Saturday, August 08, 2009

Replies to Readers of My Article on the Real Right to Medical Care

From a reader in Cambridge, ON, Canada:
RE:The Real Right To Medical Care....

[T]hanks for the fantastic article on real medical care vs. socialized
medicine. I am writing this email because I am a young Canadian who has a socialized medical system. While I cannot argue your logic for a true free market medical care system, I did finish your piece feeling like there is one hole. Not to say the idea is flawed, by no means, but if individuals have a right to life, and had an illness that was fatal if not treated but could not afford said treatment, where does that leave doctors? You mention charity, and I'm sure to a degree that would exist, but if you were a practicing medical doctor, and knew you could save a life with a simple procedure, how many could you turn away based on cost? While I wholeheartedly agree with the principles you outline in your piece, I found it fascinating, I did get the sense that the issue was not broached for that reason. Now I realize this may only be a small percentage of the population in a truly free market, but a life is a life at the end of the day. I hope you find the time for at least a modest response, if I somehow missed you stating said circumstance in your piece, please simply direct me to said section.

Dear Reader:

Thank you for your note. The right to life is not a right to be kept alive by other people, against their will. If there were such a right, then you and I and everyone else not in poverty would have to be devoting our lives to keeping alive countless numbers of impoverished people all over the world. To the contrary, paraphrasing Ayn Rand, the right to life is the right of an individual to take all of the [peaceful, non-coercive] actions that sustain and promote his life. This understanding of the right to life is incompatible with the notion of people having a right to be kept alive at others’ expense.

Of course, people may wish to give to charity within the limit of their perceiving that doing so enhances their own lives. The funds raised through charity together with the time doctors were willing to provide to charity patients would undoubtedly be concentrated on cases in which all that was necessary were relatively simple, inexpensive procedures that would save life or limb. But this cannot be a solution for all those medical problems requiring more complex and costly treatments that are beyond the means of patients and of the willingness and ability of people to provide charity.

What the solution for these medical problems is, is economic progress, which continuously improves medical care and makes it less and less expensive, while at the same times making practically all other goods and services better and less expensive as well, thereby freeing up more income to be spent on medical care if necessary. The foundation of economic progress, of course, is individual freedom and capitalism.

Always, however, there will be some people who will die because still more and better care, that others might have provided, was beyond their reach. There is simply no way to avoid this. It’s an aspect of the fact that man is mortal.

Trying to avoid it by compelling everyone to devote his life to keeping other people alive, beyond his perception of the personal, value to his own life of doing so, destroys the incentives to produce and advance, and thus ultimately does no good to anyone.

Because of this destruction, attempts to enforce such an obligation always stop short after a time. In fact, this is what we are seeing right now in the United States in the proposed roll backs in Medicare and denial of treatment to the elderly. It’s what already has taken place in Great Britain, and, I believe, in Canada and everywhere else that medical care has been collectivized long enough.

The government simply lacks the means to provide everyone with unlimited medical care. Eventually, it has to impose limits. But its limits entail depriving people of medical care who could have afforded it, if left free to use their own resources for that purpose. Its limits entail aborting further progress in medical in order to hold down the cost of operating its collectivized system.

There are two sorts of limits to medical care. One is reality, which encompasses the state of scientific and technological knowledge, the state of capital accumulation, the resulting productivity of labor, and the relative performance of different individuals cooperating together under economic competition and the pursuit of individual self-interest. Under capitalism, as the result of the pursuit of self-interest and competition, this limit is continually pushed outward and the level of care for everyone continually improves. (See my book Capitalism, chap. 9, for further discussion of this.)

The other kind of limit to medical care is arbitrary government fiat. The government takes over medical care and it decides who is to receive care and to what extent. Under government control, the limit to medical care tends to be frozen, indeed, declining. Progress in medical care is largely prohibited as a threat to the government’s budget and decline accompanies the coming to the fore of doctors who are content to be mere tools of government policy; it also accompanies the general economic decline that results from related government policies that are hostile to capital accumulation and economic efficiency.

There’s undoubted more to be said. But I hope that these remarks serve to address the matters you raised.

George Reisman

From a reader in Perth, Western Australia
Subject: stupid Samaritan patsy

"It should be obvious that such an arrangement entails the utter perversion of the right to medical care."

Dear Dr Reisman,

I find it astounding that a man who can write some many thousands of words on a topic, in apparently grammatically good English, can have the whole concept so wrong.
Altruism, empathy - those are the core concepts of society, not the market place. Health care is part of the altruistic nature of society, and it arose not out of purely commercial needs, it arose because most people on this planet have empathy for those who are sick, those who are unwell. People form collective societies for exactly that reason, to share the common burdens and chance misfortunes in life equally and fairly between those can and those who can't afford it.

I assume you are basically an anarchist with your attitude. All people are free from obligations to any other person, no matter what their circumstances. Hence the idea of Government to provide common services is unnecessary. I guess you probably believe that education should also be a purely commercial domain as well.

It scares me that you may have been teaching these attitudes to your economics students, the world is a poorer place if you have done so. Did you ever lecture or write on the economics of altruism or is it so far away from your moral centre that you can't understand the concept?

You are one of the people who left the man in the ditch for the stupid Samaritan patsy to come along and waste his good economic resources of food, water and labour on the man who for no reason of his own was in dire needs.

Your attitude may seem intellectually clever, put it is morally poor.

As a contrast, here in Australia we have fine collective system of medical care that works extremely well for the citizens of Australia. It is affordable, and we have better health care than the USA.

So, Dr Reisman, I think you need to look at the poor, the unemployed, those born with impediments such as lower intelligence, mental or physical disabilities and try to apply your huge mind to putting yourself into their position. It is probably difficult for you to do so, but should you be successful, you will hopefully feel remorse for your shockingly selfish position on health care.

Dear Reader:

Altruism is a philosophy of misery, suffering, poverty, and the hatred of man for man. It is the philosophy that ruled the Dark Ages and underlay such accompaniments as the Iron Maiden, the rack, and burning people alive at the stake.

Civilization is founded on the philosophy of egoism and recognition of the individual's right to the pursuit of his own, selfish happiness and the corollary recognition that the means of accomplishing this is voluntary, peaceful social cooperation under the division of labor. The gains from the division of labor give to each individual a rational self-interest in the existence of other people and in their individual freedom and right to the pursuit of their own happiness. This is the arrangement that progressively increases the supply of goods and services and improves life for everyone. (For elaboration, see Ludwig von Mises's
Socialism and my Capitalism.)

Under this arrangement—i.e., capitalism—the individual comes to regard other people with benevolence, because their existence improves his existence. In such conditions, people are prepared, within limits, to help others who suffer through no fault of their own. Thus, they help victims of earthquakes, floods, and all other natural disasters. They help people who cannot help themselves, including those who are stuck in a ditch. But that is not their primary goal or, as a rule, a major goal. It is secondary and rests upon their pursuit of their own happiness.

In contrast, when altruism prevails, each individual must regard all other individuals as a source of loss and misery. Their existence is a constant claim against his wealth and time and thus against his ability to enjoy his life. In such circumstances, the individual easily reaches the conclusion that he would be better off if those others did not exist. He would then be free of the burdens they impose.

Historically, the United States was characterized by the individual’s freedom to pursue his own happiness (a basic right enumerated in our Declaration of Independence). Thus, not surprisingly, it was also known for the goodwill and benevolence of its citizens. In contrast, the Dark Ages and the Soviet Union, two leading exemplars of altruism, were known for their hatred and barbaric treatment of human beings. What results from the prevalence of altruism is conveyed in a widely told story in the Soviet Union. It was the story of the Russian who is asked by God to wish for something that he would like God to do for him, on the understanding that whatever God does for him, he will do twice as much for his neighbor. After hearing this offer, the Russian asks that God pluck out one of his eyes, so that his neighbor can lose both eyes. (The story was reported by Hedrick Smith, in his book The New Russians, New York: Random House, 1990, p. 204.)

So much for altruism.

George Reisman

P. S. For elaboration on the contrasting natures of egoism and altruism, see the writings of Ayn Rand, in particular, Atlas Shrugged and The Virtue of Selfishness.

P.P.S. Concerning education, I believe that it should be stricly private. Schools would be legally free to operate on a commercial or non-commercial basis, as they chose. Individual would be free to support non-commercial schools and to provide scholarships for students attending for-profit schools. The main thing is that the government should not be allowed to attempt to improve students' minds on a foundation of pointing a gun at anyone's head, such as unwilling taxpayers, unwilling parents, and unwilling students.

Finally, I am not an anarchist but a supporter of government that is limited to the defense of the rights of the individual against the initiation of physical force, including fraud.

*George Reisman's replies to readers are copyright © 2009, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. He is also a Senior Fellow at the Goldwater Institute. His web site is and his blog is A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title Capitalism: A Treatise on Economics and then saving the file when it appears on the screen. The book provides an in-depth, comprehensive treatment of the material discussed in this post and of practically all related aspects of economics.

