a threat to members of the institutional order who are disinclined to participate in the transformation. To such people, social systems that run themselves without formal direction and superintendence is not only disturbing to their ambitions for power, but represents a form of fanciful thinking. With an effort that approaches a kind of religious reaffirmation of the old order, the statists resort to a constant repetition of their centralist, coercive methods at ever more detailed levels of human behavior. Such conduct is reminiscent of the behaviors Abraham Maslow saw exhibited by brain-injured patients who, in their repetitious patterns “manage to maintain their equilibrium by avoiding everything unfamiliar and strange and by ordering their restricted world in such a neat, disciplined, orderly fashion that everything in the world can be counted upon.”[16]

Much like Maslow’s patients, statists see their world of centralized power structures being enervated by life forces over which they are losing control, and imagine that the rote repetition of familiar patterns will reconfirm its vibrancy. At an unconscious level, perhaps, it may be sensed that if the ancien regime is undergoing its decline and fall, the dying model might be revivified—or at least its vital signs made to so appear—by the proliferation of new, centrally-imposed restraints upon the lives of unfettered men and women. Such obsessive efforts seek to reconfirm the validity of an antiquated system that no longer satisfies people’s expectations. War, of course, is the most dramatic expression of politically-structured violence as well as being an undertaking that brings fearful people back into a herd mentality, which is why it has become the cornerstone of modern statist efforts to preserve power over people. Perhaps this is why expansions of the war system have been such frequent precursors to the collapse of previous civilizations.

Because the power of the state directly correlates with the extent to which it usurps control over privately-owned property, political and legal systems have little interest in generating a fundamental respect for property principles. As we have seen, alternative rationales (e.g., “health,” “safety,” “offenses against the state”) are offered as the basis for resolving wrongs or disputes that would otherwise be subject to a property analysis. When “reasonableness,” the “balancing of interests,” “fairness,” “justice,” and other amorphous vagaries become substituted for an owner’s objections to a more clearly defined trespass, it becomes quite easy for people to call upon the state to force a neighbor to cease doing what a property principle would otherwise allow him to do.

This is how the violation of property interests underlies most of our social difficulties. Conflict arises from the failure of people to effectively identify or to respect property boundaries. When we regard one another’s ownership interests as inviolable, interpersonal conflicts do not arise. But as we have seen, every act of the state involves a forcible intrusion upon the interests of property owners. Whether such governmental action takes the form of regulations that restrict an owner’s control of his or her property, or forcibly transfers ownership claims to others (e.g., eminent domain), or amounts to outright confiscation (e.g., taxation), actions by the state invariably produce conflicts between owners who seek to control their property for their own ends and non-owners who use state power to force owners to conform their behavior to their purposes. The state, whether through statutory enactments or judicial holdings, thus introduces contradiction and conflict into society. The peaceful and harmonious relations that would otherwise follow from a respect for property claims, collapse into a formal system of predation, with people organizing into groups to achieve what would otherwise have to depend upon contracts among owners.

Intellectuals, most of whom have their own preferences for political intervention into people’s lives for redistributive purposes, have not been very supportive of a system that would extend liberty into the realm where people most need it: the conduct of their daily lives. In the world of ideas, where intellectuals are most protective of the inviolability of their boundaries, most accept, as an expression of the essence of liberty, the principle erroneously attributed to Voltaire: “though I disapprove of what you say, I will defend to the death your right to say it.” But why are such sentiments so narrowly confined to intellectual matters, and rejected when applied to the more mundane actions that are central to and comprise so much more of our daily lives? How much freer would both our intellectual and material lives be if we were to modify the aforesaid proposition by telling our neighbor: “though I disapprove of how you conduct your life, as long as you do not violate the property boundaries of others, I shall defend to the death your right to act as you choose”? We might then move beyond the empty bromides by which we feign “love” for our fellow humans while, at the same time, seeking ways to force them to conform to our expectations.[17]

Social order arises not so much from learning to love our neighbor, as in learning to respect him. We do not exhibit such respect when, in order to accomplish our purposes, we insist upon violating his will regarding what is his to control. Neither do our professions of love for others mean much when we are prepared to deny others their existential individuality. There is nothing quite so destructive of social harmony as arrogant, self-righteous men and women mobilizing against the tastes and lifestyles of their neighbors.

When we insist upon the use of legalized force to address what we perceive as social problems, we not only subvert the conflict-resolving role property plays throughout much of nature, but we foreclose any alternative practices. The assumption that only coercive intervention by the state is worthy of practical consideration in such matters ignores the role of informal, interpersonal methods of resolving our differences with one another. Worse still, our resort to force sends a message of contempt to our fellow beings whose purposes we find incompatible with our own, further alienating ourselves from one another and fostering more conflict. We have too often failed to heed the warning of Emerson: “Good men must not obey the laws too well.”[18] We have also overlooked the value of our own life experiences for lessons in resolving disagreements without having to resort to formalized coercion.

As long as we live in society, we will always have a need for standards of conduct, a condition necessitated by the property question. If the inviolability of property boundaries is a civilizing standard that makes for a free, creative, and orderly society, the question arises: how is such a principle to take form in the interactions of people? Historically, we have too often turned to the state to have rules of conduct generated by fiat and enforced by coercive means. But when force is employed, property interests are at once violated. The state becomes the very problem it had, in theory, been created to prevent.

But what if rule-making and enforcement is confined to property owners themselves, beginning with the self-ownership principle? What if our respect for the inviolability of property claims began with the recognition that each person was the sole authority over their respective interests, and was obligated to no one else unless he or she had voluntarily chosen to be bound? What if we recognized that, if I wanted to enjoy some property interest of yours, I would have to enter into a contract with you to do so?

This approach raises the question: what if one party breached the contract, or intentionally or unintentionally trespassed the interests of another? How would the inviolability principle be enforced? Would it be possible to do so without the use of coercion, whether employed by the state or the offended individual? Is it possible to use boycotts, ostracism, marketplace pressures, or other social means—which do not forcibly deprive the offender of his property interests—to persuade him to rectify his wrong? Might we also resort to contracts of insurance to compensate us for our losses? Because we are so unaccustomed to thinking in such non-coercive ways, and regard rule-breaking as an invitation to resort to force, we are apt to dismiss these suggested alternatives as “impractical.”

Albert Einstein informed us that “problems . . . cannot be solved by thinking the way we thought when we created them.”[19] If our prior learning leads us to react with an angry “no” to the question of seeking alternative practices, let us remember that such prior learning is what is destroying us! If we are to resolve our problems before they consume us, we might begin by taking the responsibility that is inseparable from decision-making control over our lives. To the degree we insist upon directing our own conduct, we hasten the decline of the prevailing model of state authority. In the course of doing so, we may actually generate—rather than just think or talk about—a system of rule-making and enforcement of horizontal dimensions with no hierarchy of authority, and in which all rules arise through the peaceful means of contract, custom, and manners.

As suggested earlier, the property concept qualifies as an informal system of manners, a way of respecting the worthiness and inviolability of others and, in reflection, ourselves. The word “manners” has a common ancestry with the word “manage,” meaning “to control and direct,”[20] which has property connotations. Perhaps our more distant ancestors understood what we have chosen to ignore at the cost of the conflict and violence that permeates modern society: namely, that proper and well-mannered behavior is intrinsically related to the decision making of property owners.

Each of us experiences trespasses in our life, although mostly in de minimis ways. A neighbor’s dog makes a mess in our yard, or barks incessantly at night; a teenager annoys us with a “boom-box” turned up as loud as it will play; or we are bumped and jostled as we get onto a subway or elevator. We may feel anger at the disrespect shown to us by the other person, although an apology—which acknowledges our claim to not be trespassed—usually subdues our reaction. Once again, we see the role played by manners in giving respect to individual boundaries in situations, usually of a transient nature, in which property interests are not clearly defined. Unfortunately, in a culture in which people have internalized the idea that “property rights are not absolute,” an appeal to manners often avail us not. We tend to become more confrontational, looking upon every such trespass, no matter how trivial, as a call to more aggressive responses.

Part of learning to live as mature individuals in society consists in our willingness to absorb unintended and relatively insignificant trespasses by others, without developing a self-righteous need for retribution. Implicit in failing to do so is much of what we see in our current world: the breakdown of harmonious interconnectedness as so many treat every slight or encroachment as a cause for angry reaction if not a lawsuit. But how much of such a reflexive response is occasioned by a widespread disrespect for property interests perhaps leading one who has been subject to even a relatively minor intrusion to overreact to its significance?

Because the control of private property and the corruption of language are central to the functioning of political systems, it is not surprising to discover the property concept twisted in ways that make it increasingly difficult for people to distinguish trespasses by others from crude, ill-mannered, or offensive behavior that does not result in a trespass. Herein are found the seeds of “political correctness.” More and more of us seem prepared to regard repulsive and contemptible language and behavior as we would a physical trespass. In some instances, there is a willingness to impose harsher penalties upon vulgar or abhorrent conduct than upon physically intrusive offenses. Expressions of racial, ethnic, or gender-based hatred or other forms of bigotry; motorists’ “road rage”; or ill-chosen words that do not comport with fashionable attitudes, are often met with demands for punishment that exceed any injury-in-fact.

Personally offensive behavior can generate reactions that, to the recipient, may be more upsetting than a physical trespass. One person may make vulgar comments, or walk down a public street in the nude, greatly annoying others, even though no property violation occurs. It is in such instances that manners have particular application, with non-violent social pressures— such as ostracism being a more effective means of reforming rude behavior than resort to governmental trespasses upon the offending person.

The distorted thinking that conflates trespassing and non-trespassing behavior has reduced the capacity for making critical distinctions in other areas. Thus, at least one prominent feminist has written that “intercourse”—the means by which reproduction takes place among most species—is a “violation of boundaries” of women, who are “forced” to submit to “those who dominate them.” She proceeds to analogize women, politically, to “occupied people.”[21] Likewise, school administrators have found themselves unable to distinguish between a child bringing a cough drop to school from one bringing heroin; airport security agents periodically bring ridicule upon themselves by failing to differentiate a genuine weapon from fingernail clippers or other harmless items; while the criminal justice system continues to insist that no important distinction exists between victimizing and victimless crimes. It is the essence of intelligence to be able to discriminate, i.e., to make relevant distinctions between and among various facts and principles and alternative courses of action. Not that many years ago, it was considered a compliment to tell another that he or she had a “discriminating” mind. Thanks to the politically generated corruption of language and thought, such a statement now stands as an accusation, a generic offense to human decency!

Discrimination is essential to all intelligent thinking and behavior, and depends upon one having clear boundary lines, worthy of the respect of rational minds, that define a speaker’s basis for making distinctions. It has been the failure to discriminate amongst the various standards by which people do discriminate that produces so much of our social confusion. Is a property owner discriminating—on grounds of which we disapprove—against another being allowed to enjoy access to his property, or is the state doing so when it compels an owner to act in accordance with standards it has mandated? Because the state enjoys a monopoly on the use of force, it has long been thought that its discriminatory acts ought to be kept to a minimum (e.g., criminal statutes that treat murderers, rapists, and thieves differently than non-criminals). But if an owner is the absolute authority over what he or she owns, upon what basis, other than a trespass, can another claim a forceful liberty to enter against the owner’s will? Why should a private owner be precluded from denying others the enjoyment of his or her property on any grounds whatever? The intolerance exhibited by one who refuses to associate with those of another race, religion, or lifestyle, is more than matched by others who refuse to tolerate such a bigoted person’s decisions regarding his or her own property. As suggested earlier, we pay too little attention in both thought and behavior to the importance of boundary lines. This makes it easy for some to conclude that if a given opinion or act of another is sufficiently offensive, even though not amounting to a trespass, it may be suppressed or punished by the state.

Smoking in public (e.g., in restaurants, airliners, place of employment) is another issue that can most appropriately be seen as raising not health, but trespass questions. In popular and political discussions on this topic, the issue is usually framed in terms of the smoker’s freedom to smoke and the nonsmoker’s right to be free of unhealthful substances. Rarely is the question raised as to the restaurant owner’s liberty of deciding whether to allow smoking or not. If the restaurateur has a stated policy of permitting people to smoke in his establishment, a customer who is aware of this fact would seem to have contractually agreed to the possibility of breathing unwanted smoke, thus eliminating any trespass claim. When the question is posed in such abstract ways, without any clear lines of definition and limitation, one can understand why the courts and legislative bodies respond by trying to “balance” such “competing” interests. Again, if we rephrase the question, we discover that conflict has been generated because the property principle has been abandoned. If reframed as a property trespass issue, the amorphous and uncertain nature of the invasion is eliminated. As between a smoker and nonsmoker there are no interests to be “balanced” when one person trespasses the boundaries of another.

Suppose you are having dinner in a restaurant, and a patron at the next table begins smoking a cigarette. Her smoke enters your lungs, gets embedded in your hair and clothing, and causes your eyes to water. You object to this. It should be evident that this smoker has committed a trespass upon you. Whether or not second-hand smoke constitutes a health hazard, your claim to be free from such unwanted invasions of what is yours, i.e., your body and clothing, should be a sufficient basis for your objection. For the smoker to suggest that her freedom to smoke encompasses the right to commit such trespasses is to fail to understand that liberty has a principled meaning only insofar as it is grounded in, and defined by, a mutual respect for one another’s property boundaries. If an issue of this sort should come to court—and, in our confrontational society it probably will—the only inquiry necessary for a court to make would be a factual one: did the trespass occur? There would be no room for the court to step in and start “assigning” and “balancing”— or, more accurately, confiscating and reassigning—the property rights of individuals.

The same analysis could be applied to what was, a number of years ago, one of the more controversial issues in California: the aerial spraying, with malathion, of entire cities, for the purpose of trying to prevent the spread of the Mediterranean fruit-fly. Those who objected to having their bodies, homes, cars, plants, and pets sprayed with this pesticide had to rest their arguments on presumed health problems that might arise. In so doing, the burden of proof shifted to them to show the harm that would result from such spraying, a burden they were unable to meet. Relatively few people saw this as a property trespass issue to be resolved only by a determination of whether an invasion had occurred, not the degree of physical harm suffered by the owner, or whether he or she was being “unreasonable” in making an objection. At the same time, the State of California exhibited its usual confused commitment to mixed premises: in spite of tens of thousands of people expressing strong opposition to such spraying, the state, more attuned to benefiting commercial and agricultural interests, continued to spray. In a clear demonstration of where human beings rank in the state’s hierarchy of concerns, the government halted the spraying in a region in which kangaroo rats resided.[22]

One sees, in such examples, how the elements of “boundary,” “claim,” and “control” coalesce to provide a property-based analysis of political issues. Who has the ultimate authority (“claim”) to exercise decision-making (“control”) over any given item of property (“boundary”)? How we answer that question determines whether society will be characterized by peaceful relationships or by conflict.

Politics is the mobilization of property trespasses and despoliation. All political quarrels come down to a failure to identify and/or respect property boundaries. Nowhere is this more evident than in such an emotionally charged issue as abortion. This question illustrates, as clearly as any issue, the confusion and conflict that arises from asking the wrong questions. By failing to address the issue in terms of property principles, each side has contributed to an irresolvable—and politically advantageous—conflict.

