Excuse Me, Professor: Challenging the Myths of Progressivism

by Lawrence Reed

  In so many of the discussions about income inequality, there is a basic emotional dynamic at work. Someone sees they have less than another and they feel envious. Perhaps they see they have more than another and they feel guilty. Or they see that someone has more than someone else and they feel indignation. Envy, guilt, and indignation. Are these the kinds of emotions that should drive social policy? When we begin to understand that the origins of wealth—honest entrepreneurs and stewards of capital in an inherently unequal ecosystem—we can learn to leave our more primitive emotions behind.

  SUMMARY

  •Economic inequality, like the personality traits that make up each individual, are a defining characteristic of humanity

  •When economic inequality arises naturally in the marketplace, it largely reflects the ability of individuals to serve others; when it arises from political connections, it’s unfair and corrupt

  •Allowing economic inequality to occur, so long as it doesn’t derive from politics, inevitably raises the standard of living for society as a whole

  •Concern for “the poor” is often a way to simply disguise envy or disdain for “the rich”

  #2

  “BECAUSE WE’RE RUNNING OUT OF RESOURCES, GOVERNMENT MUST MANAGE THEM”

  BY MAX BORDERS

  MILTON FRIEDMAN ONCE SAID “IF YOU PUT THE FEDERAL GOVERNMENT IN CHARGE of the Sahara Desert, in five years there’d be a shortage of sand.” The great economist wasn’t just being cute. He’s pointing to a very serious problem with government management of resources. In this chapter, we’ll talk about why it’s a problem. But first we should ask: Why are people so concerned that we will run out of resources? How can we find a reasonable balance between using resources and conserving them?

  When most people think about resources, they think about the possibility they might be used up. And running out of resources means there will be nothing left for future generations. This scares people. So the notion goes something like: If parents let kids get into the groceries on the first night of the camping trip, there won’t be any sandwiches left for the picnic. The parents wisely ration the resources and restrict the kids’ access so that there is something left for later. People who think government should manage resources are thinking that government will behave like wise parents. But does it?

  What you may not have realized is that people in the market—under certain conditions—find a balance between consumption and conservation, which one might call “sustainability.” But first there has to be a complete market mechanism. This may be hard for some people to get their heads around, because most people think markets cause overconsumption. And certain kinds of markets can.

  Healthy markets only exist under certain rules. The main rules are what we might call the Three Ps: Private property, price signals, and profit. These are the basic conditions of exchange. Without them there can be no healthy market.

  Private property means that an individual has full ownership of a resource. We know who the owner is, how much they own and that right cannot be taken away arbitrarily. The owner may also have the authority to divest himself of the resource. That means we know the difference between mine and thine and in so knowing, we have one of the conditions under which to conserve, trade, or consume.

  Prices are what economist Steven Horwitz calls “information wrapped in an incentive.” When the price of some resource goes high enough, owners have the incentive to do any number of things. They might use less of the resource (i.e. conserve it), they might find new creative ways to increase the supply of the resource, or they might find a substitute, which ends up conserving the resource. Of course, we make any such choice because we expect future returns, otherwise known as profit. And in this equilibrium created by prices, property, and profit, markets balance use with conservation.

  Consider a resource that was once highly sought after: whale blubber. Whale blubber was used as an energy resource in the 19th century. But in the case of whales, there were only two of the three Ps. Whalers had prices and profit, but no private property. The whales belonged to what is known as the Commons—which meant anyone could hunt them. Unsurprisingly they were nearly hunted to extinction. Because no one owned them, whalers had a perverse incentive to hunt them quickly. The whales rapidly became scarce. Indeed, as the number of whales went down, the price of each individual whale went up and the incentives to hunt increased. But this can’t happen if there is a robust private property regime in place. If people could own whales, their incentive is not to destroy them unsustainably, but to raise them. (Ironically, fossil fuels saved the whales thanks to substitution.)

  In the 19th Century American West, wild bison (buffalo) roamed the unfenced, commonly-held Plains by the millions. They were hunted nearly to extinction. By contrast, people could own and raise cattle. The use of barbed wire on private property made it feasible to do so. Today, there are far more cattle in the Plains than bison and even where bison are privately-owned, their long-term survival is now better assured than it ever was on “public” property.

  Consider trees. In North America, there are more trees than there have been in over a hundred years. Not only do foresters have incentives to regrow trees they harvest, they have incentives to cut them at a sustainable rate. Of course, in certain parts of the world—like Amazonia and Africa—concerns about forest clearing are justified. What’s the big difference between forests in North America and South America? In one case, forests are largely government managed and in the other they are largely privately managed.

  Since 1900, U.S. forestland acreage has remained stable, unlike some regions in the world where deforestation is happening at a rapid pace. When one includes the heavily forested Northern Forests of Canada, forestland in North America since 1900 has grown by a lot, according to the UN State of the World’s Forests reports.

