The Freeman 1970

the

FreemanVOL. 20, NO. 10 • OCTOBER 1970

Foreign Investment vs. Foreign Aid Henry Hazlitt 579Government-to-government aid promotes socialism and waste and prolongs thepoverty it is designed to cure.

A Youthful Purpose James W. Muller 594Look not to the welfare state but to freedom, urges this young man.

Hyperinflation in Germany Hans F. Sennholz 598The German experience with runaway inflation after World War I should serveto warn those who advocate inflationary policies today.

The Tragedy of the Commons C. R. Batten 608To avoid the waste of resources "owned in common," they need to be broughtunder private ownership and control.

Profits and Profit Makers -What Does the Public Think About Them? Lawrence Fertig 610

How the distorted view of the innovator's function disrupts the economy.

For Moral Growth Tibor R. Machan 620If man's moral upgrading is to match his economic progress, he must assumepersonal responsibility for the job.

Throttling the Railroads:6. Railroads in the Grip of Government Clarence B. Carson 623

The sad story of the past half-century's holding action against disaster.

Freedom and Democracy Earl Zarbin 633The concepts may be related, but the words are not interchangeable.

Book Reviews: 635"Carte Blanche for Chaos" by Lillian R. Eloehme"The Theory of Education in the United States" by Albert Jay Nock"The British National Health Service" by Michael R. Saxon, M.D.

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

the

FreemanA MONTHLY JOURNAL OF IDEAS ON LIBERTY

IRVINGTON-ON·HUDSON, N. Y. 10533 TEL.: (914) 591-7230

LEONARD E. READ

PAUL L. POIROT

President, Foundation forEconomic Education

Managing Editor

THE FREEMAN is published monthly by theFoundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of privateproperty, the free market, the profit and loss system,and limited government.

Any interested person may receive its publicationsfor the asking. The costs of Foundation projects andservices, including THE FREEMAN, are met throughvoluntary donations. Total expenses average $12.00 ayear per person on the mailing list. Donations are invited in any amount-$5.00 to $10,000-as the meansof maintaining and extending the Foundation's work.

Copyright, 1970, The Foundation for Economic Education, Inc. Printed In

U.S.A. Additional copies, postpaid, to one address: Single copy, 50 cents;

3 for $1.00; 10 for $2.50; 25 or more, 20 cents each.

Articles from this journal are abstracted and lndexed in Historical

Abstracts and/or America: History· and Life. THE FREEMAN also Is

available on microfilm, Xerox University Microfilms, Ann Arbor, MIch

igan 48106. Permission granted to reprint any article from this issue,

with appropriate credit, except liThe Tragedy of the Commons."

HENRY HAZLITT

FOREIGN

INVESTMENTFOREIGN

AID

AT the beginning of Chapter IIIof his History of England, ThomasBabington Macaulay wrote:

"In every experimental sciencethere is a tendency toward perfection. In every human being thereis a wish to ameliorate his owncondition. These two principleshave often sufficed, even whencounteracted by great public calamities and by bad institutions,to carry civilization· rapidly forward. No ordinary misfortune, noordinary misgovernment, will doso much to make a nation wretchedas the constant effort of every manto better himself will do to makea nation prosperous.·. I t has oftenbeen found that profuse expenditures, heavy taxation, absurdcommercial restrictions, corrupttribunals, disastrous wars, sedi-

Henry Hazlitt is well-known to FREEMANreaders as author, columnist, editor, lecturer,and practitioner of freedom. This article willappear as a chapter in a forthcoming book, TheConquest of Poverty, to be published by Arlington House.

tions, persecutions, conflagrations,inundations, have not been able todestroy capital so fast as the exertions of private citizens havebeen able to create it. It caneasily be proved that, in our ownland, the national wealth has, during at least six centuries, beenalmost uninterruptedly increasing.... This progress, having continued during many ages, becameat length, about the middle of theeighteenth century, portentouslyrapid, and has proceeded, duringthe nineteenth, with acceleratedvelocity."

We too often forget this basictruth. Would-be humanitariansspeak constantly today of "thevicious circle of poverty." Poverty, they tell us, produces malnutrition and disease, which produceapathy and idleness, which perpetuate poverty;¥ and no progessis possible without help from outside. This theory is· today propounded unceasingly, as if it were

580 THE FREEMAN October

axiomatic. Yet the history of nations and 'individuals shows it tobe false.

It is not only "the natural effortwhich every man is continuallymaking to better his own condition" (as Adam Smith put it evenbefore Macaulay) that we need toconsider, but the constant effortof most families to give theirchildren a "better start" than theyenjoyed themselves. The poorestpeople under the most primitiveconditions work first of all forfood, then for .clothing andshelter. Once they have provideda rudimentary shelter, more oftheir energies are released for increasing the quantity or improving the quality of their food andclothing and shelter. And for providing tools. Once they have acquired a few tools, part of theirtime and energies can be releasedfor making more and better tools.And so, as Macaulay emphasized,economic·progress can become accelerative.

One reason it took so many centuries before this acceleration actually began, is that as men increased their production of themeans of subsistence, more oftheir children survived. Thismeant that their increased production was in fact mainly used tosupport an increasing population.Aggregate production, population,and consumption all increased;

but per capita production andconsumption barely increased atall. Not until the Industrial Revolution began in the late eighteenthcentury did the rate of productionbegin to increase by so much that,in spite of leading to an unprecedented increase in population, itled also to an increase in percapita production. In the Western world this increase has continued ever since.

So a country can, in fact, starting from the most primitive conditions, lift itself from poverty toabundance. If this were not so,the world could never have arrivedat its present state of wealth.Every country started poor. As amatter of historic fact, most nations raised themselves from"hopeless" poverty to at least aless wretched poverty purely bytheir own efforts.

Specialization and Trade

One of the ways by which eachnation or region did this was bydivision of labor within its ownterritory and by the mutual exchange of services and products.Each man enormously increasedhis output by eventually specializing in a single activity - by becoming a farmer, butcher, baker,mason, bricklayer, or tailor - andexchanging his product with hisneighbors. In time this process extended beyond national bound-

1970 FOREIGN INVESTMENT VS. FOREIGN AID 581

aries, enabling each nation to specialize more than before in theproducts or services that it wasable to supply more plentifully orcheaply than others, and by exchange and trade to supply itselfwith goods and services fromothers more plentifully or cheaplythan it could supply them for itself.

But this was only one way inwhich foreign trade acceleratedthe mutual enrichment of nations.In addition to being able to supplyitself with more goods and cheapergoods as a result of foreign trade,each nation supplied itself withgoods and services that it couldotherwise not produce at all, andof which it would perhaps noteven have known the existence.

Thus foreign trade educateseach nation that participates in it,and not only through such obviousmeans as the exchange of booksand periodicals. This educationaleffect is particularly importantwhen hitherto backward countriesopen their' doors to industriallyadvanced countries. One of themost dramatic examples of thisoccurred in 1854, when Commodore Perry at the head of aU. S.naval force "persuaded" the Japa-

.nese, after 250 years of isolation,to open their doors to trade. andcommunication with the U.S. andthe rest of the world. Part ofPerry's success, significantly, was

the result of bringing and showingthe Japanese such things as a modern telescope, a model telegraph,and a model railway, which delighted and amazed them.

Some Steps May Be Skipped

Western reformers today, praising some hitherto backward country, in Africa or Asia, will explain how much smarter its nativesare than we of the West becausethey have "leaped in a singledecade from the seventeenth intothe twentieth century." But theleap, while praiseworthy, is not sosurprising when one recalls thatwhat the natives mainly did wasto import the machines, instruments, technology, and know-howthat had been developed duringthose three centuries by the scientists and technicians of theWest. The backward countrieswere able to bypass home coalfurnaces, gaslight, the street car,and even, in most cases, the railroad, and to import Western automobiles, Western knowledge ofroad-building, Western airplanesand airliners, telephones, centraloil heaters, electric light, radio andtelevision, refrigerators and airconditioning, electric heaters,stoves, dishwashers and clotheswashers, machine tools, factories,plants, and Western technicians,and then to send some of theiryouth to Western colleges and uni-


versities to become technicians,engineers, and scientists. Thebackward countries imported, inbrief, their "great leap forward."

In fact, not merely the recentlybackward countries of Asia andAfrica, but every great industrialized Western nation, not excluding the United States, owes a verygreat part - indeed, the major part- of its present technologicalknowledge and productivity to discoveries, inventions, and improvements imported from other nations. Notwithstanding the elegantelucidations by the classical economists, very few of us today appreciate all that the world andeach nation owes to foreign trade,not only in services· and products,but even more in knowledge, ideas,and ideals.

International Investment

Historically, international tradegradually led to international investment. Among independent nations, international investment developed inevitably when theexporters of one nation, in orderto increase their sales, sold onshort-term credit, and later onlonger-term credit, to the importers of another. It developed alsobecause capital was scarcer in theless developed nation, and interestrates. were higher. It developed ona larger scale when men emigratedfrom one country to another, start-

ing businesses in the new country,taking their capital as well as theirskills with them.

In fact, what is now known as"portfolio" investment - the purchase by the nationals of one country of the stocks or bonds of thecompanies of another - has usually been less important quantitatively than this "direct" investment. In 1967 U. S. private investments abroad were estimated tototal $93 billion, of which $12billion were short-term assets andclaims, and $81 billion long-term.Of American long-term private investments abroad, $22 billion wereportfolio investments and $59 billion direct investments.

The export of private capital forprivate investment has on thewhole been extremely profitablefor the capital-exporting countries.In everyone of the twenty yearsfrom 1945 to 1964 inclusive, forexample, the income from old direct foreign investments by U. S.companies exceeded the outflow ofnew direct investments. In thattwenty-year period new outflowsof direct investments totaled $22.8billion, but income from old directinvestments came to $37.1 billion,plus $4.6 billion from royaltiesand fees, leaving an excess inflowof $18.9 billion. In fact, with theexception of 1928, 1929, and 1931,U. S. income from direct foreigninvestments exceeded new capital


outlays in every year since 1919.1Our direct foreign investments

also greatly stimulated our merchandise exports. The U. S. Department of Commerce found thatin 1964, for example, $6.3 billion,or 25 per cent of our total exportsin that year, went to affiliates ofAmerican companies overseas.

It is one of the ironies of ourtime, however, that the U. S. government decided to put the entireblame for the recent "balance-ofpayments deficit" on American investments abroad; and beginningin mid-1963, started to penalizeand restrict such investment.

The advantages of internationalinvestment to the capital importing country should be even moreobvious. In any backward countrythere are almost unlimited potential ventures, or "investmentopportunities," that are not undertaken chiefly because the capitalto start them does not exist. It isthe domestic lack of capital thatmakes it so difficult for the "underdeveloped"country to climb outof its wretched condition. Outsidecapital can enormously accelerateits rate of improvement.

Investment from abroad, likedomestic investment, can be of twokinds: the first is in the form of

1 See The. United States Balance ofPayments (Washington: InternationalEconomic Policy Association, 1966), pp.21 and 22.

fixed interest-bearing loans, thesecond in the form of direct equityinvestment in which the foreigninvestor takes both the risks andthe .profits. The politicians of thecapital-importing country usuallyprefer the first. They see theirnationals, say, making 15 or 30per cent annual gross profit on aventure, paying off the foreignlender at a rate of only 6 per cent,and keeping the difference as netprofit. If the foreign investormakes a similar assessment of thesituation, however, he naturallyprefers to make the direct equityinvestment himself.

But the foreigner's preferencein this regard does not necessari1y mean that the capital-importingcountry is injured. It is to its ownadvantage if its government putsno vexatious restrictions on theform or conditions of the privateforeign investment. For if theforeign investor imports, in addition to his capital, his own (usually) superior management, experience, and technical know-how,his enterprise may be more likelyto succeed. He cannot help butgive employment to labor in thecapital-importing country, even ifhe is allowed to bring in laborfreely from his own. Self-interestand wage-rate differentials willprobably soon lead him to displacemost of whatever common or evenskilled labor he originally brings


in from his own country with thelabor of the host country. He willusually supply the capital-importing country itself with some article or amenity it did not havebefore. He will raise the averagemarginal productivity of labor inthe country in which he has builthis plant or made his investment,and his enterprise will tend toraise wages there. And if his investment proves particularly profitable, he will probably keep reinvesting most of his profits in it aslong as the market seems to justifythe reinvestment.

There is still another benefit tothe capital-importing country fromprivate foreign investment. Theforeign investors will naturallyseek out first the most· profiitableinvestment opportunities. If theychoose wisely, these will also bethe investments that produce thegreatest surplus of market valueover costs and are therefore economically most productive. Whenthe originally most productive investment opportunities have beenexploited to a point where the comparative rate of return begins todiminish, the foreign investorswill look for the next most productive investment opportunities,originally passed over. And so on.Private foreign investment willtherefore tend to promote the mostrapid rate of economic improvements.

Foreigners Are Suspect

It is unfortunate, however, thatjust as the government of theprivate-capital-exporting countrytoday tends to regar~ its capitalexports with alarm as a threat toits "balance of payments," thegovernment of the private-capitalimporting country today tends toregard its capital imports at leastwith suspicion if not with evengreater alarm. Doesn't the privatecapital-exporting country make aprofit on this capital? And if so,mustn't this profit necessarily beat the expense of the capital-importing country? Mustn't the latter country somehow be givingaway its patrimony? It seems impossible for the anticapitalist mentality (which prevails among thepoliticians of the world, particularly in the underdeveloped countries) to recognize that both sidesnormally benefit from any voluntary economic transaction,. whether a purchase-sale or a loan-investment, domestic or international.

Chief among the many fears ofthe politicians of the capital-importing country is that foreigninvestors "take the money out ofthe country." To the extent thatthis is true, it is true also ofdomestic investment. If a homeowner in Philadelphia gets a mortgage from an investor in NewYork, he may point out that hisinterest and amortization pay-


ments are going out of Philadelphia and even out of Pennsylvania.But he can do this with a straightface only by forgetting that heoriginally borrowed the moneyfrom the New York lender eitherbecause he could not raise it at allin his home city or because he gotbetter terms than he could get inhis home city. If the New Yorkermakes an equity investment inPennsylvania, he may take out allthe net profits; but he probablyemploys Pennsylvania labor tobuild his factory and operate it.And he probably pays out $85 to$90 annually for labor, supplies,rent, etc., mainly in Pennsylvania,for every $10 he takes back toNew York. (In 1969, Americanman ufacturing corporationsshowed a net profit after taxes ofonly 5.4 per cent on total value ofsales.) "They take the money outof the country" is an objectionagainst foreign investors resultingeven more from xenophobia thanfrom anticapitalism.

Fear of Foreign Control

Another objection to foreigninvestment by politicians of thecapital-importing country is thatthe foreign investors may "dominate" the borrowing country'seconomy. The .implication (madein 1965 by the de Gaulle government of France, for example) isthat American-owned companies

might come to have too much tosay about the economic decisionsof the government of the countriesin which they are located. The realdanger, however, is the other wayround. The foreign-owned company puts itself at the mercy ofthe government of the host country. Its capital in the form ofbuildings, equipment, drilled wellsand refineries, developed mines,and even bank deposits, may betrapped. In the last twenty-fiveyears, particularly in Latin America and the Middle East, as American oil companies and others havefound to their sorrow, the dangersof discriminatory labor legish(tion, onerous taxation, harassment, or even expropriation, arevery real.

