Perspective – Liberty Magazine – May 2009

Brother, Can You Spare a Decade?
by Mark Skousen

Few things other than a New Deal can be more painful than an economic depression. But few eras were more vital and enjoyable than the private side of the last one.

One of the rare books in my financial library is “I Like the Depression,” by Henry Ansley, the “Jackass of the Plains.” This amusing little volume was published by Bobbs-Merrill in 1932, and the price was a buck fifty.

Ansley, a newspaperman from Amarillo, Texas, described a prosperity in the 1920s that wasn’t that great. He burned candles at both ends, became a financial hotshot, and ultimately overextended himself. Then the depression hit: “Good-by twin beds, frozen salads, indigestion, credit and swelled head. Hail to the old-fashioned nightgown, buttermilk, sow bosom [a kind of food], comfort and cash.” He lost his job but found happiness by rediscovering leisure, friends, and neighborliness. Hard times taught him the value of a dollar and not to take things for granted: “My dog is my pal again; my wife my lover and my Dad my advisor.”

Ansley’s book was never a bestseller, but it started me thinking. Can the worst of times also be the best of times? The history books are replete with the evils of the 1930s — soup lines, bank closings, Hoovervilles, dustbowls, bear markets, demoralizing despair. It’s all been retold countless times, in such books as Milton Meltzer’s “Brother, Can You Spare a Dime?,” John Steinbeck’s “The Grapes of Wrath,” and most recently Amity Shlaes’s “The Forgotten Man.” The Great Depression brought us Nazi Germany, the New Deal, Keynesianism, and, some say, World War II.

Not surprisingly, everyone from Wall Street to the halls of Congress is worried that the current recession will turn into the dreaded D, and has seized on desperate rescue measures. But was the Great Depression all bad? Did anything good come out of the 1930s? I started doing some research and was amazed to find a bright side to the gloomy ’30s — a lower cost of living, great new inventions and other technological advances, new forms of entertainment, more sports and reading, and a return to sober social behavior.

Start with leisure. Henry Ansley describes the free time he had during the depression. Indeed, millions of Americans had a lot more leisure time. Before the depression, almost everyone worked a six-day week. In the 1930s, the five-day work week became commonplace. “Spread the work!” was the rally cry. By 1937, wage earners in 57% of all manufacturing companies enjoyed a five-day week. Saturday was now a free day, and the Saturday rush hour was replaced by the Friday rush hour.

As a result, there was a tremendous increase in sports and leisure-oriented jobs. People began getting out into the sun and open air and taking a greater interest in golf, tennis, skiing, roller skating, and bicycling. Softball became a national pastime; by 1939, there were nearly half a million teams and 5 million players of all ages throughout the country. Expensive private club golf courses withered, but inexpensive public courses grew. Miniature golf was all the rage in the early ’30s. Bobby Jones became the first and only person to win the Grand Slam of golf in 1930. And black athletes became national idols for the first time, Joe Louis in boxing and Jesse Owens in track and field.

Americans traveled more. House trailers became a very big business. Camping, canoeing, and other inexpensive outdoor activities increased in popularity. People took their cameras with them, and photography became a craze of remarkable dimensions. Americans took tons of pictures with their small German cameras. Life and Look — big, glossy picture magazines — became popular.

Dancing, all the rage in the ’20s, continued to rage in the ’30s. Americans would dance their way out of the depression! Young people everywhere danced the swing, the jitterbug, and the boogie woogie to the music of Benny Goodman, Tommy Dorsey, and Louie Armstrong.

Indoors, parlor games such as bridge and the ingenious “Monopoly” were popular. People read more, and circulation at local public libraries increased. Kids loved comic books, especially “Superman,” the world’s first comic book superhero. Books “condensed” by Reader’s Digest saved time and money. There was an intense interest in epic novels — Pearl Buck’s “The Good Earth,” A.J. Cronin’s “The Citadel,” Margaret Mitchell’s “Gone with the Wind” — as well as such how-to books as Dale Carnegie’s “How to Win Friends and Influence People.” (1937, with 17 printings right away).

In the same year, Lin Yutang, the Chinese-American Taoist, published “The Importance of Living,” which was to become especially popular among libertarians. It encouraged Americans to stop worrying and start “letting go.” One chapter was entitled “The Art of Loafing.” “I am quite sure,” Lin wrote, “that amidst the hustle and bustle of American life, there is a great deal of wistfulness, of the divine desire to lie on a plot of grass under tall beautiful trees of an idle afternoon and just do nothing.” Whether fortunately or unfortunately, in their own opinion, millions of Americans got to live Lin’s upbeat message of idleness.

New Entertainments

Idleness — and its companion, entertainment. People wanted to forget their troubles, and radio and motion pictures provided an escape. Radio really came of age during this period, with up to 80 million listeners on some evenings. There was a lot more to radio than FDR’s fireside chats. It was the way to hear worldwide news bulletins, good music, and such half-hour comedies as “Amos ’n’ Andy,” the first syndicated program, and “The Jack Benny Show.” In the late 1930s, NBC was carrying broadcasts of symphony orchestras, especially its own orchestra, conducted by the immortal Arturo Toscanini, to 10 million listeners every week. And who can forget the night of Sunday, October 30, 1938, when Orson Welles broadcast his version of H.G. Wells’ “The War of the Worlds”?

Hollywood blossomed during the ’30s. In one decade, the motion picture industry went from silent films to talkies in Technicolor. Films brought the American public together as never before. Gary Cooper, Fred Astaire, Ginger Rogers, Katharine Hepburn, John Wayne, Mickey Rooney, and Clark Gable were welcome alternatives to Adolf Hitler, Benito Mussolini, Josef Stalin, and other demagogues of the era. Many considered Shirley Temple a gift from God during the gloomy de-pression. The motion picture event of 1938 was the first full-length animated cartoon, Walt Disney’s “Snow White.” The same year saw one of the first films in Technicolor, the blockbuster “The Adventures of Robin Hood,” starring Errol Flynn. A burst of classic award-winning films came out the next year, including “The Wizard of Oz,” “Mr. Smith Goes to Washington,” and the greatest of all epic films, “Gone With the Wind.”

The ’30s was the era of the first great horror films, “Frankenstein,” “Dracula,” “Dr. Jekyll and Mr. Hyde,” and “King Kong.” For a dime, Americans could go to the Saturday matinee and see double features of cowboys, adventurers, and gangsters. The silver screen brought us science fiction, serial thrillers and the Singing Cowboy (Gene Autry). The theater was filled with humor — Laurel and Hardy, W.C. Fields, the Three Stooges. Americans would laugh their way out of the depres-sion! There were reasons why Chicago economist Robert Lucas, Jr., called the 1930s “one long vacation.”

