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Economics in One Lesson Part 8

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In seeing that economics is a science of tracing consequences, we must have become aware that, like logic and mathematics, it is a science of recognizing inevitable implications implications.

We may ill.u.s.trate this by an elementary equation in algebra. Suppose we say that if x x = 5 then = 5 then x + y = x + y = 12. The "solution" to this equation is that y equals 7; but this is so precisely because the equation 12. The "solution" to this equation is that y equals 7; but this is so precisely because the equation tells tells us in effect that Y equals 7. It does not make that a.s.sertion directly, but it inevitably implies it. us in effect that Y equals 7. It does not make that a.s.sertion directly, but it inevitably implies it.

What is true of this elementary equation is true of the most complicated and abstruse equations encountered in mathematics. The answer already lies in the statement of the problem The answer already lies in the statement of the problem. It must, it is true, be "worked out." The result, it is true, may sometimes come to the man who works out the equation as a stunning surprise. He may even have a sense of discovering something entirely new-a thrill like that of "some watcher of the skies, when a new planet swims into his ken." His sense of discovery may be justified by the theoretical or practical consequences of his answer. Yet the answer was already contained in the formulation of the problem. It was merely not recognized at once. For mathematics reminds us that inevitable implications are not necessarily obvious implications. it is true, be "worked out." The result, it is true, may sometimes come to the man who works out the equation as a stunning surprise. He may even have a sense of discovering something entirely new-a thrill like that of "some watcher of the skies, when a new planet swims into his ken." His sense of discovery may be justified by the theoretical or practical consequences of his answer. Yet the answer was already contained in the formulation of the problem. It was merely not recognized at once. For mathematics reminds us that inevitable implications are not necessarily obvious implications.

All this is equally true of economics. In this respect economics might be compared also to engineering. When an engineer has a problem, he must first determine all the facts bearing on that problem. If he designs a bridge to span two points, he must first know the exact distance between these two points, their precise topographical nature, the maximum load his bridge will be designed to carry, the tensile and compressive strength of the steel or other material of which the bridge is to be built, and the stresses and strains to which it may be subjected. Much of this factual research has already been done for him by others. His predecessors, also, have already evolved elaborate mathematical equations by which, knowing the strength of his materials and the stresses to which they will be subjected, he can determine the necessary diameter, shape, number and structure of his towers, cables and girders.

In the same way the economist, a.s.signed a practical problem, must know both the essential facts of that problem and the valid deductions to be drawn from those facts. The deductive side of economics is no less important than the factual. One can say of it what Santayana says of logic (and what could be equally well said of mathematics), that it "traces the radiation of truth," so that "when one term of a logical system is known to describe a fact, the whole system attaching to that term becomes, as it were, incandescent."1 Now few people recognize the necessary implications of the economic statements they are constantly making. When they say that the way to economic salvation is to increase credit, it is just as if they said that the way to economic salvation is to increase debt: these are different names for the same thing seen from opposite sides. When they say that the way to prosperity is to increase farm prices, it is like saying that the way to prosperity is to make food dearer for the city worker. When they say that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes. When they make it a main objective to increase exports, most of them do not realize that they necessarily make it a main objective ultimately to increase imports. When they say, under nearly all conditions, that the way to recovery is to increase wage rates, they have found only another way of saying that the way to recovery is to increase costs of production. economic statements they are constantly making. When they say that the way to economic salvation is to increase credit, it is just as if they said that the way to economic salvation is to increase debt: these are different names for the same thing seen from opposite sides. When they say that the way to prosperity is to increase farm prices, it is like saying that the way to prosperity is to make food dearer for the city worker. When they say that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes. When they make it a main objective to increase exports, most of them do not realize that they necessarily make it a main objective ultimately to increase imports. When they say, under nearly all conditions, that the way to recovery is to increase wage rates, they have found only another way of saying that the way to recovery is to increase costs of production.

It does not necessarily follow, because each of these propositions, like a coin, has its reverse side, or because the equivalent proposition, or the other name for the remedy, sounds much less attractive, that the original proposal is under all conditions unsound. There may be times when an increase in debt is a minor consideration as against the gains achieved with the borrowed funds; when a government subsidy is unavoidable to achieve a certain military purpose; when a given industry can afford an increase in production costs, and so on. But we ought to make sure in each case that both sides of the coin have been considered, that all the implications of a proposal have been studied. And this is seldom done.

2.