Yet the anticapitalistic, xenophobic, and other prejudicesagainst private foreign investmenthave been so widespread, in boththe countries that would gainfrom importing capital and thecountries that would profit fromexporting it, that the governmentsin both sets of count'ries have imposed taxes, laws and regulations,red tape, and other obstacles todiscourage it.

At the same time, paradoxically,there has grown up in the lastquarter-century powerful politicalpressures in both sets of countriesin favor of the richer countriesgiving capital away to the poorer


in the form of government-to-government "aid."

The Marshall Plan

This present curious giveawaymania (it can only be called thaton the part of the countries making the grants) got started as theresult of an historical accident.During World War II, the UnitedStates had been pouring supplies- munitions, industrial equipment,foodstuffs - into the countries ofits allies and cobelligerents. Thesewere all nominally "loans." American Lend-Lease to Great Britain,for .. example, came to some $30 billion and to Soviet Russia to $11billion.

But when the war ended, Americans were informed not only thatthe Lend-Lease recipients couldnot repay and had no intention ofrepaying, but that the countriesreceiving these loans in wartimehad become dependent upon themand were still in desperate straits,and that further credits werenecessary to stave off disaster.

This was the origin of the Marshall Plan.

On June 5, 1947, General GeorgeC. Marshall, then American Secretary of State, made at Harvardthe world's most expensive commencement address, in which hesaid:

"The truth of 'the matter is thatEurope's requirements, for the

next three or four years, of foreignfood and other essential products- principally from America - areso much greater than her presentability to pay that she must havesubstantial additional help, or faceeconomic, social, and political deterioration of a very grave character."

Whereupon Congress authorizedthe spending in the followingthree-and-a-half years of some $12billion in aid.

This aid was widely creditedwith restoring economic health to"free" Europe and halting themarch of communism in the recipient countries. It is true thatEurope did finally recover fromthe ravages of World War II - asit had recovered from the ravagesof World War I. And it is truethat, apart from Yugoslavia, thecountries not occupied by SovietRussia did not go communist. Butwhether the Marshall Plan accelerated or retarded this recovery,or substantially affected the extentof communist penetration in Europe, can never be proved. Whatcan be said is that the plight ofEurope in 1947 was at least asmuch the result of misguided European governmental economic policies as of physical devastationcaused by the war. Europe's recovery was far slower than itcould have been, with or withoutthe Marshall Plan.


This was dramatically demonstrated in West Germany in 1948,when the actions between June 20and July 8 of Economic MinisterLudwig Erhard in simultaneouslyhalting inflation, introducing athoroughgoing currency reform,and removing the strangling network of price controls, brought theGerman· "miracle" of recovery.

As Dr. Erhard himself describedhis action: "We decided upon andre-introduced the old rules of afree economy, the rules of laissezfaire. We abolished practically allcontrols over allocation, prices,and wages, and replaced them witha price mechanism controlled predominantly by money."

The result was that German industrial production in the secondhalf of 1948 rose from 45 per centto nearly 75 per cent of the 1936level, while steel production doubled that year.

It is sometimes claimed that itwas Germany's share of Marshallaid that brought on the recovery.But nothing similar occurred inGreat Britain, for example, whichreceived more than twice as muchMarshall aid. The German percapita gross national product, measured in constant prices, increased64 per cent between 1950 and1958, whereas the per capita increase in Great Britain, similarlymeasured, rose only 15 per cent.

Once American politicians got

the idea that the American taxpayer owed other countries a living, it followed logically that hisduty could not be limited to just afew. Surely that duty was to seethat poverty was abolished everywhere in the world. And so in hisinaugural address of January 20,1949, President Truman called for"a, bold new program" to make"the benefits of our scientific advances and industrial progressavailable for the improvement andgrowth of underdeveloped areas....This program can greatly increasethe industrial activity in othernations and can raise substantiallytheir standards of living."

Because it was so labeled in theTruman address, this program became known as "Point Four." Under it the "emergency" foreign aidof the Marshall Plan, which wasoriginally to run for three of fouryears at most, was universalized,and has now been running formore than twenty years. So far asits advocates and built-in bureaucracy are concerned,; it is tolast until foreign poverty has beenabolished from the face of theearth, or until the per capita "gap"between incomes in the backwardcountries and the advanced countries has been closed - even if thattakes forever.

The cost of the program alreadyis appalling. Total disbursementsto foreign nations, in the fiscal


years 1946 through 1970, came to$131 billion. The total net interestpaid on what the U. S. borrowedto give away these funds amountedin the same period to $68 billion,bringing the grand total throughthe 25-year period to $199 billion.2

This money went altogether tosome 130 nations. Even in the fiscal year 1970, the aid program wasstill operating in 99 nations andfive territories of the world, with51,000 persons on the payroll, including U. S. and foreign personnel. Congressman Otto E. Passman, chairman of the Foreign Operations Subcommittee on Appropriations, declared on July 1,1969: "Of the three-and-a-half billion people of the world, all but36 million have received aid fromthe U. S."

Domestic Repercussions

Even the colossal totals justcited do not measure the total lossthat the foreign giveaway program has imposed on the American economy. Foreign aid has hadthe most serious economic sideeffects. It has led to grave distortions in our economy. It hasundermined our currency, andcontributed toward driving. us offthe gold standard. It has accelerated our inflation. It was suf-

2 Source: Foreign Operations Subcommittee on Appropriations, House ofRepresentatives, July 1, 1970.

ficient in itself to account for thetotal of our Federal deficits in the1946-70 period. The $199 billionforeign aid total exceeds by $116billion even the $83 billion increase in our gross national debtduring the same years. Foreign aidhas also been sufficient in itself toaccount for all our balance-of-payments deficits (which our government's policies blame on privateforeign investment) .

The advocates of foreign aidmay choose to argue that thoughour chronic Federal budget deficitsin the last 25 years could be imputed to foreign aid, we couldalternatively impute those deficitsto other expenditures, and assumethat the foreign aid was paid forentirely by raising additionaltaxes. But such an assumptionwould hardly improve the case forforeign aid. It would mean thattaxes during this quarter-centuryaveraged at least $5 billion highereach year than they would haveotherwise. It would be difficult toexaggerate the setbacks to personal working incentives, to newventures, to profits, to capital investment, to employment, to wages,to living standards, that an annualburden of $5 billion in additionaltaxation can cause.

If, finally, we make the "neutral"assumption that our $131 or $199billion in foreign aid (whicheverway we choose to calculate the


sum) was financed in exact proportion to our actual deficit andtax totals in the 25-year period,we merely make it responsible forpart of both sets of evils.

In sum, the foreign aid programhas immensely set back our ownpotential capital development. Itought to be obvious that a foreigngiveaway program can. raise thestandards of living of the socalled "underdeveloped areas" ofthe world only by lowering ourown Iiving stand~rds comparedwith what they could otherwise be.If our taxpayers are forced tocontribute millions of dollars forhydroelectric plants in Africa orAsia, they obviously have thatmuch less for productive investment in the U. S. If they contribute $10 million dollars for a housing project in Uruguay, they havejust that much less for their ownhousing, or any other cost equivalent, at home. Even our own socialist and statist do-gooders wouldbe shaken if it occurred to themto consider how much might havebeen done with that $131 or $199billion of foreign aid to mitigatepollution at home, build subsidizedhousing, and relieve "the plight ofour cities." Free enterprisers, ofcourse, will lament the foreigngiveaway on the far more realisticcalculation of how enormously theproduction, and the wealth andwelfare of every class of our popu-

lation, could have been increasedby $131 to $199 billion in moreprivate investment in new andbetter tools and cost-reducingequipment, and in higher livingstandards, and in more and betterhomes, hospitals, schools, and universities.

The Political Arguments

What have been the economic orpolitical compensations to theUnited States for the staggeringcost of its foreign aid program?Most of them have been illusory.

When our successive Presidentsand foreign aid officials make inspirational speeches in favor offoreign aid, they dwell chiefly onits alleged humanitarian virtues,on the need for American generosity and compassion, on our dutyto relieve the suffering and sharethe burdens of all mankind. Butwhen they are trying to get thenecessary appropriations out ofCongress, they recognize the advisability of additional arguments.So they appeal to the Americantaxpayer's material self-interest.It will redound to his benefit, theyargue, in three ways: 1. It willincrease our foreign trade, andconsequently the profits from it.2. It will keep the underdevelopedcountries from going communist.3. It will turn the recipients of ourgrants into our eternally gratefulfriends.


The answers to these argumentsare clear:

1. Particular exporters mayprofit on net balance from theforeign aid program, but theynecessarily do so at the expense ofthe American taxpay·er. It makeslittle difference in the end whetherwe give other countries the dollarsto pay for our goods, or whetherwe directly give them the goods.We cannot grow rich by givingour goods or our dollars away. Wecan only grow poorer. (I would beashamed of stating this truism ifour foreign aid advocates did notso systematically ignore it.)

2. There is no convincing evidence that our foreign aid playedany role whatever in reversing,halting, or even slowing down anydrift toward communism. Our aidto Cuba in the early years of theprogram, and even our specialfavoritism toward it in assigningsugar quotas and the like, did notprevent it from going communistin 1958. Our $769 million of aid tothe United Arab Republic did notprevent it from coming underRussian domination. Our $460million aid to Peru did not preventit from seizing American privateproperties there. Neither our$7,715 million aid to India, nor our$3,637 million aid to Pakistan, prevented either country from movingdeeper and deeper into socialismand despotic economic controls.

Our aid, in fact, subsidized thesevery programs, or made them possible. And so its goes, countryafter country.

3. Instead of turning the recipients into grateful friends, thereis ever-fresh evidence that ourforeign aid program has had precisely the opposite effect. It ispre-eminently the American embassies and the official Americanlibraries that are mobbed andstoned, the American flag that isburned, the Yanks that are told togo home. And the head of almostevery government that acceptsAmerican aid finds it necessary todenounce and insult the UnitedStates at regular intervals in orderto prove to his own people that heis not subservient and no puppet.

So foreign aid hurts both theeconomic and political interest ofthe country that extends it.

The Unseen Costs of

Utopian Programs

But all this might be overlooked,in a broad humanitarian view, ifforeign aid accomplished its mainostensible purpose of raising theliving levels of the countries thatreceived it. Yet both reason andexperience make it clear that inthe long run it has precisely theopposite effect.

Of course, a country cannot giveaway $131 billion without its doingsomething abroad (though we


must always keep in mind thereservation - instead of somethingelse at home). If the money isspent on a public housing project,on a hydroelectric dam, on a steelmill (no matter how uneconomicor ill-advised), the housing or thedam or the mill is brought intoexistence. It i~ visible and undeniable. But to point to that is topoint only to the visible gross gainwhile ignoring the costs and theoffsets. In all sorts of wa.ys - economic, political, spiritual- the aidin the long run hurts the recipientcountry. It becomes dependent onthe aid. It loses self-respect andself-reliance. The poor country be..comes a pauperized country, abeggar country.

There is a profound contrastbetween the effects of foreign aidand of voluntary private investment. Foreign aid goes from government to government. It istherefore almost inevitably statistand socialistic. A good part of itgoes into providing more goods forimmediate consumption, whichmay do nothing to increase thecountry's productive capacity. Therest goes into government projects, government five-year plans,government airlines, governme~t

hydroelectric plants and dams, orgovernment steel .mills, erectedprincipally for prestige reasons,and for looking impressive in colored .photographs,and regardless

of whether the projects are economically justified or· self-supporting. As a. result, real economicimprovement is retarded.

The Insoluble Dilemma

From the very' beginning, foreign aid has faced an insolubledilemma. I called attention to thisin a book published in 1947, WillDollars Save the World?, whenthe Marshall Plan was proposedbut not yet enacted:

"Intergovernmental loans [theyhave since become mainly gifts,which only intensifies the problem]are on the horns· of .this dilemma.If on the one hand they are madewithout conditions, the funds aresquandered and dissipated and failto accomplish their purpose.. Theymay even be used for the preciseopposite of the purpose that thelender had in mind. But if thelending government attempts toimpose conditions, its attemptcauses immediate resentment. Itis called 'dollar diplomacy'; or'American imperialism'; or 'interfering. in the internal affairs' ofthe borrowing nation. The resentment is .quickly exploited by theCommunists in that nation."

In the 23 years since the foreign-aid program was .. launched,the administrators have not onlyfailed to find their way out of thisdilemma; they have refused evento acknowledge its. existence. They


have zigzagged from one course tothe other, and ended by followingthe worst course of all: they haveinsisted that the recipient governments adopt "growth policies"which mean, in practice, government "planning," controls, inflation, ambitious nationalized projects - in brief, socialism.

If the foreign aid were not offered in the first place, the recipient government would find it advisable to try to attract foreignprivate investment. To do this it

. would have to abandon its socialistic and inflationary policies, itsexchange controls, its laws againsttaking money out of the country.It would have to abandon harassment of private business, restrictive labor laws, and discriminatorytaxation. It would have to giveassurances against nationalization, expropriation, and seizure.

Specifically, if the nationals ofa, poor country wanted to borrowforeign capital for a private project, and had to pay a going rateof, say, 7 per cent interest for theloan, their project would have tobe one that promised to yield atleast 7 per cent before the foreigninvestors would be interested. Ifthe government of the poor country, on the other hand, can get the

. money from a foreign governmentwithout having to pay interest atall, it need not trouble to ask itselfwhether the proposed project is

likely to prove economic and selfliquidating or not. The essentialmarket guide to comparative needand utility is then completely removed. What decides priorities isthe grandiose dreams of the government planners,. unembarrassedby bothersome calculations of comparative costs and usefulness.

The Conditions for Progress

Where foreign government aid isnot freely offered, however, a. poorcountry, to attract private foreigninvestment, must establish an actual record of respecting privateproperty and maintaining freemarkets. Such a free-enterprisepolicy by itself, even if it did notat first attract a single dollar offoreign investment, would giveenormous stimulus to the economyof the country that adopted it. Itwould first of all stop the flight ofcapital on the part of its own nationals and stimulate domestic investment. It is constantly forgotten that both domestic and foreigncapital investment are encouraged(or discouraged) by the samemeans.