The abortion debate has pitted the “pro-choice” advocates against “pro-life” supporters, abstract concepts whose inconsistent application further clouds any clear meaning. Most “pro-choice” supporters are nonetheless disposed to deprive people of their right to make decisions in other areas (e.g., to discriminate against others on a variety of matters, or to support various governmental programs), while most “pro-life” defenders have proven themselves eager supporters of wars and capital punishment. It should not surprise us that such utter confusion has generated much heat but little light in our world.

In an effort to obscure the lethal nature of abortions, and thus make the practice less disturbing to the otherwise humane sentiments of its proponents, most people allow the state to define who is and who is not a “person.” History should remind us of the dangers inherent in conferring such authority upon political systems. The American government defined the rights of slaves and Indians out of existence, while greatly restricting those of married women; and twentieth-century tyrannies such as Nazi Germany, China, and the Soviet Union defined whole categories of people out of legal existence. Such historic experiences should inform our intelligence before we become enthusiasts for current listings of non-persons.

It is unfashionable to state, albeit undeniable, that from the moment of conception onward, an embryo is a living being with a distinct DNA of its own, a DNA that derives from, but is other than, that of either parent. Contrary to the reductionists who would debase the embryo as the functional equivalent of a wart or a cyst, it is a genetically unique individual, a fact known to even a first year biology student. Nor should one accept, without examination, the argument that an embryo is still in a “developmental” stage and is, therefore, not a “person.” Because of the negentropic nature of life, each of us is in a continuing state of development up until the time of our death. I continue to write, into my seventies, and have recently taken up painting, one way of expressing the changes that continue to occur within me throughout my life. This characterization of embryos by the pro-abortion advocates is but another manifestation of a mechanistic vision of nature.

Attributing “self-ownership” to an embryo may pose some difficulties, however, since it is unlikely that embryos have ever consciously asserted such claims. The same can be said, however, of any infant or, for that matter, most adults: who, among us, has ever made a conscious declaration to be a self-owner? Have you or I done so, if we continue to acknowledge the rightful authority of the state to regulate, tax, and conscript us into its service? When I ask my first year law students whether they own themselves—and whether they understand the implications of whatever answer they give—most sit in stunned silence at the audacity of such an existential question. Thus, if a claim of self-ownership is dependent upon an individual giving conscious voice thereto, the “right” to kill an infant or, perhaps, an adult, could be as justified as the killing of an embryo. It is more plausible, perhaps—and much safer—to presume a claim of self-ownership derived from the self-sustaining, self-controlling actions of each individual, whether embryo or octogenarian.

If we are prepared to acknowledge self-ownership for any genetically identifiable human being, an intentional abortion amounts to an invasion of the embryo’s property interest, and the mother and her doctor have trespassed upon that interest. On the other hand, the mother is also a self-owning being, and is entitled to not have her property boundaries trespassed by others (e.g., the state). The pro-abortion advocate would likely argue that the embryo is a trespasser upon the woman, but as almost all pregnancies are occasioned by a volitional act of the woman—and never as the result of a conscious entry by the embryo—such a contention would fail. But even if the embryo were the product of a rape—a non-volitional act by the woman—the embryo is not the wrongdoer but an unintended consequence of the crime. He or she would be, at worst, an unintentional trespasser, to which the question must be answered as to whether a property owner may rightfully take the life of a trespasser. From a property perspective, we are thus left with the seemingly anomalous situation that the embryo, as a self-owning person, is entitled to not be aborted, while the mother, also a self-owning person, is entitled to not have the state trespass upon her in order to restrain the exercise of her decision-making. When abortion becomes a political (i.e., divisive) issue, devoid of respect for property principles, different groups become polarized out of a failure to refine the question. For the state to intervene in the matter in order to enjoin the abortion would constitute a trespass to the mother.

If both the embryo and the mother are persons with separate but necessarily interconnected property interests, and the state’s intervention would amount to a trespass of the mother’s boundaries, does this mean that, in a society that fully respected property interests, a mother would be free to kill this other person? If the answer is “yes,” as it applies to a pregnant woman, would it also apply to the rest of us: that we are free to kill—or, as a friend of mine used to remind me, free to try to do so— another person? Precisely! We are free, not because the state, or a religion, or a constitution, or an ideology tells us that we are, but because each one of us is in control of our energies and conduct. How each of us chooses to exercise our freedom determines not only the content of our own character, but whether we will live in peace or conflict, cooperation or confrontation, with others. Here again, however, we find ourselves confronted by the fear of being responsible for our own liberty—Kaufmann’s “decidophobia”—that causes so many of us to look to constituted “authorities” to render moral decisions for us when we are faced with irresolvable conflicts. As with all property questions, who will make decisions about what?

Social order arises when the values of “peace” and “liberty” are integrated through respect for the inviolability of property boundaries. When social issues are severed into mutually-exclusive categories such as “pro-life” and “pro-choice,” the foundations of political division are set in place. Groups compete for control of the coercive machinery of the state in order to enforce their visions upon others. When our thinking is free of conflict and contradiction, however, we are able to discover that “pro-life” and “pro-choice” imply one another. Liberty, exercised within the self-limiting nature of property ownership, is the condition in which individuals are able to make the choices upon which the quality of their lives depend.

Our daily newspapers are filled with abundant empirical evidence that each of us is free to engage in all kinds of harmful actions, in spite of numerous laws to the contrary. To say that we are free to commit injuries upon others does not imply, however, that we are entitled to do so, or that such acts are justifiable. Recalling the common origins of the two words, “proper” behavior is that which a “property” owner is entitled to make, i.e., decision-making within the boundaries of what one owns. If we are to be self-owning, self-controlling beings, we must be prepared to acknowledge that our boundaries serve not only to exclude the intrusions of others, but to circumscribe the range of our actions. Without the concept of property boundaries to define the limits of our actions, our claims become, quite literally, boundless. The propriety of our behavior then becomes measured by the constantly shifting fashions of legislation, public opinion polls, cultural tastes, and prejudices formed by unconscious forces.

Perhaps it is time for us all to walk away from both the practice and the self-righteous thinking that presumes the legitimacy of the power of the state to usurp both control over and responsibility for our actions. As people become aware that their responsibility extends to the full range of their actions, and can neither be limited nor increased by the dictates of political fashion, perhaps they will discover their own way to responsible behavior. If not, no amount of political maneuvering or religious/ideological commitment seems capable of forestalling the entropic fate of our civilization.

Herein lies the challenge for all who understand the importance of human freedom: am I able to insist upon the full range of my authority over my own life and, at the same time, respect the inviolability of the boundary lines that distinguish my authority from that of my neighbors? It is the nature of political systems to be dominated by short-term thinking that pays little attention to transcendent principles having no immediate, observable consequences. Violating the will of individuals concerning what is theirs to control is the ultimate default response by the state. Such a mindset is not only incapable of sustaining a productive society but, worse, the failure to see the interconnected nature of respect for property boundaries helps to destroy civilized societies. This is what living in a condition of liberty is all about: making our own choices and accepting the responsibility for those choices, not by participating in state-induced deceptions designed to conceal the consequences of our self-indulgent actions.

Notes

[2] Immanuel Kant, Critique of Practical Reason and Other Writings in Moral Philosophy, trans. and ed. by Lewis White Beck (Chicago: University of Chicago Press, 1949), p. 87.

[3] See, e.g., John A. Hostetler, Amish Society, 3rd ed. (Baltimore: The Johns Hopkins University Press, 1980); Steven M. Nolt, A History of the Amish (Intercourse, Penn.: Good Books, 1992); Donald B. Kraybill, ed., The Amish and the State (Baltimore: The Johns Hopkins University Press, 1993).

[4] See, e.g., David Barash, The Survival Game: How Game Theory Explains the Biology of Cooperation (New York: Macmillan, 2003), p. 98.

[5] John Phillip Reid, Law for the Elephant: Property and Social Behavior on the Overland Trail (San Marino, Calif.: The Huntington Library, 1980), pp. 300–01.

[6] Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, Mass.: Harvard University Press, 1991).

[7] Shinn, Mining Camps, pp. 111, 112; also quoted in Vardis Fisher and Opel Laurel Holmes, Gold Rushes and Mining Camps of the Early American West (Caldwell, Idaho: The Caxton Printers, Ltd., 1968), p. 275.

[8] Fisher and Holmes, ibid.

[9] Ibid.

[10] J.D. Borthwick, Three Years in California, Joseph Gaer, ed. (Edinburgh and London: William Blackwood & Sons, 1857); quoted in Fisher and Holmes, ibid., p. 276.

[11] Daniel Knower, The Adventures of a Forty-Niner (Albany, N.Y.: Weed-Parsons Printing, 1894), quoted in Fisher and Holmes, ibid., p. 276.

[12] C.G. Jung, Psychological Reflections (Princeton, N.J.: Princeton University Press, 1970), p. 178.

[13] Lest any doubt that government regulation amounts to the state’s claiming an ownership interest in people, consider Justice Harlan’s dissenting opinion in Lochner v. New York (198 U.S. 45 (1905)), a case striking down state legislation limiting the number of hours employees could work in bakeries. In Harlan’s view, long hours “may endanger the health and shorten the lives of the workmen, thereby diminishing their physical and mental capacity to serve the state and to provide for those dependent upon them” (p. 72; emphasis added).

[14] See, Walter Adams, “The Military-Industrial Complex and the New Industrial State,” American Economic Review 58 (May, 1968): 652–65; reprinted in Ralph Andreano, ed., Superconcentration/Supercorporation (Andover, Mass.: Warner Modular Publications, 1973), R-337-2; Murray L. Weidenbaum, Government-Mandated Price Increases: A Neglected Aspect of Inflation (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1975).

[15] San Francisco Chronicle, January 21, 2007, p. E-7.

[16] Abraham Maslow, “A Theory of Human Motivation,” in Psychological Review (1943): 370ff.

[17] If we were to apply such thinking to the realm of learning with as much unfocused facility as we do to economic matters, we would quickly see the absurdity of such ideas. Does knowledge come in some fixed quantity, with the more learned having garnered an “unfair” share at the expense of the unlearned? Perhaps it is the function of the government school system to “redistribute” the ignorance, to the end that all can be equally unknowledgeable and operate from a “level playing field.” Were the creative geniuses of human history—Aristotle, Copernicus, Shakespeare, Francis Bacon, Dante, Lao Tzu, Newton, Beethoven, the Curies, Leonardo da Vinci, Einstein, Blake, George Washington Carver, Edison, to name but a few—nothing more than pillagers, “robber intellects,” who stole from some common storehouse of human inventiveness and insight?

[18] Ralph Waldo Emerson, Politics, published in 1844 and included in The Selected Writings of Ralph Waldo Emerson, p. 427.

[19] Alice Calaprice, ed., The Expanded Quotable Einstein (Princeton, N.J.: Princeton University Press, 2000), p. 317.

[20] Partridge, Origins, p. 378; Webster’s Third New International Dictionary, p. 1372.

[21] Andrea Dworkin, Intercourse (London: Secker & Warburg, 1987), pp. 122–24.

[22] Los Angeles Times, May 3, 1990, Sect. B, p. 12.

This excerpt has been published with the permission of the Ludwig von Mises Institute.

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 May 2005 issue of FEE’s journal, “The Freeman.”)

As a former university professor, I read thousands of student-authored essays through the years — sometimes joyously, but probably just as often, painfully.  Occasionally, the process of researching and writing exerted significant influence over a student’s future interests, thinking and perhaps even behavior.  But of all the student essays ever written anywhere, I doubt that any had as profound an effect on its author and the world as one that was penned 220 years ago at Cambridge.

Throughout Britain, the annual Latin essay contest at Cambridge was known and the honor of winning it coveted.  The topic for the 1785 competition was prompted by a horrific human tragedy a few years before: Near the end of a long voyage from Britain to Africa to the West Indies, the captain of the British slave ship “Zong” had ordered his crew to throw 133 chained black Africans overboard to their deaths.  He reckoned that by falsely claiming the ship had run out of fresh water, he could collect more for the “cargo” from the ship’s insurer than he could fetch at a slave auction in Jamaica.

No one in the Zong affair was prosecuted for murder.  A London court ruled the matter a mere civil dispute between an insurance firm and a client.  As for the Africans, the judge declared their drowning was “just as if horses were killed,” which, as horrendous as that sounds today, was not a view far removed from the conventional wisdom that prevailed worldwide in 1785.  Slavery, after all, was an ancient institution.  Even to this day, the number of people who have walked this earth in bondage far outnumbers those who have enjoyed even a modest measure of liberty.

Moved by the fate of the Zong’s victims and the indifference of the court, the university vice-chancellor in charge of selecting the topic for the 1785 contest at Cambridge chose this question: “Anne liceat invitos in servitutem dare?” – Is it lawful to make slaves of others against their will?”

Enter a man who, with a handful of compatriots armed only with the printed and spoken word, would clutch the public by the neck and not let go until it consigned slavery to the moral ash heap of history.

Born in Wisbech in 1760, Thomas Clarkson was a 25-year-old Cambridge student who hoped to be a minister when he decided to try his luck in the essay contest.  Slavery was not a topic that had previously interested him, but he plunged into his research with the vigor and meticulous care that, with the passion that his findings later sparked, would come to characterize nearly every day of his next sixty-one years.   Drawing from the vivid testimony of those who had seen the unspeakable cruelty of the slave trade first-hand, Clarkson’s essay won first prize.

What Clarkson had learned wrenched him to his very core.  Shortly after claiming the prize, and while riding horseback along a country road, his conscience gripped him.  Slavery, he later wrote, “wholly engrossed” his thoughts.  He could not complete the ride without making frequent stops to dismount and walk, tortured by the awful visions of the traffic in human lives.  At one point, falling to the ground in anguish, he determined that if what he had written in his essay was indeed true, it could lead to only one conclusion: “it was time some person should see these calamities to their end.”

Adam Hochschild, author of a splendid recent book on the history of the campaign to end slavery in the British empire titled “Bury the Chains,” explains the significance of those few minutes in time:

“If there is a single moment at which the antislavery movement became inevitable, it was the day in 1785 when Thomas Clarkson sat down by the side of the road at Wades Mill . . . . For his Bible-conscious colleagues, it held echoes of Saul’s conversion on the road to Damascus.  For us today, it is a landmark on the long, tortuous path to the modern conception of universal human rights.”  More than two centuries on, that very spot is marked by an obelisk, not far from London.

No man can rightfully lay claim, moral or otherwise, to owning another.  That became Clarkson’s all-consuming focus.  Casting aside his plans for a career as a man of the cloth, he mounted a bully pulpit and risked everything for the single cause of ending the evil of slavery.  At first, he sought out and befriended the one group — the Quakers — who had already gone on record on the issue.  But the Quakers were few in number and were written off by British society as fringe weirdos.  Quaker men even refused to remove their hats for any man, including the king, because they believed it offended an even higher authority.  Clarkson knew that anti-slavery would have to become a mainstream, fashionable, grassroots, educational effort if it had any hope to succeed.

On May 22, 1787, Clarkson’s organizational skills brought together twelve men, including a few of the leading Quakers, at a London print shop to plot the course.  Alexis de Tocqueville would later describe the results of that meeting as “extraordinary” and “absolutely without precedent” in the history of the world.  This tiny group, which named itself the Committee for the Abolition of the African Slave Trade, was about to take on a firmly established institution in which a great deal of money was made and on which considerable political power depended.  The broad public knew little about the details of slavery and what it did know, it had accepted for the most part as perfectly normal since time immemorial.