The a.n.a.lysis of our ill.u.s.trations has taught us another incidental lesson. This is that, when we study the effects of various proposals, not merely on special groups in the short run, but on all groups in the long run, the conclusions we arrive at usually correspond with those of unsophisticated common sense. It would not occur to anyone unacquainted with the prevailing economic half-literacy that it is good to have windows broken and cities destroyed; that it is anything but waste to create needless public projects; that it is dangerous to let idle hordes of men return to work; that machines which increase the production of wealth and economize human effort are to be dreaded; that obstructions to free production and free consumption increase wealth; that a nation grows richer by forcing other nations to take its goods for less than they cost to produce; that saving is stupid or wicked and that squandering brings prosperity. would not occur to anyone unacquainted with the prevailing economic half-literacy that it is good to have windows broken and cities destroyed; that it is anything but waste to create needless public projects; that it is dangerous to let idle hordes of men return to work; that machines which increase the production of wealth and economize human effort are to be dreaded; that obstructions to free production and free consumption increase wealth; that a nation grows richer by forcing other nations to take its goods for less than they cost to produce; that saving is stupid or wicked and that squandering brings prosperity.

"What is prudence in the conduct of every private family," said Adam Smith's strong common sense in reply to the sophists of his time, "can scarce be folly in that of a great kingdom." But lesser men get lost in complications. They do not reexamine their reasoning even when they emerge with conclusions that are palpably absurd. The reader, depending upon his own beliefs, may or may not accept the aphorism of Bacon that "A little philosophy inclineth men's minds to atheism, but depth in philosophy bringeth men's minds about to religion." It is certainly true, however, that a little economics can easily lead to the paradoxical and preposterous conclusions we have just rehea.r.s.ed, but that depth in economics brings men back to common sense. For depth in economics consists in looking for all the consequences of a policy instead of merely resting one's gaze on those immediately visible.

3.

In the course of our study, also, we have rediscovered an old friend. He is the Forgotten Man of William Graham Sumner. The reader will remember that in Sumner's essay, which appeared in 1883: As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law pa.s.sed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X.... What I want to do is to look up C....I call him the Forgotten Man.... He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him. it over with B, and A and B then propose to get a law pa.s.sed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X.... What I want to do is to look up C....I call him the Forgotten Man.... He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.

It is a historic irony that when this phrase, the Forgotten Man, was revived in the 1930s, it was applied, not to C, but to X; and C, who was then being asked to support still more Xs, was more completely forgotten than ever. It is C, the Forgotten Man, who is always called upon to stanch the politician's bleeding heart by paying for his vicarious generosity.

4.

Our study of our lesson would not be complete if, before we took leave of it, we neglected to observe that the fundamental fallacy with which we have been concerned arises not accidentally but systematically. It is an almost inevitable result, in fact, of the division of labor.

In a primitive community, or among pioneers, before the division of labor has arisen, a man works solely for himself or his immediate family. What he consumes is identical with what he produces. There is always a direct and immediate connection between his output and his satisfactions.

But when an elaborate and minute division of labor has set in, this direct and immediate connection ceases to exist. I do not make all the things I consume but, perhaps, only one of them. With the income I derive from making this one commodity, or rendering this one service, I buy all the rest. I wish the price of everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply. The greater the scarcity, compared to everything else, in this one thing that I supply, the higher will be the reward that I can get for my efforts. everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply. The greater the scarcity, compared to everything else, in this one thing that I supply, the higher will be the reward that I can get for my efforts.

This does not necessarily mean that I will restrict my own efforts or my own output. In fact, if I am only one of a substantial number of people supplying that commodity or service, and if free compet.i.tion exists in my line, this individual restriction will not pay me. On the contrary, if I am a grower of wheat, say, I want my particular crop to be as large as possible. But if I am concerned only with my own material welfare, and have no humanitarian scruples, I want the output of all other other wheat growers to be as wheat growers to be as low low as possible; for I want scarcity in wheat (and in any foodstuff that can be subst.i.tuted for it) so that my particular crop may command the highest possible price. as possible; for I want scarcity in wheat (and in any foodstuff that can be subst.i.tuted for it) so that my particular crop may command the highest possible price.

Ordinarily these selfish feelings would have no effect on the total production of wheat. Wherever compet.i.tion exists, in fact, each producer is compelled to put forth his utmost efforts to raise the highest possible crop on his own land. In this way the forces of self-interest (which, for good or evil, are more persistently powerful than those of altruism) are harnessed to maximum output.