It is not true, to repeat, that thepoor countries are necessarilycaught in a "vicious circle of poverty," from which they cannotescape without massive handoutsfrom abroad. It is not true that"the rich countries are gettingricher while the poor countries are


getting poorer." It is not true thatthe "gap" between the livingstandards of the' poor countriesand the rich countries is growingever wider. Certainly that is nottrue in any proportionate sense.From 1945 to 1955, for example,the avera.ge rate of growth ofLatin American countries in national income was 4.5 per cent perannum, and in output per head2.4 per cent - both rates appreciably higher than the correspondingfigure for the United States.3

Intervention Breeds Waste

The foreign aid ideology ismerely the relief ideology, theguaranteed-income ideology, applied on an international scale. Itsremedy, like the domestic reliefremedy, is to "abolish poverty" byseizing from the rich to give to

3 Cf."Some Observations on 'Gapology,'"by P. T. Bauer and John B. Wood in Economic Age (London), November-December 1969. Professor Bauer is one of thefew academic economists who have seriously analyzed the fallacies of foreignaid. See also his Yale lecture on foreignaid published by The Institute of Economic Affairs (London), 1966, and hisarticle on "Development Economics" inRoads to Freedom: Essays in Honour ofFriedrich A. von Hayek (London: Routledge & Kegan Paul, 1969). I may alsorefer the reader to my own book, Will Dol·,lars Save the World? (Appleton, 1947),to my pamphlet, Illusions of Point Four'(Irvington-on-Hudson, New York: Foun·,dation for Economic Education, 1950),and to my chapter on "The Fallacy ofForeign Aid" in my Man Vs. the WelfareState (Arlington House, 1969).

the poor. Both proposals systematically ignore the reasons for thepoverty they seek to cure. Neitherdra.ws any distinction between thepoverty caused by misfortune andthe poverty brought on by shiftlessness and folly. The advocatesof both proposals forget that theirchief attention should be directedto restoring the incentives, selfreliance, and production of thepoor family or the poor country,and that the principal means ofdoing this is through the freemarket.

In sum, government-to-government foreign aid promotes statism, centralized planning, socialism, dependence, pauperization, inefficiency, and waste. It prolongsthe poverty it is designed to cure.Voluntary private investment inprivate enterprise, on the otherhand, promotes capitalism, production, independence, and self-reliance. It is by attracting foreignprivate investment that the greatindustrial nations of the worldwere once helped. It is so thatAmerica itself was helped by British capital, in the nineteenth century, in building its railroads andexploiting its great national resources. It is so that the still "underdeveloped areas" of the worldcan most effectively be helpedtoday to develop their own greatpotentialities and to raise the living standards of their mass,es. ~

AYouthful Purpose.~ .

JAMES W.MULLER

This article is from the addresspresented by Mr. Muller as valedictorian of the 1970 graduatingclass of the Horace Greeley HighSchool in Chappaqua, .New York.

* * *TURN to the. person sitting next· toyou. Now ask yourself if youcould be this person for just oneday. Could you go through his lifeacting just 'as he would?

The answer, obviously, is no.This person is an individual. Youare another. Your lives are notinterchangeable.

And would. you let him be youfor a day? Certainly. not! Therewould be no telling what he mightdo to your friendships, what sillypropositions .he might accept inyour name, or which' of your possessions he might .lose· or waste.

If the question were rephrasedso that you became him for hiswhole life, the answer' would beno, even more resolutely.

And· if the question dealt withthe population of a whole nation,it would be absolutely preposter-

594

ous! Each of us expends all hiswaking energies .running his ownlife; it would be inconceivable foranyone to run more than one.

But a whole conception of government is based on this absurdity, and it is the system which hasalways ruled the majority of .mankind.Not at all surprisingly, ithas done very poorly. Statism hasslipped through history as feudalism, absolute monarchy, proletarian dictatorship, fascism, socialism, and in a score of other guises.Every form is based on the thesisthat someone should be able toforce you to do something youwould rather not do. The instrument is coercion. By wielding thisclub the state rules men.

Having discovered the nature ofstatism, we ought to look criticallyat our own societyto see if we areguided by its tenets. But first itis necessary to decide what thestate should properly do.

It is evident that men, if left todo literally whatever they wantedto, would soon begin to take un..;fair advantage of other men by

1970 A YOUTHFUL PURPOSE 595

subverting their liberties throughbrute force. This, unfortunately,is the history of human behavior.Thus we set up an agency to defend our liberties from internal orexternal attack. This agency hascome to be· called government. Experience has shown that certainsystems of organization for itsoperation work best, and the menwho wrote our Constitution did aremarkable job of establishing aworkable system. Essentially, then,the purpose of the state is to ensure the liberties of all the peopleby using negative restraints. It isnot to enter the social, economic,or moral realms in the hope ofremaking men in a better image.To do so is only to subvert the~

very liberties it is designed tosafeguard.

The State Out of Boundsand Few Seem to Care

In our society we have suchanagency whose organizational unitHare dispersed throughout the na-tion. With only a cursory examination, however,we see that it hasgone far beyond its proper bounds.Furthermore, few people opposethis false direction for the state.

Instead, the current. debate centers rather ludicrously on tryingto determine what form of statismis most enlightened. We .hear ofa critical discussion waging inWashington on what are called

national priorities. This term isconveniently misleading because itimplies that one or another improper governmental function ismost important - more importantthan our own activities. It fails torecognize that our national priorities were set almost two hundred years ago. Most important toeach of us are his individual priorities, and to set these is not thestate's responsibility.

The disputants in this greatdebate over priorities attempt todecide which coercive functions ofthe state are most crucial. Perhaps a farmer argues with asenior citizen about the relativevirtues of parity payments andsocial security. Here. we .see thestatist mentality at work. Frederic Bastiat, a French economist,exposed the futility of this conception in his perceptive aphorism: "The state is the great fictionby which everyone tries to live atthe expense of everyone else."Never is there· a brief recess toreflect that just possibly a mancan ethically tap only his ownresources. A thin veil called democracy cannot conceal plunder.Coercion by a majority is no lessreprehensible than that perpetrated by a tyrant, even if itsapplication is ·less bold and bloodyand bright.

There is a strong reluctance onthe part of the American people to


part with the cherished sanctuaries of statism in their midst. Iwas once discussing an especiallyblatant. example of statism in thiscountry when one of the groupexclaimed: "Why, I think yourideas are frightening!" Somewhattaken aback at first, I replied:"You find it frightening that Idon't want to run your life anddon't want you to· run mine 1"This was a new thought.

The statist feature in questionwas public education, a systemcharacterized by state-run schoolswhich have a high degree of compulsion in curriculum, attendance,and other features. Not only mustevery child attend these schools,or others approved by the state,but every person of suitable income must pay for their operationand maintenance. And the greatpotential for widespread andmeaningful progress through freeeducation has declined.

Recently I expressed pleasurethat the bond issue for the construction of a new library in. Chappaqua had failed. Another personimmediately said he agreed withme that the site in question wasnot a good one. He was thenrather astonished when I replied:"On the contrary, it was a goodsite. I hope someone builds a library there. But not the town ofChappaqua."

And the reaction to my offhand

remark that democracy alonewould never guarantee liberty waseven more revealing. "What,"asked my companion, "you areagainst majority control1" I replied that I was against control ifit meant coercion, adding: "Democracy is an equitable way tochoose our public officials, but withit must go a better understandingof the proper role of the state."

Until we recognize that factthat just as the factory guard wasnever intended to be the plantmanager, the government's purpose is not to rule but to keep thepeace - we in America will be forever susceptible to what Jeffersoncalled "every form of tyranny overthe mind of man." Restraints oncreative energy do no good. Coercion in a humanitarian guiseand here I mean social security,minimum wage laws, welfare payments, and the like - does no good.Legislated morality - and here Imean antipornography laws, prohibition, laws against cigaretteadvertising, and the like - does nogood. And governmental monopolies, outright or clandestine, onany enterprise - and here I meanregulating such businesses as thetelecommunications industry tosuch an extent that their everymove must be sanctioned by thegovernment, building roads, running our star-crossed state mailsystem, and the like - do no good.

1970 A YOUTHFUL PURPOSE 597

Closed to Further ThoughtI am told that if the govern

ment did not accomplish all thesefunctions, no one would. But consider the train of thought involved. Once the government becomes involved in any enterprise,it is thought that no one elsecould accomplish it, simply because no one else is allowed to try.Whether the prohibition is effected by outright legislation orthrough economic pressure, it isimpossible for anyone to conceiveof another course. (If you triedto ·set up·a rival post office systemnow, you would soon run into allthe problems I am discussing.)Now imagine for a moment thatthe government at its inceptionhad decided, for whatever reason,that it would provide shoes andsocks to every American child until the age of twelve. If someonelater proposed that this be handled by the free market, the retortwould be that clearly only thegovernment could handle thisfunction. Surely those who wishto end the state's role would havethe children walk around withoutshoes and socks and freeze in thewinter, would have them get nailsand thorns in their tender feet asthey walk to school unshod! Whatinhumanity indeed!

A favorite tack of statists is torespond to attacks on the statistmachinery by asking: "What

would you put in place of thosethings you wish were abolished 1"This question is usually followedby general comments about thenecessity of being constructive.

To my mind no greater fallacyhas worked its way into the American character. It assumes thatthe person who wishes to stopimproper governmental activitiesis all set to substitute his ownblueprint for· the society in theirplace. It ignores the fact thatthere are two hundred millionAmericans, each of whom mayhave ideas to handle these activities, and each of whom will beallowed· to implement them in thefree market if he so wishes. Icertainly do not have all the answers, because I am only one ofthe two hundred million. PerhapsI would not have thought of thelight bulb, but Thomas Edison did,and we are all the better for it.No such invention has been produced through coercive force.

Robert Goddard, the father ofmodern rocketry, said in his highschool valedictory address in 1904:"It is difficult to say what is impossible, for the dream of yesterday is the hope of today and thereality of tomorrow."

It is my hope today that thedream of the men who wrote theConstitution will become the reality of our tomorrow. ~

THE ORGANIZATION for EconomicCooperation and Development,which endeavors to achieve international coordination of government policies, recently expressedalarm about the ever acceleratingrates of inflation. It called thepace of monetary depreciation "unacceptably high" and warned aboutthe inherent dangers of a majorbusiness depression as a result oframpant inflation. In fact, manyEuropean economists are convinced that "the Western world isat the threshhold ofa runaway inflation of the Latin-Americantype."

During the 1950's we had grownaccustomed to a creeping depreciation of currencies at an averagerate of 2 per cent a year. Duringthe 1960's the rate. had climbed to4 and 5 per cent; last year itreached 6 per cent, which is wellbeyond the creeping pace. And, ifwe project the depreciation growth

Dr. Sennholz heads the Department of Economics at Grove City College and· is a notedwriter and lecturer for freedoM.

598

rates of the 1960's to the 1970's,we must brace ourselves for inflation of 10 to 20 per cent· annually.

We need not here analyze manypolitical and social aspects of thisominous development in the Western world. But we should like toreview the history of the greatestinflation of the century, the German hyperinflation of the early1920's, and the ideological causesthat brought it about. For historyis the glass through which we maybehold the deeds. and errors, thefoibles and misfortunes of mankind.

The German inflation, too, began with a creeping rate of oneand two per cent. When WorldWar I broke out, the central bank(Reichsbank) immediately suspended redeemability of its notesin order to. prevent a run on itsgold reserves. Then it offered assistance. to the central governmenttoward financing the war effort.As taxes are always unpopular thegovernment preferred to borrowhuge amounts of money to cover

1970 HYPERINFLATION IN GERMANY 599

its budgetary deficits. And thecentral bank assisted every issueof new treasury obligations by discounting much of it. Thus, a largepercentage of government. debt

. found its way into the vaults ofthe Reichsbank and an ~quivalent

amount of printing-press moneyinto the peoples' cash holdings. Asin other belligerent countries, thecentral bank was monetizing thegrowing government debt.

By the end of the war, theamount of money in circulationhad risen fourfold and prices some140 per cent. Yet, the Germanmark had suffered no more thanthe British pound, was somewhatweaker than the American dollar,but stronger than the Frenchfranc. Five years .later, in Decem··ber 1923, the Reichsbank had is··sued 496.5 quintillion marks eachof which had fallen to one tril··Honth of its 1914 gold value.1

1 According to the British and Germansystems of numeration, the billion is amillion of millions, a trillion a million ofbillions, and each higher denomination(e.g. quadrillion, quintillion, sextillion,etc.) is a million times the one preceding.In the American system, the billion is athousand millions, and each higher denomination is' a thousand times the preceding. lt must also be noted that a billion in the U.S. system is called milliardin the British and German systems. InGerman and British texts thesentenc1ewould thus read: "Five years later in December 1923 the Reichsbank had issued496.5 trillion marks each of which hadfallen to one billionth of its 1914 goldvalue."

How stupendous! Practically every item of trade was costing trillions of marks. The American dollar was quoted at 4.2 trillionmarks, the American penny at 42billion marks. How could a European nation that prided itself onits high levels of education andscholarly knowledge suffer such athorough destruction of its money?Who would inflict on a great na-tion such evil which had ominouseconomic, social, and political ramifications not only for Germanybut for the whole world? Was itthe victors of World War I who, indiabolical revenge, devastated thevanquished country through ruinous financial manipulation andplunder?

Every mark was printed by Germans and issued by a central bankthat was governed by Germansunder a government that waspurely German. It was German political parties, such as the Socialists, the Catholic Centre Party,and the Democrats, forming various coalition governments, thatwere solely responsible for governmental policies. Of course, admission of responsibility for anycalamity cannot be expected fromany political party.

The reasoning that led theseparties to inflate the national currency at such astronomical ratesis not only interesting for economic historians, but also exposes


the rationale of monetary destruction. The doctrines and theoriesthat led to the German monetarydestruction have been applied withsimilar consequences in manyother countries, and underlie therampant inflation throughout theWestern world today.

Four erroneous doctrines ortheories guided the German monetary authorities in those balefulyears.

No Inflation in Germany

The most amazing economic sophism advanced by eminent financiers, politicians, and, economistsendeavored to show that therewas neither monetary nor creditinflation in Germany. These experts readily admitted that thenominal amount of paper moneyissued was indeed enormous. Butthe real value of total currency incirculation, that is, the total valuein terms of gold or goods prices,they argued, was much lower thanbefore the war and low relative tothat of other industrial countries.

The Minister of Finance, celebrated economist Helfferich, repeatedly assured his nation thatthere was no inflation in Germanysince the total value of currencyin circulation, when measured ingold, was covered by the gold reserves in the Reichsbank at a muchhigher ratio than before the war.2

2 Das Geld, 1923, p. 646.

The President of the ReichsbankHavenstein categorically deniedthat the Central Bank had inflatedthe German currency. He was convinced that it followed a restrictive policy since its portfolio was,worth, in gold marks, less thanhalf its 1913 holdings.

Professor Julius Wolf wrote inthe summer of 1922: "In proportion to the need, less money circulates in Germany now than before the war. This statement maycause surprise, but it is correct.The circulation is now 15 to 20times that of pre-war days, whilstprices have risen 40 to 50 times."Similarly, Professor Elster reassured his people: "Howeverenormous may be the apparentrise in the circulation in 1922, actually the figures show a decline."3

The Statistical Bureau of theGerman Government even calculated the real values of the percapita circulation in various countries. It, too, concluded that therewas a shortage of· currency inGermany, but a great deal of inflation abroad.

Of course, this fantastic conclusion drawn by monetary authorities and experts bore ominous consequences for millions ofpeople. Through devious sophisms,it simply denied individual responsibility for the disaster and thus

3 Von der Mark zur Reichsmark, 1928,p. 167.


GermanyEnglandFranceSwitzerlandU.S.A.

removed all limits to the issuanceof more paper money.