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Saturday, February 07, 2009

New York Times Columnist Maureen Dowd Wants Soviet-Style Show Trials with Capitalist Defendants in Shackles

New York Times columnist Maureen Dowd has written a column (January 28, 2009) full of withering hatred and contempt for many of today’s most prominent businessmen, first and foremost the heads of the Wall Street Banks. She singles out Citigroup and Merrill Lynch in particular, denouncing the first for going ahead with taking delivery of a $50 million luxury jet at the very time the firm was losing billions, and the last CEO of the second, John Thain, for spending $1 million to redecorate his office, also in the midst of his firm’s suffering major losses.

Her column leaves the reader with a view of these people and, by implication, of practically the whole economic class to which they belong, i.e., virtually all businessmen and capitalists, as having a mentality that combines the worst features of Marie Antoinette and Nero. The former, of course, was Queen of France until 1793, when she was beheaded. She is famous for allegedly having said in response to being informed of the peasantry’s lack of bread, “Let them eat cake.” And Nero was the Roman emperor who is known for having fiddled while Rome burned, and who died in 68 AD, committing suicide when he learned that the Roman Senate had ordered that he be flogged to death.

Having led her readers to such an assessment of these people, she concludes her column with the declaration, “Bring on the shackles. Let the show trials begin.” If they do begin, Dowd will be there, perhaps with knitting needles, in the role of a modern-day Madame Defarge, the Dickens character who knitted while watching aristocrats being guillotined during the French Revolution.

The day after Dowd’s column appeared, a news story in The Times reported that, “Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year. That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.”

The day after that, President Obama called the bonuses “shameful.”

The Fate of Capitalism

It is very easy to interpret the kind of facts that have been described, as an indictment of the capitalist system, which is exactly how they are being interpreted. Millions of people have lost their jobs; millions more fear that they will lose theirs. These millions cannot avoid the further fear that they and their families will be utterly impoverished. And they are being led to blame their losses on capitalism, in large part by being led to blame it on the persons of individual businessmen or capitalists whom they perceive as hateful.

What is present and being inflamed is the psychology of an angry mob. Its sympathies are with innocent victims who have suffered a great wrong. It’s sure it knows who is responsible and how. The next step will be for someone to yell, “Get a rope!”

Already, businessmen and capitalists are starting to cower in fear. Corporations are racing to get rid of their private jets. Next it will be their private dining rooms and limousines. Private profit and personal luxury at any level are in danger before the onslaught of a collectivist mentality that holds that if many are suffering, all must suffer, and, further, that those who do not suffer are responsible for the suffering of those who do. Anyone whose head is above the crowd will risk being a target.

This is the time for everyone to recall whatever instances in his life that he remembers when angry mobs turned out to be wrong. Perhaps it’s only a scene from a movie or book, in which someone is able to present a few facts that the mob doesn’t know and that begin to place things in a different, calmer light. Let me be that someone now and begin with one very important and fundamental relevant fact.

Today’s Economic System Is A “Mixed Economy,” Not Laissez-Faire Capitalism

And that is that even if all of the facts as presented were absolutely true, it would not imply any reason whatever to condemn capitalism. Capitalism is a system in which absurd, self-destructive behavior severely punishes whoever is guilty of it. Such people suffer losses, go bankrupt, and lose their ability to have significant further economic influence. Their example then serves as a lesson to others to avoid such behavior.

However, we are very far from having capitalism today, certainly not capitalism in its logically consistent form of laissez-faire capitalism. What we have today is a “mixed economy,” that is, a severely hampered, distorted form of capitalism. In such a system, such behavior can continue, thanks to government subsidies, grants of monopoly privilege and suppression of competition, and now by means of government “bailouts.”

A mixed economy is an economy which remains capitalistic in its basic structure, but in which the government extensively intervenes with the initiation of physical force to compel actions that are against the interest of individuals and/or to prohibit actions that are in the interest of individuals. For example, today it compels people to pay an income tax, which is against their interest but which they pay in order to stay out of jail. It also prohibits them from engaging in various business mergers or paying wages below a certain amount, things which it would be to their interest to do but now do not, because they wish to avoid being fined or imprisoned. (In my recent article
“The Myth that Laissez Faire Is Responsible for Our Financial Crisis,” I present an extensive description of the extent of government intervention.)

A mixed economy lacks the fundamental moral-political principles that are needed to determine what is proper or improper for a government to do. Its only principle, if one can call it that, is that the government can do anything that enough people believe will accomplish what they think is “good,” according to an undefined standard. Our mixed economy rests on the effective discarding of the United States Constitution, which placed severe limits on government power and thus stood as a bulwark in defense of an economic system that was almost one of laissez-faire. The Constitutional protections were discarded by a process of pretending that the Constitution could somehow “grow” or “evolve,” which actually meant nothing other than choosing to ignore it.

In a mixed economy, every significant-sized business must fear what the government can do to it. It needs protection, in the form of political connections. It secures these through appointing former government officials to its board of directors, paying such officials lavish consulting fees, and giving lavish campaign contributions to candidates for public office. In these ways it buys the protection it needs.

But soon businesses learn that their protectors can also be used to gain lucrative government contracts, government subsidies, and monopolistic privileges ranging from tariffs and licensing laws to antitrust suits against competitors. Thus, it is not long before the upper echelons of large firms become populated not only with men who cower before the government but also with those who seek to manipulate the government to their advantage, which is where we are today.

Certainly not all big businessmen are this way, and probably only a few of those that are, are so through and through. For the most part, they still have real jobs to do in running their companies, and to the extent they simply do those jobs, they are productive. But probably most big businessmen are morally compromised if only because they must live in fear of the government and are helpless to do anything about it.

Responsibility for the Financial Crisis

There is a sense in which an important sub-group of businessmen does have genuine responsibility for the present economic crisis and for all previous crises of financial contraction and deflation. This is the sub-group of commercial bankers.

Ironically, the way in which they have been responsible is by means of doing something that almost everyone very much wants them to do, above all, the government, and even when the crisis comes, still wants them to do or to get back to doing as soon as possible. This something is the practice of credit expansion. Credit expansion is the lending out of new and additional money that is created out of thin air, with the encouragement and support of the government. Governments value and encourage credit expansion both in the mistaken belief that it is a source of prosperity and in the knowledge that it is a ready source of money to finance government spending.

Credit expansion is what creates a delusion of prosperity while it lasts and economic depression when it ends. It is all that needs to be stopped to end the boom-bust cycle. (In this brief article, I must ask the reader who wants to understand the process, and how to stop it, to be content merely with references to further reading, namely, Chapters XX and XXXI of Ludwig von Mises’s
Human Action and Chapters 12 and 19 of my own Capitalism: A Treatise on Economics. Concerning the role of credit expansion in our present crisis in particular, please see my articles “The Myth that Laissez Faire Is Responsible for Our Financial Crisis,” “Our Financial House of Cards and How to Start Replacing It With Solid Gold,” and “The Housing Bubble and the Credit Crunch.”)

I want now to deal with the subjects of bonuses and corporate jets.


Granting bonuses to employees and buying jet planes are perfectly legitimate for private business firms. In today’s context, this means firms that have not received government bailout money.

Giving bonuses and buying jet planes are purely business decisions. It’s only a question of whether the bonuses motivate the employees who receive them to bring in profits to the firm that are greater than the bonuses paid, or not. If the answer is yes, then it makes sense to pay the bonuses.

To the chief executive of a privately owned, non-taxpayer supported Wall Street firm, the payment of bonuses even in a year of calamitous losses may appear as still making economic sense, at least if the firm expects to stay in business. This is because the bonuses are not paid to people who have incurred the firm’s losses. Those losses are in the assets the firm owns. They are not in its day-to-day trading operations, which may continue to be profitable.

The situation is analogous to that of a retail chain which has had massive losses because of such things as fire or hurricane damage to its warehouses, but whose stores are still making money. The Wall Street firm is still executing customers’ orders in buying and selling securities, it is still trading in currencies and in the futures markets, and still arranging mergers and acquisitions, and divestitures and breakups. All of these aspects of its business may well still be profitable.

The brokers and traders, the mortgage and acquisition specialists et al., and their various assistants and supporting staffs, have contributed very substantially to these operating profits. The same is true of many of the economic and financial researchers and analysts that the firm employs in connection with its still profitable operations. Money is set aside out of the year-end totals to pay bonuses to the members of such groups, based on their respective individual profitability. The bonuses are accumulated employee compensation, similar in nature to the commissions paid to retail sales clerks. If the firm expects to be in business in the following year, and wants to retain the services of these employees, who, despite the firm’s massive losses in its accumulated assets, have performed well, it probably needs to pay them their bonuses.

John Thain, the then president of Merrill Lynch tried to explain this fact to an interviewer, when he said, “If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.