  By contrast, forests in many parts of the world are losing ground. Why are North America’s forests growing while forests in other areas are being lost? Certainly the biggest factor is whether the country has the Three Ps. The absence of property rights is known as the Tragedy of the Commons. If we look at the facts around the world, places that have stable private property rights have stable forestland. Places that don’t have stable property rights regimes, have tragedies of the commons—with its attendant rush to exploit. If something isn’t owned, then lots of people may have incentive to use and even abuse it, and little or no incentive to take care of it or grow it bigger.

  Political leaders in areas without private property rights have tried to solve the problem of over-exploitation of forestland through the application of government management—that is: simply forbid people from using the resource or have the government allocate it “sustainably.” Contrary to progressive conservation clichés, neither policy works particularly well.

  In the case of bans, black markets form and there is a race to exploit the resource. Poachers and illegal exploiters emerge as the problems persist. For example, black rhinos are under threat in Africa despite bans. Because the profit motive is even stronger under bans, risk takers come out of the woodwork. In the case of government allocation of resources, the process can easily be corrupted. In other words, anyone who is able to capture the regulators will be able to manipulate the process in his favor. What follows is not only corruption, but in most cases considerations of “sustainability” go by the wayside, along with all the market mechanisms that constitute the true tests of sustainability.

  SUMMARY

  •It is simplistic to assume that people will blindly use up what sustains them without regard to the incentive structures they face; if they have incentives to conserve, they will do so

  •Private property is a powerful incentive to conserve resources. You lose if you squander what’s yours

  •When property is held “in common,” you have a license to use and abuse resources with little incentive to nurture and improve them

  #3

  “EQUALITY SERVES THE COMMON GOOD”
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  BY LAWRENCE W. REED

  “FREE PEOPLE ARE NOT EQUAL, AND EQUAL PEOPLE ARE NOT FREE.”

  I wish I could remember who first said that. It ought to rank as one of the great truths of all time, and one that is fraught with profound meaning.

  Equality before the law—for instance, being judged innocent or guilty based on whether or not you committed the crime, not on what color, sex, wealth class, or creed you represent—is a noble ideal and not at issue here. The “equalness” to which the statement above refers pertains to economic income or material wealth.

  Put another way, then, the statement might read, “Free people will earn different incomes. Where people have the same income, they cannot be free.”

  Economic equality in a free society is a mirage that redistributionists envision—and too often are willing to shed both blood and treasure to accomplish. But free people are different people, so it should not come as a surprise that they earn different incomes. Our talents and abilities are not identical. We don’t all work as hard. And even if we all were magically made equal in wealth tonight, we’d be unequal in the morning because some of us would spend it and some of us would save it.

  To produce even a rough measure of economic equality, governments must issue the following orders and back them up with fines, penalties, or even prisons or firing squads: “Don’t excel or work harder than the next guy, don’t come up with any new ideas, don’t take any risks, and don’t do anything differently from what you did yesterday.” In other words, don’t be human.

  The fact that free people are not equal in economic terms is not to be lamented. It is, rather, a cause for rejoicing. Economic inequality, when it derives from the voluntary interaction of creative individuals and not from political power, testifies to the fact that people are being themselves, each putting his uniqueness to work in ways that are fulfilling to himself and of value to others. As the French would say in a different context, Vive la difference!

  People obsessed with economic equality—egalitarianism, to employ the more clinical term—do strange things. They become envious of others. They covet. They divide society into two piles: villains and victims. They spend far more time dragging someone else down than they do pulling themselves up. They’re not fun to be around. And if they make it to a legislature, they can do real harm. Then they not only call the cops, they are the cops.

  Examples of injurious laws motivated by egalitarian sentiments are, of course, legion. They form the blueprint of the modern welfare state’s redistributive apparatus. A particularly classic case was the 1990 hike in excise taxes on boats, aircraft, and jewelry. The sponsors of the bill in Congress presumed that only rich people buy boats, aircraft, and jewelry. Taxing those objects would teach the rich a lesson, help narrow the gap between the proverbial “haves” and “have-nots,” and raise a projected $31 million in new revenues for the federal Treasury in 1991.

  What really occurred was much different. A subsequent study by economists for the Joint Economic Committee of Congress showed that the rich did not line up by the flock to be sheared: Total revenue from the new taxes in 1991 was only $16.6 million. Especially hard-hit was the boating industry, where a total of 7,600 jobs were wiped out. In the aircraft industry, 1,470 people were pink-slipped. And in jewelry manufacturing, 330 joined the jobless ranks just so congressmen could salve their egalitarian consciences.

  Those lost jobs, the study revealed, prompted a $24.2 million outlay for unemployment benefits. That’s right—$16.6 million came in, $24.2 million went out, for a net loss to the deficit-ridden Treasury of $7.6 million. To advance the cause of economic equality by a punitive measure, Congress succeeded in nothing more than making both itself and the rest of us a little bit poorer.

  To the rabid egalitarian, however, intentions count for everything and consequences mean little. It’s more important to pontificate and assail than it is to produce results that are constructive or that even live up to the stated objective. Getting Congress to undo the damage it does with bad ideas like this is always a daunting challenge.