GOLD VALUE OF MONIES INCIRCULATION

Gold MarksPer Person

1920 192287.63 17.9284.40 110.73

180.05 229.9089.49 103.33

101.35 97.66

SOURCE: Wirtschaft und Statistik, 1923, No. l.(To arrive at U.S. dollar amountsthese figures should be divided by 4.2.)

The source of this momentouserror probably lies in failure tounderstand one of the most important determinants of moneyvalue: the attitude of people toward money. For one reason oranother, people may vary theircash holdings. An increase in cashholdings by many people tends toraise the exchange value of money;reduction in cash holdings tendsto lower it. Now, in order to radically change their cash holdings,individuals must have cogent reasons. They naturally enlarge theirholdings whenever they anticipaterising money value as, for instance, in a depression. And theyreduce their holdings wheneverthey expect declining money value.In the German hyperinflation, theyreduced their holdings to an absolute minimum and finally avoidedany possession at all. It is obvious

that goods prices must then risefaster and the value of money depreciate faster than the rate ofmoney creation. And if the valueof individual cash holdings declines faster than the rate ofmoney printing, the value of thetotal stock of money must also depreciate faster than this rate.

This is so well understood thateven the mathematical economistsemphasize the money "velocity"in their equations and calculationsof money value.4 But the Germanmonetary authorities were unaware of such basic principles ofhuman action.

For Health, Education, Welfare,and Full Employment

Immediately after the war, theGerman government, under theleadership of the Socialist party,embarked upon heavy expendituresfor health, education, and welfare.This added to the already heavyload on the Treasury for demobilization expenses, the demands bythe Armistice, the disorders of therevolution, staggering deficits ofthe nationalized industries, especially the railroads, postal services, telephone, and telegraph.The resources made available bythe creation of new money wereapparently unlimited! A numberof measures for the nationalization

4 Cf. my essay on "The Value of Money" in THE FREEMAN, Nov. 1969.


of certain industries (e.g., coal,electrical, and potash industries)were introduced, but failed to become law. The eight-hour day wasenacted, and labor unions weregiven many legal immunities andprivileges. In fact, a system oflabor councils was set up whichauthorized the workers in each enterprise to elect representativeswho ·shared in the management ofthe company!

While government expendituresrose by leaps and bounds,·. the revenue suffered a gradual decline; inOctober 1923, only 0.8 per cent of

:government expenses were covered'by tax revenues. For the periodfrom 1914 to 1923 scarcely 15 percent of the expenses were coveredby means of taxes. In the finalphase of the inflation the Germangovernment experienced a complete atrophy of the fiscal system.

The depreciation of the currencybrought about the destruction oftaxable wealth in the form· ofmortgages and bonds,annuitiesand pensions, which in turn reduced government revenue. It istrue, some speculators reaped spectacular profits from the depreciation, but they easily evaded thetax collector. Moreover, the fiscalpolicies of the Socialist government were openly hostile towardcapital and frequently endeavoredto impose confiscatory capitallevies upon all wealth.. Secretary

of· the Treasury Erzberger evenvowed that "in the future Germany, the rich should be nomore/'Consequently. a massive "flight ofcapital" from Germany developedas all classes of savers investedtheir money in foreign bank accounts, currencies, bills, securities,and the like. Much taxable wealthwas removed from the grip of taxcollectors.

Furthermore, the rapid depreciationof currency greatly reducedall tax liabilities during the timeinterval between the taxable transaction and the date of tax payment. The taxpayer .usually paida sum the real value of which wasgreatly reduced by inflation.Nevertheless, government expenditure accelerated, while revenue interms of real value continued todecline. The growing deficits thenwere met with even larger quantities of printing press money,which in turn generated everlarger deficits. The German monetary authorities were trapped in avicious circle from which they hadneither the political courage northe financial know-how to extricatethemselves.

The leading monetary authority,Dr. Helfferich, even warned hispeople against the direconsequences of, monetary stabilization."To follow the good counsel ofstopping the printing of noteswould mean refusing to economic


life the circulating medium necessary for transactions, paymentsof salaries and •wages, and so on;it would mean that in a very shorttime the entire public, and aboveall the Reich, could no longer paymerchants,employees, or workers.In a few weeks, besides the printing of notes, factories, mines, railways and post office, national andlocal government, in short, all national and economic life would bestopped."5

The Balance of Payments and the

Treaty 0' Versailles

Throughout the period of theinflation the most popular explanation of the monetary depreciationlaid the blame on an unfavorablebalance of payments, which in turnwas blamed on the payment ofreparations and other burdens imposed by the Treaty of Versailles.To most German writers and politicians, the government deficitsand the paper inflation were notthe cause, but the consequences,of the external depreciation of themark.

The wide popularity of this explanation, which charged the victorious allies with full responsibility for the German disaster,bore ominous implications for thefuture. Its simplicity appealed tothe masses of economically ignorant people whose chauvinism and

5 Das Geld, p. 650.

nationalism always make the ideaof foreign intrigue and conspiracyso palatable. The intellectual andpolitical leaders who actively propagated the doctrine were sowingthe seeds for the whirlwind theyultimately reaped a decade later.

During those baleful years, Germany procured gratuitously fromabroad large quantities of rawmaterials and foodstuffs. According to various authoritative estimates, foreign individuals andbanks bought at least 60 billionpaper marks which the Reichsbank had floated abroad at anaverage price of lJt: gold mark fora paper mark. The depreciation ofthe mark to one trillionth of itsearlier value repudiated these foreign claims to German goods.Thus, foreigners suffered lossesof some 15 billion gold marks, orsome $3.5 billion U.S. dollars,which was eight times more thanGermany had paid in foreign exchange on account of reparations.

Even if it had been true thatexcessive burdens were thrust onGermany by the Allies, there wasno need for any monetary depreciation. The two phenomena areentirely independent. If excessiveburdens are thrust upon a government, whether they be foreign ordomestic, government must raisetaxes, or borrow some funds, orcurtail other expenditures. Excessive reparation payments may ne-


cessitate higher taxes on the populace, or large loans that reduce thesupply of savings for industry andcommerce, or painful cuts in government service and employment.The standard of living of the people thus burdened will probably bedepressed - unless the reductionof bureaucracy should release newproductive energy. But the valueof money is not affected by thereparation burden unless economicproductivity is impaired by thefund raising.

Once government has achievedthe necessary budgetary surplus,the payment of reparations is asimple matter of exchange. TheTreasury buys the necessary goldor foreign exchange from its central bank and delivers it to therecipient government. The loss ofgold or foreign exchange then necessitates a corresponding reduction of central bank money, whichin turn tends to depress the pricesof goods. The lowered prices encourage more exports while theydiscourage imports, that is, generate what is commonly called a"favorable balance of payments"or new influx of gold and foreignexchange. In short, there can beno shortage of gold or foreign exchange as long as the central bankrefrains from inflation and monetary depreciation.

The German monetary authorities flatly denied this economic

reasoning. Instead, they preferredto lament the excessive burdensthrust onto Germany and the unfavorable balance of payments generated thereby. In 1923 they addedyet another excuse: the French occupation of the Ruhr district. TheCentral Statistical Office put it thisway: "The fundamental cause ofthe dislocation of the Germanmonetary system is the disequilibrium of the balance of payments.The disturbance of the nationalfinances and the inflation are intheir turn the consequences of thedepreciation of the currency. Thedepreciation of the currency upsetthe Budget balance, and determined with an inevitable necessitya divergence between income andexpenditure, which provoked theupheaval."6

Again I quote Dr. Helfferich:"Inflation and the collapse of theexchange are children of the sameparent: the impossibility of paying the tributes imposed on us.The problem of restoring the circulation is not a technical or banking problem; it is, in the lastanalysis, the problem of the equilibrium between the burden andthe capacity of the German economy for supporting this burden."7

Even American economists

6 Deutschlands Wirtschaftslage, March1923, p. 24.

7 "Die Autonomie der Reichsbank" inBorsen-Courier of Apr. 4, 1922.


echoed the German theory. Professor John H. Williams presentedthis causal order: "Reparationpayments, depreciating exchanges,rising import and export prices,rising domestic prices, consequentbudgeting deficits, and at the sametime an increased demand forbank credit; and finally increased.note-issue."s And Professor JamesW. Angell contended that "thereality of the type of analysiswhich runs from the balance ofpayments and the exchanges togeneral prices and the increased.issue of paper seems to be defi··nitely established."9

Speculators Did It

When all other explanations areexhausted, modern government ~

usually falls back on the specula··tor who is held responsible for aneconomic and social evils. Whatthe witch was to medieval man:,the capitalist is to socialists andcommunists, the speculator is tomost politicians and statesmen::the embodiment of eviL He is saidto be imbued with ruthless andfickle selfishness that is capableof wrecking the national economy:,governmental plans, and, in thecase of the German inflation, the

8 "German Foreign Trade and the Reparations Payments" (Quarterly Journalof Economics, 1922, p. 503).

9 The Theory of International Prices,192.6, p. 195.

national currency. No matter howblatantly contradictory this explanation may be, it is most popular with government authoritiesin search of a convenient explanation for the failure of their ownpolicies.

The same German officials whodenied the very existence of inflation lamented the depreciationcaused by speculators. Or theyblamed the Allied reparation burdens and simultaneously denouncedspeculators for the depreciation.Dr. Havenstein, the President ofthe Reichsbank, embracing everyconceivable theory that mightclear his own policies of blame,also pointed at the speculators.Before a parliamentary committee,he testified: "On the 28th ofMarch began the attack on theforeign exchange market. In verynumerous classes of the Germaneconomy, from that day onward,thought was all for personal interests and not for the needs ofthe country."

In a chorus, the newspapers repeated the charge: "According toall appearances the fall of themark did not have its origin in theNew York exchange, from which itmay be concluded that in Germanythere was active speculation di..rected toward the continual rise ofthe dollar.... We are witnessinga rapid increase in the numberof those who speculate. on the fall


of the mark and who are acquiringvested interests in a continual depreciation.... The enormous speculation on the rise of the Americandollar is an open secret. Peoplewho, having regard to their age,their inexperience, and their lackof responsibility, do not deservesupport, have nevertheless securedthe help of financiers, who arethinking exclusively of their ownimmediate interests.... Thosewho have studied .seriously theconditions of the money marketstate that the movement againstthe German mark remained on thewhole independent of foreign markets for more than six months. Itis the German bears, helped bythe inaction of the Reichsbank,who have forced the collapse inthe exchange."

In its broadest sense, speculation is every economic action thatmakes provision for an uncertainfuture. The· student who studiesaeronautical engineering speculates on the future demand for hisservices. The businessman who enlarges his inventory speculates· ona profitable market in the future.The housewife who hoards sugarspeculates on the availability ofsugar in the future. The buyer· orseller of goods or securities hopesto make a profit from futurechanges in prices. All such actionsreflect a natural motivation of freemen to improve their material

well-being or, at least, to avertlosses.

When speculators observe oranticipate more inflation andmonetary depreciation, they naturally endeavor to sell the depreciating currency and buy goods orforeign exchange that do not depreciate. They are preserving theirworking capital. Thus, they arepromoting not only their own interests but also those of societywhich benefits from the preservation of productive capital. Thegovernment that is actively de..,stroying the currency is injuringthe national interest; successfulspeculators are safeguarding it.Surely, the speculators who soldGerman marks and bought U.S.dollars proved to be right in theend.

The Current Dilemma in theLight of the German Experience

The world-wide inflation that isengulfing the free world nowsprings from similar doctrines andtheories. It is true, there is noTreaty of Versaille$ and no repa.ration payments that can beblamed for the inflation. But inmany countries of Central andWestern Europe the .responsibilityfor monetary depreciation issquarely laid on American balanceof payments deficits that are flooding those countries with U. S.dollars. While European monetary

1970 HYPERINFLATlON IN GERMANY 607

authorities a.re actively inflatingand depreciating their own currencies - although at a slower ratethan their American counterparts-they are pointing at the U.S.balance of payments as theultimate cause of their currency depreciation. As in the Germanhyperinflation foreign intrigueand artifice are said to be at workagain.

And again the speculators arecharged for a share of the blame.American investors who buy for-,eign securities or make direct for-,eign investments are said to belargely responsible for the outflowof U.S. funds and loss of gold,which is creating an unfavorablebalance of payments and weaken··ing the U.S. dollar. Moreover"Americans who prefer foreignproducts over home-made prod··ucts, or choose to travel abroadrather than stay at home are de··cried-as selfish a:qd unpatriotic.Numerous regulations imposed bythe very monetary authorities whoperpetrate the inflation aim toprevent speculation in order tosave the dollar.

The specious argument that de··nies the presence of any inflationin terms of purchasing power orgold value may be expected toemerge in later phases of the in··

flation when monetary authoritieswill desperately seek any argumentthat promises to hold them blameless~

The most popular contemporarydoctrine that advocates inflationand credit expansion pleads itscase in terms of economic boomand full employment. Our economic order which is laboring underheavy government interventionand restriction is a stop-and-gosystem with alternating booms andbusts. The booms are generated byheavy budgetary deficits andmonetization of government debt.The busts inevitably follow thebooms as soon as stabilization isattempted or the rate of inflationis temporarily slowed in order toprevent a hyperinflation. Underthe -sway of the "new economics"of Lord Keynes and his Americandisciples, our monetary authorities inflate and depreciate to finance the boom, and then "reinflate" when the economy falters,to prevent massive unemployment.Inflation is the modern panaceafor political, social, and economicevils most of which were createdby the inflation itself. In truth, itis a savory poison that slowly killsnot only the patients who take itbut also the doctors who prescribeit. I)

c. R. BATTEN

THE TRAGEDY OF THE COMMONS

THE TITLE for this piece was borrowed from Garrett Hardin and hisarticle that first appeared in Science, and later in The Environmental Handbook prepared for theFirst National EnvironmentalTeach-In.

I do not want to imply that Iagree with all of Hardin's ideas,but he does give a very good explanation of the tragedy of commonly owned property when eachperson is free to use it as he sees fit.

He uses as an example the common pasture, where, as explainedby Hardin, each herdsman asks,"What is the utility to me of adding one more animal to the herd?"This utility has two aspects: thepositive one of increased income tothe herdsman from the sate of theadditional .animal, and the nega-

Mr. Batten, an experienced forester and student of human and natural resources, presentlyis a free-lance writer in Boulder, Colorado.

al\O

tive aspect of increased overgrazing created by one more animal.

Since the positive increment goesentirely to the herdsman, and thenegative effect is spread among allthe herdsmen who use the pasture,it is obviously to the individualherdsman's advantage to increasethe size of his herd, regardless ofits effects on the pasture. This sameconclusion is reached by everyherdsman that shares the commonpasture.

As Hardin explains: "Each manis locked into a system that compelshim to increase his herd withoutlimit - in a world that is limited.Ruin is the destination towardwhich all men rush, each pursuinghis own best interest in a societythat believes in the freedom of thecommons. Freedom in a commonsbrings ruin to all."