Ms. Dowd apparently does not know the difference between an operating profit and a balance-sheet loss. She apparently does not know the difference between the due of a successful salesman in a retail-store and the due of someone whose actions have served to burn down the store’s warehouse. But she does know how to be furious. She responded to this explanation by exclaiming:

Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism.
Despite her ignorance and her collectivism-inspired refusal to draw distinctions between individuals and their respective individual performances and responsibilities, Ms. Dowd does have something of a point. Namely, if because of the bankruptcy and closing of many Wall Street firms, there should be a glut of brokers and traders et al., then the remaining Wall Street firms would be in a position to reduce their compensation. But that would be something they would typically announce before the fact, not after the fact of an agreed-upon compensation having been earned.


My discussion of bonuses was in the context of the operations of a privately owned business firm, not one that has to be financially supported by the government and is operated with funds provided by taxpayers. In awarding bonuses after Merrill Lynch’s receipt of government bailout money, which started in September of 2008, Mr. Thain did not realize that he was no longer in charge of a private firm. He did not realize what difference this made to the fundamental character of his firm. Neither did very many other people at the time. But more on this later.

Corporate Jets

I turn now to the subject of corporate jets.

If a corporation can afford to buy a jet and having it will enable extremely high-paid executives to avoid wasting time waiting at airports and be able to be more efficient in working in the time spent in flight, then over time its purchase may actually save more money than it costs. If so, then it will be a good business decision to buy the plane.

It may even be a good business decision to buy it, if the executives who fly in it simply prefer it because it’s more comfortable and enjoyable. In such a case, even if the plane saves nothing in costs or not enough to justify its purchase, it can still make good economic sense for the firm to buy the plane. This will be the case if it is in a position to reduce the compensation paid to the executives in question by as much or more than the amount that it must expend for their personal benefit.

Thus, for example, if the plane falls short of covering its cost through increased productivity on the part of the executives by, say, $1 million per year, the firm will have the benefit of more satisfied executives at absolutely no net cost to itself, if it gets the executives to accept $1million less per year in monetary compensation. In that way, it is the executives who effectively bear the cost of the plane that is otherwise uncovered. And the firm will have whatever indirect monetary gains that may result from better satisfied executives.

Indeed, to the extent that the executives are willing to forgo an amount of compensation that is greater than what is required to cover any otherwise uncovered cost of the plane, the firm has a clear saving in monetary terms. Thus, if the executives can be paid $2 million less per year, while the otherwise uncovered part of the cost of the plane is still $1 million, the firm has a monetary saving of $1 million per year by buying the plane. (Today’s tax laws work in this direction. The replacement of $1 million in monetary compensation with $1 million in indirect compensation, serves to reduce the executives’ after-tax monetary compensation by perhaps as little as $500 thousand, while saving the corporation the full $1 million.)

Situations such as this actually occur all the time, throughout business. Again and again, firms provide fringe benefits that are of value to their employees but which do not cover their cost through increased productivity. They are motivated to provide them by being able to save more in what they would otherwise have to pay the employees in take-home wages than the cost of the fringe benefits.

For example, imagine the situation of employees having to choose between two employers. One of them provides air conditioning. The other does not. In the heat of summer, it is a comparative pleasure to work for the one, and extremely uncomfortable to work for the other. If the employees can earn $1,000 per week by working for the employer who provides air conditioning, and they value that air conditioning sufficiently, then in order to be induced to work for the second employer, they might require a wage of $1,100 per week. If that second employer can provide air conditioning at a cost to himself of, say, $10 per worker per week, then he will save $90 per worker per week if he provides it. Because in that case, he can obtain his workers for a take-home wage of $1,000 plus an air-conditioning cost of $10, instead of for a take-home wage of $1,100 plus no cost on account of air conditioning. Obviously, such conditions compel the employer to provide air conditioning. It is his recognition of such conditions that led the first employer to provide air conditioning to begin with, i.e., simply because employees value having it far more than the reduction in their take-home wages that is needed to pay for it.

This discussion has application to the $1 million office remodeling that so offended Ms. Dowd. Please keep in mind that the remodeling was commissioned in late 2007, when the executive in question started his position. At that time, Merrill Lynch had not yet received any government money and was thus still a fully privately owned company. The executive in question, John Thain, was a man in charge of the use of hundreds of billions of dollars of capital. And, therefore, if he was indeed the right man for the job, which is certainly what was hoped, was easily entitled to compensation at least as far into double-digit millions as that paid to Hollywood movie stars and leading athletes.

With this many millions in compensation, the value to him of $1 million more or less, may not have been terribly great. (Hollywood stars have weddings that cost more.) It may well have been far below the value he attached to spending his hours of working time in an office that was made to personally please him in every possible respect, and which he may have expected to occupy for many years. In such a case, instead of his firm paying him however many millions it otherwise would have paid him, it could pay him a million dollars less, or even more than a million dollars less. In that case, it was he who bore the cost of the office, out of compensation to which, in the judgment of the parties concerned, he was entitled.

Alternatively, it’s entirely reasonable that providing such an office and the optimum working environment that it provided, could be expected to improve his efficiency with respect to deciding the pattern of investment of his firm’s hundreds of billions of dollars of assets. It would not have taken a great deal of such improvement with respect to the use of sums so vast to be able to earn an additional billion or more of profit for his firm. Understanding this, the firm may well have given him his office in the belief that doing so would add vastly more to its profits than the cost of the remodeling.

When Ms. Dowd discussed this million-dollar office remodeling, her reaction was one of incredulity, outrage, and utter contempt. Here’s what she said (referring to an interviewer of the executive):

Bartiromo pressed: What was wrong with the office of his predecessor, Stanley O’Neal?

‘Well — his office was very different — than — the — the general décor of — Merrill’s offices,’ Thain replied. ‘It really would have been — very difficult — for — me to use it in the form that it was in.’
Dowd then asked in a triumph akin to that of crushing a cockroach:

Did it have a desk and a phone?
I can’t help wondering, if when Dowd may need a surgical operation someday, she will be satisfied if her surgeon has a table and a knife.


Government bailouts put everything in a different light. They give everyone in the country the right to second guess every decision of the firms that have received the bailouts, on the grounds that the money used by those firms is theirs, the taxpayers.

Understandably, the taxpayers become furious about things like bonuses, corporate jets, and expensive office remodelings. They see themselves simply as being made to pay for these things. This is because, unlike the shareholders of a private company, the taxpayers will never have any possible financial benefit even if the expenditures might actually be perfectly reasonable and well made if they took place in the context of a privately owned company. And unlike the shareholders of a private company, they were never given a choice about whether or not they wanted their funds to be turned over to this or that company. Their funds were simply seized in order that others might have the means with which to pay bonuses and financially profit from and/or personally enjoy such things as corporate jets and expensive offices.

Bailouts represent a collision between two incompatible modes of operation—between what Mises calls “profit management” and “bureaucratic management.” That is, they represent a collision between operation according to the principle of striving to make profits and avoid losses, which characterizes private business, and operation according to the dictates of rules and regulations, which characterizes government.

The companies bailed out expected to go on operating as private businesses, but with government money. That’s how the bailouts were advertised. But that is impossible.

Once government money enters the picture, the firms are effectively nationalized, even though the outward guise and appearance of private ownership may remain. This is because their operations are no longer based on profit-and-loss considerations but on satisfying the government and whatever sectors of public opinion are loud enough at the moment to influence the government’s decisions.

What precise actions the government will take are unclear at the moment and appear contradictory. For example, the front-page lead article of The New York Times of February 5, 2009 carries the headline “Executive Pay Limits Seek to Alter Corporate Culture,” followed by the subhead, “Obama Announces a $500,000 Cash Cap at Companies Getting Future Aid.”

Nevertheless, a careful reading of the article shows that $500,000 is a limit only on annual salary. Payment of stock options will still be possible, but they will not be able to be exercised until all of the company’s debt to the government is repaid. Even the limit on annual salary appears to be not very firm. In most cases, it can apparently be waived by means of a “nonbinding shareholder vote.”

The article declares,

Even the new rules allow companies some leeway. While giving shareholders a say in bonuses above the cap and restricting when stock incentives can be cashed in, the rules do not place limits on the size of such awards, which have become the biggest part of many compensation packages. In addition, the toughest new rules apply only to large companies seeking government assistance to survive…. And companies that seek aid but do not need exceptional government assistance can waive the $500,000 pay cap, as long as they submit their executive pay policies to a nonbinding shareholder vote.
Very significantly, the article notes that

The rules would not prohibit a lower-level executive, like a stock trader or investment banker, from continuing to receive tens of millions of dollars in pay. (My italics.)
If this last is true, then one must wonder exactly what the brouhaha about bonuses was all about in the first place. Because, with this last provision, they appear to be back in, almost in full force.

The current version of the proposed pay caps is clearly contradictory and bound to disappoint Wall Street’s critics. It reads like a compromise forged of a competition between whose lobbyists could get to which politicos with the largest bribes or greatest threats first. At this point, there is no telling what the final proposal will look like. The Times’s article notes that “Officials also emphasized that several of the proposals would not be made final until after public comments had been considered.”