New Technology

Alvin Hansen and other Keynesian economists developed their “stagnation thesis” in the late 1930s, arguing that the United States was indefinitely stuck in an economic rut. They claimed that there was no new technology, no new frontier to drive the American economy. They ignored the tremendous economic progress that took place throughout the depression — the invention of plastics, artificial fibers, plywood, the 2-cycle diesel engine, and lighter, tougher steels.

Ernst Ruska and Max Knoll invented the electron microscope in 1932. Howard Armstrong created FM radio in 1933. Wallace Carothers manufactured nylon, and Robert A. Watson-Watt discovered radar in 1935. Hans Pabst von Ohain developed the jet engine in 1937 and the first jet airplane in 1939. Chester Carlson originated xerography in 1938. Igor Sikorsky made the first practical helicopter in 1939. Several people, including Philo T. Farnsworth and Isaac Shoenberg, developed television in the 1930s. CBS and NBC began broadcasting TV during this decade.

Manufacturers weren’t idle in getting new technology to market. New household products included electric mixers, pop-up toasters, vacuum cleaners, refrigerators, and irons. For the first time, consumers enjoyed sliced bread and packaged frozen foods. Union Pacific came out with fancy new streamlined, air-conditioned trains. Mass-market automobiles could now accelerate to 60 mph, carrying passengers along new highways with underpasses and cloverleafs. The dirigible, a new form of air transportation, appeared in 1936 (but disappeared with the fiery destruction of the Hindenberg a year later). The Douglas DC3 came out in 1936, traveling at 200 mph, compared to the 1932 passenger airplane speed of 110 mph. Coast-to-coast travel in overnight air sleepers was now possible. New ocean liners, such as the Queen Mary, appeared in a crowded New York harbor. Everyone came to witness the building of the 102-story Empire State Building and the Rockefeller Center (the only skyscraper group to rise in the 1930s). And who could not marvel at the Golden Gate Bridge, opened to traffic on May 28, 1937?

Social historian Frederick Lewis Allen, author of “Only Yesterday” (1931), a bestselling history of the 1920s, summed it up best when he wrote in a sequel, “Since Yesterday” (1940), “the American imagination was beginning to break loose again.” At the end of the decade, the New York World’s Fair had as its theme “The World of Tomorrow.”

Society and Economics

The depression brought about a change in American social trends. People attended church more. Many retreated from the sexual revolution of the roaring ’20s. The mood was more somber and prudent, even after Prohibition was repealed in December 1933. (By the end of the decade, Alcoholics Anonymous was founded.) There was greater approval of marriage and family life. The divorce rate dropped sharply, by 23% from 1929 to 1932, though so did the marriage rate and the birth rate — possibly because marriage and children cost money.

Not all economic news was bad. The most favorable statistic was the decline in the cost of living. During the period 1929–32, retail prices dropped by an average 24%, wholesale prices by 31%, farm prices by 51%, and raw commodity prices by 42%. Of course, wages, salaries, dividends, and other forms of income declined as well, but for those who kept their jobs and held onto their assets, the loss of nominal income was offset by sharply lower prices for all consumer products. “Everything was all right in those years,” said a woman quoted in Amity Shlaes’ book, “but only if you had a job.”

Unemployment reached 25% and higher in some regions at the depths of the depression, causing enormous hardship for millions of Americans. But see it in another light: three out of every four people were employed in the worst parts of the depression. Total employment rose after 1932, reaching 90% by the end of the decade. In a sense, the Democrats were right: happy days were here again!

Businesses adjusted to the new deflation by downsizing, cutting costs, and implementing labor-saving devices. Even the farming industry mechanized. By 1936, despite persistent unemployment, real national output had nearly recovered to pre-depression levels. Auto sales exceeded all previous years except 1928–29. The steel industry was operating at close to capacity. Even the building industry was climbing briskly. Miami was having its best season since the collapse of the Florida land boom. The race tracks were crowded, lavish debutante parties flourished in the big cities, and the night clubs were full.

For bulls and bears alike, the 1930s was the most fantastic period in stock market history. Stock prices collapsed between 1929 and 1932, losing an average 88%, but industrial, rail, and utility stocks all shot up from their lows in the summer of 1932, anticipating the end of hard times. Few bull markets have ever equaled the rocket performance of the summer of 1932, when the rails tripled within eight weeks and the utility averages doubled. Wall Street went on a rampage for the next four years. The Dow rose 67% in 1933, 4% in 1934, 38% in 1935, and 25% in 1936. After a sharp 32% correction in 1937, the market re-sumed its upward trend until war broke out in Europe in September, 1939. There were also plenty of speculative opportunities on the long side of gold and other natural resource stocks during the ’30s. In sum, the bulls, not just the bears, had plenty of chances to make money in the 1930s.

There’s an old saying, “It is the irritation in the oyster that forms the pearl.” The Great Depression was an irritation that most people didn’t expect. A few people couldn’t take the hard times and jumped out of windows, but most responded to the challenge. Adversity often demonstrates the virtue and creativity of humankind. Bad news often creates good news and opportunities to learn and advance. The 1930s were no exception.

Mark Skousen is the author of Economic Logic, now available in its second edition.

Suggestion – Liberty Magazine
The Necessary Evil
by Mark Skousen

Today libertarians spend most of their time lamenting the consequences of big government. And rightly so. Today government is less a defender of freedom and more a Hobbesian leviathan that undermines prosperity. When we do talk about limited government, it is often seen solely as “a necessary evil.”1 Too much government and the economy chokes. Too little, and it cannot function. Is there a Golden Mean?

George Washington best summarized the libertarian view: “Government is not reason; it is not eloquence; it is force! Like fire, it is a dangerous servant and a fearful master.”2 So it is with some trepidation that I suggest that societies or countries may not have enough good or legitimate government. In the never-ending battle against big government, it might be well to consider what constitutes “good government” to see how far we have strayed from the proper role of the state.

Each year the Fraser Institute publishes their Economic Freedom of the World Index (see www.fraserinstitute.org), which measures five major areas of government activity in more than 100 countries: size of government, legal structure, sound money, trade, and regulation. The most surprising thing about the study, according to its author James Gwartney, a professor of economics at Florida State University, is the importance of legal structure as the key to maximum performance for an economy. “It turns out,” he told me in a recent interview, “that the legal system — the rule of law, security of property rights, an independent judiciary, and an impartial court system — is the most important function of government, and the central element of both economic freedom and a civil society, and is far more statistically significant than the other variables.”