But if it is possible for wheat growers or any other group of producers to combine to eliminate compet.i.tion, and if the government permits or encourages such a course, the situation changes. The wheat growers may be able to persuade the national government-or, better, a world organization-to force all of them to reduce pro rata the acreage planted to wheat. In this way they will bring about a shortage and raise the price of wheat; and if the rise in the price per bushel is proportionately greater, as it well may be, than the reduction in output, then the wheat growers as a whole will be better off. They will get more money; they will be able to buy more of everything else. Everybody else, it is true, will be worse off: because, other things equal, everyone else will have to give more of what he produces to get less of what the wheat grower produces. So the nation as a whole will be just that much poorer. It will be poorer by the amount of wheat that has not been grown. But those who look only at the wheat farmers will see a gain, and miss the more than offsetting loss. things equal, everyone else will have to give more of what he produces to get less of what the wheat grower produces. So the nation as a whole will be just that much poorer. It will be poorer by the amount of wheat that has not been grown. But those who look only at the wheat farmers will see a gain, and miss the more than offsetting loss.

And this applies in every other line. If because of unusual weather conditions there is a sudden increase in the crop of oranges, all the consumers will benefit. The world will be richer by that many more oranges. Oranges will be cheaper. But that very fact may make the orange growers as a group poorer than before, unless the greater supply of oranges compensates or more than compensates for the lower price. Certainly if under such conditions my particular crop of oranges is no larger than usual, then I am certain to lose by the lower price brought about by general plenty.

And what applies to changes in supply applies to changes in demand, whether brought about by new inventions and discoveries or by changes in taste. A new cotton-picking machine, though it may reduce the cost of cotton underwear and s.h.i.+rts to everyone, and increase the general wealth, will mean the employment of fewer cotton pickers. A new textile machine, weaving a better cloth at a faster rate, will make thousands of old machines obsolete, and wipe out part of the capital value invested in them, so making poorer the owners of those machines. The further development of nuclear power, though it can confer unimaginable blessings on mankind, is something that is dreaded by the owners of coal mines and oil wells.

Just as there is no technical improvement that would not hurt someone, so there is no change in public taste or morals, even for the better, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chast.i.ty would ruin the oldest profession in the world.

But it is not merely those who deliberately pander to men's vices who would be hurt by a sudden improvement in public morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline. If there were no criminals we should need fewer lawyers, judges and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen. morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline. If there were no criminals we should need fewer lawyers, judges and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen.

Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skill to meet that precise need. If progress were completely even all around the circle, this antagonism between the interests of the whole community and of the specialized group would not, if it were noticed at all, present any serious problem. If in the same year as the world wheat crop increased, my own crop increased in the same proportion, if the crop of oranges and all other agricultural products increased correspondingly, and if the output of all industrial goods also rose and their unit cost of production fell to correspond, then I as a wheat grower would not suffer because the output of wheat had increased. The price that I got for a bushel of wheat might decline. The total sum that I realized from my larger output might decline. But if I could also because of increased supplies buy the output of everyone else cheaper, then I should have no real cause to complain. If the price of everything else dropped in exactly the same ratio as the decline in the price of my wheat, I should be better off, in fact, exactly in proportion to my increased total crop; and everyone else, likewise, would benefit proportionately from the increased supplies of all goods and services.

But economic progress never has taken place and probably never will take place in this completely uniform way. Advance occurs now in this branch of production and now in that. And if there is a sudden increase in the supply of the thing I help to produce, or if a new invention or discovery makes what I produce no longer necessary, then the gain to the world is a tragedy to me and to the productive group to which I belong. tragedy to me and to the productive group to which I belong.

Now it is often not the diffused gain of the increased supply or new discovery that most forcibly strikes even the disinterested observer, but the concentrated loss. The fact that there is more and cheaper coffee for everyone is lost sight of; what is seen is merely that some coffee growers cannot make a living at the lower price. The increased output of shoes at lower cost by the new machine is forgotten; what is seen is a group of men and women thrown out of work. It is altogether proper-it is, in fact, essential to a full understanding of the problem-that the plight of these groups be recognized, that they be dealt with sympathetically, and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere.

But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value. Yet this is what the world has repeatedly sought to do by protective tariffs, by the destruction of machinery, by the burning of coffee, by a thousand restriction schemes. This is the insane doctrine of wealth through scarcity.

It is a doctrine that may always be privately true, unfortunately, for any particular group of producers considered in isolation-if they can make scarce the one thing they have to sell while keeping abundant all the things they have to buy. But it is a doctrine that is always publicly false. It can never be applied all around the circle. For its application would mean economic suicide.

And this is our lesson in its most generalized form. For many things that seem to be true when we concentrate on a single economic group are seen to be illusions when the interests of everyone, as consumer no less than as producer, are considered.