“Looking back today,” writes Hochschild, “what is more astonishing than the pervasiveness of slavery in the late 1700s is how swiftly it died.  By the end of the following century, slavery was, at least on paper, outlawed almost everywhere.”  Thomas Clarkson was the prime architect of “the first, pioneering wave of that campaign” (the movement in Britain) which Hochschild properly describes as “one of the most ambitious and brilliantly organized citizens’ movements of all time.”

William Wilberforce is most often given the lion’s share of the credit for ending slavery in the British empire.  He was the long-time Parliamentarian who never gave in to overwhelming odds, introducing bill after bill to abolish first the trade in slaves and later, slavery itself.  Hero he certainly was, but it was Thomas Clarkson who first proposed to Wilberforce that he be the movement’s man in Parliament.  And it was information Clarkson gathered by crisscrossing 35,000 miles of British countryside on horseback that Wilberforce often used in parliamentary debate.  Clarkson was the mobilizer, the energizer, the barnburner, the fact-finder, and the very conscience of the movement.

He translated his prize-winning essay from Latin into English and supervised its distribution by the tens of thousands.  He gave lectures and sermons.  He wrote articles and a least one book.  He helped British seamen escape from the slave-carrying ships they were pressed against their will to serve on.  He filed murder charges in courts to draw attention to the actions of fiendish slave ship captains.  He convinced witnesses to speak.  He gathered testimony, rustled up petition signatures by the thousands, and smuggled evidence from under the very noses of his adversaries.  His life was threatened many times and once, surrounded by an angry mob, he very nearly lost it.  The long hours, the often thankless and seemingly fruitless forays to uncover evidence, the risks and the costs that came in every form, the many low points when it looked like the world was against him — all of that went on and on year after year.  None of it ever made so much as a perceptible dent in Thomas Clarkson’s drive.

When Britain went to war with France in 1793, Clarkson and his committee saw early progress in winning converts evaporate.  The opposition in Parliament argued that abandoning the slave trade would only hand a lucrative business to a mortal enemy.  And the public saw winning the war as more important than freeing people of another color from another continent.  But Clarkson did not relent.  He, his ally in Parliament Wilberforce, and the committee Clarkson had formed, kept spreading the message and looked for the best opportunities to press it forward.

It was at Clarkson’s instigation that a diagram of a slave ship became a convincing tool in the debate.  Depicting hundreds of slaves crammed like sardines in horrible conditions, it proved to be pivotal in winning the public mind.  Clarkson’s committee enlisted the help of famed pottery maker Josiah Wedgwood in producing a famous medallion with the image of a kneeling black man, chained, uttering the words, “Am I not a man and a brother?”  Indeed, Clarkson’s imprint was on almost everything the committee did.  It even produced one of the first newsletters and one of the first direct-mail campaigns for the purpose of raising money.

The effort finally paid off.  The tide of public opinion swung firmly to the abolitionists.  The trade in slaves was outlawed by act of Parliament when it approved one of Wilberforce’s bills in 1807.  Twenty-six more years of laborious effort by Clarkson, Wilberforce and others were required before, in 1833, Britain freed all slaves within its realm and became a model for peaceful emancipation everywhere.

Clarkson died at the age of 86, having outlived the other eleven he had called together at the print shop back in 1787.  Hochschild tells us that the throngs of mourners “included many Quakers, and the men among them made an almost unprecedented departure from sacred custom” by removing their hats.

An essay lit a match, which started a fire, which saved millions of lives and changed the world.  If you ever hear anyone dismissing the power of pen and ink, just tell them the story of Thomas Clarkson and his prize-winning essay.

by Leslie Snyder

Leslie Snyder has specialized in finance and economics, business and investments.

The administration of a republic is supposed to be directed by certain fundamental principles of right and justice, from which there cannot, because there ought not to, be any deviation; and whenever any deviation appears, there is a kind of stepping out of the republican principle, and an approach toward the despotic one.

—Thomas Paine

Justice is the only foundation upon which a society of free and independent people can exist. Justice is a concrete, recognizable, and objective principle. It is not a matter of opinion.

In our day and age the word justice is rarely used in political and economic discussions. The entire reason for the existence of communities, laws, governments and court systems has been forgotten. But if life and property are to be protected and secured, which is the purpose of society, then justice must be the rule. To quote Paine again, “A republic, properly understood, is a sovereignty of justice.”

According to a 1931 Webster’s dictionary, justice is the “quality of being just; impartiality.” Just is “conforming to right; normal; equitable.” A 1961 Webster’s dictionary says justice is “The principle of rectitude and just dealings of men with each other—one of the cardinal virtues. Administration of law . . .” A 1975 edition of a Grolier Webster dictionary says justice is “Equitableness; what is rightly due; lawfulness . . . .”

Since 1931 a new meaning of the word justice has been added, that of lawfulness, which is not only erroneous, but deceitful and misleading. Justice is not based on law; rather, law ought to be based on justice. It is only common sense, for men lived and worked together before laws were formed. Generally laws are passed to formalize what has preceded under common practice, what has stood the test of time as being just and equitable. Laws are common practice put down in black and white for all to see and know.

The ancient philosophers said that justice is speaking the truth and paying your debts, giving to each man what is proper to him, doing good to friends and evil to enemies. Therefore, there must be something more basic, more fundamental than laws on which to found justice. In fact, the French jurist Charles de Montesquieu (16891755) ably contended that “before laws were made, there were relations of possible justice. To say that there is nothing just or unjust but what is commanded or forbidden by positive laws, is the same as saying that before the describing of a circle all the radii were not equal.”

Minding One’s Own Business

The Greek philosophers had the simplest definition of justice. To Plato (c. 428-348 B.C.), in The Republic, Book IV, justice is simply “doing one’s own business, and not being a busybody . . . . A man may neither take what is another’s, nor be deprived of what is his own . . . . This is the ultimate cause and condition of the existence of all” other virtues in the State, “and while remaining in them is also their preservative.”

In Book XII of Plato’s Laws, the conclusion is drawn that “by the relaxation of that justice which is the uniting principle of all constitutions, every power in the state is rent asunder from every other.” In other words, without justice the threads of society unravel and society disintegrates into barbarism.

Aristotle (384-322 B.C.) in Nicomachean Ethics, Book V, gives greater perception to what justice is. It “is found among men who share their life with a view to self- sufficiency, men who are free . . . . Thereforejustice is essentially something human.” (Emphasis added.) In other words, free men may choose to be just or unjust. Justice, as an ethical term, is voluntary; “. . . a man acts unjustly or justly whenever he does such acts voluntarily.” When wrong is done and done voluntarily, it then becomes an act of injustice. In short, “All virtue is summed up in dealing justly,” said Aristotle.

More concretely, Aristotle claims, in Rhetoric, Book I, “Justice is the virtue through which everybody enjoys his own possessions in accordance with the law; its opposite is injustice, through which men enjoy the possessions of others in defiance of the law.” There is the problem of using the law to legalize theft and to redistribute the property of one group to another group, but for the time being, we must assume Aristotle means the use of laws that are rightful and just. For when he says “justice has been acknowledged by us to be a social virtue, and it implies all others,” he has laid the foundation of a just society.

Furthermore, Aristotle maintains that “legal justice is the discrimination of the just and the unjust.” And, “Of political justice part is natural, part legal—natural, that which everywhere has the same force and does not exist by people’s thinking this or that.” Natural justice must precede law and form the basis of law thereon.

In the sixteenth century Michel de Montaigne (1533-1592), in his The Essays, eloquently said: “The justice which in itself is natural and universal, is otherwise and more nobly ordered, than that other justice, which is special, national, and constrained to the ends of government.” He continues, “There cannot a worse state of things be imagined, than where wickedness comes to be legitimate, and assumes with the magistrate’s permission, the cloak of virtue . . . . The extremest sort of injustice, according to Plato, is where that which is unjust, should be reputed for just.”

Hobbes on Natural Justice

In Thomas Hobbes’ (1588-1679) Leviathan, further ground is laid on which to base natural justice. The names just and unjust, says Hobbes, when they are attributed to men’s actions, signify conformity or nonconformity to reason. Therefore, “Justice . . . is a rule of reason by which we are forbidden to do anything destructive to our life, and consequently a law of nature.”

Then Hobbes leads beautifully into the virtue of just actions: “That which gives to human actions the relish of justice is a certain nobleness or gallantness of courage, rarely found, by which a man scorns to be beholding for the contentment of his life to fraud, or breach of promise. This justice of the manners is that which is meant where justice is called a virtue; and injustice, a vice.”

Earlier it was established that justice is the social virtue on which a just society is constructed. Hobbes adds to this not only by tying virtues to the laws of nature, but to moral philosophy as well. “Now the science of virtue and vice is moral philosophy; and therefore the true doctrine of the laws of nature is the true moral philosophy . . . . For moral philosophy is nothing else but the science of what is good and evil in the conversation and society of mankind.” Thus, Hobbes establishes the fact that a just society is a moral society.

Saint Augustine (354-430) in The City of God, Book XIX, declares “Where, therefore, there is no true justice there can be no right. For that which is done right is justly done, and what is unjustly done cannot be done by right.” Hence, justice precedes “rights.”

Joseph Joubert eloquently phrased justice as truth in action.

Since practicing the virtue of justice is voluntary, man ought to have the courage to stand up and fight for what is right and against what is wrong. Cato the Younger said it this way: “. . . a man has it in his power to be just, if he have but the will to be so, and therefore injustice is thought the most dishonorable because it is least excusable.”

Another way to consider what justice is, is to compare it with injustice. For example, in Utilitarianism, John Stuart Mill (1806-1873) states that” . . . it is just to respect, unjust to violate, the legal rights of any one.” Second, “. . . injustice consists in taking or withholding from any person that to which he has a moral right.” Third, “It is universally considered just that each person should obtain that (whether good or evil) which he deserves.” Fourth, “It is confessedly unjust to break faith with any one: to violate an engagement, either expressed or implied . . . .” Fifth, “It is, by universal admission, inconsistent with justice to be partial.”

A Moral Issue

Mill, too, sees justice as a moral issue. He concludes: “Whether the injustice consists in depriving a person of a possession, or in breaking faith with him, or in treating him worse than he deserves, or worse than other people who have no greater claims, in each case the supposition implies two things—a wrong done, and some assignable person who is wronged. Injustice may also be done by treating a person better than others; but the wrong in this case is to his competitors, who are also assignable persons . . . . Justice implies something which it is not only right to do, and wrong not to do, but which some individual person can claim from us as his moral right.”

Thomas Paine’s Dissertations speak about justice where the public good is concerned. He maintains that, “The foundation-principle of public good is justice, and wherever justice is impartially administered, the public good is promoted; for as it is to the good of every man that no injustice be done to him, so likewise it is to his good that the principle which secures him should not be violated in the person of another, because such a violation weakens his security, and leaves to chance what ought to be to him a rock to stand on.”

The great American constitutional lawyer of the nineteenth century, Lysander Spooner, wrote a pamphlet entitled: Natural Law, or The Science of Justice, which succinctly summarizes what justice is:

The science of mine and thine—the science of justice—is the science of all human rights; of all a man’s rights of person and property; of all his fights to life, liberty, and the pursuit of happiness.

It is the science which alone can tell any man what he can, and cannot, do; what he can, and cannot, have; what he can, and cannot, say, without infringing the rights of any other person.

It is the science of peace; and the only science of peace; since it is the science which alone can tell us on what conditions mankind can live in peace, or ought to live in peace, with each other.

These conditions are simply these: viz., first, that each man shall do, towards every other, all that justice requires him to do; as, for example, that he shall pay his debts, that he shall return borrowed or stolen property to its owner, and that he shall make reparation for any injury he may have done to the person or property of another.

The second condition is, that each man shall abstain from doing to another, anything which justice forbids him to do; as, for example, that he shall abstain from committing theft, robbery, arson, murder, or any other crime against the person or property of another.

So long as these conditions are fulfilled men are at peace, and ought to remain at peace, with each other. But when either of these conditions is violated, men are at war. And they must necessarily remain at war until justice is re-established.

Through all time, so far as history informs us, wherever mankind have attempted to live in peace with each other, both the natural instincts, and the collective wisdom of the human race, have acknowledged and prescribed, as an indispensable condition, obedience to this one only universal obligation: viz., that each should live honestly towards every other.

The ancient maxim makes the sum of man’s legal duty to his fellow men to be simply this: “To live honestly, to hurt no one, to give to every one his due . . .”

Never has such a complex subject as justice been treated so clearly and simply. To summarize justice thus far: Justice means that each must be accountable for his own actions, entitled to the reward of his labor, and responsible for the consequences of his wrong doings.

The love of justice should be instilled in every man, woman and child—all should wish to see justice done. For without justice the rule of men (dictatorship), not of law, assumes power. Without justice, society disintegrates into barbarism, where courts of law are administered by favor and pull instead of objective law, and without objective laws, the individual is at the mercy of the ruling power and its agents. The ancient atrocities return, such as no trial by jury, confiscatory taxes on life and property, the purchasing of judges, legislators, and sheriffs; all previous forms of the prior administration of justice become part of the current machinery which administers not justice, but injustice or tyranny.

In short, all that is good rests on justice. Where there is no justice, there is no morality—no right or wrong—anything goes and usually does. Justice is a social virtue to be practiced by individuals. Justice demands that the individual reward or recognize good and condemn evil. To practice justice one should know a man for what he is and treat him accordingly, whether he be honest, dishonest, friend or thief. The good should be rewarded, the bad punished.

The Highest Goal

Society cannot place before it a higher or nobler goal than the administration of justice. Thus, here is a bit of advice from Conversations with Goethe, March 22, 1825: “A great deal may be done by severity, more by love, but most by clear discernment and impartial justice.”

Once the meaning of justice has been established, next comes the understanding of freedom and liberty, which are crucial because only under freedom can the individual achieve his highest potential and pursue his happiness.

To speak of liberty and freedom is to speak first of natural laws or the right of nature. Hobbes lays an excellent foundation of natural laws or rights. He affirms that the right of nature is the liberty each man has to use his own power for the preservation of his own life, and his own judgment and reason are the best means for achieving it.

The first law of nature, according to Jean Jacques Rousseau (17121778), results from man’s nature. “His first law is to provide for his own preservation, his first cares are those which he owes to himself; and, as soon as he reaches years of discretion, he is the sole judge of the proper means of preserving himself . . . .”

Therefore, if man’s first obligation is to provide for his own life, he must live under the proper conditions in which to sustain his life, namely, liberty. By liberty is understood the absence of external impediments, the absence of opposition.

Hayek on Liberty

In The Constitution of Liberty, Nobel-prize winner Friedrich A. Hayek points out that liberty is a negative concept like peace. “It becomes positive only through what we make of it. It does not assure us of any particular opportunities, but leaves it to us to decide what use we shall make of the circumstances in which we find ourselves . . . .” He continues, “Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions and will receive praise or blame for them. Liberty and responsibility are inseparable.” (Emphasis added.)

To expound further, Mill explains that one cannot take away another’s freedom no matter how sincerely one tries to protect another. Only by our own hands can any positive and lasting improvement in our lives be worked out. And through “the influence of these two principles all free communities have both been more exempt from social injustice and crime, and have attained more brilliant prosperity, than any others . . . .”