What would be required to satisfy the rhetoric of Wall Street’s critics would be the total abolition of bonuses and a maximum limit on total executive compensation in the nationalized firms to $500,000 for any one individual. That, of course, would mean the destruction of the nationalized firms as viable institutions.

With such a level of compensation, further discussion of such things as corporate jets and expensive office remodelings would disappear, at least as far as the nationalized firms were concerned. This is because the low pay ceilings on executive salaries, and thus the kind of low quality executives likely to be attracted, would eliminate the context in which an economic calculation could justify the purchase of a jet or an expensive office remodeling.

Executives whose salaries are limited to $500,000 are not going to be able to afford to accept the kind of reduction in take-home wages that would be necessary to cover any significant part of the cost of providing a jet or an expensive office remodeling. Nor is any enhanced productivity of such executives likely to be great enough to justify the cost. The head of a government controlled firm may inherit a luxurious office but all that he can afford or that can be afforded on his behalf is not very much more than a desk and a phone—and volumes of rules and regulations that he can consult and scrupulously follow, in order to be able to prove that whatever losses may strike his firm were not his fault.

But the destruction of bailouts is not limited to the crippling of the firms that are bailed out. It also taints the operations of the firms that are operating without bailouts. As already pointed out, they too have given up their jets and are keeping their heads down, despite the fact that economic rationality implies that they should keep their jets. They have been cowed by a raging hostility toward capitalism and wealth.


I quote the words of a prominent New York Times reporter, who sees the facts of the situation, even describes some that I omitted, and yet approves of what has happened. He writes:

When you get right down to it, the purchase of a new plane or an office renovation is pretty meaningless for companies as large as Citigroup or Bank of America [Merrill Lynch is now part of Bank of America]. It’s not unheard of for executives to spend $1 million or more on remodeling when they get the corner office. It’s pocket change. And companies can usually make a halfway decent business case to justify a new airplane. (It goes longer distances than older planes, can take more executives to meetings, allows the top brass to be more efficient and productive, etc., etc.) The question of whether bailout money was used to pay for these perks — as alleged by The New York Post, which broke the Citi airplane story — is, at best, ambiguous. Indeed, breaking the airplane contract and sending the jet back to the manufacturer will probably
cost the bank more than keeping the plane. None of that matters. You could make the same argument about the auto executives who flew on corporate jets when they came to Washington to ask Congress for help: surely, it was a better use of their time to fly rather than drive from Detroit, as they did the second time around, after being spanked for taking the jets. That didn’t matter either. What matters is the symbolism. At a time when the country is in such trouble — and executives are asking for bailouts — anything that smacks of plutocracy is going to arouse justifiable populist anger. (Joe Nocera, “It’s Not the Bonus Money. It’s the Principle,” New York Times, January 31, 2009, p. B1. My italics.)
So here we have it. What the outrage is really all about is the hatred of great wealth and its possessors. The goal is to attack them in the name of an alleged duty of the individual to sacrifice his wealth, pleasure, and enjoyment, and ultimately his life, for the benefit of others less fortunate. Seen in this light, the furor raised about corporate jets, office remodelings, and the like is understandable. It is the kind of symbolism appropriate to a campaign on behalf of self-sacrifice and against the pursuit of happiness.

In sharpest contrast and opposition to the philosophy of self-sacrifice and to the role of government as the enforcer of sacrifice, stand these famous lines:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men….
These words are from the Declaration of Independence, which is the founding document of the United States. Their meaning is that the United States was established for the purpose of securing the right of the individual to pursue his own happiness, which includes material prosperity. In the United States, the individual and his rights are supreme. Government exists only in a subordinate role, that of a servant dedicated to protecting and securing the individual and his rights from the aggression of common criminals at home and of despots abroad.

What symbolism would be appropriate to this conception of the relationship between the citizens and their government? How would it differ from the present such symbolism?

The present symbolism depicting the relationship between the government and the citizen is that the head of the government, the President of the United States, has at his disposal, with no objection from anyone, Air Force One, which is a Boeing 747 jet plane that costs hundreds of millions of dollars and, when configured for commercial operation, carries more than 450 passengers. At the same time, howls of anger and fury go up when one of the largest private corporations in the country dares to order a 12-seat jet plane for $50 million.

The acceptance of this relationship symbolizes the total reversal of the relationship between government and citizen that the founding of our country was intended to establish and maintain. The symbolism appropriate to that relationship would be that while private citizens are free to fly in 747s, or Lunar Landers for that matter, depending only on how successful is their individual pursuit of happiness, the President of the country, who is merely the chief night watchman of the nation, and is its servant, is consigned to a 12-seater jet.

Of course, this is not to begrudge the President of the United States the use of a 747 in today’s world, in which he may require such a plane merely in order to have necessary means of communication at his disposal. But it is to remind all those seeking to deify the government and raise it above the citizens, that they are encouraging a servant to forget his place and to become the master of those whom it is his duty to serve.

Copyright © 2009, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. He is also a Senior Fellow at the Goldwater Institute. His web site is and his blog is A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title, above, and then saving the file when it appears on the screen. The book provides further, in-depth treatment of the substantive material discussed in this article and of practically all related aspects of economics.

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Friday, November 28, 2008

Why We MUST Invoke Our Individual Rights—Now, By Gen LaGreca

America today is a nation in trouble. The great fortress of liberty, the country of the most productive, prosperous, and happy people in the world, is now in grave danger. America is under siege by the Dark Side, the forces of statism, while its Knights of Liberty are disarmed, demoralized, and suffering near-fatal wounds.

The country that once elected leaders whose ideas upheld liberty now elects leaders whose sweet-sounding platitudes and woozy promises are all that is required, and whose actual, dangerous ideas need not be examined until after Election Day.

The country that defended property rights now seizes 40-percent of our income in a myriad of taxes imposed by all levels of government—with even larger levies on incomes, profits, investments, and savings on the horizon.

The country that championed capitalism now vilifies our industries, cripples them with regulations, seizes their profits, then declares that the free market has failed and government must take over.

The country that made possible the great industrial titans—the Henry Fords, Thomas Edisons, and others whose productive genius moved mankind forward—now thinks that government can run things better, and that government should own, operate, and finance our corporations, deciding which will survive and which will die, creating a new kind of soup kitchen where emaciated companies stand in a bread-line waiting for their bailout.

The country that protected the individual now protects polar bears, spotted owls, caribou, and the wilderness at the expense of human life.

The country that fought a revolution to end the abuse of power now elects politicians who wallow in power like hippos in mud, such as members of congressional subcommittees who hold hearings threatening the prosperity or very existence of American business firms, and then let the hearings end with little or no result when the hapless firms make sufficient contributions to the reelection campaigns of the congressmen.

The country of the American eagle, flying proud and free, now pens its people up like chickens in a coop, waiting to feed at the welfare state’s trough.

America is a nation whose government is on the ascent and whose people, consequently, are on the descent.

What can explain our alarming plunge into statism? At the dawn of our country we held a powerful weapon to fight our first battle for liberty, an ideological weapon that emboldened an upstart group of colonists, against all odds, to topple the British Goliath and to ignite a firestorm of liberty that in time led to the abolition of slavery, the suffrage of women, and the spread of freedom around the globe. What ideal ushered in a glorious new age for mankind?

This year’s award-winning mini-series on HBO, “John Adams,” captures the answer. It portrays the moment when Adams reads the stirring document that is the soul of the new nation, the Declaration of Independence, and exclaims to its author, Thomas Jefferson: “This is not only a declaration of our independence, but of the rights of all men!”

The weapon that toppled a king and transformed the world, America’s shining sword, was the doctrine of individual rights.

Our Founding Fathers were imbued with the spirit of the Enlightenment, with the glory, power, and moral rightness of the individual unshackled and free. America’s great distinction is that it reined in government to unleash individual liberty.

The result was amazing. America triggered an explosion of scientific and industrial advancement and a standard of living unmatched in history. The American Dream became the worldwide symbol of boundless opportunity and achievement. A great civilization arose, a country of confident, resourceful, hard-working, wealth-creating, and life-loving people.

All of this rested on a bedrock of liberty—on a government that protected the rights of the individual.

But things changed. The doctrine of individual rights was not always expressed unambiguously or applied consistently in our founding. Cracks in our armor, such as clauses in the Constitution allowing Congress to regulate interstate commerce and to promote the general welfare, gave the Dark Side of Statism an opening to enlarge government far beyond its original purpose.

And our enemies on the Dark Side got stronger as Western thought turned its back on the individual and his right to exist unencumbered by the state. Later thinkers claimed that a person must serve a purpose allegedly higher than his own life and happiness, a purpose dictated by the government. This notion led to communism and fascism. Sadly, it has now spread across America.

Barack Obama states in the Chicago Reader, “[I]ndividual actions, individual dreams, are not sufficient. We must unite in collective action, build collective institutions and organizations.” John McCain urges in his speeches that Americans serve “a national purpose that is greater than our individual interests.” Is there any fundamental difference between these exhortations of the candidates of our two major parties and that of the Nazi Party’s “the common good before the individual good”?