To see the problem as a whole, and not in fragments: that is the goal of economic science.

1George Santayana, The Realm of Truth The Realm of Truth (1938), p. 16. (1938), p. 16.

Part Three The Lesson After Thirty Years

Chapter XXVI.

THE L LESSON A AFTER T THIRTY Y YEARS.

THE FIRST EDITION of this book appeared in 1946. It is now, as I write this, thirty-two years later. How much of the lesson expounded in the previous pages has been learned in this period? of this book appeared in 1946. It is now, as I write this, thirty-two years later. How much of the lesson expounded in the previous pages has been learned in this period?

If we are referring to the politicians-to all those responsible for formulating and imposing government policies-practically none of it has been learned. On the contrary, the policies a.n.a.lyzed in the preceding chapters are far more deeply established and widespread, not only in the United States, but in practically every country in the world, than they were when this book first appeared.

We may take, as the outstanding example, inflation. This is not only a policy imposed for its own sake, but an inevitable result of most of the other interventionist policies. It stands today as the universal symbol of government intervention everywhere.

The 1946 edition explained the consequences of inflation, but the inflation then was comparatively mild. True, though federal government expenditures in 1926 had been less than $3 billion and there was a surplus, by fiscal year 1946 expenditures had risen to $55 billion and there was a deficit of $16 billion. Yet in fiscal year 1947, with the war ended, expenditures fell to $35 billion and there was an actual surplus of nearly $4 billion. By fiscal year 1978, however, expenditures had soared to $451 billion and the deficit to $49 billion. in fiscal year 1947, with the war ended, expenditures fell to $35 billion and there was an actual surplus of nearly $4 billion. By fiscal year 1978, however, expenditures had soared to $451 billion and the deficit to $49 billion.

All this has been accompanied by an enormous increase in the stock of money-from $113 billion of demand deposits plus currency outside of banks in 1947, to $357 billion in August 1978. In other words, the active money supply has been more than tripled in the period.

The effect of this increase in money has been a dramatic increase in prices. The consumer price index in 1946 stood at 58.5. In September 1978 it was 199.3. Prices, in short, more than tripled.

The policy of inflation, as I have said, is partly imposed for its own sake. More than forty years after the publication of John Maynard Keynes' General Theory General Theory, and more than twenty years after that book has been thoroughly discredited by a.n.a.lysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce existing unemployment. An appalling irony is that they are making these recommendations when the federal government has already been running a deficit for forty-one out of the last forty-eight years and when that deficit has been reaching dimensions of $50 billion a year.

An even greater irony is that, not satisfied with following such disastrous policies at home, our officials have been scolding other countries, notably Germany and j.a.pan, for not following these "expansionary" policies themselves. This reminds one of nothing so much as Aesop's fox, who, when he had lost his tail, urged all his fellow foxes to cut off theirs.

One of the worst results of the retention of the Keynesian myths is that it not only promotes greater and greater inflation, but that it systematically diverts attention from the real causes of our unemployment, such as excessive union wage-rates, minimum wage laws, excessive and prolonged unemployment insurance, and overgenerous relief payments.

But the inflation, though in part often deliberate, is today mainly the consequence of other government economic interventions. It is the consequence, in brief, of the Redistributive State-of all the policies of expropriating money from Peter in order to lavish it on Paul. mainly the consequence of other government economic interventions. It is the consequence, in brief, of the Redistributive State-of all the policies of expropriating money from Peter in order to lavish it on Paul.

This process would be easier to trace, and its ruinous effects easier to expose, if it were all done in some single measure-like the guaranteed annual income actually proposed and seriously considered by committees of Congress in the early 1970s. This was a proposal to tax still more ruthlessly all incomes above average and turn the proceeds over to all those living below a so-called minimum poverty line, in order to guarantee them an income-whether they were willing to work or not-"to enable them to live with dignity." It would be hard to imagine a plan more clearly calculated to discourage work and production and eventually to impoverish everybody.

But instead of pa.s.sing any such single measure, and bringing on ruin in a single swoop, our government has preferred to enact a hundred laws that effect such a redistribution on a partial and selective basis. These measures may miss some needy groups entirely; but on the other hand they may shower upon other groups a dozen different varieties of benefits, subsidies, and other handouts. These include, to give a random list: Social Security, Medicare, Medicaid, unemployment insurance, food stamps, veterans' benefits, farm subsidies, subsidized housing, rent subsidies, school lunches, public employment on make-work jobs, Aid to Families with Dependent Children, and direct relief of all kinds, including aid to the aged, the blind, and the disabled. The federal government has estimated that under these last categories it has been handing federal aid benefits to more than 4 million people-not to count what the states and cities are doing.