Gwartney pointed to a number of countries that lack a decent legal system, and as a result suffer from corruption,insecure property rights, poorly enforced contracts, and inconsistent regulatory environments, particularly in Latin America, Africa, and the Middle East. “The enormous benefits of the market network — gains from trade, specialization, expansion of the market, and mass production techniques — cannot be achieved without a sound legal system.” 3

The Proper Role of the State

Milton Friedman identifies the legitimate roles of the state: “The scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow- citizens: to preserve law and order, to enforce private contracts, to foster competitive markets. Beyond this major function, government may enable us at times to accomplish jointly what we would find it more difficult or expensive to accomplish severally.” 4

Adam Smith suggests that this “system of natural liberty” will lead to a free and prosperous society. As Smith declares, “Little else is required to carry a state to the highest degree of opulence from the lowest level of barbarism, but peace, easy taxes, and a tolerable administration of justice.”5

The division between the positive and negative role of government can be represented visually. In the diagram on the next page, we have on the vertical axis “socio-economic well-being”: some general measure of the quality of life in a free and civil society. For empirical studies, economists might want to use changes in real per capita income, but this may be too confining. On the horizontal axis we have “government activity.” At point O, we have zero government, and as we move along the horizontal axis, the size and scope of government activity increase. The ultimate extreme is the totalitarian regime, which institutes “total government,” though I would hesitate to label this “100% government,” since no government can control all activity.

Too Little vs. Too Much Government

My thesis is that as a society moves from zero government to point P, economic well-being increases to peak performance. Then, as it adopts a larger and less necessary government, its growth diminishes, and can even turn negative if government becomes too burdensome and controlling. Looking at the left side of the mountain, point O (zero government) to P (optimal government) constitutes “too little” government. For example, a nation may spend too few of its resources on personal protection, property control, and government administration. Here we see how increasing the size and scope of government activity initially leads to increased well-being, as measured by individual freedom and prosperity. Point P represents the right amount of government and the optimal amount of expenditure necessary to fulfill its legitimate functions.

This is the ideal of the minimalist state. Any point to the right of P represents too much government, when the central authority becomes a burden rather than a blessing. I’ve drawn it as a gradual downward slope, so that the more bad government a country adopts, the greater the decline in performance, even to the point X where government is so large and so intrusive that it results in the destruction of economic and social well-being, which is probably worse than the costs of anarchy.

Quantifying the Right Amount of Government

Can we quantify P, the optimal size of government? Several economists have attempted to determine the ideal level of government spending as a percentage of GDP. In the1940s, Australian economist Colin Clark said that the maximum size of government should not exceed 25% of GDP. Anything higher would hurt economic growth.6 Professor Gerald W. Scully, of the University of Texas at Dallas suggests that the tax rate ought not to exceed 23%.7 World Bank economists Vito Tanzi and Ludger Schuknecht analyzed 17 countries during the period 1870 to 1990 and concluded that public spending in newly industrialized countries should not exceed 20% and in industrialized countries not more than 30%.8 Is optimal government (point P) the same for every country?

This would make an interesting study, but I suspect that differences in culture and socio-economic circumstances suggest that some nations require more government than others. As Benjamin Franklin states, “A virtuous and laborious [industrious] people may be cheaply governed.”9 And a lazy, dishonest people must be expensively governed.

Graph

Optimistically, I would think that if all nations were featured together on the diagram above, the various points P would constitute a fairly narrow mountain range. Almost every country in the world today is to the right of Point P, and could grow faster and enjoy a higher quality of life by reducing the size and scope of government. Countries from China to Ireland to Chile have demonstrated how dramatically the economy can improve by cutting back the state. I’m sure even Hong Kong, #1 in the Fraser Institute’s study in terms of performance and freedom, could benefit from some improvements by scaling back some types of government services.

According to the latest surveys of economic freedom by the Fraser Institute and Heritage Foundation, countries on average are becoming more free, and not surprisingly, the world’s economic growth rate is rising.10 After noting that government represents 40–50% of GDP in most developed nations, Tanzi and Schuknecht conclude, “we have argued that most of the important social and economic gains can be achieved with a drastically lower level of public spending than what prevails today.”11

Two Case Studies in Little or No Government

Are there any examples of countries to the left of point P, that have too little government? The United States suffered from too little government under the Articles of Confederation, which was the basic law of the land from its adoption in 1781 until 1789, when they were replaced by the Constitution. The Articles limited the federal government to conducting foreign affairs, making treaties, declaring war, maintaining an army and navy, coining money, and establishing post offices. But it could not collect taxes, it had no control over foreign or interstate commerce, it could not force states to comply with its laws, and it was unable to payoff the massive debts incurred during the Revolutionary War. States were already putting up trade barriers, striking a serious blow to free trade, and the economy struggled. After the Constitution became law, the United States flourished because of improved government finances, protection of legal rights, and free trade among the 13 states.

A modern-day example of too little government is Somalia, located east of Ethiopia and Kenya, where life has been difficult and often dangerous without any central authority since 1991. For example, drivers pass seven checkpoints, each run by a different militia, on their way to the capital. At each of these “border crossings” all vehicles must pay an “entry fee” ranging from $3 to $300, depending on the value of goods being transported. Competing warlords vie for control of the countryside, which has frequently collapsed into civil war. Only an estimated 15% of children go to school, compared to 75% in neighboring states. However, a recent report by the World Bank indicates that an innovative private sector is flourishing in Somalia. This vindicates the Coase theorem, named for economist Ronald Coase, which argues that in the absence of government authority, the private sector will step in to provide alternative services, depending on the transaction costs.12 The central market in Bakara is thriving: all kinds of consumer goods, from bananas to AK-47s, are readily sold; mobile phones proliferate and internet cafes prosper. But with no public spending, the roads and utilities are deteriorating. Private companies have yet to appear to build roads — the transaction costs are apparently too prohibitive. Public water is limited to urban areas, and is not considered safe, but a private system extends to all parts of the country as entrepreneurs have built cement catchments, drilled private boreholes, or shipped water from public systems in the city.