Today America has dropped its saber of individual rights. We stand disarmed and vulnerable to what could be fatal wounds to our liberty. This is why we urgently need to rediscover the meaning of our rights and rekindle our devotion to them. Then we must define a strategy for picking up our sword again, sharpening it, shining it, and using it adroitly to win the most important battle of our age, the battle to rescue our lives and liberty from the Dark Side of Statism. So, let us begin.

The Meaning of Our Individual Rights

The Declaration of Independence proclaims that our rights include “life, liberty, and the pursuit of happiness,” or as described in one state document, the 1784 Constitution of New Hampshire, our rights include “enjoying and defending life and liberty; acquiring, possessing, and protecting property; and in a word, of seeking and obtaining happiness.” What does this really mean? The following are ten characteristics of individual rights.

1. Our Rights are Unalienable
They are inherent in our nature as human beings. No government gives us our rights, and no government can take them away. In Jefferson’s Summary View of the Rights of British America, he states that free people claim their rights “as derived from the laws of nature, and not as the gift of their Chief Magistrate.” Exercising our rights is like breathing. We need not ask the government’s permission to breathe, nor to exercise our rights.

Remember this when you the hear statists like Mr. Obama say in a speech in Roseburg, Oregon: “We can’t drive our SUVs and eat as much as we want and keep our homes on 72 degrees . . . and then just expect that other countries are going to say okay.” How can we claim our unalienable rights if we can be prevented by the state from enjoying a standard of living that somehow offends another country?

2. Our Rights are Rights to Take Action
They are not entitlements to the free goods and services of other people. In a letter to Isaac Tiffany, Jefferson defines liberty as “unobstructed action according to our will within limits drawn around us by the equal rights of others.” This means we may work for the things we want. We may earn money and buy a house, but we may not
expect the government to seize taxpayers’ money to provide us with a house for free.

As James Madison said on the floor of our country’s newly formed Congress: “I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.” According to the Father of the Constitution, charity is a private matter. You may spend your own money to help your fellow man, but the state cannot seize your money and force you to be charitable. How can we fail to conclude that today’s entire welfare state and the redistribution of wealth fueling it are illegitimate and must be stopped?

3. The Pursuit of One’s Own Happiness is a Right
A person is not a pawn in the service of the state’s aims. When Hillary Clinton, echoing her party’s platform, declares in a San Francisco speech, “We’re going to take things away from you on behalf of the public good,” how can this mean anything other than her intention to seize your property and infringe on your happiness so that she and her party’s voting base can pursue their happiness at your expense?

4. The Majority Cannot Violate the Rights of the Individual
Because individual rights are unalienable, they are not subject to any majority vote. Our Founders were as suspicious of democracy, or unlimited majority rule, as they were of monarchy. In a letter to P.S. Dupont de Nemours, Jefferson states: “[T]he majority oppressing an individual is guilty of a crime . . . and by acting on the law of the strongest breaks up the foundations of society.” If you have a bigger bank account than your neighbors, they cannot steal your money and redistribute it among themselves. By the doctrine of individual rights, neither can the government. If Congress votes to increase your taxes to pay for a prescription drug plan for seniors, or a mortgage bailout for homeowners, it is telling you that a majority can rob you of your rights. When a neighborhood gang steals your money, you can call the police; but when the perpetrator is Congress, who can you turn to for help?

5. There are No Rights of Groups
Rights belong to individuals. If pizza eaters lobby Congress for a “right” to a free pizza every Thursday, and if Congress, out of concern for their nourishment or their votes, grants their wish, it acts illegitimately. There are no special rights of seniors, workers, farmers, women, minorities, people with blue eyes, left-handed people, etc.

The Founders tried to protect the individual not only from the tyranny of a monarch, but also from the control of what they called “factions,” i.e., special interest groups seeking government privileges and entitlements to benefit their members at the expense of other citizens. In the Federalist Papers, Number 10, Madison addresses the danger of a democracy bringing factions into power: “[S]uch democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property . . .” How can we fail to see how today’s Godzilla-like factions have invaded our country, crushing the individual under their massive feet? How can we fail to realize that today we have a government of the factions, by the factions, and for the factions?

6. Our Rights Include the Right to Property
Without property rights, no rights are possible. If the state can seize the fruits of your labor, doesn’t that make you “a laborer legally bound to and obliged to serve a master,” which is the definition of a serf? And if you are a business owner, with the state now regulating virtually every aspect of your enterprise, doesn’t that make you “someone whose actions are controlled by the will of others,” which is the definition of a puppet?

Consider Mr. Obama’s answer to the now-famous Joe the Plumber, who questioned the senator’s plan to tax him: “I think when you spread the wealth around, it's good for everybody.” How can it be clearer that Mr. Obama intends to punish success, seize the money of productive people, and give it away to those who haven’t earned it?

Does a rich person have less of a right to property than a poor one? John Adams writes in A Defense of the Constitutions of Government of the United States, “[I]t must be remembered that the rich are people just as well as the poor; that they have rights as well as others; that they have as clear and as sacred a right to their large property as others have to theirs which is smaller; that oppression to them is as possible and as wicked as to others.” By the doctrine of individual rights, how must we rate the endless schemes of today’s politicians to “tax the rich”? Doesn’t this seem like a pack of wolves and a few lambs deciding what to have for lunch?

And what are we to make of the recent YouTube-captured lament by U.S. congressman Jim Moran of Virginia, who says, “[W]e have been guided by a Republican administration who believes in this simplistic notion that people who have wealth are entitled to keep it and they have an antipathy towards the means of redistributing wealth”? Isn’t the loot-and-plunder agenda of the statists becoming more blatant than ever before? Is this the civilized society in which people’s rights have Constitutional protection?

7. Our Rights Include the Right to Intellectual and Spiritual Independence
Our rights rest on the fundamental freedom of every person to use his own mind, think for himself, form his own beliefs, and the liberty to act on these judgments. Jefferson’s Act for Establishing Religious Freedom in Virginia was an achievement he valued so highly that he had it acknowledged on his tombstone. This bill stopped the government’s practice of paying clergy with public funds because, in Jefferson’s words, “to compel a man to furnish . . . money for the propagation of opinions which he disbelieves is sinful and tyrannical.”

Jefferson fought for a “wall of separation between church and state” and was “against all maneuvers to bring about a legal ascendancy of one sect over another.” By the doctrine of individual rights, what must we conclude about today’s faith-based initiatives, which allocate public funds to religious organizations, and the attempts by religious lobbyists and elected officials to dictate public policy based on their faith? What must we conclude about the America-damning Chicago pastor, Jeremiah Wright, who, according to Fox News, received $15 million in federal grants for his organization? Why should people who disagree with his vile preaching be taxed to support Jeremiah Wright, or any other person or organization—religious or secular—whose beliefs, values, and causes they do not share?

Our right to intellectual freedom extends to all beliefs, be they in science, art, philosophy, or any other field, including politics. In an address to the Danbury Baptist Association, Jefferson makes clear that “the legislative powers of government reach actions only, and not opinions.”

With our newly elected Democratic Congress already planning to pass a law that will suppress commentators on talk-radio who oppose them, how can we fail to see the emboldened, Hugo Chavez-like force now being unleashed in the halls of our government? How can we fail to see that the statists’ euphemistically named “Fairness Doctrine” is really a “Censorship in America Doctrine”? How can we fail to realize that this vile scheme must be defeated before it takes away the most potent weapon we have in our fight, our sacred right to freedom of speech?

8 Our Rights Rest on Reason
People are capable of self-government because they possess reason. Says Jefferson in a letter to Peter Carr: “Fix reason firmly to her seat and call to her tribunal every fact, every opinion.” Our Founders expected people to use their own minds to control their own lives. For example, Jefferson gently chastised his teenage daughter, Martha, when she relied on her teacher’s help to read an ancient Roman history text. He wrote her in a letter: “If you always lean on your master, you will never be able to proceed without him. It is part of the American character to consider nothing as desperate—to surmount every difficulty . . . ” Contrast this call for self-sufficiency to today’s welfare state, which destroys our capacity to think and act for ourselves and transforms us into helpless dependents.

9. Our Rights are Violated Only by Force
Only acts of physical force or fraud violate our rights. In Jefferson’s Notes on Virginia he states: “The legitimate powers of government extend to such acts only as are injurious to others.” If I pick your pocket, break your leg, or breach a contract with you, then I violate your rights and the government can and must stop me.

But if I draw a cartoon that offends you, I haven’t violated your rights. If I make a windfall profit on Wall Street, I do not violate the rights of people who didn’t invest as I did. If I offer you a job at a wage lower than you would prefer, I haven’t violated your rights. You are free to seek a better job. However, the government certainly violates my rights if it compels me to hire you on terms I don’t accept. The peaceful economic and personal activities of private persons exercising their liberty do not violate the rights of others and cannot be abridged by the state.