One author has recently counted and examined no fewer than forty-four welfare programs. Government expenditures for these in 1976 totaled $187 billion. The combined average growth of these programs between 1971 and 1976 was 25 percent a year-2.5 times the rate of growth of estimated gross national product for the same period. Projected expenditures for 1979 are more than $250 billion. Coincident with the extraordinary growth of these welfare expenditures has been the development of a "national welfare industry," now composed of 5 million public and private workers distributing payments and services to 50 million beneficiaries. for 1979 are more than $250 billion. Coincident with the extraordinary growth of these welfare expenditures has been the development of a "national welfare industry," now composed of 5 million public and private workers distributing payments and services to 50 million beneficiaries.1 Nearly every other Western country has been administering a similar a.s.sortment of aid programs-though sometimes a more integrated and less haphazard collection. And in order to do this they have been resorting to more and more Draconian taxation.

We need merely point to Great Britain as one example. Its government has been taxing personal income from work ("earned" income) up to 83 percent, and personal income from investment ("unearned" income) up to 98 percent. Should it be surprising that it has discouraged work and investment and so profoundly discouraged production and employment? There is no more certain way to deter employment than to hara.s.s and penalize employers. There is no more certain way to keep wages low than to destroy every incentive to investment in new and more efficient machines and equipment. But this is becoming more and more the policy of governments everywhere.

Yet this Draconian taxation has not brought revenues to keep pace with ever more reckless government spending and schemes for redistributing wealth. The result has been to bring chronic and growing government budget deficits, and therefore chronic and mounting inflation, in nearly every country in the world.

For the last thirty years or so, Citibank of New York has been keeping a record of this inflation over ten-year periods. Its calculations are based on the cost-of-living estimates published by the individual governments themselves. In its economic letter of October 1977 it published a survey of inflation in fifty countries. These figures show that in 1976, for example, the West German mark, with the best record, had lost 35 percent of its purchasing power over the preceding ten years; that the Swiss franc had lost 40 percent, the American dollar 43 percent, the French franc 50 percent, the j.a.panese yen 57 percent, the Swedish krone 47 percent, the Italian lira 56 percent, and the British pound 61 percent. When we get to Latin America, the Brazilian cruzeiro had lost 89 percent of its value, and the Uruguayan, Chilean, and Argentine pesos more than 99 percent. its purchasing power over the preceding ten years; that the Swiss franc had lost 40 percent, the American dollar 43 percent, the French franc 50 percent, the j.a.panese yen 57 percent, the Swedish krone 47 percent, the Italian lira 56 percent, and the British pound 61 percent. When we get to Latin America, the Brazilian cruzeiro had lost 89 percent of its value, and the Uruguayan, Chilean, and Argentine pesos more than 99 percent.

Though when compared with the record of a year or two before, the overall record of world currency depreciations was more moderate; the American dollar in 1977 was depreciating at an annual rate of 6 percent, the French franc of 8.6 percent, the j.a.panese yen of 9.1 percent, the Swedish krone of 9.5 percent, the British pound of 14.5 percent, the Italian lira of 15.7 percent, and the Spanish peseta at an annual rate of 17.5 percent. As for Latin American experience, the Brazilian currency unit in 1977 was depreciating at an annual annual rate of 30.8 percent, the Uruguayan of 35.5, the Chilean of 53.9, and the Argentinian of 65.7. rate of 30.8 percent, the Uruguayan of 35.5, the Chilean of 53.9, and the Argentinian of 65.7.

I leave it to the reader to picture the chaos that these rates of depreciation of money were producing in the economies of these countries and the suffering in the lives of millions of their inhabitants.

As I have pointed out, these inflations, themselves the cause of so much human misery, were in turn in large part the consequence of other policies of government economic intervention. Practically all these interventions unintentionally ill.u.s.trate and underline the basic lesson of this book. All were enacted on the a.s.sumption that they would confer some immediate benefit on some special group. Those who enacted them failed to take heed of their secondary consequences-failed to consider what their effect would be in the long run on all groups.

In sum, so far as the politicians are concerned, the lesson that this book tried to instill more than thirty years ago does not seem to have been learned anywhere.