With today's increasing concernover our natural resources and our

1970 THE TRAGEDY OF THE COMMONS 609

environment, ecologists are fond ofpointing at present-day deserts inthe Middle East, Spain, and otherparts of the world that were onceproductive lands, but were turnedby man into nonproductive barrens.

But if we were to study the history of these areas in detail, wewould find that they are examplesof the "Tragedy of the Commons,"where each herdsman tried to reapthe most possible benefit to himselffrom common pastures, without regard to the negative aspects ofover-use of the land.

We witnessed the same phenomenon in our own West, when stockmen appropriated vast areas ofpublicly-owned land for their ownuse. As long as each stockman hadcontrol of "his own range," it wasgenerally well managed, within itsgrazing capacity. But when therange became overcrowded, andthe Federal government yielded todemands to open the public rangesfor indiscriminate use, seriousovergrazing began, to the detri··ment not only of the lands, but alsoof those who used them.

On the other hand, some of themost productive lands of the worldhave been privately owned andmanaged for centuries, for thebenefit of the owner.

It is not possible to get optimunluse out of commonly owned lands,no matter how well regulated theymay be by some land agency or

authority. Each interest seeks togain the most possible from theland. The grazier is not interestedin the timber resource. The timberman is not interested in theminerals that may lie beneath thesoil. The miner is interested inneither the grass nor the trees.

But if the land is owned by anindividual, whether he is a rancher,a timberman, or a miner, all thecosts and all the benefits accrue tohim, so he seeks to make the bestpossible use of the property. Therational owner realizes that in thelong run the practices that are bestfor the land are the best for him.

The timberman owner sees thegrass and makes it available forlivestock or wildlife, while makingsure that the land will be kept productive for future crops of bothtimber and grass. Even the miner,who may seemingly destroy theland through strip mining, recognizes that his own best interestsrequire the reclamation of thatland for timber, grazing, recreation, or other uses that will satisfyhuman wants.

So the real "Tragedy of the Commons" is that we have failed tolearn from our past experience. Wehave failed to learn that land andresources in private ownership willnot be destroyed, but will be preserved, simply because it is in theowner's best interest to preservefuem. ~

Profitsand Proiit..Maiaers

What does the public think about them?

LAWRENCE FERTIG

IT IS AXIOMATIC that a nationwhich hopes to substantially improve its standard of living andmaximize economic growth mustprovide maximum' freedom forthe' entrepreneur. For it is theentrepreneur who makes decisionsabout the use of capital and directshis ideas and energies towardmeeting the most urgent demandsof the consumer. Upon his efficiency depend the creation ofprofits and the accumulation ofcapital so essential. to increasingthe goods and services availablefor the citizens of any country.

If the American public clearlyunderstood this concept, the re-

Mr. Fertig is an economic columnist. This article is condensed from his paper before themeeting of the Mont Pelerin Society in Munich, Germany, September, 1970, being oneof several presentations concerning the imageof the entrepreneur in various countries.

610

strictions and impediments placedon the operations of the entrepreneur in the United States wouldnever have been initiated. In thispaper I shall try to describe thepublic image of the entrepreneur,suggest some reasons why theAmerican public has a distortedview of· the entrepreneurial function, and discuss some of the effects of this distortion upon theeconomy of the United States.

According to entrepreneurialtheory as developed by Mises andKnight, there would be no profitsand no capital accumulation in astatic society.1 A changing society

1 Frank H. Knight, Risk, Uncertaintyand Profit (Boston: Houghton Mifflin,1921), p. 36:

"N0 a priori argument is necessary toprove with general foreknowledge ofprogressive changes, no losses and nochance to make profits will arise.· This is

1970 PROFITS AND PROFIT-MAKERS 611

is necessary to provide opportunity for the enterpreneur's judgment and talents. Wherever thefuture is uncertain, the abilitiesof the entrepreneur come intoplay. Uncertainty is the basis ofthe risks he takes. It is his perception, estimates, and judgmentabout the future which permithim possibly to make a profit andaccumulate capital.

According to the above theory,practically everyone is an entrepreneur who employs the factorsof production toward fulfilling theneeds of the citizens. Some do so

the first principle of speculation and isparticularly familiar in the capitalization of the anticipated increase in thevalue of land."

Ludwig von Mises, Planning for Freedom (South Holland, Ill.: LibertarianPress, 1952), pp. 119-120:

"Profits are never normal. They varyonly where there is a maladjustment, adivergence between actual productionand production as it should be in orderto utilize the available material andmental resources for the best possiblesatisfaction of the wishes of the public.They are the price of those who removethis maladjustment that disappear assoon as the maladjustment is entirelyremoved. In the imaginary constructionof an evenly rotating economy there areno profits. There the sum of the pricesof the complementary factors of production, due allowance being made fortime preference, coincide with the price!of the product.... It is the entrepre··neurial decision that creates either profitor loss. It is mental acts of the mind ofthe entrepreneur from which profiblultimately originate. Profit is a productof the mind, the success in anticipatingthe future state of the market."

efficiently and gain a profit, andsome inefficiently and incur a loss.This applies equally to large corporate organizations, small companies, and individuals in· theirbusiness activity.

Plainly, encouragement of thefree market and the absence ofstrangling restrictions provide themost fertile ground for entrepreneurial skills. This is the basisof a nation's progress. It makespossible increased capital formation, the most efficient use ofcapital, and the greatest possibleincrease in the living conditionsof all citizens.

Function V5. Image of .theEntrepreneur

But unfortunately the functionof the entrepreneur, as defined byleading neoclassical economists, ishardly the image of the entrepreneur in the mind of the man inthe street. Perhaps we can clarifythis subject by restating the basicquestion as follows: What do mostAmerican citizens think aboutprofits and those who are engagedin making profits? The answer tothat question would give us thekey to the image of the entrepreneur.

Under our representative formof government, what citizens thinkabout profits and private enterprise has a way of becoming lawabout this subject.


There are a number of pieces ofevidence which bear on the imageof the entrepreneur and can leadus to some valid conclusions. Theevidence runs along the followinglines:

1. Sporadic opinion polls onprofits and the entrepreneur.

2. Laws affecting the entrepreneur which are passed in Congress, including revision of thetax structure.

3. The nature of concepts andideas which prevail in institutionsof higher learning in the U. S.The student of today becomesteacher, editor, community leader,and legislator of tomorrow. Whathe is taught in college becomes ofvital importance to the functionof the entrepreneur.

4. Books, .articles, and speechesby leading intellectual figureswhich have a decided effect on thethinking of the typical citizen andon the restraints he is willing toenforce upon enterprise and profit.

5. Entrepreneurial decisions bythe man in the street - as opposedto general ideas which he mayexpress - and which can give usa clue as to how he feels aboutsome aspects of profits and freeenterprise.

Opinion Polls on the Entrepreneur

Practically all surveys of publicopinion reveal that the Americanpublic accepts the. idea of profits

as a necessary part of our businesssystem.2 But they also reveal thatmore than half the public is always of the opinion that profitsare "too high" and that the publicis misinformed on the relativemagnitude of wages, profits, andthe like. There is a general impression that the workers do notfairly share the wealth which theyhelp to create. For instance, pollsshow that a great majority of thepublic believes that the largershare of productivity increases always goes to stockholders in theform of profits. These opinions areespecially strong among many professional people - school teachers,ministers, and others.3 While thesesurveys do not constitute conclusive evidence, their findings reveala blurred image of the entrepreneur in the public mind, to say theleast.

Favoring the Small EntrepreneurPenalizing the Big Company

It is important to note onecentral fact about the image ofthe entrepreneur which invariablyemerges from the evidence athand. While the typical citizenconsiders himself to be ratherfavorable in a general way to

2 Claude Robinson, UnderstandingProfits (Princeton: D. Van Nostrand& Co.), Ch. 2, "What the Public Thinksof Profits," pp. 30, 31, 32, 33.

S Ibid., p. 29.


private enterprise and profits, hedoes not think of small companiesin the same category as bigbusiness. The man in the· streetknows little or nothing. of· thefunction of the entrepreneur asdefined by neoclassical economists.He regards the corner grocerystore, the hamburger stand, andthe recently formed small manufacturer in quite a different lightfrom U.S. Steel, General Motors:.DuPont, and the like. Further..more, he tends to think of an en··trepreneur as someone who under··takes a new venture, not as allindividual or group who mustmake important judgments everyday in the conduct of some vastcompany like DuPont or GeneralMotors.

Of course, he may be willing toconcede that some phases of largebusiness activity require entrepreneurial skills, such as promoting new inventions by GeneralElectric, new techniques of producing steel, newly discovereddrugs, and so forth. But in themain he conceives of the entrepreneur as a small or medium-sizebusiness which is engaged in somenew creative effort. This conceptof entrepreneurship is reflected inthe kind of legislation by Congresswhich he approves.

Such legislation, for instance,authorized setting up a Small Business Administration (SBA) "to

aid the little fellow." The perilousstate .of small business is oftendue to the backbreaking load oftaxes, work restrictions enforcedby labor unions, minimum wagelaws which prevent the hiring ofneeded help, and so forth. Havingburdened small business with theserestrictions, the government thenpursues the usual course of creating new interventions in an attempt to redress the evils whichit created by former intervention.

We must contrast this government solicitude for the small andmedium-size business with thenumerous attacks and harassments on big corporations.

Taxes and the Entrepreneur

We gain further insight intothe typical citizen's view of theentrepreneur by analyzing taxlegislation which he and his representatives in Congress favor.These tax schedules generally tendto restrict entrepreneurial effortand capital accumulation. This isindeed a curious fact at the present time because there is urgentnecessity for greater entrepreneurial effort and more capital inorder to meet the needs of industry, states, and municipalities.Whether the problem is antipollution, housing, educational facilities, or transportation, the needis for capital and more capital.

In the face of this need it is


strange indeed that a responsiblelegislature would pass the TaxReform Act of 1969. The complexity of this bill is in itselfdetrimental to the conduct of business.But most important of all, itsmain provisions plainly restrictcapital accumulation and enterprise. In substance the Act provides for long-run reductions ofover $9 billion a year for individuals (mostly lower and middle income), two-thirds of which will befinanced by increase on businessand capital accumulation. Provisions of the Act which restrictcapital accumulation include lessdepreciation on most new buildings, heavier taxes on producers ofnatural resources, and smaller lossreserves for financial institutions.

The Act raises the amount ofpersonal income exempt from taxation, thus in effect lowering thetax rates for the low and middleincome groups. On the other hand,it increases the tax rate for individuals with annual incomes of$100,000 or more. At the sametime the Act repeals the tax creditfor investment by corporations\vhich had· acted as an incentivefor modernizing and expandingproduction facilities.

One other provision of the newtax law affecting entrepreneurshiprequires mention. On the personalincome tax form there is. a provision for "earned income" in one

column, and "other income" inanother column. The maximumtax on "earned" income will beonly 50 per cent, for "other" income 70 per cent. This is oneshort step from adopting the ideaof earned and unearned incom.ewhich is obviously a Marxian inheritance. Aside from this basictheoretical implication, the provision on the tax form which separates earned income from thatderived from interest, dividends,royalties, and the like, is a clearindication of the tendency to underrate entrepreneurial freedomand the necessity of capital accumulation.

The above provisions (and manymore) are undoubtedly a reflection of the attitude of Congressand the people that capital accumulation is not all-importantand that large-scale entrepreneursmust be assessed at a higher ratethan others.

The Intellectuals' Attack on

Large-Scale Ent.repreneurs

The public confusion about thenature of the entrepreneur is encouraged by socialistically orientedintellectuals. The general directionof their attack is to castigate thejarge corporations, to undermineconfidence in established companies, and in fact to question thevery basis of the free enterprisesystem. The free market, encour-


agement of the entrepreneur, andthe importance of profits in private enterprise, are generally derided. Ideas advanced by thesewritel's and teachers are the basisfor editorials, special articles inmagazines, and political campaigns. They become part of theintellectual framework of collegestudents and most of those en-,gaged in formulating social, political, and economic ideas.

Clear evidence of this may beseen in the predominance of text··books which are anticapitalist atworst, and equalitarian and inter··ventionist at best. A generation ofcollege students have been broughtup on the following texts: Eco··nomic Analysis and Public Policyby Bowman and Bach; The Ele··ments of Economics by LorieTarshis; Income ·and Employmentby Theodore Morgan, and mostimportant of all, Economics: AnIntroductory Analysis by PaulSamuelson. The last-mentionedtext has sold several million copies.It is no exaggeration to say thatthe vast majority of students whoassimilated the ideas in thesetexts completed their educationwith a very low tolerance for freemarket economics and freedom forthe entrepreneur. A great numberof students were influenced to become absolutely hostile to the ireeenterprise system. Undoubtedly awhole generation' of opinion-mak-

ers were conditioned by thesetexts.

A nation like the United Stateswhich has been nurtured over theyears on attacks against the entrepreneur, varying from thescholarly works of Thorstein Veblen to popular books' and articlestypified by such works .as TheRobber Barons by Matthew Josephson, The Rich and the SuperRich and The Sixty Families byFerdinand Lundberg - such a nation is naturally influenced againstthe entrepreneur.

Within the past few years therehas' appeared a book unsympathetic and even hostile to .themarket economy which has had animportant influence on teachers,editors, and other' molders' of public opinion. This is John Galbraith's The Industrial State. Herehe strikes directly at big businessand the idea of consumer sovereignty.

Schumpeter l s· Contribution

No discussion of the Intellectualand the Entrepreneur can be considered complete without referringto the brilliant analysis of JosephA. Schumpeter in his book Capitalism, Socialism and Democracy,published nearly a generation ago.The influence of the intellectualwho, Schumpeter says, Hwields thepower of the spoken and writtenword," is central to his thesis. We


now clearly see the truth of hisstatement that "the role of theintellectual group consists primarily in stimulating, energizing,verbalizing and organizing this[anticapitalist] material." Furthermore, "they staff political bureaus, write party pamphlets andspeeches, act as secretaries andadvisers, make the individual politician's newspaper reputation,"and so forth. The point is, according to Schumpeter, that "unlikeany other type of society, capitalism inevitably and by virtue ofthe very logic of its civilization,creates, educates, and subsidizes avested interest in social unrest.This social unrest is stirred by thesociology of the intellectuals."

It must be noted that not alltextbooks and all teaching inAmerican colleges is interventionist or collectivist. In recentyears, it is heartening to note,many free-market advocates haveestablished small enclaves in various institutions of learning, andin some cases have written textbooks for college courses. Whilethese ideas are undoubtedly becoming more widespread, there islittle doubt that the preponderanceof teaching and writing by intellectuals of the United Statesleans heavily toward interventionand restrictions of the entrepreneur.

It is interesting and perhaps

hopeful to note that interventionists and left-wing intellectuals donot have, and never have had, masssupport in the United States fora broad-scale political attack uponfree enterprise. The intellectualleft can nibble away at the profitsystem, but it does not seem ableto form a political base for afrontal attack. Furthermore, theincentive system is so powerfulthat it has been able to absorb theharassments and attacks madeupon it while still maintaining itsstrength to' build a large capitalbase and to provide the most productive industrial society in theworld.