10. Government’s Sole Job is to Protect Individual Rights
Wise government, explains Jefferson in his First Inaugural Address, “shall restrain men from injuring one another . . . shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.” And that’s it. That’s the whole of the job of government.

Bear this in mind when you consider Mr. Obama’s views on American government, given in an uncharacteristically candid 2001 interview with WBEZ radio in Chicago. He expresses regret that the Supreme Court “never entered into the issues of redistribution of wealth” because it “didn’t break free from the essential constraints that were placed by the Founding Fathers in the Constitution.” However, Mr. Obama sees a way around these Constitutional constraints: “[O]ne of the, I think, tragedies of the civil-rights movement . . . was a tendency to lose track of the political and community organizing activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributive change.” How are we to interpret this? Will pressure-group warfare and intimidation by community thugs be the means of bypassing the Constitution and bringing about the “major redistributive change” that Mr. Obama envisions? How can we not be alarmed by these statements? How can we not see that government today has become the greatest threat to our lives, liberty, and property?

Six Strategies for Using Individual Rights in the Fight for Freedom

To win the battle for freedom, we must invoke individual rights, and we must invoke them now, before it’s too late. The statists have become emboldened by their recent election victories; their ranks have degraded to include officials that talk like thugs; their attacks on our rights have become more open and virulent. This brings us to what could be a watershed moment in American history. We must invoke individual rights because they bring morality to our side, and the moral argument is the most powerful weapon of all. The person whose position stems from correct and compelling moral principles will win any argument, just as our Founders won their cause in establishing America. Let’s examine six strategies for employing individual rights in the fight for freedom. These six points will be formulated using the word RIGHTS, which, conveniently for us, contains six letters.

R = Reason with Moral Principles, Not Just Practicality
For example, consider the draft (and the same arguments would hold for other forms of obligatory “national service,” which Mr. Obama seems to be entertaining). When we periodically hear calls for a military draft, the friends of freedom often argue that a volunteer army is more efficient. This is true and definitely deserves to be said. However, giving only the bad consequence (the inefficiency) of an act of government usurpation without explaining why the policy is wrong in principle reduces the argument to a mere practical discussion of the effectiveness of different armies, with no pressing moral issue at stake to rally the public to one side or the other. If the statists can raise plausibility that the draft is efficient, then the friends of liberty have no leg to stand on.

Giving the practical argument from the inefficiency of a draft is like trying to walk with one leg. Adding the moral argument from individual rights gives us two legs—plus a spine. The argument from individual rights asserts that the draft is wrong because it represents involuntary servitude, i.e., it violates a person’s right to life and liberty. A person has the right to decide for himself what he wants to do with the precious years of his life. Government exists to protect that sacred right, not to violate it. A person is free to chose his employment, including a job with the government, especially one that could risk his life. It would be clearly tyrannical for the state to draft its public school teachers, police officers, or mail carriers against their will. How then can the government claim the power to compel someone to serve in the military?

Furthermore, the argument from rights strengthens the practical argument by giving the underlying reason why the draft is inefficient, namely, because people do not perform well when their rights are violated and they are working under compulsion.

The argument from rights deals a mortal blow to the statists. It elevates the issue from a technical matter of military efficiency to a moral issue involving nothing less than our fundamental Constitutional rights. The moral argument is unanswerable, unless you want to be on the side that violates individual rights. This is what we are aiming at—a moral crusade for the sanctity of individual rights as our answer to the statists.

I = Invoke Private Solutions to Life’s Problems
Living in a free society means that we citizens take care of ourselves, and we relish doing so. We’re Americans, the most resourceful people on earth. Each of us is master of our fate and captain of our soul, and that’s the glory of life. Because the nanny state destroys self-esteem and self-reliance, we need to help people discover that they can blow their noses without the nanny holding the handkerchief. Here are just a few self-help tips for living in a free society:

—If you don’t go to school and don’t work hard to get ahead, then don’t expect the same rewards as those who do. You haven’t earned them.

—If you default on a loan, lick your wounds and don’t make the same mistake again. But don’t expect the government to bail you out with money fleeced from taxpayers who pay their debts on time.

—If you want to develop a new enterprise, invention, or source of energy, then work for the removal of all government regulations standing in your way and convince private investors to support you, but don’t try to get a billion-dollar government boondoggle. Be an entrepreneur, not a leech.

—In short, don’t expect any free lunches. Everything worth having in life requires effort to obtain. And there are no guarantees. You can lose your job, your investments can fail, and your fiancé can leave you. Stop trying to use the government to shield you from life’s risks. Take the plunge and feel the tingle of life.

In fighting for freedom, hold people responsible for their own lives.

G = Get Behind Capitalism
We must defend the free market because it is the expression of our individual rights in the economic and material sphere of life. By pursuing profit, we further our lives and happiness. By engaging in economic activities unfettered by the government, we exercise our liberty. As Ayn Rand observed: “[A] free mind and a free market are corollaries.”

The Dark Side’s resentment of capitalism is unrelenting. Capitalism is to a socialist what a stake in the heart is to a vampire. It is the living proof of the power of freedom to create unlimited wealth and prosperity, without the need for power-hungry politicians to run things for us. This is why the Dark Side’s attacks on capitalism are so virulent, and why we must resoundingly defeat them.

For example, consider a CEO’s pay. The statists call for government to limit a CEO’s compensation. Friends of freedom explain that a company is unable to attract the best candidate for CEO with a salary lower than the person can obtain elsewhere. Furthermore, they explain, CEOs deserve their salaries because they bring additional revenue into the company that vastly surpasses their pay, revenue that expands the business, creates more jobs, increases wages of employees, and lowers prices for customers. This argument is crucial in educating the public on the remarkable benevolence of the free market and on its unmatched effectiveness in bringing prosperity to everyone. We need to disseminate this information in order to combat the countless misconceptions of capitalism and ignorance of economics that poison our culture.

But, we can’t stop there. We need to strengthen our case for capitalism by adding the argument from individual rights, which asserts the following: Any government regulation to cut a CEO’s pay sends a message to all Americans to beware. If you make too much, you’re no longer covered by the Constitution; your rights to your life and property are no longer protected; they’re subject to seizure by the police force of the state. Where would it stop? What about a baseball player, or a rock star, or a brilliant surgeon—are they too successful? Does their pay also need chopping by Congress? Will the government seize their livelihood and destroy the American Dream for them, too? CEOs are citizens, which means they have rights, including the right to accept any compensation offered to them. Would the government use its police power to cut the salary of a janitor? If the janitor is free to work for the highest possible salary he can get, then why would the Constitutional rights be different for a company executive? Why would the janitor’s rights be protected, but the CEO’s rights trampled?

The argument from rights shows how government tampering with anyone’s pay represents a tampering with the Constitution and bedrock of America.

H = Hammer the Government for Using Force Against Innocent Citizens
The more we unmask the use of force, the more people will see the thuggery involved in the regulated state.

During a Congressional hearing with oil company executives, Congresswoman Maxine Waters of California castigated them for the rise in gasoline price and threatened a complete government takeover of their industry. Based on this incident, can anyone fail to see the thin line that exists between the welfare state and the police state? The answer to Maxine Waters should be something like this:

The property rights of the millions of shareholders who own these corporations are guaranteed by the Constitution and are unalienable. That means there is never a situation in which you could expropriate that property, even if the price of gasoline hit $1,000 a gallon. This hearing should be adjourned and another one started to remove you from office because you are threatening a level of tyranny characteristic of communism, namely, a police-state seizure of an industry. The rights of every American are at risk with you in office.

If enlightened citizens speak out like this, maybe next time a company executive will have the courage.

T = Talk Straight and Unmask the Enemy’s Evasions
We must translate the honey-coated language of the Dark Side into plain English.

“Redistributive justice” means looting and plundering those who produce in order to give benefits to those who haven’t earned them.

“Government investments in new technology” means replacing real investments—private people taking careful risks with their own money and expecting results—with government squandering of taxpayers’ money in subsidies, grants, and boondoggles that need never turn a profit, that need never show results, with every special-interest group under the sun in line for the bounty.

The most honey-coated of all the statists’ expressions, their constant refrain, is: “We just want to help people.” The notion of government, the exclusive wielder of police force, as a helper in the peaceful affairs of citizens is absurd. Government intrusion necessitates the use of compulsion. As George Washington is reputed to have said: “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master. Never for a moment should it be left to irresponsible action.”

When politicians say they just want to help people, they neglect to mention that they are garnering dangerous, unchecked powers for themselves and destroying our liberty in the process. We must not allow them the excuse of good intentions. No one can take away our rights, be their intentions good or bad.

For example, the daughter of a presidential candidate appears on television to say: “My dad is a wonderful man. He wants to give free healthcare to the people.” What’s the answer to this? What about giving their rightful freedom to the people? What about the freedom of doctors? Are they now excluded from the Constitution? Do they no longer have the liberty to practice their profession by their own judgment and conscience? Under state-run medicine, doctors lose this freedom and must take orders from bureaucrats.