If we go through the chapters of this book seriatim, we find practically no form of government intervention deprecated in the first edition that is not still being pursued, usually with increased obstinacy. Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies. They are imposing heavier and more ex-propriatory taxes than ever. They still recommend credit expansion. Most of them still make "full employment" their overriding goal. They continue to impose import quotas and protective tariffs. They try to increase exports by depreciating their currencies even further. Farmers are still "striking" for "parity prices." Governments still provide special encouragements to unprofitable industries. They still make efforts to "stabilize" special commodity prices. practically no form of government intervention deprecated in the first edition that is not still being pursued, usually with increased obstinacy. Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies. They are imposing heavier and more ex-propriatory taxes than ever. They still recommend credit expansion. Most of them still make "full employment" their overriding goal. They continue to impose import quotas and protective tariffs. They try to increase exports by depreciating their currencies even further. Farmers are still "striking" for "parity prices." Governments still provide special encouragements to unprofitable industries. They still make efforts to "stabilize" special commodity prices.

Governments, pus.h.i.+ng up commodity prices by inflating their currencies, continue to blame the higher prices on private producers, sellers, and "profiteers." They impose price ceilings on oil and natural gas, to discourage new exploration precisely when it is in most need of encouragement, or resort to general price and wage fixing or "monitoring." They continue rent control in the face of the obvious devastation it has caused. They not only retain minimum wage laws but keep increasing their level, in face of the chronic unemployment they so clearly bring about. They continue to pa.s.s laws granting special privileges and immunities to labor unions; to oblige workers to become members; to tolerate ma.s.s picketing and other forms of coercion; and to compel employers to "bargain collectively in good faith" with such unions-i.e., to make at least some concessions to their demands. The intention of all these measures is to "help labor." But the result is once more to create and prolong unemployment, and to lower total wage payments compared with what they might have been.

Most politicians continue to ignore the necessity of profits, to overestimate their average or total net amount, to denounce unusual profits anywhere, to tax them excessively, and sometimes even to deplore the very existence of profits.

The anticapitalistic mentality seems more deeply embedded than ever. Whenever there is any slowdown in business, the politicians now see the main cause as "insufficient consumer spending." At the same time that they encourage more consumer spending they pile up further disincentives and penalties in the way of saving and investment. Their chief method of doing this today, as we have already seen, is to embark on or accelerate inflation. The result is that today, for the first time in history, no nation is on a metallic standard, and practically every nation is swindling its own people by printing a chronically depreciating paper currency. spending." At the same time that they encourage more consumer spending they pile up further disincentives and penalties in the way of saving and investment. Their chief method of doing this today, as we have already seen, is to embark on or accelerate inflation. The result is that today, for the first time in history, no nation is on a metallic standard, and practically every nation is swindling its own people by printing a chronically depreciating paper currency.

To pile one more item on this heap, let us examine the recent tendency, not only in the United States but abroad, for almost every "social" program, once launched upon, to get completely out of hand. We have already glanced at the overall picture, but let us now look more closely at one outstanding example-Social Security in the United States.

The original federal Social Security Act was pa.s.sed in 1935. The theory behind it was that the greater part of the relief problem was that people did not save in their working years, and so, when they were too old to work, they found themselves without resources. This problem could be solved, it was thought, if they were compelled to insure themselves, with employers also compelled to contribute half the necessary premiums, so that they would have a pension sufficient to retire on at age sixty-five or over. Social Security was to be entirely a self-financed insurance plan based on strict actuarial principles. A reserve fund was to be set up sufficient to meet future claims and payments as they fell due.

It never worked out that way. The reserve fund existed mainly on paper. The government spent the Social Security tax receipts, as they came in, either to meet its ordinary expenses or to pay out benefits. Since 1975, current benefit payments have exceeded the system's tax receipts.

It also turned out that in practically every session Congress found ways to increase the benefits paid, broaden the coverage, and add new forms of "social insurance." As one commentator pointed out in 1965, a few weeks after Medicare insurance was added: "Social Security sweeteners have been enacted in each of the past seven general election years."

As inflation developed and progressed, Social Security benefits were increased not only in proportion, but much more. The typical political ploy was to load up benefits in the present and push costs into the future. Yet that future always arrived; and each few years later Congress would again have to increase payroll taxes levied on both workers and employers. benefits were increased not only in proportion, but much more. The typical political ploy was to load up benefits in the present and push costs into the future. Yet that future always arrived; and each few years later Congress would again have to increase payroll taxes levied on both workers and employers.