The Man in the Street as Entrepreneur

It must not be assumed that theaverage citizen is antagonistic toall entrepreneurial effort and freeenterprise. In fact, in a generalway he approves it, and by hisactions indicates that he wouldlike to become an important entrepreneur himself. Evidence ofthis is at hand in the investmentactivities of the typical citizenhow he handles the cash savingswhich he has accumulated.

Today there are at least 25 million individual owners of equitiesin the United States. This is approximately 12 per cent of theentire population and about 25 percent of the adult population. Butto this substantial number must


be added the millions who investthrough mutual funds. The volumeof mutual fund investment hasgrown to over $48 billion - havingrecorded an accumulation of morethan $7 billion in the year 1969.Of course there are duplicationsamong individual investors andmutual fund investors, but takenall in all, the growth of investmentby the typical citizen has beenphenomenal in the past five or tenyears.

Inflation - and the Imageof the Entrepreneur

Although the man in the streetwould assert that he is quite favorable to the general idea of freeenterprise and. encouragement toprofit making, his tolerance foradverse economic conditions isquite low. Whenever conditions become difficult and he feels frustrated with shrinking income andrising costs, his tendency is to optfor government intervention in theeconomic process. This invariablyoccurs during a period of substantial monetary inflation, suchas we have had in the past fewyears. Economists, of course, arefamiliar with the time lag thattakes place between changes inmonetary policy and changes inthe rate of inflationary price increases. But the average citizendoes not understand this, and hebecomes restless under the pound-

ing he takes during an inflation.Then he demands government intervention at any cost. Under suchconditions successful operations ofthe entrepreneur are impeded.

But it must not be imaginedthat only consumers run to Washington during periods of inflation. Heads of leading corporations .also engage in an unseemlyrush to Washington to apply pressure for price and wage controls.Inflation is dangerous for manyreasons, especially because it tendsto create pressure for governmentintervention and wage-price control. To .encourage a favorableclimate for the entrepreneurialeffort it is essential to controlinflation.

Labor Unions and the Entrepreneur

A discussion of the entrepreneur in the United States shouldnot be concluded without somemention of the effects of laborunions on entrepreneurial activities. Beyond question the rigidityof unions' rules and practices, therestrictions upon entrepreneurialdecisions, are an important deterrent. Human nature being what itis, some people are able to operateefficiently despite all the obstructions in their way. It certainlycannot be asserted that unionization and monopoly practices byunions have operated to preventcapital accumulation in the United


States. The record since 1936,when powerful unions were givenmonopoly privileges under the law,tends to confirm the fact thatentrepreneurs have . been able todemonstrate their dynamism .andto create a fabulously productivesociety despite all obstacles.

But conversely, there is littlequestion that the present laws andthe practices of unions are a decided drag on entrepreneurialactivity.

Also it should be pointed outthat powerful unions have theability to demand and get uneconomic wage increases which act asa force for encouraging monetaryinflation by the administration inpower.

If labor demands and gets increases of, say, 8 to 10 per centper annurn, and if the Administration holds to a policy of a verylimited increase in the money supply, the result would be increased

. unemployment unless wage increases are offset by productivityincreases, which is highly improbable.

Thus, the effect of labor unionpower is to create a conditionwhich could lead - and generallydoes - to a new cycle of inflation.Since Washington is sensitive tofears of recession, the tendency isto validate excessive wage increases by excessively increasingthe money supply. The old inflation

is barely curbed before a new onestarts. So the nation goes fromone inflationary plateau toanother, due to the inexorable· pressureof monopoly labor unions.

Conclusion

The image of the entrepreneurin the mind of the· American public corresponds only vaguely to thefunction of the entrepreneur asdefined by economists. The publicbelieves that the entrepreneur ·isan innovator or promoter of something new, and generally is asmall business. The fact is thatbig business and small, innovatorsand· traditional businesses, all areentrepreneurs because they areseeking to make a profit. The basicquestion, then, is: What does theAmerican public think of profitsand profit-making?

I have outlined briefly some ofthe hard evidence on which wemight base a valid conclusionpublic· opinion polls, the Acts ofCongress supported by the public,the climate of opinion amongthose who teach in the collegesand those who write for the general public, investment attitudesof the public, and so on. Substantially, this evidence indicatesthat the man in the street has arather ambivalent attitude towardthe entrepreneur and the vital importance of capital accumulation.

On the negative side is the


growth of restrictions on entrepreneurial activity. A major influence along these lines has beenthe teaching and writing of leftwing intellectuals who favor intervention. Inflation also •gives atremendous impetus to restrictivemeasures. Curbing inflation· is essential to perpetuate a healthyfree-market system.

On the more hopeful side is thefact that the intellectual left doesnot have, and never has had, masssupport in the United States fora broad-scale political attack onfree enterprise. Also, the invest~

ment activities of more than 25million citizens indicate their desire to participate in entrepreneurial activity.

While the progress of interventionist measures may give a feeling of hopelessness at times, itmust be realized that the profitsystem is so powerful that it has,nevertheless, accomplished miracles of capital accumulation andproduction. It bears the heavyburden of interventionism remarkably well.

Finally, it must be noted, thereis a heartening increase of activityby free-market advocates in theacademy and in journalism and inpolitics.

There are fashions in politicaland economic thinking;. and thefashion of the past generationmay be altered through educationof the American public. ~

IDEAS ON

LIBERTY

In Retrospect

THE ENTREPRENEURS are neither perfect nor good in any metaphysical sense. They owe their position exclusively to the factthat they are better fit for the performance of the functionsincumbent upon them than other people are. They earn profitnot because they are· clever in performing their tasks, but because they are more clever or less clumsy than other people are.They are not infallible and often blunder. But they are lessliable to error and blunder less than other people do. Nobodyhas the right to take off~~nse at the errors made by the entrepreneurs in the conduct of affairs and to stress the point thatpeople would have been better supplied if the entrepreneurs hadbeen more skillful and prescient. If the grumbler knew better,why did he not himself :fill the gap and seize the opportunityto earn profits? It is easy indeed to display foresight after theevent. In retrospect all fools become wise.

LUDWIG VON MISES, Profit and Los8

~orMORAL

GROWTH

~TIBOR R. MACHAN

THE PHILOSOPHY of freedom hasnot always fared so well as hasthe practice of freedom. For instance, the American economicsystem, flowering under conditions of comparative freedom, hasyielded a virtual miracle of goodsand services, whereas the politicalphilosophy of liberty - the system's moral framework - hasfallen out of favor with Americans. And today's enemies of liberty look at the moral climate andpropose that we blame it on America's economic success. They saythat the free enterprise systemessentially the voluntary cooperation of individuals in their economic activities - did not anddoes not work. They attempt toprove this on the grounds that

Mr. Machan is Assistant Professor of Philosophy at California State College, Bakersfield.

~n/\

economic efficiency is not servedby freedom of production and exchange; but what they are reallycomplaining about is that the freemarket has not done what it wasnever designed to do: it has notmade everyone morally perfect.

The problem here is a failure torecognize the difference betweenpolitical and personal behavior.The former has to do with howpeople should live together inpeace, while the latter concernsone's conduct of his own life. Aneffective political system may beapproximated without the guarantee that citizens of the systemwill all be good individuals. It isprecisely so as to· secure the possibility for the highest degree ofmoral development on each person's part that people must befree from each other's aggression.

It is man's personal freedom,his capacity for choice, that formsthe philosophical base of the political system we call the free society. If men were not free in thisbasic sense, they could not helpdoing what they do; and to expectthem to refrain from interferingwith each other's lives would beirrational. And so would be thedesire for a free society.

A free political society wouldrequire some means of protectionagainst those who· would trespassupon or attack the lives and properties of peaceful persons. This

1970 FOR MORA1L GROWTH 621

conviction has been the impetusbehind people's support for somekind of political system, that is,for the institution of government.

What the enemies of freedomhave never understood is thatthere simply is no political meansby which to make people good. Afree society does, however, stopthose who try to lord it overothers. If a culture is morally defective, there is nothing that politically free men can do to inducemorality except to educate as energetically and effectively as theirtalents and devotion to virtue permit. It is a mistake to blame freemen for not attempting to makeothers better through politicalmeans: a person who respectsfreedom cannot aspire to become aphilosopher king without contradicting himself; it is illogical topreach that no man should ruleothers and at the same time attempt to bring about this condition of freedom and virtue byforce!

When individuals fail to measure up in moral qualities as istrue of many in America today,this means they are acting withoutquestioning what is right orwrong. The idea that individualscan aspire to moral virtue has beendown-graded; instead, the collective, the group, the society hasbeen given the responsibility ·ofbuilding the good life. Individual-

ism always has been central to theAmerican economic system, but inmatters of personal morality theindividual was not widely recognized to have great significanceand responsibility. Instead, thecommunity, the church, the bodypolitic assumed the role of moralleadership.

Today, when it is obvious tomost that morality cannot be politicalized and that something isdrastically wrong, people are rejecting even the possibility of being good. Many college and university students· express the viewthat right and wrong cannot beknown; we are capable only ofmindless action. Not only studentsand young people but members ofthe older generation are generallypessimistic about the possibility ofbuilding a better life for themselves and a better society.

Overt enemies of the free society often capitalize on this cultural moral vacuum by attributingit to the relative freedom mostpeople enjoyed in the early daysof America and other Western societies which were influenced bythe English classical liberal tradition (of Adam Smith, DavidHume, John Stuart Mill). Bypointing to some of the real andalleged personal failings of peoplewho have been part of the American culture, they would have usbelieve that there is a necessary

622 THE FREE'MAN October

connection between political freedom and personal misconduct.

There is, of course, a necessaryconnection between freedom andthe possibility of evil, just as thereis such a connection between freedom and the possibility of good.But what is important is that bothgood and evil are matters of personalconduct. No one can makeanother person good or evil. Harming someone who is good will notmake him evil, nor will helping anevil person make him good, in thefinal analysis. Praise and blame,reward and punishment, are all responses to good and evil, but theyare not primary causes.

Those who contend that the freesociety is bad for people, becausepeople who have been free did notalways behave well, are mistaken.It is, in fact, only in a free societythat. the wrongheadedness, thepersonal mischievousness of somepeople, does not necessarily havea harmful effect on all. In socialism, where everyone has a hand inthe life of everyone else, the evilthat men do must live after them--and beside them,and aroundthem, and on and on. The mismanagement of some collectivist government project burdens us all.Nor is it possible to uncover thosewho are responsible for the mismanagement. The abandonment ofself-responsibility in favor of col""lective action invariably spreads

the lack of responsibility throughout society.

Today, in a climate of fear andmoral uncertainty, unscrupulouspersons make all sorts of attemptsto gain political power over people. Their arguing that the freesociety and the corresponding freemarket produce human evil mustbe challenged. A free society maynot produce everything that everyone· would like; but free menhave the option to pursue·· theirown goals and aims. When thereis no freedom, a person cannoteven aspire toward satisfying hisaims privately. When one's life iscontrolled by political masters andthings are going badlY,there islittle personal incentive towardimprovement, and understandablyso. But in freedom,· one man's efforts suffice to make his own life,at least, more productive or otherwise worth while. And this mayencourage others· to do likewise.

To try to improve the quality oflife in a given society by centralizing it under political leadershipis futile. Such efforts simply diffuse responsibility and reduce thelikelihood of moral improvement.Needed, instead, is a concentratedeffort to restore to people boththeir rights and their responsibilities. Those who value human lifeand look for it to be lived wellshould encourage progress towarda free society. ~

CLARENCE B. CARSON

TlIrottling tlle Railroads

IF SOMEONE had set out withmalice aforethought to destroy theeffectiveness of the American railroads,he could hardly have devised· better ways than those employed .by the Federal governmentfor much of the twentieth century - short of hiring wreckingcrews to take up the track anddynamiters to blow up the rollingstock. Before World War I, thegovernment subjected the railroads to increasingly debilitatingrestrictions: by trying to useforce to make them compete, notpermitting them to compete inmany of the usual ways, makingit difficult for them· to cooperateDr. Carson is a frequent· contributor to THEFREEMAN and other journals and the authorof several books, his latest being The War onthe Poor (Arlington House, 1969). He isChairman of the Social Science Department atOkaloosa-Walton College in Florida.

In the Gripof Government1920-1958

and coordinate their activities,freezing the systems into theirearlier patterns, prohibiting themto follow certain practices bywhich they could profit and serveconsumers, prescribing uneconomic practices, driving investorsaway and, perhaps unintentionally, promoting the dissipation ofworking capital.

Having so circumscribed therailroads as to make it virtuallyimpossible for them to adjust tonew demands and changing conditions, the government took overand ran them during World WarI. The railroads were technicallyreturned to their owners after thewar, but this was done in such away that the .death grip uponthem was retained if not actuallytightened. While the railroads


were bound hand and foot, as itwere, government subsidized andpromoted alternative means oftransport and facilitated theunionization of their employeesagainst them.

Indeed, if railroad managementshad been dangerous criminals withlengthy records of dastardly acts,they could hardly have been morecarefully watched and had theiractivities more extensively limitedand restrained. In fact, railroadmen were treated as second classbusinessmen, as charlatans readyat every moment to cheat investors, as extortionists ready totake unfair advantage of customers, as conspirators eager to besetthe public, and as brigands on themarch to destroy American transport. From another angle, railroaders were treated as if theywere truant children whose everyactivity must henceforth be minutely supervised and whose dealings must be subjected to the mostsearching scrutiny. In short, menwho undertook to operate railroadswere, in that capacity, virtualprisoners of their own government.

However, it would be an errorto suppose that those directlyconnected with the operation ofthe railroads were the primaryvictims of these government policies. Railroad executives have nodoubt generally enjoyed compen-

sation and prestige similar totheir counterparts in other industries. Supervisory personnel musthave had good salaries over theyears. Employees of railroads haveusually received relatively highwages. Even stockholders havefrequently received dividends andbondholders been paid off. Theprimary victims of government intervention in the operations ofthe railroads have been consumers - all of us - who have beendenied the best goods at the lowestprices and passenger service ofhigh quality at low prices whichthey might have otherwise had.It is probably impossible for governments to follow policies thatwill induce businessmen to servewithout compensation, but it iseasy to devise policies which resultin losses to consumers. This hasbeen the result of the government's regulation of the railroads.

The Socialist Attack

Back of these policies was socialist doctrine, as was indicatedin an earlier chapter, however revised and watered down that doctrine might be when it reachedthe popular mind. More than anyone else, it was socialists who conceived of businessmen as villainspreying on the public for privategain. To them, private enterprisewas irredeemably flawed by theselfish quest for· gain. The rail-

1970 RAILROADS IN THE GRIP OF GOVERNMENT 625

roads received the full brunt ofthe earliest socialist assaultagainst private enterprise inAmerica. It does not follow, ofcourse, that all who favored regulating the railroads were socialists. Much of the animus for regulation can be accounted for byspecial interests wishing to usethe railroads for their particularadvantage. But socialism providedthe ideological ammunition - theanimosity toward private business,the notion that service should bedivorced from profit, and the statist assumptions held by regulators- and the protective coloration forthese special interests.