Another scenario involves farm subsidies. I saw a kind and gentle Republican senator say on television: “We only wanted to help farmers.” She didn’t realize that ethanol mandates for gasoline would contribute to rising prices of gas and food and would lead to food riots in the world. We must translate her words into plain English for the good senator: You mean you only wanted to rob the taxpayer to pander to the farm vote. You wanted to pass regulations favorable to farmers but disastrous to other citizens. The Constitution does not give you the power to take money out of my pocket and put it into a farmer’s pocket. And the Constitution does not give you the power to meddle in somebody’s business, mandating what goes into a product.

We need to find principled public officials to defend our rights, rather than the typical Republicans, who accept the statists’ premises because they want to please everyone and never raise eyebrows. The first Americans had the courage to face the enemy musket to musket. The least that officials on our side can do is summon the courage to raise a few eyebrows.

S = Stand as One People Against the State, Not as Pressure Groups Against One Another
Today the vast majority of politicians are invested in their special interest groups, which means they are intensifying the welfare state and stifling our liberty. They are breaking us into warring tribes—pitting the seniors against the young, the patients against the doctors, the consumers against the oil companies, the home buyers against the mortgage companies—with more and more government regulation as the alleged answer to our woes. We must see beyond this scam. We must take up the sword as one people in one fight against statism.

Defending any person’s individual rights is scoring a point for all of us. Therefore, we need to be the one non-special interest group that places the individual in the center of the battle for liberty. In each instance in which we want to fight for freedom, we need to ask ourselves two questions:

—1. Whose individual rights are being violated?
—2. What can I say or do to defend them?

For example, instead of the typical practice of businesses lobbying for regulations favorable to their enterprises or detrimental to their competitors, imagine if a consortium of companies banned together in a massive media campaign addressed to the public, not to the legislators, asserting the individual rights of each of them to operate without government interference. How shocking it would be to learn that business owners have Constitutional rights and they are asserting them! The consortium must risk vehement denunciations by the Dark Side and hold its ground. Such a battle would refocus the American people on the true meaning of rights, educate the young (who apparently never learned of America’s greatest legacy in school), and eventually win the country. Wouldn’t that be a better way to spend millions of dollars than to obtain some range-of-the-moment concession from the statists while reinforcing their system of political pull?

And in education, instead of parents’ groups fighting each other over what curriculum should be taught in public schools, what if the enlightened among them banned together to fight for the right and responsibility of every parent to control his child’s education? This would be a fight to privatize schools and establish a free marketplace of education. Such a fight would rescue the precious minds of the young from the control of the state.

We have now refreshed our understanding of individual rights, the only doctrine that stands between us and tyranny and that makes a civilized society possible.

There is much concern that we are losing our distinctive American values, and we are right to feel this concern, because we are losing them. However, the exact nature of the values that made us the greatest country in the world often eludes us. Let us always remember with pride that our unique American values are: a respect for individual rights and all that implies—i.e., limited government, personal liberty, and laissez faire capitalism.

We have established six strategies for asserting and defending our rights in the battle for freedom. These six strategies can be condensed into a single battlecry: Argue from individual rights. In your letters to the editor, op-eds, articles, calls to radio talk-shows, e-mails to television news shows, discussions with your town councils, neighbors, family, and friends, argue from individual rights. For those holding or seeking public office, in your campaign speeches, in the positions you take, and in your presentations in the halls of government, argue from individual rights. It is the only way to win the battle for freedom. It is the only way to rescue our lives and country. And may the force of this powerful and noble weapon be with you.

Copyright © 2008 by Genevieve LaGreca.
Gen LaGreca is the author of Noble Vision, a ForeWord magazine Book-of-the-Year award-winning novel about liberty. Permission is given to post or publish this article with attribution to the author and to

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Saturday, January 12, 2008

Credit Expansion, Economic Inequality, and Stagnant Wages

Capital in the form of credit is normally and, certainly, properly, extended out of previously accumulated savings. In sharpest contrast, credit expansion is the creation of new and additional money out of thin air, which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds. Its existence serves to reduce interest rates and to enable loans to be made and debts to be incurred which otherwise would not have been made or incurred. Always and everywhere, to the extent that private banks participate in the process of credit expansion, they do so with the sanction and generally with the active encouragement of the government.

Economists, above all Ludwig von Mises, have shown how credit expansion is responsible for the boom-bust business cycle and how its existence depends on deliberate government policy. Nevertheless, public opinion believes that the business cycle is an inherent feature of capitalism and that the role of government is not that of causing the phenomenon but of combating it. Indeed, as Mises observed, “Nothing harmed the cause of liberalism [capitalism] more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy.”

The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism. Namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.

It is not accidental that the two leading periods of credit expansion in history—the 1920s and the period since the mid 1990s—have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices. Since the stocks are owned mainly by wealthy people, they are the main beneficiaries of the process. The more substantial and the more prolonged the credit expansion is, the larger are the gains enjoyed by wealthy people more than anyone else.

The new and additional funds injected into the economic system also soon show up in an additional demand for capital goods, such as business inventories and plant and equipment, and in an additional demand for consumers’ durable goods, such as houses and automobiles. The purchase of these latter goods, like the capital goods purchased by business firms, depends largely on credit and is encouraged by lower interest rates. It is also fed by the capital gains being reaped by wealthy individuals, which results in an especially pronounced increase in the demand for luxury housing and for luxury goods in general.

The additional demand for capital goods and consumers’ durable goods serves to increase business sales revenues and thus business profits across a wide spectrum of the economic system. Credit expansion increases profits in the economic system because the expenditure of the new and additional money in buying capital goods and labor increases the sales revenues of business firms immediately, while it increases the costs they must deduct from those sales revenues only with a time lag. This is also true to an extent of inflation that enters the economic system by means of its creators simply spending the new and additional money rather than lending it out—“simple inflation,” as Mises calls it. What is present in both kinds of inflation—credit expansion and simple inflation—is the fact that sales revenues rise as soon as new and additional money is spent, but the costs deducted from the sales revenues of any given year largely reflect outlays of money made in previous years. In those previous years the quantity of money and volume of spending of virtually all types was smaller, including the spending that shows up in the present year as costs in business income statements.

Credit expansion boosts profits more than does simple inflation because the reduction in interest rates it brings about serves to increase the time lag between the making of expenditures for capital goods and labor and their subsequent appearance as costs in business income statements. The low interest rates encourage the purchase of such things as durable machinery and the undertaking of construction projects. The kind of increase that this must bring about in economy-wide profits can be seen in the following examples.

Thus in one case, imagine that a business firm uses newly created money that has come into its hands to increase its newspaper advertising, say. Its additional expenditure will be equivalent additional sales revenue to the newspaper. It will also most likely be an equivalent immediate additional cost to it—a cost that it must deduct from its sales revenues in its very next income statement. Thus, in the same accounting period that the newspaper records additional sales revenues equal to the firm’s additional expenditure, the firm itself must record an equal additional cost of production to deduct from its own sales revenues. Obviously, in this case there is no increase in the economy-wide aggregate amount of profit. This is because economy-wide, aggregate sales revenues and economy-wide aggregate costs have both increased to the same extent.

But now imagine that the firm spends the same amount of money in buying durable machinery that will be depreciated over a ten-year period. Once again, a seller, this time the seller of the machinery, will immediately have additional sales revenues equal to our firm’s additional expenditure. But in this case, our firm will certainly not have an equally large additional cost of production to report in its next income statement. If its expenditure for the machinery was $1 million, say, then while the seller has $1 million of additional sales revenues in his next annual income statement, our firm will probably have merely $100 thousand of additional costs to report in its next annual income statement. This is because the purchase price of the machine is not charged off all at once, but only gradually, over its depreciable life. The implication of this example is that in the current year there will be an addition of $900,000 to economy-wide, aggregate profits. If our firm’s $1 million were part of an investment in the construction of a building with a forty-year depreciable life, the implied addition to economy-wide, aggregate profits would be even greater.

Such boosts to profits go hand in glove with the rise in common-stock prices and greatly reinforce them. Of course, once credit expansion comes to an end, the stimulus it gave to profits and to the stock market both disappear and at that point profits plunge and capital gains turn into capital losses. And at that point, the enemies of capitalism turn to attacking capitalism for causing depressions.

Now as the new and additional money created in credit expansion works its way through the economic system, one would expect the demand for labor and thus wage rates also to rise. This certainly does tend to happen and in the 1920s wages increased substantially in terms both of money and real buying power. They simply did not increase to nearly the same extent as the incomes of the wealthier strata of the population, nor, of course, to the extent that business profits increased.

In addition to the special stimulus given to profits, a second reason for the failure of wages to keep pace with the rise in profits, is that the encouragement given by credit expansion to the purchase of durable capital goods, particularly plant and equipment, tends to take place at the expense of funds that otherwise would be devoted to the purchase of labor services. As a result, the rise in wages is retarded at the same time that profits sharply advance. For this reason too it does not keep pace with the rise in profits.