There are now 15 airline companies providing service to six international destinations, and airplane safety can be checked at foreign airports. After the public court system collapsed, disputes have been settled at the clan level by traditional systems run by elders, with the clan collecting damages. But there is still no contract law, company law, or commercial law in Somalia. Sharp inflation in 1994–96 and 2000–01 destroyed confidence in the three local currencies, and the U.S. dollar is now commonly used. Because of a lack of reliable data, neither the Fraser Institute nor the Heritage Foundation’s economic freedom indexes rank Somalia. The World Bank concludes, “The achievements of the Somali private sector form a surprisingly long list. Where the private sector has failed — the list is long here too — there is a clear role for government intervention. But most such interventions appear to be failing. Government schools are of lower quality than private schools. Subsidized power isbeing supplied not to the rural areas that need it but to urban areas, hurting a well-functioning private industry. Road tolls are not spent on roads. Judges seem more interested in grabbing power than in developing laws and courts. Conclusion: A more productive role for government would be to build on the strengths of the private sector.”13

In short, most countries could use less government, but a few countries could use more of the right kind of authority. There is an optimal size and structure of government, and when it is reached, the result is, in the words of Adam Smith, “universal opulence which extends itself to the lowest ranks of the people.”14

Personal Snapshots
Forecasts & Strategies
June 2002

“Economic repression breeds intolerance, fanaticism and terrorism.”

— Gerald P. O’Driscoll, Jr., Heritage Foundation

I couldn’t believe my eyes when I saw this unusual map of the world. “The World Map of Economic Freedom” was published by the Heritage Foundation and The Wall Street Journal before the terrorist attacks on September 11, 2001. This incredible map—reproduced in full in the May issue of Ideas on Liberty—predicted in living color a war between America and the Middle East, and reveals in unmistakable clarity why Islamic extremists attacked New York and Washington.

Since September 11, we’ve heard all kinds of reasons why the terrorists struck America—in retaliation for the United States’ supporting Israel, for America’s meddling in the Middle East, Arab’s envy of America’s superpower status and their hatred of America’s lifestyle. This map gives the real reason.

World Economic Freedom Map from the Fraser Institute

In this “world map of economic freedom,” each nation is ranked according to its degree of economic freedom, based on 10 factors, such as level of taxation, trade restrictions, labor regulations, inflation, property rights and government intervention in the economy. Countries in blue, like the United States and Britain, are ranked “free.” Countries in green, like Canada and France, are considered “mostly free.” Nations in yellow, like Russia and Brazil, are labeled “mostly unfree.” Finally, nations in red are ranked “repressed.”

This world map is an eye-opener. It shows that few nations are truly free. Countries colored in blue include the United States, Britain, Australia, New Zealand and Hong Kong. Clearly, freedom is a delicate and rare flower. Canada and Europe are “mostly free.” Third World nations are “mostly unfree.” Countries painted yellow include Russia, China, India, Brazil and most of Africa. In fact, of the 155 nations surveyed, over half (81) received a negative grade (yellow or red).

The Biggest Shock: Where Is the Red?

But the most shocking fact is that almost all of the red nations are located in the Middle East. It is clearly the area of the world with the highest concentration of “repressed” freedom. This area of the world has been crippled from constant war, corruption, inflation, black markets, protectionism and government intervention on a grand scale. Most of the Arab world continues to suffer from economic dislocation, political turmoil and military conflict. It is not surprising that for most Arabs the standard of living is low, despite an abundance of oil.

The Most Important Lesson in the War on Terrorism

What is the most important lesson we can learn from this map? Simply this: Economic repression leads to intolerance, fanaticism and terrorism. It is not surprising that the Middle East is a major source of radicalism and chaos. A closed society breeds intolerance and fanaticism. Interestingly, most of the Middle East is also famous for its lack of political democracy and religious tolerance. Most are ruled by dictators or kings. Religious proselyting is prohibited in Arab nations and even in Israel.

But there is another important lesson to learn from this map. Liberalized trade and open markets break down cultural and social monotheism, and destroy fanaticism and intolerance. Business encourages people to become educated, industrious and self-disciplined. Commerce encourages trade, travel and exchange between nations and cultures.

What then is the real solution to the War on Terrorism? Sending troops and fighting war in faraway lands may offer a short-term solution to terrorism, but the only real permanent peace can be achieved through expanding trade and business, and establishing a legal system conducing to a civil society and prosperous economy. In short, a good dose of open markets and competition in all walks of life could go a long way toward bringing peace, prosperity and goodwill in this dangerous part of the world. Until that happens, however, many will shout “peace, peace, when there is no peace.” (Jeremiah 8:11)

Our Goal at FEE: Color the World Blue!

This world map also gives us the opportunity to explain our mission here at FEE in simple terms that everyone can see: Freedom in our time for all peoples. Our goal is to color the world blue. I do think that we are making progress. If you saw this world map of economic freedom in 1985, when the Soviet Union and China were closed communist nations, over half the world’s population would have been colored “red.” With the collapse of the Berlin Wall and the downfall of Soviet communism, many nations have moved from “red” to “yellow” and from “yellow” to “green.” Will they eventually move to “blue”? Through our books, monthly magazines and seminars, FEE will do everything in its power to achieve this lofty goal.

Action to Take: To receive a copy of “The Map That Predicted the Terrorist Attacks,” subscribe now to Ideas on Liberty, only $39 for 12 issues. We’ll send you, free, the map and a four-page commentary. Make your payment to Foundation for Economic Education, 30 South Broadway, Irvington, New York 10533. Or www.fee.org or call 800/960-4FEE, ext. 209, for credit-card orders.

FEE Fest 2002: Special Report

“I’ve attended many conferences, but yours is the best of the best. Thank you!”

—Attendee, FEE National Convention

Last month, FEE held its first ever FEE National Convention, and it was a huge success. With only four months of planning, we were able to register nearly 900 attendees. Nathaniel Branden, a keynote speaker at the Saturday night banquet, described the atmosphere well when he said, “I feel an electricity here that I haven’t sensed at libertarian meetings for a long time.” Actor Ben Stein wrote a poem just for FEE (to be published in the June issue of Ideas on Liberty), and C-SPAN Book TV videotaped six book authors (check the schedule on www.booktv.com or www.FEEnews.org).

The FEE Fest was packed with workshops, panels and debates on philosophy, history, economics, finance, education, art and public policy.

Audiotapes/Videos Now Available

If you missed the FEE Fest, I have good news. Audio and videotapes are available for almost all the sessions at the FEE National Convention. Audiotapes cost only $5 per session, ($275 for all) and videotapes are available for only $15 ($110 for all). Go to www.FEEnationalconvention.org for the complete list of tape recordings available and how to order or call Harold Skousen, 800/254-2057.