Further, “. . . any restriction on liberty reduces the number of things tried and so reduces the rate of progress. In such a society freedom of action is granted to the individual, not because it gives him greater satisfaction but because if allowed to go his own way he will on the average serve the rest of us better than any orders we know how to give.”

In short, liberty is the only object which benefits all alike and should provoke no sincere opposition. Liberty “is not a means to a higher political end. It is itself the highest political end,” says Lord Acton. It is required for security in the pursuit of the highest objects of private life and civil society.

Morality Requires Freedom

If liberty is to live upon one’s own terms and slavery is to live at the mercy of another’s, then it follows that to live under one’s own terms means the individual has a choice of actions. He can be virtuous or not; he can be moral. Therefore, morality requires freedom. Thus, only free men can be just men!

In his The Road to Serfdom, Hayek ties liberty to morality. Since morals are of necessity a phenomenon of individual conduct, to be moral one must be free to make choices. Where man is forced to act by coercion, the ability to choose has been pre- empted. Only under liberty and freedom can man be moral. As a result, only “where we ourselves are responsible for our own interests . . . has our decision moral value. Freedom to order our own conduct in the sphere where material circumstances force a choice upon us, and responsibility for the arrangement of our own life according to our own conscience, is the air in which alone moral sense grows and in which moral values are daily recreated in the free decision of the individual. Responsibility, not to a superior, but to one’s conscience, the awareness of a duty not exacted by compulsion . . . and to bear the consequences of one’s own decision, are the very essence of any morals which deserve the name.”

The facts have been established thus far that man must live under liberty to become as productive, as noble, and as just as he can, since liberty is the condition under which morality thrives. Also, only the individual knows what is best for himself. And finally, liberty does not provide opportunities, but leaves the individual free to choose those ac tions which he thinks will best suit him and to bear the consequences of those actions.

The Price of Freedom

There is one more thing to consider about freedom and liberty—the price. Tocqueville remarked, “Some abandon freedom thinking it dangerous, others thinking it impossible.” But there is a third reason. Some abandon freedom thinking it too expensive. Freedom is not free. “Those who expect to reap the blessings of freedom, must, like men, undergo the fatigues of supporting it,” noted Paine.

“Freedom is the most exacting form of civil government—it is, in fact, the most demanding state of all for man. That is because freedom demands—depends upon—self- discipline from beth the governed and the governing. The foundation of freedom is self- government and the foundation of self-government is self-control,” explains author Rus Walton, of One Nation Under God. Freedom requires more, however. It requires a strong and vigilant defense. ‘The greater the threat of evil, the stronger that defense must be. That which is right does not survive unattended; it, too, must have its defenders . . . .”

Is liberty worth the effort? According to Frederic Bastiat, all you have to do is look at the entire world to decide. That is, which “countries contain the most peaceful, the most moral, and the happiest people? Those people are found in the countries where the law least interferes with private affairs; where government is least felt; where the individual has the greatest scope, and free opinion the greatest influence; where administrative powers are fewest and simplest; where taxes are lightest and most nearly equal, and popular discontent the least excited and the least justifiable; where individuals and groups most actively assume their responsibilities, and, consequently, where the morals of . . . human beings are constantly improving; where trade, assemblies, and associations are the least restricted; . . . where mankind most nearly follow its own natural inclinations; . . . in short, the happiest, most moral, and most peaceful people are those who most nearly follow this principle: although mankind is not perfect, still, all hope rests upon the free and voluntary actions of persons within the limits of right; law or force is to be used for nothing except the administration of universal justice.”

What this means to us today is that our society, so filled with government regulations and laws, has taken away many of our liberties. For example, we cannot go into some businesses without being licensed, taxed, and regulated. We are presumed guilty (of dishonesty) until proven innocent (which is impossible). Our reputations are continually under attack and, for the most part, stand for nothing. Honesty and integrity, once the backbone of our society, have been replaced by government regulations and promises. Under this system of injustice all of us are losing our liberties, wealth, and happiness.

What better way to summarize the spirit of liberty and freedom and justice than to quote Tocqueville, who said, “I should have loved freedom, I believe, at all times, but in the time in which we live I am ready to worship it.”

This article has been published with FEE‘s permission and has been originally published at The Freeman March 1980 • Volume: 30 • Issue: 3.

By Ludwig von MIses

Ludwig von Mises, 1881-1973, was one of the great defenders of a rational economic science, and perhaps the single most creative mind at work in this field in the 20th century.

If the supply of caviar were as plentiful as the supply of potatoes, the price of caviar—that is, the exchange ratio between caviar and money or caviar and other commodities—would change considerably. In that case, one could obtain caviar at a much smaller sacrifice than is required today. Likewise, if the quantity of money is increased, the purchasing power of the monetary unit decreases, and the quantity of goods that can be obtained for one unit of this money decreases also.

When, in the sixteenth century, American resources of gold and silver were discovered and exploited, enormous quantities of the precious metals were transported to Europe. The result of this increase in the quantity of money was a general tendency toward an upward movement of prices. In the same way, today, when a government increases the quantity of paper money, the result is that the purchasing power of the monetary unit begins to drop, and so prices rise. This is called inflation.

Unfortunately, in the United States, as well as in other countries, some people prefer to attribute the cause of inflation not to an increase in the quantity of money but, rather, to the rise in prices.

However, there has never been any serious argument against the economic interpretation of the relationship between prices and the quantity of money, or the exchange ratio between money and other goods, commodities, and services. Under present day technological conditions there is nothing easier than to manufacture pieces of paper upon which certain monetary amounts are printed. In the United States, where all the notes are of the same size, it does not cost the government more to print a bill of a thousand dollars than it does to print a bill of one dollar. It is purely a printing procedure that requires the same quantity of paper and ink.

In the eighteenth century, when the first attempts were made to issue bank notes and to give these bank notes the quality of legal tender—that is, the right to be honored in exchange transactions in the same way that gold and silver pieces were honored—the governments and nations believed that bankers had some secret knowledge enabling them to produce wealth out of nothing. When the governments of the eighteenth century were in financial difficulties, they thought all they needed was a clever banker at the head of their financial management in order to get rid of all their difficulties.

Some years before the French Revolution, when the royalty of France was in financial trouble, the king of France sought out such a clever banker, and appointed him to a high position. This man was, in every regard, the opposite of the people who, up to that time, had ruled France. First of all he was not a Frenchman, he was a foreigner—a Genevese. Secondly, he was not a member of the aristocracy, he was a simple commoner. And what counted even more in eighteenth century France, he was not a Catholic, but a Protestant. And so Monsieur Necker, the father of the famous Madame de Stall, became the minister of finance, and everyone expected him to solve the financial problems of France. But in spite of the high degree of confidence Monsieur Necker enjoyed, the royal cashbox remained empty—Necker’s greatest mistake having been his attempt to finance aid to the American colonists in their war of independence against England without raising taxes. That was certainly the wrong way to go about solving France’s financial troubles.

No Secret Source of Funds

There can be no secret way to the solution of the financial problems of a government; if it needs money, it has to obtain the money by taxing its citizens (or, under special condi tions, by borrowing it from people who have the money). But many governments, we can even say most governments, think there is another method for getting the needed money; simply to print it.

If the government wants to do something beneficial—if, for example, it wants to build a hospital—the way to find the needed money for this project is to tax the citizens and build the hospital out of tax revenues. Then no special “price revolution” will occur, because when the government collects money for the construction of the hospital, the citizens—having paid the taxes—are forced to reduce their spending. The individual taxpayer is forced to restrict either his consumption, his investments or his savings. The government, appearing on the market as a buyer, replaces the individual citizen: the citizen buys less, but the government buys more. The government, of course, does not always buy the same goods which the citizens would have bought; but on the average there occurs no rise in prices due to the government’s construction of a hospital.

I choose this example of a hospital precisely because people sometimes say: “It makes a difference whether the government uses its money for good or for bad purposes.” I want to assume that the government always uses the money which it has printed for the best possible purposes—purposes with which we all agree. For it is not the way in which the money is spent, it is the way in which the government obtains this money that brings about those consequences we call inflation and which most people in the world today do not consider as beneficial.

For example, without inflating, the government could use the tax-collected money for hiring new employees or for raising the salaries of those who are already in government service. Then these people, whose salaries have been increased, are in a position to buy more. When the government taxes the citizens and uses this money to increase the salaries of government employees, the taxpayers have less to spend, but the government employees have more. Prices in general will not increase.

But if the government does not use tax money for this purpose, if it uses freshly printed money instead, it means that there will be people who now have more money while all other people still have as much as they had before. So those who received the newly- printed money will be competing with those people who were buyers before. And since there are no more commodities than there were previously, but there /s more money on the market—and since there are now people who can buy more today than they could have bought yesterday—there will be an additional demand for that same quantity of goods. Therefore prices will tend to go up. This cannot be avoided, no matter what the use of this newly-issued money will be.

And most importantly, this tendency for prices to go up will develop step by step; it is not a general upward movement of what has been called the “price level.” The metaphorical expression “price level” must never be used.

When people talk of a “price level,” they have in mind the image of a level of a liquid which goes up or down according to the increase or decrease in its quantity, but which, like a liquid in a tank, always rises evenly. But with prices, there is no such thing as a “level.” Prices do not change to the same extent at the same time. There are always prices that are changing more rapidly, rising or falling more rapidly than other prices. There is a reason for this.

Early Beneficiaries

Consider the case of the government employee who received the new money added to the money supply. People do not buy today precisely the same commodities and in the same quantities as they did yesterday. The additional money which the government has printed and introduced into the market is not used for the purchase of all commodities and services. It is used for the purchase of certain commodities, the prices of which will rise, while other commodities will still remain at the prices that prevailed before the new money was put on the market. Therefore, when inflation starts, different groups within the population are affected by this inflation, in different ways. Those groups who get the new money first, gain a temporary benefit.

When the government inflates in order to wage a war, it has to buy munitions, and the first to get the additional money are the munition industries and the workers within these industries. These groups are now in a very favorable position. They have higher profits and higher wages; their business is moving. Why? Because they were the first to receive the additional money. And having now more money at their disposal, they are buying. And they are buying from other people who are manufacturing and selling the commodities that these munition makers want.

These other people form a second group. And this second group considers inflation to be very good for business. Why not? Isn’t it wonderful to sell more? For example, the owner of a restaurant in the neighborhood of a munitions factory says: “It is really marvelous! The munition workers have more money; there are many more of them now than before; they are all patronizing my restaurant; I am very happy about it.” He does not see any reason to feel otherwise.

The situation is this: those people to whom the money comes first now have a higher income, and they can still buy many commodities and services at prices which correspond to the previous state of the market, to the condition that existed on the eve of inflation. Therefore, they are in a very favorable position. And thus inflation continues step by step, from one group of the population to another. And all those to whom the additional money comes at the early stage of inflation are benefited because they are buying some things at prices still corresponding to the previous stage of the exchange ratio between money and commodities.

Others Must Lose

But there are other groups in the population to whom this additional money comes much, much later. These people are in an unfavorable position. Before the additional money comes to them they are forced to pay higher prices than they paid before for some—or for practically all—of the commodities they wanted to purchase, while their income has remained the same, or has not increased proportionately with prices.

Consider for instance a country like the United States during the Second World War; on the one hand, inflation at that time favored the munitions workers, the munition industries, the manufacturers of guns, while on the other hand it worked against other groups of the population. And the ones who suffered the greatest disadvantages from inflation were the teachers and the ministers.

As you know, a minister is a very modest person who serves God and must not talk too much about money. Teachers, likewise, are dedicated persons who are supposed to think more about educating the young than about their salaries. Consequently, the teachers and ministers were among those who were most penalized by inflation, for the various schools and churches were the last to realize that they must raise salaries. When the church elders and the school corporations finally discovered that, aider all one should also raise the salaries of those dedicated people, the earlier losses they had suffered still re mained.

For a long time, they had to buy less than they did before, to cut down their consumption of better and more expensive foods, and to restrict their purchase of clothing—because prices had already adjusted upward, while their income, their salaries, had not yet been raised. (This situation has changed considerably today, at least for teachers.)

There are therefore always different groups in the population being affected differently by inflation. For some of them, inflation is not so bad; they even ask for a continuation of it, because they are the first to profit from it. We will see, in the next lecture, how this unevenness in the consequences of inflation vitally af fects the politics that lead toward inflation.

Under these changes brought about by inflation, we have groups who are favored and groups who are directly profiteering. I do not use the term “profiteering” as a reproach to these people, for if there is someone to blame, it is the government that established the inflation. And there are always people whofavor inflation, because they realize what is going on sooner than other people do. Their special profits are due to the fact that there will necessarily be unevenness in the process of inflation.

Inflation as a Tax

The government may think that inflation—as a method of raising funds—is better than taxation, which is always unpopular and difficult. In many rich and great nations, legislators have often discussed, for months and months, the various forms of new taxes that were necessary because the parliament had decided to increase expenditures. Having discussed various methods of getting the money by taxation, they finally decided that perhaps it was better to do it by inflation.

But of course, the word “inflation” was not used. The politician in power who proceeds toward inflation does not announce: “I am proceeding toward inflation.” The technical methods employed to achieve the inflation are so complicated that the average citizen does not realize inflation has begun.

During one of the biggest inflations in history, in the German Reich after the First World War, the inflation was not so momentous during the war. It was the inflation after the war that brought about the catastrophe. The government did not say: “We are proceeding toward inflation.” The government simply borrowed money very indirectly from the central bank. The government did not have to ask how the central bank would find and deliver the money. The central bank simply printed it.

Today the techniques for inflation are complicated by the fact that there is checkbook money. It involves another technique, but the result is the same. With the stroke of a pen, the government creates fiatmoney, thus increasing the quantity of money and credit. The government simply issues the order, and the fiat money is there.

The government does not care, at first, that some people will be losers, it does not care that prices will go up. The legislators say: “This is a wonderful system!” But this wonderful system has one fundamental weakness: it cannot last. If inflation could go on forever, there would be no point in telling governments they should not inflate. But the certain fact about inflation is that, sooner or later, it must come to an end. It is a policy that cannot last.

In the long run, inflation comes to an end with the breakdown of the currency—to a catastrophe, to a situation like the one in Germany in 1923. On August 1, 1914, the value of the dollar was four marks and twenty pfennigs. Nine years and three months later, in November 1923, the dollar was pegged at 4.2 trillion marks. In other words, the mark was worth nothing. It no longer had any value.

Some years ago, a famous author wrote: “In the long run we are all dead.” This is certainly true, I am sorry to say. But the question is, how short or long will the short run be? In the eighteenth century there was a famous lady, Madame de Pompadour, who is credited with the dictum: “Après nous le déluge” (“After us will come the flood”). Madame de Pompadour was happy enough to die in the short run. But her successor in office, Madame du Barry, outlived the short run and was beheaded in the long run. For many people the “long run” quickly becomes the “short run”—and the longer inflation goes on the sooner the “short run.”

How long can the short run last? How long can a central bank continue an inflation? Probably as long as people are convinced that the government, sooner or later, but certainly not too late, will stop printing money and thereby stop decreasing the value of each unit of money.

The Flight from Money

When people no longer believe this, when they realize that the government will go on and on without any intention of stopping, then they begin to understand that prices to morrow will be higher than they are today. Then they begin buying at any price, causing prices to go up to such heights that the monetary system breaks down.