More important, socialism provided a direction and a goal forregulation. The ultimate professedgoal of socialists was governmentcontrol of the railroads and theiruse for the benefit of the people.Two means to this end have beenset forth. One is the governmentownership and operation of therailroads. This is the way of whatare now sometimes called doctrinaire socialists. The other way ismore subtle and indirect; it involves government control without ownership and entails a variety of means. This is the way ofpragmatic socialists. They do notordinarily refer to themselves associalists at all in the UnitedStates; they prefer to be knownas pragmatists, liberals, or some

such euphemism. But from thedirection of their thrust it can bedetermined that they are socialists, regardless of the name bywhich they are known.

Pressure Toward GovernmentOwnership and Operation

Up to and through World War Ithe pressure of socialists wastoward government ownershipand operation of the railroads.This was true of several thirdparties which did not identifythemselves as socialists as well asthe various avowedly socialistparties. Herbert Croly, a "progressive" socialist, indicated howthe goal might be achieved inwhat he wrote a few years before VVorld VVar I:

In the existing condition of economic development and of public opinion, the man who believes in theultimate necessity of governmentownership of railroad road-beds andterminals must be content to wait andto watch. The most that he can do forthe present is to use any openingwhich the course of railroad development affords, for the assertion of hisideas; and if he is right, he will gradually be able to work out, in relationto the economic situation of the railroads, some practical method of realizing the ultimate purpose.!

1 Herbert Croly, The Promise of American Life, Cushing Strout, intro. (NewYork: Capricorn Books, 1964), p. 377.


Regulation set the stage fora government takeover by makingit increasingly difficult for therailroads to do their job effectively. World War I provided thecrisis which was used as the occasion for government operationof the roads. A major propagandaeffort was made during and immediately after World War I tomake the takeover complete andpermanent. This campaign didnot succeed; it was thwarted bya Congress determined to returnthe railroads to their owners.

It turned out, however, thatonly doctrinaire socialism was rejected. American reformism hadtaken its own peculiar form. Instead of going from operatingthem to government ownershipof the railroads, the governmentabandoned both of these andturned to full-fledged control. Itwas sufficient for the day thatgovernment have power, authority, and control over the railroads.Progressivism had prepared theway for this direction to be taken.Politically, such a direction isclearly superior to ownership andoperation. When government ownsand operates, bureaucrats musttake on onerous duties and responsibilities; they must providethe services and get the moneyfor operation. Control withoutownership provides the bureaucrat with power over but little, if

any, responsibility for renderingservices. At any rate, this is whatwas established for the InterstateCommerce Commission in the1920's.

Regulated Out of Service

It was about as clear as suchthings can be that when WorldWar I came the government restrictions made it virtuallY impossible for the railroads to provide the desired services. A railroad historian has recently observed that the "poor condition ofthe rail lines in 1917 was no doubtpartly the result of earlier excessive or mistaken regulation...."2

Even the Interstate CommerceCommission's recommendations atthe time indicated an awarenessof the debilitating impact of therestrictions. The Commission recommended that the governmenteither take over and operate therailroads "or that all legal obstacles to the complete unificationof the railways for that period beremoved...."3

Once in power over them, thegovernment reversed its formerpolicies toward the railroads.What was sauce for the privateenterprise goose definitely was not

2 John F. Stover, The Life and Declineof the American Railroad (New York:Oxford University Press, 1970), p. 175.

3 Sidney L. Miller, Inland Transportation (New York: McGraw-Hill, 1933), p.156.

1970 RAILROADS IN· THE GRIP OF GOVERNMENT 627

sauce for the government gander.William G. McAdoo, who wasplaced in charge of the railroads,proceeded to do all sorts of thingsthat had been either prohibited orbeyond the power of rail executives. Rail service was speedilycoordinated; the railroads weretreated as if they were a singlesystem. Freight was routed theshortest way. The governmentdiscriminated vigorously amongshippers, giving war goods preference. Passenger service for thegeneral public was greatly curtailed. The railroads had for several years been denied any significant rate increase. "Under theFederal Control Act it was unnecessary to secure the approvalof either state or federal regulatory bodies for changes inrates...." New rates could simplybe proclaimed: thus, "the Administration announced, on May 25,1918, a 25 per cent increase infreight rates effective a monthlater...."4 Of course, the governmentwas free also of antitrustrestrictions and could and didtreat the railroads as a gianttrust.

Even so, the railroads were inbad shape when they were returnedto their owners in 1920. McAdooand his successor had seen fit toaccumulate a huge deficit ratherthan raise rates sufficiently to

4 Ibid., p. 163.

cover costs. "The official reportof the' Railroad Administrationadmitted that the total operatingexpenses (plus rentals paid to theindividual railroad companies) exceeded total revenues for thetwenty-six months of federal operation ... by just over $900,000,000."5 And this figure does not include more than $200 million laterpaid to the railroads for undermaintenance during the war. Thislatter figure, however, amountedto only about one-third of what therailroads claimed they were duefor undermaintenance. The railroad owners were stuck with aninheritance of high wages to employees, excess equipment constructed for wartime purposes,and roads that had generally beenrun down.

The Transportation Act 01 1920

Had the management of therailroads been left free to operatethem as they saw fit, they mighthave been able to revive the roads.They were not. Instead, they weremuch more completely shackledthan ever by the TransportationAct of 1920. This act should beconsidered the crowning piece andculmination of Progressive legislation. The agitation of the Progressives produced antitrust activity, a spate of legislation, several constitutional amendments,

5 Stover, op. cit., p. 173.


and heady intervention in foreignaffairs. By· the end of World WarI, or before, it appeared to havelost its impetus. Americans wereweary of reform and were registering their feelings at the polls.Even so, one more piece of Progressive legislation was pushedthrough, one which was typicalof what Theodore Roosevelt hadadvocated as the Bull Moose candidate in 1912 - that the government leave property ownership inprivate hands but subject thegreat industries to stiff regulation. Of course, Roosevelt supposed that the railroads were already so regulated, but the principle which he would have appliedto all industry was carried to itslogical .conclusion in the EschCummins Transportation ·Act.

Much early policy was reversed.The Interstate Commerce Act hadprohibited pooling. The Transportation Act of 1920 authorized theInterstate Commerce Commissionto approve pools if it could beshown that they were in the public interest. Antitrust legislationhad been aimed at one corporationindirectly controlling others. Thenew act authorized the Commission, "upon application by anycarrier or carriers and after hearing, to approve 'the acquisition ...by one of such carriers of the control of any other such carrier orcarriers, either under a lease or

by the purchase of stock or in anyother manner not involving theconsolidation of such carriers intoa single system for ownership andoperation,' upon such a basis asmay be found by that body to bejust and reasonable."6

Planned Consolidation

The Act charged the Commission with the task of preparingand adopting "a plan for the consolidation of the railway properties of the continental UnitedStates into a limited number ofsystems. In the division of suchrailways into such systems undersuch plan, competition shall bepreserved as fully as possible andwherever practicable the existingroutes and channels of trade andcommerce shall be maintained...."To make it possible for this to beaccomplished, the act permittedthe Commission to authorize consolidations of railroads into singlecorporations according to themaster plan.7 Actually, the Commission have never put any suchplan into effect. They are waiting,no doubt, until mathematicianssquare the circle before undertaking so forbidding a task as this.

No longer was it legal for anyone to build or extend a railroadat will. The act required that a

6 Miller, Ope cit., P. 175.7 All such authorized actions were spe

cifically exempted from antitrust suits.

1970 RAILROADS IN THE GllUP OF GOVERNMENT 629

prospective builder must firsthave a "certificate of convenienceand necessity" from the Commission before beginning construction. Moreover, the law providesthat "no carrier ... shall abandonall or any portion of a line of railroad or the operation thereof unless and until there shall firsthave been obtained from the Commission a certificate that the present or future public convenienceand necessity permit of suchabandonment."

The restrictions on railroad finance were equally restrictive.Following a brief period of graceafter the act went into effect, "nosecurities might be issued legallyby any carrier subject to regulation except upon Commission approval."8 The act lays down thegeneral principles upon which suchapproval may be granted. It notesthat Commission approval does notin any way imply that the UnitedStates government guaranteessuch securities. The only securities a railroad might issue withoutCommission approval would benotes maturing within two yearsand even such borrowing was restricted to 5 per cent of the parvalue of outstanding securities.

Rate Control

The most amazing provisions ofthe Transportation Act of 1920,

8 Miller, op. cit., p. 1'77.

however, were probably those having to do with rates. The Commission was authorized to fix ratesfor roads under its authority according to how it grouped themfrom time to time. The rates wereto be fixed so as to assure a fairreturn upon investment if the railroad were efficiently run. Initially,Congress declared that a fair return in most instances would be5V2 per cent annually of the aggregate value of railway properties. Any railroad that earnedmore than 6 per cent on the aggregate value of its properties in agiven year was to have one-half ofthe excess placed in a reserve fundfor its own future use and the otherone-half to be turned over to theCommission to place in a generalcontingency fund to aid ailingrailroads. What was involved wasa most complex limitation on earnings and a redistribution plan.

There were several other rateprovisions of the act. The Interstate Commerce Commission wasgranted virtual pre-emptive authority over rates so far as stateregulatory bodies were concerned.If it found that state regulationsoccasioned any prejudice or inconvenience to interstate commerceit could negate them. For the firsttime, also, the Commission wasempowered to prescribe minimumas well as maximum rates. It couldalso prescribe the division of joint


rates between or among two ormore carriers if it found the prevailing division to be unjust. Thelong and short haul clause wasaltered so as to further limit theexemptions the Commission couldgrant from its provisions.

Routing and Service

The Commission was grantedextensive powers over routing andservice. A carrier found "improperly" diverting traffic from another line would be liable to theextent of paying the whole amountgained to the "injured" railroad.The Commission was authorizedto divert traffic to other lines if,in its opinion, a road was unableto provide a service. Moreover,the Commission was empowered todetermine what routes interchanged traffic should take. Shouldcar shortages develop, the Commission could direct their disposition so as to relieve the difficultywithout regard to the desires ofthe owners. The law provided thatit should be the duty of every carrier "to furnish safe and adequatecar service and to establish, observe, and enforce just and reasonable rules, regulations, andpractices with respect to car service." Nor was the Commissionto be particularly concerned aboutprivate ownership of terminalsand surrounding trackage. If theCommission should find that it

would be in the "public interest,""it shall have the power to requirethe joint or common use of terminals, including mainline trackor tracks for a reasonable distanceoutside of those terminals...."9

The owners were to be paid something for such usage, of course.

Certain of these provisions havebeen altered over the years. TheEmergency Railroad Transportation Act of 1933 attempted onceagain to effect' consolidations oflines into larger and more stablesystems. The attempt to prescribeearnings precisely had alreadybeen more or less abandoned. TheTransportation Act of 1940 placedrestrictions on competitive modesof transportation. But the government grip upon the railroads byway of the Interstate CommerceCommission has generally remained. That hold was authorizedand established by the Transportation Act of 1920, and its provisions amply illustrate the extentof the grasp.

A state of organized irresponsibility was established by this legislation. The power to make managerial decisions of wide and determining scope was vested in theInterstate Commerce Commission.The responsibility for operatingthe railroads remained with private management. But that management was denied the authority

9 Ibid., p. 182.

1970 RAILROADS IN THE GIUP OF GOVERNMENT 631

to make on its own all sorts ofdecisions by which entrepreneursordinarily operate businesses efficiently and successfully. Rail executives could not, and cannot,buy, sell, build, abandon, or dispose of their facilities withoutCommission approval. They couldnot sell stock to raise new fundsnor consolidate with other lineswithout the authorization of theruling government body. In mostof the usual ways, railroad managers could not compete with railor other modes of transportation,could not compete in price, in supplying of certain kinds of service,or even, if the Commission soruled, in the exclusive use of better located facilities.

No Room to Operate

Critics of railroad managementhave long claimed that those running the roads were cautious, unimaginative, disinclined to innovate, and lacking in vision. In viewof the limitations under whichthey operate it would hardly besurprising if the charges were, insubstance, true. Any new serviceinnovation could be quite expensive to the railroad. It might notpayoff, yet the road might bestuck with providing it indefinitelybecause the Commission decidedthat the "public interest" requiredit.

The crucial factor in explaining

the "unimaginativeness" of railmanagement, however, is the tyingof rate structures to earnings.When this is combined with government engendered inflationthat is, increase of the money supply - as it usually has been since1920, it is easy to understandwhy managements have been reluctant to make daring innovations. Increases in money supplymean that prices in general mustrise to offset the increase. Yetrailroads have to observe a timelag before they can raise theirprices, if it turns out that theyare permitted to do so. To get theraise, they need to demonstratethat their earnings are insufficientunder the present rate structure.The effect of this is that railroadscan rarely expect to turn a goodprofit by extending services, butthey can lose a great deal. Inshort, railroads cannot - underinflationary conditions - makemuch of a profit; they can, however, have horrendous losses.

Actually, however, rail executives have often been quite imaginative. They have even made interesting service and equipmentinnovations from time to time, butthat is not what I want to pointout here. Much of the managerialimagination has not been expendedin finding ways to improve andexpand service, as it normallywould be. It·· has, instead, been de-

632 THE FRE'EMAN October

voted to finding ways for a railroad to survive and make a modest profit under the crushing burden of restrictions, to findingways to circumvent the thrust ofregulation, and to finding arguments and evidence to convincethe Commission to permit somecourse of action.

Holding Against Disaster

Railroad men have fought afifty-year-Iong holding actionagainst disaster. Denied most ofthe avenues by which they mightadvance, they have husbandedtheir resources by strategic retreats. They have developed ingenious arguments supported byvoluminous arbitrarily construedstatistics for reducing servicesfor dropping passenger trains, forcutting off dining cars, for closing depots, for not installingwarning systems, and so on. Theyhave become, in effect, unbusinessmen, for rather than seeking toexpand services, they have soughtto reduce them; rather than increasing traffic, they have sometimes sought to reduce it; ratherthan reduce prices to increase thenumber of customers, they haveoften sought to raise prices andhave thereby reduced customersand revenue.

These unbusinesslike actionsmake sense only in the frameworkof restrictions that has been

erected. The reversal of prioritiesfrom expanding services throughinnovation to reducing servicescan be explained, and the explanation will show that it was aboutas good business as could be done.Denied much expectation of profitsby new exertions, railroad menturned to making what profits theycould by as little effort as possible.They sought to keep only that business which was most profitable,involved the least risky outlay offunds, and entailed the leastamount of effort to acquire andservice. They sought to use therails where they were most clearlysuperior to other modes of transportationand to avoid competition where superiority was lesscertain.