SKOUSEN’S PUZZLER FOR JUNE:

1883 is a very important year in economics. Name one economist who died in 1883, and two economists who were born in that same year. They say that it took two economists to make up for the mischief of the one who died. Who are these three economists? (Hint: You can find the answer in my book, The Making of Modern Economics, available from FEE, 800-960-4FEE, ext. 209).

The first 10 winners with the correct answer will receive a copy of my book, Economic Logic. Drawing will be on July 31, 2002. Send answer to Quarterly Puzzler, c/o Phillips Investment Resources, LLC, 7811 Montrose Rd., Potomac, Maryland 20854, or e-mail your answer to msfs_cs@investor-place.com.

From The President’s Desk
Published in Ideas on Liberty – May 2002

The Right to Be Left Alone

by Mark Skousen

“The makers of the Constitution conferred the most comprehensive of rights and the right most valued by all civilized men—the right to be let alone.”

-JUSTICE LOUIS D. BRANDEIS

According to Thomas Jefferson and the Declaration of Independence, one of the “repeated injuries and usurpations” committed against the American people by the King of England was the erecting of “a multitude of New Offices, and . . . swarms of Officers to harass our people, and eat out their substance.”

Today, following the tragic events of September 11, 2001, the American people face another troublesome threat—swarms of security agents harassing us at airports, borders, buildings, and highways. Like many of you who travel frequently, my wife, Jo Ann, and I have been subjected to these often overzealous security guards who ask inane questions; force us to remove our shoes, jackets, and belt buckles; and meticulously go through our carry-on bags. I’ve had my fingernail clippers confiscated twice. Jo Ann was frisked three times in one day. Others have fared far worse. My friend and IOL fellow columnist Walter Williams was almost arrested in Jacksonville, Florida, after he refused to be patted down. A congressman was required to disrobe. After these security encounters, I always feel my privacy, indeed my dignity, has been violated.

President George W. Bush has urged citizens to return to normal life, but business and domestic affairs are never the same when a war is on, and this war on terrorism is no exception.1 Bush’s proposed federal budget jumped 9 percent from last year, pushing the United States into a deficit again. Private enterprise has been forced to spend billions on security measures, a real burden on a recessionary economy. (Imagine, intelligent employees spending the rest of their lives trying to catch some nut out there, representing 1/1000 of 1 percent of travelers.) Airport security has now become federalized. And we have become, in the words of Sheldon Richman, “tethered citizens.”

In revolutionary times, colonists were so incensed by the invasions of privacy and other personal abuses by British officers that Congress’s first act was to pass a Bill of Rights, including Amendment III, “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law,” and Amendment IV, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

The Fourth Amendment forms the basis of a “right to privacy,” the right to be left alone, as Justice Louis Brandeis put it. The enjoyment of financial and personal privacy is fundamental to a free and civil society. True liberty is to be able to walk down the street, cash a check, buy goods, talk on the telephone, or take a trip without being hassled, hounded, followed, or interrogated by government agents. People should be able to get away from the madding crowds without being followed or asked stupid questions. When I travel abroad, there is no better feeling than walking through the green customs door marked “Nothing to Declare.” When I return home and close the door, there is a feeling of security, knowing that the police aren’t going to break it down in the middle of the night for a “warrantless” search. It happened in Soviet Russia and Nazi Germany, but surely not in America!

Privacy Eroding

Yet the right to privacy so cherished by Americans of generations past is gradually eroding. New airport-security laws require all travelers to carry a “government-issued” ID, usually a driver’s license or passport. Thus we have come dangerously close to creating a national identity card for all Americans. The war on drugs has made it virtually impossible to deal legally in large amounts of cash, the most anonymous form of doing business. Some banks are requiring thumbprints for identification. Mandatory drug-testing of students and employees is becoming commonplace without any reference to the constitutional principle of “probable cause.” Since September 11, police routinely check automobiles and trucks coming into New York City without a warrant. Tampa and other big cities are videotaping citizens in “crime-prone” areas around the clock. California and other states are capturing all drivers on film and issuing tickets for alleged speeders.

I wrote the first book on financial privacy in the early 1980s.2 It was a huge underground hit, selling over 400,000 copies. Clearly, vulnerable Americans felt the need for protection against potential lawsuits, government surveillance, prying relatives, aggressive salesmen, and professional thieves. From time to time, I am asked to do an updated edition, but I have refused. Why? Because the law has changed and become so complex that it takes a full-time professional to stay up on all the dos and don’ts. However, I can recommend an excellent newsletter that focuses on privacy issues: The Financial Privacy Report, published and written by Michael Ketcher (to subscribe, call 1-866-429-6681; P.O. Box 1277, Burnsville, MN 55337).

Despite the recent intrusions into individual personal affairs, you can still maintain a certain degree of privacy. You can take a car, bus, or train, and go to most destinations without being noticed or tracked. In small transactions, you can still pay with cash instead of using credit cards or checks. You can buy a large number of gold and silver coins with cash and avoid reporting requirements. You can refuse to give your Social Security number to schools, hospitals, dentist and doctor offices, insurance companies, and most private organizations (but not banks, brokers, or the IRS). You can open a foreign bank account with less than $10,000 and not have to report it. You can use a post office box to keep direct mail promoters from contacting you. You can demand a search warrant before allowing the police to come into your house or business, or to search your automobile.

In short, by maintaining a low profile, you can usually avoid the scrutiny of overzealous bureaucrats, nosy neighbors, or jealous relatives.

1. Historian Robert Higgs makes this very clear in his excellent article, “How War Makes Government Bigger,” Ideas on Liberty, December 2001.
2. Mark Skousen, The Complete Guide to Financial Privacy (Alexandria House Books, 1979; New York: Simon & Schuster, 1983).

Published in January, 2001, issue of Liberty Magazine:

THE TROUBLED ECONOMICS OF AYN RAND
by Mark Skousen

“No creator was prompted by a desire to serve his brothers…”

–Howard Roark, The Fountainhead (1994:710)

Ayn Rand, author of the celebrated Capitalism: The Unknown Idea, is honored almost universally as the fountainhead of market capitalism, an impassioned proponent of reason, individualism, and rational self-interest.

There is much to praise in Ayn Rand’s novels and writings, especially her uncompromising defense of freedom and her unrelenting denunciations of collectivism. No one has written more persuasively about property rights, the right of an individual to safeguard his wealth and property from the agents of coercion. Her novels The Fountainhead and Atlas Shrugged have probably done more than any other works of fiction to vindicate and honor the glories of “making money.”

Yet in reading her novels and writings, I was surprised to learn that her work often portrays a strange, distorted view of the money-making process. In a perverse way, her model of business may even give aid to the cause of the enemies of liberty–by giving capitalism a bad name.