Despite any appearances to the contrary, the rise in real wages in the 1920s was not the result of credit expansion but of rising production. Credit expansion actually operated to retard the rise in production insofar as it caused the wasteful investment of capital, i.e., what Mises calls malinvestment.

The rise in production is what prevented the prices of goods and services from rising as rapidly as credit expansion raised wage rates in terms of money. The rise in production, in turn, was based on a high degree of availability of capital funds provided by actual savings, as opposed to credit expansion, together with rapid scientific and technological progress. It was this that increased real wages, i.e., the goods and services that wage earners could actually buy with their wages.

In contrast to the experience of the 1920s, in the two great recent credit expansions, i.e., the bubble of 1995-2001 and its successor the presently collapsing housing bubble that began not long thereafter, there has been very little, if any, rise in real wages. Most commentators appear to attribute this to nothing more than the unrestrained greed of businessmen and capitalists. They apparently go on the theory that if there is anything in the economic system that breathes or moves other than at the command of the government, or other than with the active supervision and control of the government, it is proof that we live in an era of “laissez-faire.” For example, in The New York Times of December 30, 2007, in an article titled “The Free Market: A False Idol After All?,” Times columnist Peter Goodman writes:

For more than a quarter-century, the dominant idea guiding economic policy in the United States and much of the globe has been that the market is unfailingly wise. So wise that the proper role for government is to steer clear and not mess with the gusher of wealth that will flow, trickling down to the [sic] every level of society, if only the market is left to do its magic.

That notion has carried the day as industries have been unshackled from regulation, and as taxes have been rolled back, along with the oversight powers of government.
This alleged laissez-faire environment, such writers pretend, has enabled businessmen and capitalists shamelessly to enrich themselves at the expense of increasingly impoverished wage earners, to whom nothing any longer even “trickles down.” Increased free trade and “globalization,” of course, are attacked as part of the process and as greatly contributing to the stagnation or outright decline in real wages.

In sharpest contrast to such blather, in the real world there are innumerable rules and regulations enacted by the Federal Government to control virtually every aspect of economic activity. They are contained in the more than 70,000 pages of The Federal Register. The overwhelming mass of government interference described therein, and in its counterparts at the state and local level, is a glaring refutation of claims about the existence of any kind of laissez faire in the present-day world. The very description of such interference, in tens of thousands of pages of official text, is a refutation of such size and literal weight as to render any claims about laissez faire or insufficient government controls or regulations utterly nonsensical.

This truly massive body of material also suggests that the actual explanation of the stagnation in real wages is precisely an ever growing burden of government intervention in the economic system. The intervention is in the form of policies that undermine genuine saving and in numerous other ways undermine capital accumulation and the rise in the productivity of labor. Personal and corporate income taxes, the inheritance tax, the capital gains tax, and government budget deficits—all entail the taking away of funds that if left in the hands of their owners would have been heavily spent, indeed, overwhelmingly spent, in the purchase of capital goods and labor services. Instead, those funds are diverted into financing the consumption of the government and those to whom the government gives money.

Inflation and credit expansion greatly exacerbate this diversion of funds, because their effect is artificially to increase the incomes subject to these taxes and to thus to deprive business firms of the funds required to replace assets at prices made higher by the same process that increases their taxable incomes. The progressive aspect of income and inheritance taxes also worsens their effects, because incomes tend to be saved and invested the more heavily the larger they are; at the same time, substantial inheritances are more likely to be retained in the form of accumulated savings and capital than are modest inheritances.

Because of the reduced demand for labor that results from the taxation of funds that would otherwise have been used in employing labor and in buying capital goods, wages are substantially less than they otherwise would have been. At the same time, the buying power of those reduced wages is also sharply reduced in comparison with what it would otherwise have been.

It is worth pointing out that totally apart from the effect of social security in undermining the incentive to save, the sheer rise in tax rates since 1965 to pay for the system has taken away fully eight additional percentage points of the income of every wage earner whose earnings are equal to or less than the amount subject to such taxation. In 1965 the combined social security tax on wage earners and their employers was 7.25 percent, which applied to a maximum annual income of $4800. Today, the combined rate is 15.3 percent, which includes 2.9 percent for Medicare. The 15.3 percent rate currently, i.e., in 2008, applies to all wages and salaries up to a maximum of $102,000 per year. The effect of these major increases both in social security tax rates and in the amount of income
subject to them has been to reduce the take-home wages of many workers by considerably more than 8 percent.

The social security contribution of employers is a loss to wage earners, because it is a cost of employment no different than the payment of take-home wages. Financially, it is a matter of indifference to employers whether they pay this sum to the government or to their employees. The cost to them is the same. It is money that the employees could and would have had, if the government had not taken it from the employers.

The same is true of all other costs borne by employers on behalf of their workers, whether it is health insurance, day care, family leave, or whatever. The costs in question are all costs of employment, which, in the absence of such government interference, the wage earners could and would have had in their own pockets. Compelling employers to pay the costs of such things is at the expense of the workers’ take-home wages. The more such costs are imposed, the lower are take-home wages in comparison with what they otherwise would have been. The increase in such costs over time has correspondingly held down any rise in take-home wages.

Government intervention, as I’ve said, not only holds down the demand for labor and thus wages, particularly take-home wages, but it also reduces the buying power of wages. This is because the supply of capital goods is less, thanks to the diversion of funds from their purchase. The absence of these capital goods prevents the productivity of labor from being increased as much as it otherwise would have been. This in turn holds down the production both of consumers’ goods and of further capital goods. The consequence of a lesser supply of consumers’ goods is prices of consumers’ goods that are higher than they otherwise would have been and thus a buying power of wages that is correspondingly lower than it otherwise would have been.

The consequent absence of further capital goods compounds the negative effect on production, in a process that can be repeated over and over again, with each passing year. What this means is that because fewer capital goods in the form of factories and machines are available this year, the ability to produce capital goods in the form of factories and machines for the following year is reduced, because capital goods in the form of factories and machines are the means of producing further capital goods in the form of factories and machines no less than they are of producing consumers’ goods.

The buying power of wages is also reduced by all of the other laws and regulations that hold down the production and supply of goods in general and thus keep up prices. And again, there is a compounding effect. Environmental legislation deserves an especially prominent place in any list of such laws and regulations. Already, because of the restrictions it has imposed on the production of oil, coal, natural gas, and atomic power, it has served to raise the price of energy to unprecedented levels and to deprive many wage earners of the ability to buy gasoline for their cars or trucks and heating oil for their homes. To the extent that wage earners are able to pay energy prices reflecting a $100- per-barrel price of oil, their ability to buy other goods is correspondingly reduced. If the environmental movement’s agenda of radical reductions (up to 90 percent) in carbon dioxide emissions is imposed, meeting it will require absolutely crippling cutbacks in the production and use of oil, coal, and natural gas which must result in corresponding reductions in production, increases in prices, and absolute devastation for real wages.

The negative effect on production here is again a cumulative one, inasmuch as lack of energy supplies hampers the ability to find and exploit further supplies of energy. The more abundant and cheaper energy is, the greater is man’s ability to move masses of earth and to process them, thereby developing further energy supplies. Thus, government intervention that reduces energy supplies reduces the ability to find and exploit further energy supplies.

Other examples of laws and regulations holding down production are minimum-wage, prounion, and licensing legislation. These cause higher costs, higher prices, the diversion of labor from more productive pursuits to less productive pursuits, and, finally, unemployment. Subsidies of all kinds, tariffs, and consumer-product safety legislation also serve to hold down the production and supply of things and to keep up or add to their costs and prices. Again, to whatever extent production in general is curtailed, so too is the production of capital goods, with a consequent cumulative negative effect on subsequent production.

It should be clear that the resumption of an era of high and progressively rising real wages requires a radical reduction of government intervention into the economic system and the reestablishment of economic freedom.

What we have seen is that credit expansion is responsible not only for the boom-bust business cycle, as Mises showed, but also that it is a major source of artificial economic inequality and sharply increases profits relative to wages. These are processes that come to an end and are actually thrown into reverse as soon as credit expansion stops and the recession/depression that is its ultimate consequence begins. In wasting capital through malinvestment, it undermines the rise in production and accompanying rise in real wages. Despite credit expansion, real wages could still rise through most of American history, because of the substantial economic freedom enjoyed in the United States and did so even in the midst of credit expansion, as in the 1920s. In the last two episodes of major credit expansion, however, and over the last several decades as a whole, real wages have largely stagnated. This stagnation is the result of massive government intervention into the economic system that undermines capital accumulation and both the demand for labor and the productivity of labor. It is not the result of economic inequality, the profit motive, or any other aspect of the capitalist system.

I have explained all of the essential matters discussed in this article in full detail, with all of their presuppositions and implications, in my book Capitalism: A Treatise on Economics.

Copyright © 2007, by George Reisman. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is

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