Not only were the tax rates continuously increased, but there was a constant rise in the amount of salary taxed. In the original 1935 bill the salary taxed was only the first $3,000. The early tax rates were very low. But between 1965 and 1977, for example, the Social Security tax shot up from 4.4 percent on the first $6,600 of earned income (levied on employer and employee alike) to a combined 11.7 percent on the first $16,500. (Between 1960 and 1977, the total annual tax increased by 572 percent, or about 12 percent a year compounded. It is scheduled to go much higher.) At the beginning of 1977, unfunded liabilities of the Social Security system were officially estimated at $4.1 trillion trillion.

No one can say today whether Social Security is really an insurance program or just a complicated and lopsided relief system. The bulk of the present benefit recipients are being a.s.sured that they "earned" and "paid for" their benefits. Yet no private insurance company could have afforded to pay existing benefit scales out of the "premiums" actually received. As of early 1978, when low-paid workers retire, their monthly benefits generally represent about 60 percent of what they earned on the job. Middle-income workers receive about 45 percent. For those with exceptionally high salaries, the ratio can fall to 5 or 10 percent. If Social Security is thought of as a relief system, however, it is a very strange one, for those who have already been getting the highest salaries receive the highest dollar benefits.

Yet Social Security today is still sacrosanct. It is considered political suicide for any congressman to suggest cutting down or cutting back not only present but promised future benefits. The American Social Security system must stand today as a frightening symbol of the almost inevitable tendency of any national relief, redistribution, or "insurance" scheme, once established, to run completely out of control.

In brief, the main problem we face today is not economic, but political. Sound economists are in substantial agreement concerning what ought to be done. Practically all government attempts to redistribute wealth and income tend to smother productive incentives and lead toward general impoverishment. It is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. Government's main economic function is to encourage and preserve a free market. When Alexander the Great visited the philosopher Diogenes and asked whether he could do anything for him, Diogenes is said to have replied: "Yes, stand a little less between me and the sun." It is what every citizen is ent.i.tled to ask of his government.

The outlook is dark, but it is not entirely without hope. Here and there one can detect a break in the clouds. More and more people are becoming aware that government has nothing to give them without first taking it away from somebody else-or from themselves. Increased handouts to selected groups mean merely increased taxes, or increased deficits and increased inflation. And inflation, in the end, misdirects and disorganizes production. Even a few politicians are beginning to recognize this, and some of them even to state it clearly.

In addition, there are marked signs of a s.h.i.+ft in the intellectual winds of doctrine. Keynesians and New Dealers seem to be in a slow retreat. Conservatives, libertarians, and other defenders of free enterprise are becoming more outspoken and more articulate. And there are many more of them. Among the young, there is a rapid growth of a disciplined school of "Austrian" economists.

There is a real promise that public policy may be reversed before the damage from existing measures and trends has become irreparable.

1Charles D. Hobbs, The Welfare Industry The Welfare Industry Was.h.i.+ngton, D.C.: Heritage Foundation, 1978). Was.h.i.+ngton, D.C.: Heritage Foundation, 1978).

A NOTE ON B BOOKS.

THOSE WHO DESIRE to read further in economics should turn next to some work of intermediate length and difficulty. I know of no single volume in print today that completely meets this need, but there are several that together supply it. There is an excellent short book (126 pages) by Faustino Ballve, to read further in economics should turn next to some work of intermediate length and difficulty. I know of no single volume in print today that completely meets this need, but there are several that together supply it. There is an excellent short book (126 pages) by Faustino Ballve, Essentials of Economics Essentials of Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education), which briefly summarizes principles and policies. A book that does that at somewhat greater length (327 pages) is (Irvington-on-Hudson, N.Y.: Foundation for Economic Education), which briefly summarizes principles and policies. A book that does that at somewhat greater length (327 pages) is Understanding the Dollar Crisis Understanding the Dollar Crisis by Percy L. Greaves (Belmont, Ma.s.s.: Western Islands, 1973). Bettina Bien Greaves has a.s.sembled two volumes of readings on by Percy L. Greaves (Belmont, Ma.s.s.: Western Islands, 1973). Bettina Bien Greaves has a.s.sembled two volumes of readings on Free Market Economics Free Market Economics (Foundation for Economic Education). (Foundation for Economic Education).