Consumer Sovereign in The Fountainhead

Take, for example, Howard Roark’s philosophy toward his architectural work in The Fountainhead. In the beginning, Roark indicates that he chose architecture as a profession because he loves his work. He seeks to set the highest standards of excellence. He tries to be creative. All of these traits are to be admired.

But then Roark denies a basic tenet of sound economics–the principle of consumer sovereignty. When the dean of the architectural school tells Roark, “Your only purpose is to serve him [the client],” Roark objects. “I don’t intend to build in order to serve or help anyone. I don’t intend to build in order to have clients. I intend to have clients in order to build.” (1994:14) This bizarre, almost anti-social, attitude sounds like a perverse rending of Say’s Law, “supply creates its own demand,” or the statement made in the film Field of Dreams, “If you build it, they will come.” But supply only creates demand if the supply can be sold to customers; and people come to a new baseball field only if they want to play or watch. Supply must satisfy demand, or it becomes a wasted resource.

Now I have no problem with an architect who tries to set new standards of design, just as I would applaud entrepreneurs who seek to invent a new product or design a new process. Such actions are often highly risky and financially dangerous, and are often met with derision at first. Ayn Rand rightly points out that they are a major cause of economic progress. History is full of examples of “men who took first steps down new roads armed with nothing but their own vision.” (Rand 1994:710)

But the goal of all rational entrepreneurship must be to satisfy the needs of consumers, not to ignore them! Discovering and fulfilling the needs of customers is the essence of market capitalism. Imagine how far a TV manufacturer would get if he decides to build TVs that only tune into his five favorite channels, the consumer be damned. It wouldn’t be long before he would be on the road to bankruptcy.

Rand Denies the Essence of Business Enterprise

In short, Howard Roark’s conviction is irrational and contradicts a basic premise of Rand’s Objectivist philosophy. For Roark, A is not A. He wants A to be B–his B, not his customer’s A. Thus, Ayn Rand’s ideal man misconceives the very nature and logic of capitalism–to fulfill the needs of customers and thereby advance the general welfare. As Ludwig von Mises writes in his book, The Anti-Capitalist Mentality, “The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way. Wealth can be acquired only by serving the consumers.” (1972:2) Apparently Howard Roark doesn’t believe in consumer sovereignty. As he states in his final court defense, “An architect needs clients, but he dos not subordinate his work to their wishes.” (1994:714) Really?

Talk to any architects about The Fountainhead. Yes, they will tell you that there are a few self-centered, highly-egotistical, elitist Howard-Roark types in architecture who can get away with making monuments to their egos at their client’s expense. Frank Lloyd Wright, an architect Rand deeply admired, may be one of them. But the book’s thesis is entirely unrealistic in the everyday world of commercial building. Occasionally a client values more the notoriety of living in a home built by a signature designer than getting what he really wants, but not many. Almost all of Rand’s scenarios are extreme and idealistic, a strategy that works to sell novels, but does violence to all sense of reality. Normally architects work closely with the client and make numerous changes in order to fit the client’s needs.

Compromise is a necessary element to a successful completion of a project. And this consumer-oriented approach is true in all areas of capitalistic production. An architect or producer of any product who acts like Roark in The Fountainhead is likely to be out of work. Roark’s fate is even worse–he is guilty of his crime, blowing up a much-needed housing project rather than permit the slightest alteration in his designs. The jury may have exonerated him, but the market punishes his kind of behavior.

Ironically, Ayn Rand herself compromised in the making of the movie “The Fountainhead.” She insisted that only Frank Lloyd Wright would design the models for the film, but her demand was later rejected due to Wright’s outrageous fee. In the end, the models were done by a studio set designer. Rand called them “horrible” and “embarrassingly bad.” But the film was made and released. (Branden 1986:209) Oh, the agonies of dealing with other people!

The fact that Howard Roark represents the ideal man in Ayn Rand’s novel and the fact that she denigrates other characters in The Fountainhead who “compromise” with client’s demands suggest that Ayn Rand is philosophically in denial when it comes to comprehending the nature of business. She denies the very raison d’etre of capitalism–consumer sovereignty.

Assault on the Common Man

In this sense, Ayn Rand is not much different from other artists and intellectuals. Artists often bash the capitalist system. They hate the idea of subjecting their talents to crass commercialism and the crude tastes of the common man. Yet Ludwig von Mises chastised this snobbish attitude in The Anti-Capitalist Mentality: “The judgment about the merits of a work of art is entirely subjective. Some people praise what others disdain. There is no yardstick to measure the aesthetic worth of a poem or of a building.” (1972:75) Mises adds that only through economic progress — the creation of surplus wealth — has the level of taste and art been raised to meet the criteria of the more sophisticated artist. “When modern industry began to provide the masses with the paraphernalia of a better life, their main concern was to produce as cheaply as possible without any regard to aesthetic values. Later, when the progress of capitalism had raised the masses’ standard of living, they turned step by step to the fabrication of things which do not lack refinement and beauty.” (1972:80)

The Flaw in Atlas Shrugged

This brings us to the fatal flaw in Atlas Shrugged. Rand’s basic plot violates the whole rationale of business’s existence–constantly working within the system to find ways to make money. There will never be a Galt’s Gulch, where the world’s greatest entrepreneurs isolated themselves from the rest of the world. There will never be enough principled business leaders to fight the system. The business world does not typically attract ideologues and true believers; it attracts people primarily interested in money making by whatever means. They wouldn’t give John Galt the time of day. As Mises states, “There is little social intercourse between the successful businessmen and the nation’s eminent authors, artists and scientists…Most of the ’socialites’ are not interested in books and ideas.” (Mises 1972:19) Ayn Rand admired Mises, but apparently she didn’t learn much from his writings. Pity.

Altruism Vs. Selfishness

Howard Roark’s diatribe against consumer sovereignty is undoubtedly a way to introduce Rand’s philosophy of selfishness. There are two extremes here: The philosophy of those who serve and satisfy themselves only, and the philosophy of those who believe that they should strive at all times to serve and sacrifice for others. Rand labels the latter “altruism.” In The Virtue of Selfishness, she opines, “Altruism declares that any action taken for the benefit of others is good, and any action taken for one’s own benefit is evil.” (Rand 1999:80) Obviously, Rand protests against altruism and espouses the opposite extreme. As Francisco d’Anconias tells Dagny Taggart in Atlas Shrugged: “Don’t consider our interests or our desires. You have no duty to anyone but yourself.” (Rand 1992:802) No sacrifice, no altruism, just pure egotistical selfishness.