I refer to the case of Germany, which the whole world was watching. Many books have described the events of that time. (Although I am no German, but an Austrian, I saw everything from the inside: in Austria, conditions were not very different from those in Germany; nor were they much different in many other European countries.) For several years, the German people believed that their inflation was just a temporary affair, that it would soon come to an end. They believed it for almost nine years, until the summer of 1923. Then, finally, they began to doubt. As the inflation continued, people thought it wiser to buy everything available, instead of keeping money in their pockets. Furthermore, they reasoned that one should not give loans of money, but on the contrary, that it was a very good idea to be a debtor. Thus inflation continued feeding on itself.

And it went on in Germany until exactly August 28, 1923. The masses had believed inflation money to be real money, but then they found out that conditions had changed. At the end of the German inflation, in the fall of 1923, the German factories paid their workers every morning in advance for the day. And the workingman who came to the factory with his wife, handed his wages—all the millions he got—over to her immediately. And the lady immediately went to a shop to buy something, no matter what. She realized what most people knew at that time—that overnight, from one day to another, the mark lost 50% of its purchasing power. Money, like chocolate on a hot oven, was melting in the pockets of the people. This last phase of German inflation did not last long; aider a few days, the whole nightmare was over: the mark was valueless and a new currency had to be established.

Lord Keynes, the same man who said that in the long run we are all dead, was one of the long line of inflationist authors of the twentieth century. They all wrote against the gold standard. When Keynes attacked the gold standard, he called it a “barbarous relic.” And most people today consider it ridiculous to speak of a return to the gold standard. In the United States, for instance, you are considered to be more or less a dreamer if you say: “Sooner or later, the United States will have to return to the gold standard.”

Yet the gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments. If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say: “And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.”

A Restraint on Spending

Under an inflationary system, nothing is simpler for the politicians to do than to order the government printing office to provide as much money as they need for their projects. Under a gold standard, sound government has a much better chance; its leaders can say to the people and to the politicians: “We can’t do it unless we increase taxes.”

But under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything. If, for instance, the nation wants a new highway system, the government is expected to build it. But where will the government get the money?

One could say that in the United States today—and even in the past, under McKinley—the Republican party was more or less in favor of sound money and of the gold standard, and the Democratic party was in favor of inflation. Of course not a paper inflation, but of silver.

It was, however, a Democratic president of the United States, President Cleveland, who at the end of the 1880s vetoed a decision of Congress, to give a small sum—about $10,000—to help a community that had suffered some disaster. And President Cleveland justified his veto by writing: “While it is the duty of the citizens to support the government, it is not the duty of the government to support the citizens.” This is something which every statesman should write on the wall of his office to show to people who come asking for money.

I am rather embarrassed by the necessity to simplify these problems. There are so many complex problems in the monetary system, and I would not have written volumes about them if they were as simple as I am describing them here. But the fundamentals are precisely these: if you increase the quantity of money, you bring about the lowering of the purchasing power of the monetary unit. This is what people whose private affairs are unfavorably affected do not like. People who do not benefit from inflation are the ones who complain.

A Worldwide Plague

If inflation is bad and if people realize it, why has it become almost a way of life in all countries? Even some of the richest countries suffer from this disease. The United States today is certainly the richest country in the world, with the highest standard of living. But when you travel in the United States, you will discover that there is constant talk about inflation and about the necessity to stop it. But they only talk; they do not act.

To give you some facts: aider the First World War, Great Britain returned to the prewar gold parity of the pound. That is, it revalued the pound upward. This increased the purchasing power of every worker’s wages. In an unhampered market the nominal money wage would have fallen to compensate for this and the workers’ real wage would not have suffered. We do not have time here to discuss the reasons for this. But the unions in Great Britain were unwilling to accept an adjustment of wage rates to the higher purchasing power of the monetary unit, therefore real wages were raised considerably by this monetary measure. This was a serious catastrophe for England, because Great Britain is a predominantly industrial country that has to import its raw materials, half-finished goods, and food stuffs in order to live, and has to export manufactured goods to pay for these imports. With the rise in the international value of the pound, the price of British goods rose on foreign markets and sales and exports declined. Great Britain had, in effect, priced itself out of the world market.

The unions could not be defeated. You know the power of a union today. It has the right, practically the privilege, to resort to violence. And a union order is, therefore, let us say, not less important than a government decree. The government decree is an order for enforcement for which the enforcement apparatus of the government—the police—is ready. You must obey the government decree, otherwise you will have difficulties with the police.

The Impact of Unions

Unfortunately, we have now, in almost all countries all over the world, a second power that is in a position to exercise force: the labor unions. The labor unions determine wages and the strikes to enforce them in the same way in which the government might decree a minimum wage rate. I will not discuss the union question now; I shall deal with it later. I only want to establish that it is the union policy to raise wage ratesabove the level they would have on an unhampered market. As a result, a considerable part of the potential labor force can be employed only by people or industries that are prepared to suffer losses. And, since businesses are not able to keep on suffering losses, they close their doors and people become unemployed. The setting of wage rates above the level they would have on the unhampered market always results in the unemployment of a considerable part of the potential labor force.

In Great Britain, the result of high wage rates enforced by the labor unions was lasting unemployment, prolonged year after year. Millions of workers were unemployed, production figures dropped. Even experts were perplexed. In this situation the British government made a move which it considered an indispensable, emergency measure: it devalued its currency.

The result was that the purchasing power of the money wages, upon which the unions had insisted, was no longer the same. The real wages, the commodity wages, were reduced. Now the worker could not buy as much as he had been able to buy before, even though the nominal wage rates remained the same. In this way, it was thought, real wage rates would return to free market levels and unemployment would disappear.

This measure—devaluation—was adopted by various other countries, by France, the Netherlands, and Belgium. One country even resorted twice to this measure within a period of one year and a half. That country was Czechoslovakia. It was a surreptitious method, let us say, to thwart the power of the unions. You could not call it a real success, however.

Indexation

After a few years, the people, the workers, even the unions, began to understand what was going on. They came to realize that currency devaluation had reduced their real wages. The unions had the power to oppose this. In many countries they inserted a clause into wage contracts providing that money wages must go up automatically with an increase in prices. This is called indexing. The unions became index conscious. So, this method of reducing unemployment that the government of Great Britain started in 1931—which was later adopted by almost all important governments this method of “solving un employment” no longer works today.

In 1936, in his General Theory of Employment, Interest and Money, Lord Keynes unfortunately elevated this method—those emergency measures of the period between 1929 and 1933—to a principle, to a fundamental system of policy. And he justified it by saying, in effect: “Unemployment is bad. If you want unemployment to disappear you must inflate the currency.”

He realized very well that wage rates can be too high for the market, that is, too high to make it profitable for an employer to increase his work force, thus too high from the point of view of the total working population, for with wage rates imposed by unions above the market level, only a part of those anxious to earn wages can obtain jobs.

And Keynes said, in effect: “Certainly mass unemployment, prolonged year aider year, is a very unsatisfactory condition.” But instead of suggesting that wage rates could and should be adjusted to market conditions, he said, in effect: “If one devalues the currency and the workers are not clever enough to realize it, they will not offer resistance against a drop in real wage rates, as long as nominal wage rates remain the same.” In other words, Lord Keynes was saying that if a man gets the same amount of sterling today as he got before the currency was devalued, he will not realize that he is, in fact, now getting less.

In old fashioned language, Keynes proposed cheating the workers. Instead of declaring openly that wage rates must be adjusted to the conditions of the market—because, if they are not, a part of the labor force will inevitably remain unemployed—he said, in effect: “Full employment can be reached only if you have inflation. Cheat the workers.” The most interesting fact, however, is that when his General Theory was published, it was no longer possible to cheat, because people had already become index conscious. But the goal of full employment remained.

Full Employment

What does “full employment” mean? It has to do with the unhampered labor market, which is not manipulated by the unions or by the government. On this market, wage rates for every type of labor tend to reach a level where everybody who wants a job can get one and every employer can hire as many workers as he needs. If there is an increase in the demand for labor, the wage rate will tend to be greater, and if fewer workers are needed, the wage rate will tend to fall.

The only method by which a “full employment” situation can be brought about is by the maintenance of an unhampered labor market. This is valid for every kind of labor and for every kind of commodity.

What does a businessman do who wants to sell a commodity for five dollars a unit? When he cannot sell it at that price, the technical business expression in the United States is, “the inventory does not move.” But it must move. He cannot retain things because he must buy something new; fashions are changing. So he sells at a lower price. If he cannot sell the merchandise at five dollars, he must sell it at four. If he cannot sell it at four, he must sell it at three. There is no other choice as long as he stays in business. He may suffer losses, but these losses are due to the fact that his anticipation of the market for his product was wrong.

It is the same with the thousands and thousands of young people who come every day from the agricultural districts into the city, trying to earn money. It happens so in every industrial nation. In the United States they come to town with the idea that they should get, say, a hundred dollars a week. This may be impossible. So if a man cannot get a job for a hundred dollars a week, he must try to get a job for ninety or eighty dollars, and perhaps even less. But if he were to say—as the unions do—“one hundred dollars a week or nothing,” then he might have to remain unemployed. (Many do not mind being unemployed, because the government pays unemployment benefits—out of special taxes levied on the employers—which are sometimes nearly as high as the wages the man would receive if he were employed.)

Because a certain group of people believes that full employment can be attained only by inflation, inflation is accepted in the United States. But people are discussing the question: Should we have a sound currency with unemployment, or inflation with full employment? This is in fact a very vicious analysis.

Clarifying the Problem

To deal with this problem we must raise the question: How can one improve the condition of the workers and of all other groups of the population? The answer is: by maintaining an unhampered labor market and thus achieving full employment. Our dilemma is, shall the market determine wage rates or shall they be determined by union pressure and compulsion? The dilemma is not “shall we have inflation or un employment?”

This mistaken analysis of the problem is argued in England, in European industrial countries and even in the United States. And some people say: “Now look, even the United States is inflating. Why should we not do it also.”

To these people one should answer first of all: “One of the privileges of a rich man is that he can afford to be foolish much longer than a poor man.” And this is the situation of the United States. The financial policy of the United States is very bad and is getting worse. Perhaps the United States can afford to be foolish a bit longer than some other countries.

The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like a plague. Inflation is a policy—a deliberate policy of people who resort to inflation because they consider it to be a lesser evil than unemployment. But the fact is that, in the not very long run, inflation does not cure unemployment.

Inflation is a policy. And a policy can be changed. Therefore, there is no reason to give in to inflation. If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget of the government. Of course, public opinion must support this; the intellectuals must help the people to understand. Given the support of public opinion, it is certainly possible for the people’s elected representatives to abandon the policy of inflation.

We must remember that, in the long run, we may all be dead and certainly will be dead. But we should arrange our earthly affairs, for the short run in which we have to live, in the best possible way. And one of the measures necessary for this purpose is to abandon inflationary policies.

This article has been published with FEE‘s permission and has been originally published at The Freeman March 1980 • Volume: 30 • Issue: 3.

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York—www.fee.org.This essay is drawn from the author’s longer monograph available here. Readers can also view a speech by the author on this very subject here.

Many volumes have been written about the Great Depression and its impact on the lives of hundreds of millions of citizens around the world. Historians, economists, and politicians have all combed the wreckage searching for the “black box” that will reveal the cause of this legendary tragedy. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of eight decades ago.

How bad was the Great Depression? Generally speaking, it was worse in America than in Western Europe and Canada and my focus here is on the U.S. Over the four years from 1929 to 1933, production at America’s factories, mines, and utilities fell by more than half. Real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumors of revolt simmered for the first time since the Civil War of the 1860s.

Old myths never die; they just keep showing up in college economics and political science textbooks. Students today are frequently taught that unfettered free enterprise collapsed of its own weight in 1929, paving the way for a decade-long economic depression full of hardship and misery. President Herbert Hoover is presented as an advocate of “hands-off,” or laissez-faire, economic policy, while his successor, Franklin Roosevelt, is the economic savior whose policies brought us recovery. This popular account of the Depression belongs in a book of fairy tales and not in a serious discussion of economic history, as a review of the facts demonstrates.

The Great, Great, Great, Great Depression

To properly understand the events of the time, it is appropriate to view the Great Depression as not one, but four consecutive depressions rolled into one. Professor Hans Sennholz has labeled these four “phases” as follows: the business cycle; the disintegration of the world economy; the New Deal; and the Wagner Act.^[1]

The first phase explains why the crash of 1929 happened in the first place; the other three show how government intervention kept the economy in a stupor for over a decade.

Phase I: The Business Cycle

The Great Depression was not America’s first depression, though it proved to be the longest. The common thread woven through the several earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted that ballooned the quantity of money and credit. A boom resulted, followed later by a painful day of reckoning. None of America’s depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions.

Most monetary economists, particularly those of the “Austrian school” (represented by such notable economists as Ludwig von Mises and Nobel laureate F. A. Hayek) have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this “easy money” in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of or even contract the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards.

One of the most thorough and meticulously documented accounts of the Federal Reserve’s inflationary actions prior to 1929 is America’s Great Depression by the late Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, Rothbard estimated that the Federal Reserve expanded the money supply by more than 60 percent from mid-1921 to mid-1929.^[2] The flood of easy money drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the “Roaring Twenties.”

By early 1929, the central bank was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30 percent. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust.

The “smart” money—shrewd investors like Bernard Baruch and Joseph Kennedys who watched things like money supply—saw that the party was coming to an end before most other Americans did. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, “only a fool holds out for the top dollar.”^[3]

When the masses of investors eventually sensed the change in Fed policy, the stampede was underway. The stock market, after nearly two months of moderate decline, plunged on “Black Thursday”—October 24, 1929—as the pessimistic view of large and knowledgeable investors spread.

The stock market crash was only a symptom—not the cause—of the Great Depression: the market rose and fell in near synchronization with what the Fed was doing.

Phase II: Disintegration of the World Economy

If this crash had been like previous ones, the subsequent hard times might have ended in a year or two. But unprecedented political bungling instead prolonged the misery for twelve long years.

Unemployment in 1930 averaged a mildly recessionary 8.9 percent, up from 3.2 percent in 1929. It shot up rapidly until peaking out at more than 25 percent in 1933. Until March 1933, these were the years of President Herbert Hoover—the man that anti-capitalists depict as a champion of noninterventionist, laissez-faire economics.

Did Hoover really subscribe to a “hands off the economy,” free-market philosophy? His opponent in the 1932 election, Franklin Roosevelt, didn’t think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions of people on the dole. He accused the president of “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of presiding over “the greatest spending administration in peacetime in all of history.”

Roosevelt’s running mate, John Nance Garner, charged that Hoover was “leading the country down the path of socialism.”^[4] Contrary to the modern myth about Hoover, Roosevelt and Garner were absolutely right.

The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in June 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war. Professor Barry Poulson notes that not only were 887 tariffs sharply increased, but the act broadened the list of dutiable commodities to 3,218 items as well.^[5]

Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. They ignored an important principle of international commerce: trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here.

Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates, and foreign governments all across the world soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in the U.S. lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers.

Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government’s share of GNP increased by about one-third.