Under such policies, the railroads ceased to be a growth industry. Indeed, they appear to bean industry dying of a lingeringillness. One after another theyhave abandoned or had taken fromthem services that they once performed: the carrying of mails, thehauling of most packaged freight,much of the passenger service,and so on. Each time a railroadlops off or reduces service to anarea it is apt to reduce the number of customers for even its profitable traffic. For example, whenpassenger service to a small community is discontinued, it reducesthe likelihood that people travel-

1970 RAILROADS IN THE GlUP OF GOVERNMENT 633

ing at however great distances willgo by train when either their pointof departure or destination is thatcity. Cut off enough such serviceand even long distance trains between great cities will not haveenough passengers to warrant theprovision of the service. The sameprinciple will generally hold regarding any such service, and therailroad policies have undoubtedlyproduced the appearance of adying industry. These policies, inturn, have been the result of desperate measures taken by railroad

men caught in a stranglehold bythe Interstate Commerce Commission.

Had this been all, the railroadsmight still have held their own.But there was more. They werefaced by increasing competitionfrom other modes of transportation. And while they were beingcircumscribed by onerous restrictions, governments were frequently aiding and abetting their competitors. That part of the storyneeds also to be told. ~

Next: The Grip of Privileged Competitors

__FREEDOM AND]EMOCRACY

EARL ZARBIN

A COWORKER, assigned to write anewspaper story about Independence Day talks in Arizona,opened with this sentence:"Lawmakers and political figuresbeckoned back to the first Fourthof JuLy in talks throughout thestate yesterday with the messagethat democracy is hard to come byand even harder to maintain."Mr. Zarbin is a newspaper man in Arizona.

This linkage of the word "democracy" with the Declaration ofIndependence surprised me. WhenI asked if the word "freedom"might not be more correct, he replied: "I didn't think about it thatmuch when I wrote it."

Precisely. Seldom do we thinkabout it. Woodrow Wilson said,"The world. must be made safe fordemocracy." Would it have made


any difference if he had used"freedom" instead of "democracy"? Perhaps not, but it is delusion either to suggest or to believe that the words are alike inmeaning or significance.

Freedom is "the absence of necessity, coercion, or constraint inchoice or action; liberation fromslavery or restraint or from thepower of another." Democracy is"government by the people; especially rule of the majority; agovernment in which the supremepower is vested in the people andexercised by them directly or indirectly through a system of representation usually involving periodically held free elections."

In no way can the words "freedom" and "democracy" be substituted without confusion. Thatthey are frequently used for oneanother is understandable. Democracy, not freedom, is repeatedlyheld up to us as representative ofthe ideal. If we have democracy,

we are presumed to have freedom,according to much of the oratory.

But we can - and do in facthave denials of freedom broughtabout by democratic or majorityrule. Prohibitions against peaceful citizens entering peaceful occupations and pursuits abound.For instance, no one can open upnew land to cotton without anallotment; no one can start a radioor television broadcasting stationwithout approval. Instead of relying upon market determinationof approval or allotment for everyhonest enterprise, all too oftenpermission from government mustfirst be won. And there are countless examples of how such economic freedom has been deniedunder democracy.

Freedom is one thing, democracy another. They may be related in some ways. But the concepts are not interchangeable,nor should the nature and purpose of the two be confused. f)

Loyalty

IDEAS ON

LIBERTY

IF YOU WORK for a man, in Heaven's name work for him; andstand by the institution he represents. Remember - An ounce ofloyalty is worth a pound· of cleverness. If you must growl, condemn, and eternally find fault, why - resign your position andwhen you are on the outside, damn· to your heart's content - butas long as you are a part of the institution, do not condemn it. Ifyou do, the first high wind that comes along will blow you awayand probably you will never know why.

- ELBERT HUBBARD

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN

CARTE BLANCHEFOR CHAOS

LILLIAN R. BOEHME, the editor ofa monthly magazine called TheLiberta,rian, likes to write with adouble focus. It is a difficult trick,but she pulls it off in a searching,closely argued book called CarteBlanche for Chaos - a CriticalLook at the Kerner Report (Arlington House, $7.00).

On one level this is a "news"book. It goes rather exhaustivelyinto the findings and recommendations of the National AdvisoryCommission on Civil Disordersthat tried to get to the bottom ofthe urban rioting and arson thatbegan in the Watts area of LosAngeles and spread throughoutthe land for several of those "long,hot summers." But behind thecritique of the news there is another and far more positive bookof a kind that would have appealedto the late Isabel Paterson or thelate Rose Wilder Lane. Mrs.Boehme is not only concernedwith exposing the statist bias ofthe members of the Kerner Com-

mISSIon, she is also concernedwith enunciating the principles ofwhat Leonard Read calls "the freedom philosophy." The KernerCommission's performance is theoccasion for Mrs. Boehme's work,but she could have done just aswell if she had picked anyone ofa number of recent "official" investigations such as the Scrantoncommittee's probing into thecauses of campus violence. WithMrs. Boehme it is the applicationof her own ideas that counts.

Briefly, Mrs. Boehme has it infor the Kerner Commission forbeing part of the disease which itwas supposed to anatomize and tocure. The men of the Commissionblamed the urban riots on"racism." The theme, as stated, isthat the "needs" of the riotersand arsonists, mostly black because of the geographical focus ofthe Report, constitute a set of"rights," and the fact that the"needs" had not been satisfiedover the centuries was enough to


justify or at least to excuse allmanner of violence. "Society" isthe guilty party according to thisway of thinking. The victims ofthe rioters, so the Kerner philosophy assumes, are necessarily toblame for their own injuries, despoliation, and deaths. For theyhad done nothing to meet the"needs" of their tormentors andmurderers.

This, of course, is a junglephilosophy. It makes hunger anexcuse for taking the property ofthe person next door. It does notrecognize the individual nature of"rights," which must be considered anterior to the institution ofgovernment if we are not to confuse them with permissions orgifts or dispensations or privileges.

With their peculiar view of thenature of "rights" it is scant causefor wonder, that the men of theKerner Commission forgot to lookat the victims of the rioters. Mrs.Boehme says that "people whosehomes had gone up in flames,small shopkeepers whose stockvanished in the arms of looters,were not heard.... The 'antagonistic views' of the victims of violence were deemed irrelevant tothe Commission's quest."

Mrs. Boehme does not deny thatlife, in a slum, can be hard. Butit does not follow that just because the "nonproductive" are

poor, the productive are guilty of"depriving" them. The only wayin which the poor can be upgradedis to let the producers go to workproducing more, for without anexpansion of the economy therecan be no jobs for the "needy"who have not succeeded in findingberths within the productive system. Even the taxes that go for"relief" in the slums are dependent on prosperity outside theslums.

In a devastating summary Mrs.Boehme says the Kerner Reportclaims to defend human rights byobliterating the very concept ofrights. The Report treats "needs"as rights to what other men produce. It deplores violence - andproposes to institutionalize it bylaws that justify the forcible redistribution of other people's property. It preaches against racism,but it judges all individuals inracist terms (it is "they," theKerner Commission members,"who cannot see or write of a manwithout referring to his color.")The Commission speaks of justice,yet it proposes that the victims ofthe rioters be forced to pay forswimming pools, rat poison,schools, and even garbage pailsfor those who have burned theshops and stolen liquor and TVsets. Praise for "law" may befound in the Report, but it goeson to make out a case for the thief

1970 CARTE BLANCHE FOR CHAOS 637

who shoots a policeman in "selfdefense." The Report is all for"freedom" of thought - but itoffers sneaky justifications forshaming the press into self-censorship, and it advances proposalsfor state manipulation of thethoughts and actions of men. Finally, the Report is anticapitalistic. It makes "incompetence thecoin of the realm." It proposesthat the plight of the unemployedbe alleviated by passing more"laws to make employing themuneconomic." It sets up the "havenots" as the judges of the "haves,"which means that investment capital can be seized before it hasmade a single new machine orbuilt a new factory. It praises"free enterprise," but recommends"a fascist system of nominal private 9wnership castrated by statist controls."

The Underlying Philosophy

If I have any criticism of Mrs.Boehme's book it is that shedoesn't tell us enough about thestatist philosophers of the nineteen thirties who created the modern slums, miscalled ghettoes, inthe first place. The reason whythe blacks took up a forced marchinto Harlem and Watts, intoBrooklyn's Bedford-Stuyvesantand Detroit and the Chicago SouthSide, is that the New Deal attemptto cure the woes of American agri-

culture by subsidies to the richerfarmers ended by "tractoring thefield hands off the land." Themoney the cotton planters got forlimiting their productive acreagewent into high-priced mechanization at a much faster pace thanwould have occurred naturally if"market" principles had been permitted to operate. What wouldhave been an orderly transition,with factories moving into theSouth to employ stay-at-homelabor displaced from the farms,became a rout. The blacks, facedwith the necessity of finding newplaces to live, moved into northerncity areas that were already beingdeserted by whites who couldafford to take up new homes insuburbia. New Deal statism wasat the bottom of the congestionthat occurred over the years.

Since statist ideas are responsible for the overcrowding inplaces like Watts, I am more inclined than Mrs. Boehme to belenient with the businessmen whohave tried to do something abouttraining and employing the so-called "hard core." Mrs. Boehmecriticizes the Lockheed Corporation's program for putting Wattspeople to work in the factory ithas built in the Watts IndustrialPark. And it is true that the practice of setting up "negative" standards (such as being a school dropout or a person with a criminal


record) for employment has itsludicrous aspects. But when theLockheed company says that"none of these requirements is sodifficult as to present a significantobstacle to the normal profit function," shouldn't we be willing toaccept the explanation if the stockholders approve? The state itselfforced man off the land into theslums, leaving a problem of mopping up to somebody. So why object if businessmen volunteer todo the mopping?

• THE THEORY OF EDUCATIONIN THE UNITED STATES byAlbert Jay Nock (New York: ArnoPress, 1969, 160 pp., $6.00).

Reviewed by Robert M. Thornton

SOME EXCELLENT books and essayson education have been publishedduring the past twenty yearsmost notably those by JacquesBarzun, Mortimer Smith, RichardWeaver, Bernard Iddings Bell,George Roche, R. J. Rushdoony,and Christopher Dawson. Therewere earlier critics and one of themost perceptive was Albert JayNock whose The Theory of Education in the United States has beenrepublished. This volume is madeup of the Page-Barbour Lecturesdelivered at the University of Virginia in 1931. First published in1932, it was republished in 1949and has for a long time been out

of print and very hard to come by.Much of the criticism directed

against modern education, .whileworth while and true, does not godeep enough. But Nock, the radical thinker, put his finger on theroot of the matter: the faultytheory of education which guidesmost educators in this country.Stated briefly, this theory declaresthat (1) all persons can be edu-

. cated; (2) all persons should beeducated; and (3) universal education will bring us a much improved society. Part one is, ofcourse, false because not all persons are educable any more thanall can run a mile in four minutesor write a best-selling novel. Thiswas recognized at about the turnof the century by the powers thatbe but instead of discarding aworthless theory, they substitutedtraining for education. Nearlyeveryone may be trained to dosomething whether it be driving atruck, performing a surgical' operation, or programming a computer. Training has to do with instructing or "putting in" information and is concerned with instrumental knowledge, with vocationalism or how to earn a living.Responsibility falls chiefly on theinstructor.

Education, on the other hand, isa drawing out process that has todo with formative knowledge, withhow to live. Responsibility, of

1970 OTHER BOOKS 639

course, rests with the student."Education," wrote Nock, contrasting it with training, "contemplates another kind of product;what is it ?One of the main elements in it, I should say, is thepower of disinterested reflection.One unmistakable mark of an educated man is his ability to takea detached, impersonal, and competent view of something thatdeeply engages his affections, oneway or the other - something thathe likes very much. The study ofhistory has really no other purposethan to help put this mark on aman. If one does not study it withthis end in view, there is no usestudying it at all."

Training we need, especially inthis age of a rapidly expandingtechnology, because we need practical know-how to provide oureconomic needs and wants. But weneed "useless knowledge," too, because that is what civilizes us.Education, rightly so called, hassuffered a. terrible decline in ourtime, because we have operatedfor several generations on askewed theory which confuses education with training.

Part two of the theory is unacceptable to those who recognizethe error in part one. Those whohave not recognized it are responsible for making our schoolsystem (outside of private andparochial schools) compulsory both

as to support and attendance, asituation not unpleasing to thecollectivists who labor for thecreation of an all-powerful state.The problems created by the application of this false theory areserious: rising taxes, crowdedclassrooms, shortage of qualifiedteachers, decline in the quality ofschools, the trend toward Federalcontrol of local schools, studentriots, and lawbreaking.

Part three of the theory of education embodies the idea that "education" can solve all the problemsof the world. This is, of course, adelusion even if we were speaking of true education and nottraining. Even if everyone wereeducable, universal educationwould not bring about a utopia. Itis not simply a. lack of knowledgeand wisdom that is responsiblefor poverty, prejudice, and war;these stem from the very natureof man as a flawed creature. Onemight even say that trainingpassed off as education is makingthings worse.

The responsibility for the deplorable state of education today"lies nowhere in the order of ourinstitutions; it runs back to theacceptance of an erroneous theory.All this ludicrous state of thingsthat we have been examining isthe inevitable result of trying totranslate a bad theory into goodpractice."


• THE BRITISH NATIONALHEALTH SERVICE: Bad Medicine, Bad Politics, Bad Economicsby Michael R. Saxon, M.D. (TheSaxon Foundation; 143 S. LincolnAvenue, Aurora, Illinois 60505)1970, 61 pp., paper, $1.75.

Reviewed by W. M. Curtiss

THE 22-year-old British NationalHealth Service is pronounced afailure by Dr. Saxon. He says itpresently encompasses about 95 to97 per cent of all the health services in the United Kingdom. "Toa sensitive practicing physicianalert to the current trends of socializing American medicine, theBritish system offers much to observe and compare with an everexpanding government-sponsoredhealth service scheme inauguratedin America in July of 1965 [Medicare] ."

Dr. Saxon discusses the familiarshortcomings of the NHS - thehigh number of patients per doctor (2,500 average); the low income of doctors resulting, in part,in their great exodus from theislands; the inadequate hospitalfacilities; the suffocating effecton medical research; and, ofcourse, the high cost coveredthrough taxes. General practitioners say they have become secondclass doctors.

English socialists have claimed

that their system shows a specialcompassion in understanding theneeds of the poor and the sick.This strikes an exposed nerve inDr. Saxon who believes that thetruth is exactly the reverse. American doctors, practicing. in a market economy, can express compassion for their patients; whereasBritish doctors, in attempting totreat all patients alike, feel littleneed for compassion and havelittle time to demonstrate it.

To offer medical care to all onan equal basis and at little directcost has popular appeal, and .playsright into the hands of politicians.Dr. Saxon believes this an important reason why socialized medicine has progressed so far in theUnited Kingdom. But how manydoctors will say, with Dr. Saxon,that: "It can hardly be said thatmedical care is really a necessity.Food, clothing, and shelter areeven more fundamental to humanexistence than medical care andare supplied satisfactorily throughthe market place. . . . The constant search for profits as one delivers a needed service to the market, creates a competitive atmosphere wherein the consumer always gets the most for the least.Why then is medical care different?"

Dr. Saxon obviously wants us tolearn from the British experience.

~

The Freeman 1970

Documents

Transcript of The Freeman 1970