The Adam Smith Solution

The founder of modern economics, Adam Smith, takes a different approach by trying to incorporate both concepts in his “system of natural liberty.” Smith and Rand are in agreement about the universal benefits of a free capitalistic society. But Smith rejects Rand’s vision of selfish independence. He teaches that there are two driving forces behind man’s actions–in his Theory of Moral Sentiments, he identifies the first as “sympathy” or “benevolence” toward others in society, while in his Wealth of Nations, he focuses on the second, “self interest,” the right to pursue one’s own business. Smith believes that as the market economy develops and individuals move away from their community, “self interest” becomes a more dominant force than “sympathy.” But both are essential to achieve “universal opulence.” (Smith 1965:11)

Adam Smith is famous for making a statement that sounds Randian in tone: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” (Smith 1965:14) But this statement is often taken out of context. Smith’s self-interest never reaches the Randian selfishness that ignores the interest of others. On the contrary, in Smith’s mind, an individual’s goals cannot be fully achieved in business unless he appeals to the self-interest of others. Smith says so in the very next sentence: “We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (Ibid.) Moreover, he writes earlier on the same page, “He will be more likely to prevail if he can interest their self-love in his favour….Give me that which I want, and you shall have this which you want, is the mean of every such offer.” (Ibid.) Smith’s theme echoes his Christian heritage, particularly the golden rule, “do unto others as you would have them do unto you.” (See Matthew 7:12)

Perhaps a true capitalist spirit can best be summed up in the Christian commandment, “Love thy neighbor as thyself.” (Matthew 22:39) Adam Smith and Ludwig von Mises would undoubtedly agree with this creed, but apparently Howard Roark and John Galt — and their creator — would agree with only half. And that’s a great tragedy for the greatest novelist of the 20th century.

References

* Branden, Barbara. 1986. The Passion of Ayn Rand. Doubleday.
* Mises, Ludwig von. 1972 [1956]. The Anti-Capitalist Mentality. Libertarian Press.
* Rand, Ayn. 1992 [1957]. Atlas Shrugged. Dutton Books.
* Rand, Ayn. 1994 [1943]. The Fountainhead. Penguin Books.
* Rand, Ayn. 1999. The Ayn Rand Reader, ed. by Gary Hull and Leonard Peikoff. Penguin Books.
* Smith, Adam. 1965 [1776]. The Wealth of Nations. Modern Library.

Economics on Trial
Ideas on Liberty
November 2000

by Mark Skousen

“In the excitement over the unfolding of his scientific and technical powers, modern man has built a system of production that ravishes nature and a type of society that mutilates man.” -E. F. SCHUMACHER (1)

In 1956, Ludwig von Mises countered myriad arguments against free enterprise in his insightful book, The AntiCapitalistic Mentality. “The great ideological conflict of our age,” he wrote, “is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living.” (2)

Unfortunately, Mises’s counterattack has done little to stem the tide of anti-market sentiments. One that continues to be popular is E. F.Schumacher’s 1973 book, Small Is Beautiful which has recently been reprinted in an oversized text with commentaries by Paul Hawken and other admirers. Schumacher has a flourishing following, including Schumacher College (in Devon, England) and the Schumacher Society (in Great Barrington, Massachusetts). Hawken hails Schumacher as a visionary and author of “the most important book of [his] life.” (3) Schumacher’s message appeals to environmentalists, self-reliant communitarians, and advocates of “sustainable” growth (but not feminists the old fashioned Schumacher cited favorably the Buddhist view that “large-scale employment of women in offices or factories would be a sign of economic failure” (4) ).

From Austrian to Marxist to Buddhist

Oddly enough, Fritz Schumacher’s background is tied to the Austrians. Schumacher was born in Germany in 1911 and took a class from Joseph Schumpeter in the late 1920s in Bonn. It was Schumpeter’s course that convinced Schumacher to become an economist. While visiting England on a Rhodes scholarship in the early 1930s, Schumacher encountered F. A. Hayek at the London School of Economics and even wrote an article on “Inflation and the Structure of Production.” (5) But his flirtation with Austrian economics ended when he discovered Keynes and Marx. He renounced his Christian heritage and became a “revolutionary socialist.” The Nazi threat forced him to live in London, where he was “interned” as an “enemy alien” during World War II. After the war, he worked with Keynes and Sir William Beveridge and supported the nationalization of heavy industry in both Britain and Germany. But his real change of heart came during a visit to Burma in 1955, when he was converted to Buddhism. “The Burmese lived simply. They had few wants and they were happy,” he commented. “It was wants that made a man poor and this made the role of the West very dangerous.” (6)

Schumacher greatly admired Mahatma Gandhi and his saying, “Earth provides enough to satisfy every man’s need, but not for every man’s greed.” Eventually he wrote a series of essays that became his classic, Small Is Beautiful, published in 1973. In the 1970s, he became passionate about trees and began a campaign against deforestation. After a successful book tour in the United States, including a visit with President Jimmy Carter, he died in 1977 of an apparent heart attack.

The Lure of Buddhist Economics

Schumacher’s message is Malthusian in substance. Small Is Beautiful denounces big cities and big business, which “dehumanizes” the economy, strips the world of “nonrenewable” resources, and makes people too materialistic and overspecialized. According to Schumacher, individuals are better off working in smaller units and with less technology.

His most important chapter is “Buddhist Economics,” with its emphasis on “right livelihood” and “the maximum of wellbeing with the minimum of consumption.” Foreign trade does not fit into a Buddhist economy: “to satisfy human wants from faraway places rather than from sources nearby signifies failure rather than success.” (7) In sum, traditional Buddhism rejects labor-saving machinery, assembly-line production, large-scale multinational corporations, foreign trade, and the consumer society.

There are two problems with Schumacher’s glorification of Buddhist economics. First, it denies an individual’s freedom to choose a capitalistic mode of production; it enslaves everyone in a life of “nonmaterialistic” values. And second, it clearly results in a primitive economy. Mises responded to both these issues: “What separates East and West is . . . the fact that the peoples of the East never conceived the idea of liberty . . . . The age of capitalism has abolished all vestiges of slavery and serfdom.” And: “It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would be unbearable.” (8)

I have no objection to preaching the Buddhist value that sees “the essence of civilization not in a multiplication of wants but in the purification of human character.” Nor do I disapprove of localized markets (see my favorable review last November of the Grameen Bank, which makes small-scale loans to the poor). But none of this idealism should be forced on any society. Ultimately we must let people choose their own patterns of work and enjoyment. Clearly, whenever Third World countries have been given their economic freedom, the vast majority have chosen capitalistic means of production and consumption. As a result, poor people have been given hope for the first time in their lives-a chance for their families to break away from the drudgery of hard labor, to become educated, see the world, and enjoy “right living.”