Hoover’s agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Commenting decades later on Hoover’s administration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”^[6]

To compound the folly of high tariffs and huge subsidies, Congress then passed and Hoover signed the Revenue Act of 1932. It doubled the income tax for most Americans; the top bracket more than doubled, going from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline, and auto taxes were imposed; and postal rates were sharply hiked.

Can any serious scholar observe the Hoover administration’s massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?

Phase III: The New Deal

Franklin Delano Roosevelt won the 1932 presidential election in a landslide, collecting 472 electoral votes to just 59 for the incumbent Herbert Hoover. The platform of the Democratic Party whose ticket Roosevelt headed declared, “We believe that a party platform is a covenant with the people to be faithfully kept by the party entrusted with power.” It called for a 25 percent reduction in federal spending, a balanced federal budget, a sound gold currency “to be preserved at all hazards,” the removal of government from areas that belonged more appropriately to private enterprise, and an end to the “extravagance” of Hoover’s farm programs. This is what candidate Roosevelt promised, but it bears no resemblance to what President Roosevelt actually delivered.

In the first year of the New Deal, Roosevelt proposed spending $10 billion while revenues were only $3 billion. Between 1933 and 1936, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent.

Roosevelt secured passage of the Agricultural Adjustment Act (AAA), which levied a new tax on agricultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat, and corn being plowed under. Healthy cattle, sheep, and pigs by the millions were slaughtered and buried in mass graves.

Even if the AAA had helped farmers by curtailing supplies and raising prices, it could have done so only by hurting millions of others who had to pay those prices or make do with less to eat.

Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act (NIRA), passed in June 1933, which set up the National Recovery Administration (NRA). Under the NIRA, most manufacturing industries were suddenly forced into government-mandated cartels. Codes that regulated prices and terms of sale briefly transformed much of the American economy into a fascist-style arrangement, while the NRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent—not something a depressed economy needed for recovery.

Like Hoover before him, Roosevelt signed into law steep income tax rate increases for the high brackets and introduced a 5 percent withholding tax on corporate dividends. In fact, tax hikes became a favorite policy of the president’s for the next ten years, culminating in a top income tax rate of 94 percent during the last year of World War II. His alphabet agency commissars spent the public’s tax money like it was so much bilge.

For example, Roosevelt’s public relief programs hired actors to give free shows and librarians to catalogue archives. The New Deal even paid researchers to study the history of the safety pin, hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, and put men on the public payroll to chase tumbleweeds on windy days.

Roosevelt created the Civil Works Administration in November 1933 and ended it in March 1934, though the unfinished projects were transferred to the Federal Emergency Relief Administration. Roosevelt had assured Congress in his State of the Union message that any new such program would be abolished within a year. “The federal government,” said the President, “must and shall quit this business of relief. I am not willing that the vitality of our people be further stopped by the giving of cash, of market baskets, of a few bits of weekly work cutting grass, raking leaves, or picking up papers in the public parks.”

But in 1935 the Works Progress Administration came along. It is known today as the very government program that gave rise to the new term, “boondoggle,” because it “produced” a lot more than the 77,000 bridges and 116,000 buildings to which its advocates loved to point as evidence of its efficacy.^[7] The stupefying roster of wasteful spending generated by these jobs programs represented a diversion of valuable resources to politically motivated and economically counterproductive purposes.

The American economy was soon relieved of the burden of some of the New Deal’s excesses when the Supreme Court outlawed the NRA in 1935 and the AAA in 1936, earning Roosevelt’s eternal wrath and derision. Recognizing much of what Roosevelt did as unconstitutional, the “nine old men” of the Court also threw out other, more minor acts and programs which hindered recovery.

Freed from the worst of the New Deal, the economy showed some signs of life. Unemployment dropped to 18 percent in 1935, 14 percent in 1936, and even lower in 1937. But by 1938, it was back up to 20 percent as the economy slumped again. The stock market crashed nearly 50 percent between August 1937 and March 1938. The “economic stimulus” of Franklin Roosevelt’s New Deal had achieved a real “first”: a depression within a depression!

Phase IV: The Wagner Act

The stage was set for the 1937–38 collapse with the passage of the National Labor Relations Act in 1935—better known as the Wagner Act and organized labor’s “Magna Carta.” To quote Hans Sennholz again:

This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law.^[8]

Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants, and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation’s labor unions soared; by 1941 there were two and a half times as many Americans in unions as in 1935.

From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, Roosevelt fumed, were obstacles on the road to recovery. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the “undistributed profits tax,” was levied. “These soak-the-rich efforts,” writes economist Robert Higgs, “left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation’s decisions about private investment.”^[9]

Higgs draws a close connection between the level of private investment and the course of the American economy in the 1930s. The relentless assaults of the Roosevelt administration—in both word and deed—against business, property, and free enterprise guaranteed that the capital needed to jumpstart the economy was either taxed away or forced into hiding. When Roosevelt took America to war in 1941, he eased up on his anti-business agenda, but a great deal of the nation’s capital was diverted into the war effort instead of into plant expansion or consumer goods. Not until both Roosevelt and the war were gone did investors feel confident enough to “set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.”^[10]

On the eve of America’s entry into World War II and twelve years after the stock market crash of Black Thursday, ten million Americans were jobless. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later.

Along with the horror of World War II came a revival of trade with America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. More important, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors, and as a result, those investors came back into the economy to fuel a powerful postwar boom. The years 1945-46 brought huge reductions in government spending and much lower tax rates on business, along with smaller reductions in tax rates on individuals.

The genesis of the Great Depression lay in the inflationary monetary policies of the U.S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market that produced twelve years of agony; rather, it was political bungling on a scale as grand as there ever was.

1. Hans F. Sennholz, “The Great Depression,” The Freeman, April 1975, p. 205.

2. Murray Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, Inc., 1975), p. 89.

3. Lindley H. Clark, Jr., “After the Fall,” Wall Street Journal, October 26, 1979, p. 18.

4. “FDR’s Disputed Legacy,” Time, February 1, 1982, p. 23.

5. Barry W. Poulson, Economic History of the United States (New York: Macmillan Publishing Co., Inc., 1981), p. 508.

6. Paul Johnson, A History of the American People (New York: HarperCollins Publishers, 1997), p. 741.

7. Martin Morse Wooster, “Bring Back the WPA? It Also Had A Seamy Side,” Wall Street Journal, September 3, 1986, p. A26.

8. Sennholz, pp. 212–13.

9. Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War,” The Independent Review, Spring 1997, p. 573.

10. Ibid., p. 564.

by Thomas DiLorenzo

Thomas DiLorenzo is professor of economics at Loyola College in Maryland. This is adapted from a paper presented at the Ludwig von Mises Institute’s conference on “’The History of Liberty” at Auburn University, January 29, 2000.

It is no exaggeration to say that trade is the keystone of modern civilization. As Murray Rothbard wrote, “The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade—such as protectionism—cripple, hobble, and destroy trade, the source of life and prosperity.”^[1]

Human beings cannot truly be free unless there is a high degree of economic freedom—the freedom to collaborate and coordinate plans with other people from literally all around the world. That is the point of Leonard Read’s most famous article, “I, Pencil,” which describes how producing an item as mundane as an ordinary pencil requires the cooperation and collaboration of thousands of people from all around the world, all of whom possess very specific knowledge that allows them to assist in the manufacture and marketing of pencils. The same is true, of course, for virtually everything else that is produced.

Without economic freedom—the freedom to earn a living for oneself and one’s family—people are destined to become mere wards of the state. Thus, every attempt by the state to interfere with trade is an attempt to deny us our freedom, to impoverish us, and to turn us into modern-day serfs.

Ludwig von Mises believed that exchange is “the fundamental social relation” which “weaves the bond which unites men into society.”^[2] Man “serves in order to be served” in any trade relationship in the free market.^[3] Mises also distinguished between two types of social cooperation: cooperation by virtue of private contract and coordination, and cooperation by virtue of command and subordination or “hegemony.”^[4] The former type of coordination is symmetrical and mutually advantageous, while the latter is asymmetrical—there is a commander and a commandee, and the commandees are mere pawns in the actions of the commanders. When people become the mere pawns of their rulers they cannot be said to be free. This, of course, is the kind of “cooperation” that exists at the hands of the state.

Western civilization is the result of “achievements of men who have cooperated according to the pattern of contractual coordination” Mises wrote.^[5] The contractual state is guided by such concepts as natural rights to life, liberty, and property, and government under the rule of law. In contrast, the “hegemonic society” is one that does not respect natural rights or the rule of law. All that matters are the rules, directives, and regulations issued by dictators, whether they are called kings or congressmen. These directives may change daily, and the wards of the state must obey. As Mises wrote, “The wards have one freedom only: to obey without asking questions.”^[6]

Trade involves the exchange of property titles. Restrictions on free trade are therefore an attack on private property itself and not “merely” a matter of “trade policy.” This is why such great classical liberals as Frederic Bastiat spent many years of their lives defending free trade. Bastiat, as much as anyone, understood that once one acquiesced in protectionism, no one’s property was safe from myriad other governmental acts of theft. To Bastiat, protectionism and communism were essentially the same philosophy.

It has long been recognized by classical liberals that free trade is the most important means of diminishing the likelihood of war. Nothing is more destructive of human freedom than war. It always leads to a permanent enlargement of the state—and a reduction in human freedom—regardless of who wins. On the eve of the French Revolution many philosophers believed that democracy would put an end to war, for wars were thought to be fought merely to aggrandize and enrich the rulers of Europe. The French quickly proved this theory wrong, however, for under the leadership of Napoleon they, in Mises’s words, “adopted the most ruthless methods of boundless expansion and annexation.”^[7]

Thus it is not democracy that is a safeguard against war but, as the British (classical) Liberals were to recognize, free trade. To Richard Cobden and John Bright, the leaders of the British Manchester School, free trade—both domestically and internationally—was a necessary prerequisite for the preservation of peace; for in a world of trade and social cooperation, there are no incentives for war and conquest. It is government interference with free trade that is the source of international conflict. Indeed, naval blockades that restrict trade are the ultimate act of war. Throughout history restrictions on trade have proven to be impoverishing and have instigated acts of war motivated by territorial acquisition and plunder.

It is no mere coincidence that the 1999 meeting of the World Trade Organization—a cabal of bureaucrats, politicians, and lobbyists that favors government-controlled trade—was marked by a week of riots, protests, and violence. Whenever trade is politicized the result is inevitably conflict that quite often leads, eventually, to military aggression.

Mises summarized the relationship between free trade and peace most eloquently when he noted:

What distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the division of labor. Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action . . . . Such is the laissez-faire philosophy of Manchester.^[8]

As Bastiat often said, if goods can’t cross borders, armies will. This is a quintessentially American philosophy; it was the position of George Washington, Thomas Jefferson, and Thomas Paine, among others. “A foreign policy based on commerce” wrote Paine in Common Sense, would secure for America “the peace and friendship” of the Continent and allow her to “shake hands with the world—and trade in any market.”^[9] Paine—the philosopher of the American Revolution—believed that free trade would “temper the human mind,” help people to “know and understand each other,” and have a “civilizing effect” on everyone involved in it.^[10] Trade was seen as “a pacific system, operating to unite mankind by rendering nations, as well as individuals, useful to each other . . . . War can never be in the interest of a trading nation.”^[11]

George Washington agreed. “Harmony, liberal intercourse with all nations, are recommended by policy, humanity, and interest,” he stated in his September 17, 1796, Farewell Address.^[12] Our commercial policy “should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.”^[13]

The Eternal Struggle Between Freedom and Mercantilism

The period of world history from the middle of the fifteenth to the middle of the eighteenth centuries was an era of growth in world trade, technology, and institutions suited to trade. Technological innovations in shipping, such as the three-masted sail, brought the merchants of Europe to the far reaches of America and Asia. This vast expansion of trade greatly facilitated the worldwide division of labor, greater specialization, and the benefits of comparative advantage.^[14]

But whenever human freedom advances, as it did with the growth of trade, state power is threatened. So states did all they could then, as now, to restrict trade. It is the system of trade restrictions and other governmental interference with the free market, known as mercantilism, that Adam Smith railed against in The Wealth of Nations.As Rothbard has written:

Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held that exports should be encouraged by the government and imports discouraged.^[15]

Classical liberals waged an ideological war against mercantilism during the eighteenth and nineteenth centuries, and scored some major victories for freedom. The French physiocrats, led by the physician and economist François Quesnay, were influential from the 1750s to the 1770s. They were among the first laissez- faire thinkers who denigrated mercantilist propaganda and called for complete freedom of domestic and international trade. Their position was based on sound economics as well as Lockean notions of natural rights. Quesnay wrote, “Every man has a naturalright to the free exercize of his faculties provided he does not employ them to the injury of himself or others.”^[16]

When Anne Robert Jacques Turgot, a precursor of the Austrian school, became finance minister of France in 1774, his first official act was to free the import and export of grain. At around the same time, Adam Smith was defending trade on moral as well as economic grounds by identifying it is as part of the system of”natural justice” One of the ways he did this was to defend smuggling as a means of evading mercantilist restrictions on trade. The smuggler, explained Smith, was engaged in “productive labor” that served his fellow man (consumers), whereas if he were caught by the government and prosecuted, his capital would be “absorbed either in the revenue of the state or in that of the revenue-officer” which is an “unproductive” use “to the diminution of the general capital of the society.”^[17]

The Manchester School

Despite powerful arguments in favor of free trade offered by Quesnay, Smith, David Ricardo, and others, England (and other countries of Europe) suffered from protectionist trade policies in the first half of the nineteenth century. The British public was plundered by the mercantilist Corn Laws, which placed strict quotas on the importation of grain. By raising food prices, the laws benefited landowning political supporters of the government at the expense of consumers, especially the poor. But this changed thanks to the heroic and brilliant efforts of what came to be known as the Manchester School, led by two British businessmen (and later, statesmen), John Bright and Richard Cobden. Bright and Cobden formed the Anti-Corn Law League in 1839 and turned it into a well-oiled political machine with mass support, distributing literally millions of leaflets, holding conferences and gatherings all around the country, delivering hundreds of speeches, and publishing their own newspaper, The League.^[18]

The Irish potato famine of 1845 created great pressures for repeal of the Corn Laws, which was finally achieved on June 25, 1846. The elimination of all other import duties followed, and a 70-year period of British free trade began. Cobden was also influential in pushing through the Anglo-French treaty of 1860, which lowered French tariffs and helped put that country on the road to freer trade.

The Great Bastiat

From his home in Mugron, France, Frederic Bastiat single-handedly created a free-trade movement in his own country that eventually spread throughout Europe. Bastiat was a gentleman farmer who had inherited the family estate. He was a voracious reader, and spent many years educating himself in classical liberalism and in almost any other field that he could attain information about. After some 20 years of intense intellectual preparation, articles and books began to pour out of Bastiat (in the 1840s). His book Economic Sophisms is to this day arguably the best defense of free trade ever published. Economic Harmonies quickly followed, while Bastiat published in magazines and newspapers all over France. His work was so popular and influential that it was immediately translated into English, Spanish, Italian, and German.

Because of Bastiat’s enormous influence, free-trade associations, modeled after one he had created in France and similar to the one created by his friend Richard Cobden in England, began to sprout in Belgium, Italy, Sweden, Prussia, and Germany.