  In July 1995 economic inequality made the headlines with the publication of a study by New York University economist Edward Wolff. The latest in a long line of screeds that purport to show that free markets are making the rich richer and the poor poorer, Wolff’s work was celebrated in the mainstream media. “The most telling finding,” the author wrote, “is that the share of marketable net worth held by the top 1 percent, which had fallen by 10 percentage points between 1945 and 1976, rose to 39 percent in 1989, compared with 34 percent in 1983.” Those at the bottom end of the income scale, meanwhile, saw their wealth erode over the period—if the Wolff study is to be believed.

  On close and dispassionate inspection, however, it turns out that the study didn’t tell the whole story, if indeed it told any of it. Not only did Wolff employ a very narrow measure that inherently exaggerates wealth disparity, he also ignored the mobility of individuals up and down the income scale. An editorial in the August 28, 1995, Investor’s Business Daily laid it out straight: “Different people make up ‘the wealthy’ from year to year. The latest data from income-tax returns . . . show that most of 1979’s top-earning 20 percent had fallen to a lower income bracket by 1988.”

  Of those who made up the bottom 20 percent in 1979, just 14.2 percent were still there in 1988. Some 20.7 percent had moved up one bracket, while 35 percent had moved up two, 25.3 percent had moved up three, and 14.7 percent had joined the top-earning 20 percent.

  If economic inequality is an ailment, punishing effort and success is no cure in any event. Coercive measures that aim to redistribute wealth prompt the smart or politically well-connected “haves” to seek refuge in havens here or abroad, while the hapless “have-nots” bear the full brunt of economic decline. A more productive expenditure of time would be to work to erase the mass of intrusive government that assures that the “have-nots” are also the “can-nots.”

  This economic equality thing is not compassion. When it’s just an idea, it’s bunk. When it’s public policy, it’s illogic writ large.

  SUMMARY

  •If people are free, they will be different. That reflects their individuality and their contributions to others in the marketplace. It requires force to make them the same

  •Talents, industriousness, and savings are three of many reasons why we earn different incomes in a free society

  •Forcing people to be equal economically may make misguided egalitarians feel better but it does real harm to real people

  #4

  “THE MORE COMPLEX THE SOCIETY, THE MORE GOVERNMENT CONTROL WE NEED”

  BY LEONARD E. READ

  ARGUED A COLLEGE PRESIDENT AT A RECENT SEMINAR: “YOUR FREE MARKET, private property, limited government theories were all right under the simple conditions of a century or more ago, but surely they are unworkable in today’s complex economy. The more complex the society, the greater is the need for governmental control; that seems axiomatic.”

  It is important to expose this oft-heard, plausible, and influential fallacy because it leads directly and logically to socialistic planning. This is how a member of the seminar team answered the college president:

  “Let us take the simplest possible situation—just you and I. Next, let us assume that I am as wise as any President of the United States who has held office during your lifetime. With these qualifications in mind, do you honestly think I would be competent to coercively control what you shall invent, discover, or create, what the hours of your labor shall be, what wage you shall receive, what and with whom you shall associate and exchange? Is not my incompetence demonstrably apparent in this simplest of all societies?

  “Now, let us shift from the simple situation to a more complex society—to all the people in this room. What would you think of my competence to coercively control their creative actions? Or, let us contemplate a really complex situation—the 188,000,000 people of this nation (Editor’s note: now, in 2015, about 320 mil
lion). If I were to suggest that I should take over the management of their lives and their billions of exchanges, you would think me the victim of hallucinations. Is it not obvious that the more complex an economy, the more certainly will governmental control of productive effort exert a retarding influence? Obviously, the more complex our economy, the more we should rely on the miraculous, self-adapting processes of men acting freely. No mind of man nor any combination of minds can even envision, let alone intelligently control, the countless human energy exchanges in a simple society, to say nothing of a complex one.”

  It is unlikely that the college president will raise that question again.

  While exposing fallacies can be likened to beating out brush fires endlessly, the exercise is nonetheless self-improving as well as useful—in the sense that rear guard actions are useful. Further, one’s ability to expose fallacies—a negative tactic—appears to be a necessary preface to influentially accenting the positive. Unless a person can demonstrate competence at exploding socialistic error, he is not likely to gain wide audiences for his views about the wonders wrought by men who are free.

  Of all the errors heard in classrooms or elsewhere, there is not one that cannot be simply explained away. We only need to put our minds to it. The Foundation for Economic Education seeks to help those who would expose fallacies and accent the merits of freedom. The more who outdo us in rendering this kind of help, the better.

  (Editor’s Note: This was the first chapter in the first edition of Clichés of Socialism when it appeared in 1962. Though the “complexity requires control” fallacy is not publicly expressed so boldly today, it is still implicit in the core assumptions of modern progressivism. Almost every new innovation gives rise to some call from some progressive somewhere to regulate it, monitor it, and sometimes even ban it. Rarely will a progressive reject new assignments for government, even though government has already assumed so many assignments that it manages poorly (and at a financial loss). It behooves us to point out that the more government attempts to control, the less well it will perform all of its duties, including the essential ones. Leonard Read passed away in 1983 but his wisdom as expressed here still resonates.)