Freedom is beautiful!

1. E. F. Schumacher, Small is Beautiful Economics as if People Mattered: 25 Years Later with Commentary (Point Roberts, Wash.: Hanley & Marks, 1999 (1973)), p. 248.
2. Ludwig von Mises, The Anti-Capiaadatie Mentality (South Holland, Ill.; Libertartan Press, 1972 [1956]),p. 62.
3. Paul Hawken, Introduction to Schumacher, p. xiii.
4. Ibid., p. 40.
5. Sec The Economics of Inflation, ed. by H, P. Willis and J. A Chapman (New York: Columbia University Press, 1935).
6. Quoted in Barbara Wood, E. F. Schumacher: His Life and Thought (New York: Harper & Row, 1984), p. 245.
7. Schumacher, p. 42.
8. Mises, p. 74.

Economics on Trial
Ideas on Liberty
October 2000

Having Their Cake
by Mark Skousen

“The duty of ’saving’ became nine-tenths of virtue and the growth of the cake the object of true religion.” -JOHN MAYNARD KEYNES (1)

In his 1920 bestseller, The Economic Consequences of the Peace, John Maynard Keynes made a profound observation about the success of capitalism before the Great War. He lauded “the immense accumulations of fixed capital” built up by the “new rich” during the half century before the war and compared the huge capital investment of this golden era to a “cake,” noting how “vital” it was that the cake “never be consumed;” but continue to “grow.”

Keynes was intensely optimistic about the prospects of humanity, “if only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus for population.” Rapid capital accumulation would result in the elimination of “overwork, overcrowding, and underfeeding,” and workingmen “could proceed to the nobler exercises of their faculties.”

Alas, it was not to be. The First World War destroyed Keynes’s dream of universal progress. The cake was consumed. “The war has disclosed the possibility of consumption to all and the vanity of abstinence to many.” (2)

War isn’t the only enemy of capital accumulation. Since World War II, the greatest threat to capital formation (the growth of the cake) has been the direct and indirect taxation of capital.

Take, for example, the federal estate tax. The estate tax is often viewed as an “inheritance” tax and even a “death” tax. But it’s much worse than that. It’s also a tax on capital. An estate’s taxable property includes stocks, bonds, business assets, real estate, coins and collectibles-all after-tax, afterconsumption investments.

If your net worth exceeds $675,000, your heirs will be forced to pay at least 18 percent to the IRS. The tax rate hits a confiscatory 55 percent at a mere taxable estate of $3 million.

Capital is the lifeblood of the economy. Capital investment finances new technology, new production processes, quality improvements, jobs, and economic growth in general. When those investment funds are taxed-$28 billion in 1998-the funds are removed from the investment pool and transferred to Washington, where they are consumed. For the most part the funds are consumed through government expenditures and “transfer payments” (welfare, salaries of government workers, and so on).

The estate tax also creates economic distortions. It encourages individuals to engage in “estate planning,” expensive legal exercises to avoid the death tax. It forces individuals to buy insurance policies they would not otherwise buy and create tax-exempt trusts and foundations that they would not ordinarily create. Undoubtedly, millions of fiends are transferred every year into foundations and charities just to avoid estate taxes. Charitable giving and public foundations have become big business, but what is the price? Mismanagement and waste are common features in these nonbusiness organizations.

Another Inefficient Tax: Capital Gains Taxes

Perhaps an even more sinister tax is the capital gains tax. If you sell an asset (stock, bond, commodity, real estate, or collectible), the profits are taxed between 20 and 40 percent, depending on how long you held the asset. (If you hold for more than a year, the maximum rate is 20 percent.) This is a terrible penalty on capital. It means that every time a stock or other asset is traded outside a taxexempt vehicle, 20 to 40 percent of the profits are removed from the private economy and sent to Washington, never to be invested again. With the recent bull market on Wall Street, annual capital gains taxes have exceeded $100 billion. What a terrible drain on the economy.

Capital gains taxes also result in economic inefficiency. Because of the high tax on capital gains, many investors refuse to sell their assets. They may prefer to switch into a potentially more profitable investment, but they stay with their original investment because they hate the idea of paying Uncle Sam. Clearly, capital would be more efficiently allocated to its more productive use without this burdensome profits tax.

The United States can learn a lot from foreign nations. Hong Kong has a flat 15 percent personal income tax, a 16.5 percent corporate income tax, and no tax at all on capital gains. In fact, most of the New Industrial Countries in Southeast Asia do not tax capital gains.

Thus capital can move freely throughout Hong Kong and around the world without distortion. And the cake has grown rapidly because of capital’s tax-free status. Hong Kong does have an estate tax on values exceeding HK$7 million, but the maximum rate is only 18 percent. (3)

Fortunately, the U.S. government has recently recognized the negative drain these taxes have on the economy. It has reduced long-term capital gains, and Congress has even entertained a bill to abolish federal estate taxes altogether.

Eliminating taxes on estates and capital gains has been criticized as a break for the rich. Moreover, critics say, estate taxes should be kept in order to establish a level playing field. They argue, “Children and grandchildren of wealthy people didn’t earn inherited money. They should have to work for it, just as their parents did. Inheritances create disincentives to work.”

But these critics fail to understand the broader implications of a large tax-free estate and tax-free capital gains. Everyone-not just the rich-benefits from eliminating these taxes because wealthy people’s capital would be left intact, invested in the stock market, businesses, farms, banks, insurance companies, real estate, and other capital assets, thus insuring strong economic growth and a high standard of living for everyone. As Ludwig von Mises once stated, “Do they realize that every measure leading to capital decumulation jeopardizes their prosperity?” (4)

As an investment adviser, I share the concern that unrestricted inheritances to children or grandchildren can be morally corrupting, but there are other solutions besides a confiscatory tax. For example, a will can limit the use of inherited funds until a certain age of responsibility is reached, or a trust can offer matching funds as a way to encourage work and responsibility.

1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920), p. 20.
2. Ibid., pp. 20-21.
3. For an excellent summary of tax policies throughout the world, see International Tax Summaries, published annually by Coopers & Lybrand (New York: John Wiley & Sons).
4. Ludwig von Mises, Planning for Freedom, 4th ed. (South Holland, Ill.: Libertarian Press, 1980), p. 208.