To Bastiat, collectivism in all its forms was immoral as well as economically destructive. Collectivism constituted “legal plunder,” and to argue against the (natural) right to private property would be similar to arguing that theft and slavery were moral. The protection of private property is the only legitimate function of government, Bastiat wrote, which is why trade restrictions—and all other mercantilist schemes—should be condemned. Free trade “is a question of right, of justice, of public order, of property. Because privilege, under whatever form it is manifested, implies the denial or the scorn of property rights.” And “the right to property, once weakened in one form, would soon be attacked in a thousand different forms.”^[19]

The Struggle Against Mercantilism in America

There is no clearer example of how trade restrictions are the enemy of freedom than the American Revolution. In the seventeenth century all European states practiced mercantilism. England imposed a series of Trade and Navigation Acts on its colonies in America and elsewhere; they embodied three principles: (1) all trade between England and her colonies must be conducted by English (or English-built) vessels owned and manned by English subjects; (2) all European imports into the colonies must “first be laid on the shores of England” before being sent to the colonies so that extra tariffs could be placed on them; and (3) certain products from the colonies must be exported to England and England only.

In addition, the colonists were prohibited from trading with Asia because of the East India Company’s state- chartered monopoly. There were duties placed on all colonial imports into England.

After the Seven Years War (known in America as the French and Indian War), England’s massive landholdings (Canada, India, North America to the Mississippi, most of the West Indies) became expensive to administer and police. Consequently, the Trade and Navigation Acts were made even more oppressive, which imposed severe hardships on the American colonists and helped lead to revolution.^[20]

After the American Revolution trade restrictions nearly caused the New England states—which suffered disproportionately from them—to secede from the Union. In 1807 Thomas Jefferson was president and England was once again at war with France. England declared that it would “secure her seamen wherever found,” which included U.S. ships. After a British warship captured the U.S.S. Chesapeake off Hampton Roads, Virginia, Jefferson imposed a trade embargo that made all international commerce illegal. After Jefferson left office his successor, James Madison, imposed an Enforcement Act, which allowed war-on-drugs-style seizure of goods suspected to be destined for export.

This radicalized the New England secessionists, who had been plotting to secede ever since Jefferson was elected, and who issued a public declaration reminding the nation that “the U.S. Constitution was a Treaty of Alliance and Confederation” and that the central government was no more than an association of the states. Consequently, “whenever its [the Constitution's] provisions were violated, or its original principles departed from by a majority of the states or their people, it is no longer an effective instrument, but that any state is at liberty by the spirit of that contract to withdraw itself from the union.”^[21]

The Massachusetts legislature formally condemned the embargo, demanded its repeal by Congress, and declared that it was “not legally binding.” In other words, the Massachusetts legislature “nullified” the law, just as South Carolina would nullify the 1828 Tariff of Abominations some 20 years later. Madison was forced to end the embargo in March 1809.

There has always been a collection of men in America who wanted to bring the British mercantilist system here precisely because it was so destructive of freedom. They figured to be the commanders of the system and its chief beneficiaries. As John Taylor of Caroline observed, these men “included Hamilton and the Federalists and later, the politicians of the Era of Good Feelings in the 1820s who eventually became Whigs.”^[22] These men “sought to bring the British system to America, along with its national debt, political corruption, and Court party.”^[23]

Taylor, a noted Anti-Federalist, was a lifelong critic of mercantilism, who laid out his criticisms in his 1822 book,Tyranny Unmasked. Like Bastiat, Taylor saw protectionism as an assault on private property that was diametrically opposed to the freedom the American revolutionaries had fought and died for. Taylor sought to “unmask” the tyranny of the fables and lies that the mercantilists had devised to promote their system of plunder. If one looked at England’s mercantilist policies, Taylor wrote, “No equal mode of enriching the party of government, and impoverishing the party of people, has ever been discovered.”^[24] He wrote of the “indissoluble conexions” between both “the freedom of industry and national prosperity” and also “between national distress and protecting duties, bounties, exclusive privileges, and heavy taxation.”^[25] The former produces national happiness, whereas the latter produces national misery, according to Taylor. In pointing out the folly of economic autarky (self-sufficiency) he asked:

Will Alabama want nothing but cotton, should that State select this species of labour for its staple? Can she eat, drink, and ride her cotton? Can she manufacture it into tools, cheese, fish, rum, wine, sugar, and tea? . . . . Is not Georgia a market for manufacturers, and Rhode-Island a market for cotton, in consequence of the division of labor?^[26]

Many of Taylor’s arguments were adopted and expanded on by the South Carolinian statesman John C. Calhoun during the struggle over the 1828 Tariff of Abominations, which a South Carolina political convention voted to nullify. The confrontation between that state, which was very heavily dependent on imports, as was most of the South, and the federal government over the Tariff of Abominations almost led to the state’s secession some 30 years before the War Between the States. The federal government backed down and reduced the tariff rate in 1833.

The northern manufacturers who wanted to impose British-style mercantilism on the country did not give up, however; they formed the American Whig party, which advocated three mercantilist schemes: protectionism, corporate welfare, and a central bank to pay for it all. From 1832 until 1852 the Whigs, led by Henry Clay and later by Abraham Lincoln, fought mightily in the political arena to bring seventeenth-century mercantilism to America.^[27]

The party died in 1852, but the Whigs simply began calling themselves Republicans. The tariff was the centerpiece of the Republican party platform of 1860, as it had been when the same collection of northern economic interests called itself “Whigs” during the previous 30 years.

By 1857 the level of tariffs had been reduced to the lowest level since 1815, according to Frank Taussig in his classic Tariff History of the United States.^[28] But when the Republicans controlled the White House and the southern Democrats left the Congress, the Republicans, as former Whigs, did what they had been itching to do for decades: go on a protectionist frenzy. In his first inaugural address Lincoln stated that he had no intention to disturb slavery in the southern states and even if he did, there would be no constitutional basis for doing so. But he promised a military invasion if tariff revenues were not collected. Unlike Andrew Jackson, he would not back down from the South Carolinian tariff nullifiers.

By 1862 the average tariff rate had crept up to 47.06 percent, the highest level ever to that point, even higher than the 1828 Tariff of Abominations. These high rates lasted for decades after the war.

Many of the newspapers that supported the Republican party openly called for a military invasion of southern ports to keep the South from adopting free trade, which was written into the Confederate Constitution of 1861. On March 12, 1861, for example, the New York Post advocated that the U.S. Navy “abolish all ports of entry” in the South.^[29] On April 2, 1861, the Newark Daily Advertiser in New Jersey warned ominously that southerners had “apparently taken to their bosoms the liberal and popular doctrine of free trade” and that free trade “must operate to the serious disadvantage of the North” as “commerce will be largely diverted to Southern cities.” The “chief instigator” of “the present troubles,” South Carolina, has all along been “preparing the way for the adoption of free trade” and must be stopped by “the closing of the ports” by military force.^[30]

As mentioned above, by 1860 England itself had moved to complete free trade; France sharply reduced her tariff rates in that very year; and the free-trade movement started by Bastiat was spreading throughout Europe. Only the northern United States was clinging steadfastly to seventeenth-century mercantilism.

After the war the northern manufacturing interests who financed and controlled the Republican party “ushered in a long period of high tariffs. With the tariff of 1897, protection reached an average level of 57 percent.”^[31] This political plunder continued for about 50 years after the war, at which time international competition forced tariff rates down moderately. By 1913 the average tariff rate in the United States had declined to 29 percent.

Protectionists Triumph

But the same clique of northern manufacturers was begging for “protection” and persisted until President Herbert Hoover signed the Smoot-Hawley Tariff of 1929, which increased the average tariff rate on over 800 items back up to 59.1 percent.^[32] Smoot-Hawley spawned an international trade war that resulted in a 50 percent reduction in total exports from the United States between 1929 and 1932.^[33] Poverty and misery were the inevitable result. Even worse, the government responded to these problems of its own creation with a massive increase in government intervention, which only produced even more poverty and misery and deprived Americans of more and more of their freedoms.

Since the seventeenth century all the great classical liberals have defended free trade and opposed trade restrictions. Restrictions on trade are an attack on the institution of private property, interfere with the international division of labor that is the source of our prosperity, and are nothing less than an act of theft. As Murray Rothbard remarked:

[T]he impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers. In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.^[34] []

Notes

1. Murray Rothbard, “Protectionism and the Destruction of Prosperity,” found on www.mises.org/fullarticle.asp?title=protectionism&month=1.
2. Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s Edition (Auburn, Ala.: Mises Institute, 1998 [1949]), p. 195.
3. Ibid.
4. Ibid., p. 196.
5. Ibid., p. 198.
6. Ibid., p. 199.
7. Ibid., p. 819.
8. Ibid., p. 827.
9. Thomas Paine, Common Sense, p. 20, in Philip S. Foner, ed., Complete Writings of Thomas Paine (New York: 1954).
10. Ibid.
11. Ibid.
12. W.B. Allen, ed., George Washington: A Collection (Indianapolis: LibertyClassics, 1988), p. 525.
13. Ibid.
14. Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew Rich (New York: Basic Books, 1986), pp. 71-112.
15. Murray Rothbard, “Mercantilism: A Lesson for Our Times?” in his The Logic of Action II (Cheltenham, England: Edward Elgar, 1997), p. 43.
16. Cited in Henry Higgs, The Physiocrats (New York: Langland Press, 1952), p. 45.
17. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Oxford University Press, 1976), p. 898.
18. Nick Elliott, “John Bright: Voice of Victorian Liberalism,” in Burton W. Folsom, Jr., ed., The Industrial Revolution and Free Trade (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), p. 28.
19. Frederic Bastiat, Selected Essays on Political Economy, George B. de Huszar, ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995), p. 111.
20. Samuel Eliot Morison, Henry Steele Commager, and William Leuchtenburg, The Growth of the American Republic (New York: Oxford University Press, 1980), pp. 112-25.
21. James Banner, To the Hartford Convention: The Federalists and the Origins of Party Politics in Massachusetts, 1789-1815 (New York: Alfred A. Knopf, 1970), p. 301.
22. John Taylor, Tyranny Unmasked (Indianapolis: Liberty Fund, 1992), p. xvi.
23. Ibid.
24. Ibid., p. 11.
25. Ibid., p. 19.
26. Ibid., p. 24.
27. Michael F. Holt, The Rise and Fall of the American Whig Party (New York: Oxford University Press, 1999).
28. Frank Taussig, A Tariff History of the United States (New York: Putnam, 1931), p. 157.
29. Howard Perkins, Northern Editorials on Secession (Gloucester, Mass.: Peter Smith, 1964), p. 600.
30. Ibid., p. 602.
31. Wilson Brown and Jan Hogendom, International Economics (New York: Addison-Wesley, 1994), p. 188.
32. Ibid., p. 192.
33. Ibid., p. 193.
34. Rothbard, “Protectionism.”

This article has been published with FEE’s permission.

By Gordon Kerr

1. Introduction

Mr Feio, Mr Pichonnier, ladies and gentlemen, thank you for inviting me to address you today.  We are here to explain and hopefully start to resolve the Icelandic banking collapse.

By way of brief personal introduction I am a banker.  In my 29 year career I have experienced several banking crises.  In the early 80’s I worked on Paris Club restructurings for Latin American sovereign defaulters.

Later in the 80’s I travelled frequently to the US in connection with the Savings and Loan crisis.  In the early 90’s I worked mainly in Stockholm on mortgage backed transactions during the Swedish banking collapse.

A few years later I designed instruments that would in turn play a small but significant role in precipitating the collapse of the Western banking system.  These instruments were called synthetic capital structures. They  created the appearance of an increase in capital on bank balance sheets when in reality the economic risk and return positions of the banks concerned were essentially the same after the transactions as before.

I am a member of the Advisory Board of a London based banking educational charity – The Cobden Centre, and I work for a small investment banking firm in London.

My message to you today is simple.  There is nothing specific about the way the Icelandic authorities managed its economy or its banking system that caused this massive failure.  The root of the problem lies within the very essence of the banking system itself.  Iceland, as a very small country with an aggressive banking industry, was just at the tipping point when the system itself failed, and has therefore suffered to a disproportionately greater extent than others.

2.  Were the Western Governments correct to bail out the banks?

Imagine the feeling of going to see a doctor with a puzzling medical condition, having both legs amputated, and three months later experiencing a recurrence of the symptoms.  You are admitted to hospital again, but this time the doctor who greets you post examination is far more sombre.

He explains that you have had a pancreatic tumour all along.  Had it been correctly diagnosed on first consultation the tumour would have been annulled, but now it is out of control and certain to kill you.

This, I believe, is a fair parallel with the way in which banks in the UK and many other European countries have been rescued.  I believe the bailouts are having the opposite effect to that which was intended.  They are not helping to re-stimulate lending to small and medium sized businesses – the engines of these economies.

A smarter observer than I has compared the UK solution to the actions of an alcoholic, accepting with equanimity inevitable long term pain as the consequence of his inability to resist the temptation of one more short term, fuzzy high.

There is a danger that solutions presently proposed could accidentally cut the legs off Iceland and condemn its economy to years of stasis, instead of helping to cure its crippled banking condition.

Let us look now at the banking system itself.  The legal rules which allow banks to gamble depositors’ demand funds on long term investments have simply created a liquidity pyramid scheme which, enhanced by various other banking developments, have boosted a variety of assets to unsustainable price levels that cannot be supported by the wealth of the relevant underlying economy.  Iceland, being both part of this system and a tiny country with its own currency, simply sits at the pinnacle of this Western banking system crisis.

3. Iceland and the Global Collapse

I urge you to resist the temptation of embracing  the political exculpation  of  ‘global credit crunch’.  Although the crisis was truly global this simple linguistic term seeks if anything to discourage serious analysis of what went wrong.

Many papers and speeches I have read  are good quality diarised timelines of events in Iceland, without presenting credible cures or accurate analyses of the cause.

Iceland’s collapse was clearly related to the global failure, but each country does not necessarily need a global solution.  Indeed, whenever I hear of a problem that can only be solved by global accord I cannot avoid the conclusion that such a problem is being expressed as intractable.  The climate change issue is but one other example of a problem looking for a global solution.

Before addressing Iceland’s unique challenges, may I present some of the “banking developments” to which I referred earlier.  I am about to set out just some of the features of permitted banking activity which have combined to create an unsustainable pyramid of asset prices which Western liquidity may struggle to support.

Most of the features I am about to describe do not appear on the radar screen of the press or blissfully ignorant politicians. For brevity I will set out only five such features:

a)     The circular effect whereby asset prices are inflated merely by the creation of loans provided by banks to finance the purchase of such assets.  I have many times witnessed competitive bidding wars between two purchasers wherein the independent valuer has simply up valued the assets each time one side or the other’s bank has issued   a larger loan offer.  It is essentially the case that the size of the loan  determines the asset price, not the other way around.  Therefore it is impossible to divorce the independent valuation of assets from the quantity of debt which banks are willing to issue against the assets.

b)    Under EU fractional reserve regulations banks are required to maintain a minimum of say 8% “fraction” of their exposures as capital.  Since the bulk of European banks are shareholder owned, market forces virtually compel them to push fractional reserve regulation to the limit.  It is very difficult for the CEO of a major bank to keep his job if he is not fully leveraged in supposedly stable market conditions.

c)     The absurd accounting regime that encourages banks to transfer as much exposure as possible into derivative format.  The derivatives accounting regime  presents two important benefits to banks: 1) the front ending of multi year’s hoped for income as Day 1 “profit”, and 2) the ability of a bank to leverage its capital not 12 times (the reciprocal of the 8% basic capital ratio) but up to 200 times (the reciprocal of 1/16 of the basic capital ratio).  The 200 times leverage rule has historically been the starting point for calculating the capital to be reserved against derivative exposures, and now, under  Basel 2 rules, this higher level of leverage is permitted against any AAA rated assets even in non-derivative format provided the bank concerned is regarded as sufficiently sophisticated).