The reader who aims at a thorough understanding, and feels prepared for it, should next read Human Action Human Action by Ludwig von Mises (Chicago: Contemporary Books, 1949, 1966, 907 pages). This book extended the logical unity and precision of economics beyond that of any previous work. A two-volume work written thirteen years after by Ludwig von Mises (Chicago: Contemporary Books, 1949, 1966, 907 pages). This book extended the logical unity and precision of economics beyond that of any previous work. A two-volume work written thirteen years after Human Action Human Action by a student of Mises is Murray N by a student of Mises is Murray N. Rothbard's Rothbard's Man, Economy, and State Man, Economy, and State (Mission, Kan.: Sheed, Andrews and McMeel, 1962, 987 pages). This contains much original and penetrating material; its exposition is admirably lucid; and its arrangement makes it (Mission, Kan.: Sheed, Andrews and McMeel, 1962, 987 pages). This contains much original and penetrating material; its exposition is admirably lucid; and its arrangement makes it in some respects more suitable for textbook use than Mises' great work. in some respects more suitable for textbook use than Mises' great work.

Short books that discuss special economic subjects in a simple way are Planning for Freedom Planning for Freedom by Ludwig von Mises (South Holland, 111.: Libertarian Press, 1952), and by Ludwig von Mises (South Holland, 111.: Libertarian Press, 1952), and Capitalism and Freedom Capitalism and Freedom by Milton Friedman (Chicago: University of Chicago Press, 1962). There is an excellent pamphlet by Murray N. Rothbard, by Milton Friedman (Chicago: University of Chicago Press, 1962). There is an excellent pamphlet by Murray N. Rothbard, What Has Government Done to Our Money? What Has Government Done to Our Money? (Santa Ana, Calif.: Rampart College, 1964, 1974, 62 pages). On the urgent subject of inflation, a book by the present author has recently been published, (Santa Ana, Calif.: Rampart College, 1964, 1974, 62 pages). On the urgent subject of inflation, a book by the present author has recently been published, The Inflation Crisis, and How to Resolve It The Inflation Crisis, and How to Resolve It (New Roch.e.l.le, N.Y.: Arlington House, 1978). (New Roch.e.l.le, N.Y.: Arlington House, 1978).

Among recent works which discuss current ideologies and developments from a point of view similar to that of this volume are the present author's The Failure of the "New Economics": An a.n.a.lysis of the Keynesian Fallacies The Failure of the "New Economics": An a.n.a.lysis of the Keynesian Fallacies (Arlington House, 1959); F. A. Hayek, (Arlington House, 1959); F. A. Hayek, The Road to Serfdom The Road to Serfdom (1945) and the same author's monumental (1945) and the same author's monumental Const.i.tution of Liberty Const.i.tution of Liberty (Chicago: University of Chicago Press, 1960). Ludwig von Mises' (Chicago: University of Chicago Press, 1960). Ludwig von Mises' Socialism: An Economic and Sociological a.n.a.lysis Socialism: An Economic and Sociological a.n.a.lysis (London: Jonathan Cape, 1936, 1969) is the most thorough and devastating critique of collectivistic doctrines ever written. (London: Jonathan Cape, 1936, 1969) is the most thorough and devastating critique of collectivistic doctrines ever written.

The reader should not overlook, of course, Frederic Bastiat's Economic Sophisms Economic Sophisms (ca. 1844), and particularly his essay on "What Is Seen and What Is Not Seen." (ca. 1844), and particularly his essay on "What Is Seen and What Is Not Seen."

Those who are interested in working through the economic cla.s.sics might find it most profitable to do this in the reverse of their historical order. Presented in this order, the chief works to be consulted, with the dates of their first editions, are: Philip Wicksteed, The Common Sense of Political Economy The Common Sense of Political Economy, 1911; John Bates Clark, The Distribution of Wealth The Distribution of Wealth, 1899; Eugen von Bohm-Bawerk, The Positive Theory of Capital The Positive Theory of Capital, 1888; Karl Menger, Principles of Economics Principles of Economics, 1871; W. Stanley Jevons, The Theory of Political Economy The Theory of Political Economy, 1871; John Stuart Mill, Principles of Political Economy Principles of Political Economy, 1848; David Ricardo, Principles of Political Economy and Taxation Principles of Political Economy and Taxation, 1817; and Adam Smith, The Wealth of Nations The Wealth of Nations, 1776.

Economics broadens out in a hundred directions. Whole libraries have been written on specialized fields alone, such as money and banking, foreign trade and foreign exchange, taxation and public finance, government control, capitalism and socialism, wages and labor relations, interest and capital, agricultural economics, rent, prices, profits, markets, compet.i.tion and monopoly, value and utility, statistics, business cycles, wealth and poverty, social insurance, housing, public utilities, mathematical economics, studies of special industries and of economic history. But no one will ever properly understand any of these specialized fields unless he has first of all acquired a firm grasp of basic economic principles and the complex interrelations.h.i.+p of all economic factors and forces. When he has done this by his reading in general economics, he can be trusted to find the right books in his special field of interest.

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