I have a second confession to make.    I was involved in designing the early forms of credit derivatives.  I have written articles about this activity on the Cobden Centre website and I am grateful to its founder, Toby Baxendale, for inviting me to write about this.  Let me clarify for the record one frequently confused point.  The motivation behind the emergence of credit derivatives was not the enabling of banks to distribute loans to non-banks.  That activity was operating perfectly well before the advent of credit derivatives via other financial instruments.

The overriding motive behind the emergence of credit derivatives was in the accounting rules.  Credit derivatives allow banks to book multi-year profits, subject to supposedly conservative reserves, before they have been realised or earned in a sense that would satisfy an accountant in any industry other than banking.

d)    I referred earlier to the liquidity pyramid that results from the legal relationship between banks and depositors.  Depositors’ money belongs in law to the bank, not depositors.  The EU seems aware of this concern and some proposed new regulations talk about inhibiting banks’ future ability to mismatch the maturities of assets and liabilities.  This mismatching has, I believe, been a major contributor to the crisis in a very simple way:

• Person ‘A’ deposits £100 of cash into his instant-access bank account and receives a promise to return the cash on demand.
• The bank retains a small reserve (say £3), and lends out £97 to Person ‘B’.
• Person B purchases £97 worth of goods from person C who in turn redeposits the money in the bank.
• Both ‘A’ and ‘C’ both have a claim to instant access on this money.
• In three steps, the bank has turned £100 into £197 of useable money.

e) The use of the ECB discount window to finance banks purchase of assets post crisis.  There has, in the last 10 months, been a gradual rise in the prices of large volumes of the very type of banking assets that many UK commentators have termed “alphabet soup”.  Less kind commentators have termed some of these assets a “Liverpudlian Stew” – a rather unpleasant menu item, even by British culinary standards.  It is  in essence an attempt to present undigestible left over food as attractively as possible. (On behalf of Liverpool may I thank the EU for ordaining it as European City of Culture in 2008).

These price rises seem inconsistent with present reduced liquidity within the banking system. The only explanation I can reach is that some financial institutions have been able to fund their purchases of such assets via the central bank discounting windows such as the ECB itself.  Banks are then, as rational players in a regulated industry, motivated to make money by the monetisation of unrealised future profits by entering into synthetic arrangements on these same assets.  If true this effect will dash all our hopes that we may be coming out of the crisis.

4. ICELAND

Let us look at Iceland more specifically.  The root of the problem lay not in the failure of Iceland’s specific regulators or its national regulation system per se, but in the simple combination of three factors:

1. i.         Its small size and status as a country;
2. ii.        Its banks seeking aggressive growth;
3. iii.       Its acceptance of the Western bank regulatory regime.

The scale of the problem measured against Iceland’s GDP was simply incredible.  The country effectively staked its economic future on international banking, raising capital internationally and lending it out in highly leveraged packages relying on rating agencies and more experienced capital markets arrangers.

The deposit base which lay at the root of the banks’ efforts to prop up the pyramid should have collapsed before the problems became quite so bad, but thanks to Iceland’s status as a sovereign state and international conventions whereby one country’s banks can be “passported” to raise deposits in another, Iceland’s banks succeeded in raising considerable sums of demand deposits from other countries’ savers, in particular the UK and the Netherlands.  Those savers looked only to their own national regulators who, under passporting rules, in capital markets parlance simply “wrapped” the Icelandic Central Bank.’’

Ironically the taxpayers of countries such as the UK and Netherlands in effect wrote credit default protection on Iceland, and now, having been called on this protection, seek to exercise rights of subrogation against the Icelandic taxpaying citizenry.  But if the Icelandic people did not understand what was going on, are these actions not akin to luring the demented old lady next door into leaving you her house in her will and thereby disinheriting her children?

Icelanders who had saved in its major banks, supervised by its national regulators, were effectively performing the function of a junior mezzanine investor (ie just above the shareholders) in the capital structure of a typical “alphabet soup” investment whose fragility was almost impossible for the ordinary taxpayer to understand.

And so, the pyramid inflated further until September 29 2008.  On that date Glitnir, on seeing its credit lines withdrawn following the collapse of Lehman, knew it was unable to raise funds to satisfy a €750 million payment due on October 15^th and approached the Central Bank of Iceland for an emergency loan.  The loan request was turned down and instead Glitnir was forced to accept €600m from the central bank in return for a 75% stake.  Its shareholders were practically wiped out[i].

Iceland therefore suffered like no other country, and at a rapacious rate.  At less than 6% of GDP, government debt was tiny at the beginning of 2008.  Under an FRB system that mirrored that of all major European countries its banking system was quickly destroyed and its people burdened with unimaginable levels of debt.

5. What Should Iceland Do?

We have just heard from Dr. Tryggvi Thor Herbertsson MP that there is great doubt as to whether it will join the Euro.  Even if the Eurozone states can fund the PIGS and other bailouts presently planned, should Iceland ask for an EU bailout?

The short term appeal is obvious, is the longer term outlook as rosy?  What of the concerns of abandonment of control over fiscal and monetary policy?  Are these measures consistent with the Icelandic character and way of doing things?

Let us consider Greece very briefly.  The calm 2 weeks  ago when the Greek bailout was announced has been replaced by concern.  The austerity measures the EU would impose will be as unpopular in Iceland as they are in Greece.

There is clearly a gulf between the positions of the bailor and  the bailee.   As I prepare this speech I read in February 25th Daily Telegraph the following report by Ambrose Evans Pritchard:

“Hans-Werner Sinn, head of Germany’s IFO economic institute, said Athens was holding Euroland to ransom, threatening to set off mayhem if there is no bail-out. “Greece should never have entered the euro zone because they did not qualify and they are now blackmailing other European countries via the euro. It’s not for the EU to help Greece. We have an institution that is very experienced in bailing-out activities: the IMF,” he said.

Otmar Issing, former doyen of the European Central Bank, echoed this view in Germany’s Bundestag last Wednesday, warning that a Greek rescue would “open the floodgates” for serial bail-outs and destroy EMU discipline. “The crisis is made in Greece. It is the result of bad policy, not outside forces like an earthquake.” “

Does this rhetoric imply that life under the EU will be much better for Icelanders?  That is clearly a decision for Iceland’s Government and people.

If Iceland joins the EU then I would urge the EU to reform its own regulatory regime fundamentally to protect Iceland from further catastrophe.  Relying on rating agencies as the basis of regulation, rather than markets, makes little sense.

It is not impossible to devise a fractional reserve regulatory system that will work if its practitioners are expert bankers and fully appraised of everything that its banks are engaged in post reform.  But this is fraught with risks.

A far easier solution for Iceland is to make one simple law change.  Grant depositors title to their deposits, stipulate that the state and taxpayers will never again bail out the banks, and allow free market forces to create a safe and transparent banking system.  A ban on the maturity mismatching of assets, combined with a clear policy of NOT bailing out the banks in future, will enable free markets to flourish.

Do not blame the bankers, they were merely acting like rational capitalist players in a wrongly regulated system.  If we are to allocate blame then look to yourselves right here in the Brussels Parliament.  It is you rulemakers who have made the mistakes.  You should have worked this out.

6. Conclusion

The way forward for Iceland should be to look to itself.  Tryggvi, your people have a powerful sense of identity.  You have a wonderful natural economy, a well educated population and a well documented strength of character.  You can fix your problems yourselves, but maybe with a little help from my firm! The detail of implementation needs to be set in the context of modern banking.  A restructured banking system as proposed today would ensure:

1)   Depositors could NEVER AGAIN lose their money;

2)   Credit would resume flowing from savers to entrepreneurs;

3)   The reopening of the international capital markets to Iceland

Without these measures I fear it will be back to the operating theatre in a year or two, with little prospect of a speedy recovery.

Mr Feio, Mr Pichonnier, ladies and gentlemen, thank you for your time.

END

Gordon Kerr  – March 2nd 2010

EU Parliament, Brussels

[i] What the Icelandic Collapse has Taught Us, February 2009, Tryggvi Thor Herbertsson

This article has been published with the Cobden Centre‘s permission.

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 he first published in the June 1994 issue of FEE’s journal, “The Freeman.”

In every election year, expect to be barraged with rhetoric about “getting the country moving again,” “creating jobs, jobs, jobs,” and “stimulating the economy.”

Politicians love to promise the future and ignore their own handiwork of the past. They typically spend much more time concocting new schemes for intervention than they spend searching for old ones that deserve to be repealed.

What really deserves our attention are those specific barriers to economic opportunity erected by government—regulations, taxes, licensure laws, unfunded mandates, building and zoning codes, special privileges for organized labor, subsidies to business, chronic budget deficits that consume needed capital, a welfare system that puts a premium on idleness and a penalty on work, and an education monopoly that fails to teach children as it vacuums their parents’ wallets, to name a few.

Dozens of studies have shown that excessively restrictive zoning laws, building codes, and property taxes constitute the greatest obstacles to affordable housing for the poor. Minimum wage laws, by making it illegal to employ people whose skills are worth less than government decrees, keep hundreds of thousands from getting a start in the job market. Endless regulations designed to curtail entry into markets from trucking to taxis freeze out many a would-be entrepreneur from creating new businesses.

I’m not talking about basic laws which prevent or punish harm to others. I’m talking about the primary social disease of our age—government beyond its proper bounds, playing Robin Hood, Santa Claus, and Mother Hen all at the same time, inflicting real damage to real people who have victimized no one. Economists, at least, are increasingly taking a critical eye to such policies.

It must be understood, however, that economic analysis will not by itself make the case for ridding ourselves of these man-made obstructions. It is powerful, but still not enough, to simply add up the numbers and show how many jobs are erased by particular actions of government. It is not enough to produce graphs and models that plot the fluctuations in Gross National Product.

What is sorely needed in the discussion is a recognition of the moral backwardness that so many of these barriers to economic opportunity represent. Dismantling the barricade requires that we who advocate freedom of enterprise seize the high ground. We must appeal to what most people instinctively know is right, not just what makes the cash register sing. We must learn to speak of the deleterious actions of government in terms of trampled rights, broken dreams, and ruined lives.

For instance, when the city of Detroit in Michigan imposes—as it does—a tax burden that is several times the average burden in Michigan municipalities, that is not simply bad economics. It is an affront to every citizen of that city who wants the best for his family, who wants simply a chance to be productive. Those high taxes should evoke visions of hungry children, of a boarded-up business that was once someone’s dream, of homes torn apart because of the breadwinner’s inability to pay the bills of irresponsible politicians.

Why is it that people who go to work for government as officeholders or bureaucrats are known as “public servants”—even when highly paid? Why isn’t “public servant” a term reserved for those entrepreneurial heroes in the private sector who create jobs, invent machines, cure illnesses, build businesses, serve customers, and pay the bills of government through their taxes? When the barriers erected by “public servants” crush the self-reliance of enterprising citizens, where is the outcry of righteous indignation from the public or the press?

What taxers and regulators do to people and their business dreams and what countless other acts of government inflict upon people every day is morally repugnant. Such deeds are throwbacks to less enlightened times when the common thief and the uncommon prince were indistinguishable but for their robes.

The campaign to restore our liberties and enhance our economic opportunities must incorporate a personal, moral dimension at its core. A law which suffocates the aspirations of enterprising men and women is more than bad economics. In a free society, it ought to be a moral outrage.

Johnny Munkhammar is a Swedish writer and entrepreneur, also Research Director at European Enterprise Institute and the author of “The Guide to Reform”.

Thirty years after Margaret Thatcher came to power and 20 years after the fall of the Berlin Wall, economic freedom has decreased in half of the major economies last year. Governments are intensely chasing banks, tax havens, hedge funds, corporations and tax.

New regulations, increased public spending and protectionist measures are rife in the policy agendas of the Western world. Is ever increasing government the new trend, a reverse of the past decades of economic freedom?

So it would seem. The stimulus response to the crisis is a major step, building debt, which has to be paid for by future taxes. The demographic development and consumer demands will lead to a massive cost increase in several public systems for decades to come.

Actually, the so-called Anglo-Saxon countries – supposedly the freest major economies – had already begun to expand government before the crisis. Public spending in the US increased between 2000 and 2008 from 35 to 39 per cent of GDP, and in the UK from 37 to 47 per cent.

Costs for health care and elderly care are rising, as well as pensions. In Japan, Italy and Spain, costs for pensions will explode. Even the United States seems to be unable to avoid a rise in public expenditure, due to so-called entitlements, to today’s French or German levels.

For a number of reasons, this would be a very harmful development. First, there is no sign that the stimulus packages improved long-term growth. Huge amounts of the tax-payer’s money were thus wasted, increasing debt, which will increase future tax burdens.

Second, the past quarter-century of increased economic freedom has been an unprecedented success. Global GDP per capita rose by 50 per cent, extreme poverty was cut in half and more people than ever enjoy western-style living standards.

Third, economic freedom is strongly correlated with other important aims, such as environmental protection, social progress and indicators of quality of life.

Fourth, despite the crisis, the results of liberalization remain. Since 1990, GDP per capita has increased by 64 per cent in the US and 47 per cent in the UK – but only by 35 per cent in France, 23 per cent in Germany and 16 per cent in Japan.

And finally, if there is one lesson Europeans should have learned, it is to avoid big government. Since Eastern and Central Europe abandoned the command economies, their living standards improved more than anyone dared to imagine in 1989.

It would be devastating for our living standards to ignore this lesson and return to pre-Thatcher policies. But is that not the apparent direction right now? Happily, not. The way the policy tide has turned around may be described in one word: Massachusetts.

As voters made Republican Scott Brown the senator to succeed Ted Kennedy, Democrats lost the necessary majority to pass their health care reform. It was like a referendum on big government and it lost.

Major changes can often be traced to minor events like this. President Obama will now have to move to the center. And though American voters are different from European voters, it is unlikely that this will pass unnoticed in Europe.

Several European countries responded to the crisis by continuing free-market reforms, especially in Eastern and Central Europe, but also Sweden, for example. Their success will put more pressure on the countries that chose the fraught path of big government.

In the end, facing the economic power of the BRIC countries, even reluctant reformers like EU President Herman van Rompuy see reform as a matter of survival. Europe has reformed during the past two decades, and must continue to do so.

The stimulus should be rolled back, but the main challenge arises in the long term, and includes the US and Japan too. To avoid exploding costs in health care, elderly care and pensions, public expenditures must be transformed into private expenditures.

This is the only way to avoid ever-bigger government, with all its problems. And it would actually bring many benefits. People would be allowed more choice, suppliers would compete, and that should improve quality as well as efficiency.

Transforming the welfare state into a welfare society may not be easy or quick, which is exactly why the debate about how to do it must take place now. Politicians may fear public opinion and prefer to wait. But we have already waited far too long.

And regarding public opinion – let Massachusetts strengthen our resolve.