Conflict of Whose Interests? B. Sparks

682 the "corporate mind." On one oc casion the Secretary offered as a defense for his position a state ment that what was good for the corporation he had previously headed was good for the country. The reaction of the press was im mediate. The Secretary's state ment made headlines in most of the major newspapers of the coun try. It was cited as a prime ex ample of both the ignorance and the arrogance of successful busi nessmen in government. The experience of the corporate president who became Secretary of Defense is illustrative of a grow ing trend of our times. The cry of "conflict of interests" as a chal lenge to qualification for the per formance of certain civil and polit ical responsibilities is being heard with increasing frequency. Occa sionally it has been directed at elected officials but it has been par1971 CONFLICT OF WHOSE INTERESTS? 683 ticularly noticeable where ap pointive ones are concerned. The idea seems to be abroad in the land that any substantial degree of suc cess in business constitutes an au tomatic disqualification for public office. Experience in manufactur ing, particularly if it is in heavy industry, is interpreted as a sure sign of unfitness for high position in the Defense Department. By the same standard a man who has had wide experience in banking or other types of financial manage ment is automatically disqualified for service as Secretary of the Treasury. Similar reasoning has led others to conclude that a per son who owns stock in American industry should not be allowed to sit as judge on an American court.

Who Is Qualified? In view of the above observa tions, one might wonder where he should look to find suitable public officials. If experience in financial management disqualifies one from becoming a treasury official, then what is the appropriate back ground for the job? If manage ment of a large manufacturing en terprise renders one ineligible for the Defense Department, who is eligible? And what is there about personal ownership of a financial stake in the continued survival and prosperity of American so ciety that disqualifies one for service as a judge in the courts of that society? Critics might suggest that questions such as these do not go to the heart of the matter since they are related only to the tech nical competence or skill for the proposed job and fail to resolve the problem of personal interests that might tend to conflict with public duty. But that problem can not be resolved without inquiring into just what personal interests are involved and what is the na ture of the public duty with which these interests conflict.

The interests of a businessman in his capacity as a businessman necessarily have something to do with the success of his business. He is interested in increasing his profits. He is interested in produc ing his product at the lowest pos sible cost and selling it at the highest obtainable price. His de sire to keep costs down includes a desire that his plant be shielded from violence and that it be filled with satisfied, contented workers. His desire to get a favorable price for his product includes a desire for a continuing stream of satis fied customers with money in their pockets. This adds up to nothing more and nothing less than a de sire for a peaceful and prosperous society. Such a desire does not con flict in any way with the desired goals for society as a whole. In fact, the two are identical.

684 THE FREEMAN November Governments are established for the purpose of maintaining order. That means that the true function of government is to maintain an environment wherein a peaceful and prosperous society is possible. It means a society where volun tary exchange is permitted, where contracts are enforced, and where fraud, deception, and violence are punished. All human beings except those few who hope to become the beneficiaries of fraud, deception, and violence desire these same goals. And if the degree of the intensity of the desire may be measured by the extent of the particular person's personal or self ish interest, the desire is keenest among the most successful busi nessmen. It is they who stand to lose most· if contracts are not en forced and if theft, burglary, and other forms of violence are not restrained. At the same time it is their selfish interests operating peacefully in a free economy that tend to bring the greatest material benefits to all. This is the normal and natural result of a free mar ket operation because the greater the number of producers who are competing peacefully for customer attention, the wider will be the range of choice available to each customer and the greater will be the likelihood that the peculiar tastes of each one will be satisfied at the lowest possible cost.

The Founders Understood The unity of interests between the businessman and society as a whole was clearly understood by the founders of the American Re public. The vast majority of the signers of the Declaration of Inde pendence were well-to-do or even wealthy businessmen who saw as their primary task that .of estab lishing a government under which freedom and order could be main tained. Their rebellion was not a rebellion against an established order but a rebellion against the efforts of a government to impose trade restrictions upon some and to grant special privileges to others, the latter being those who happened to be favorites of a par liamentary majority. For the most part the Founding Fathers served without pay and when they pledged their lives, their fortunes, and their sacred honor, their for tunes were more than mere inci dental parts of that pledge. These were men of substantial means.

They had much to lose and most of them actually suffered the 10SS.1 They did so because they placed high value upon the long-term benefits to be derived from the 1 A vivid account of the backgrounds of the men who signed the Declaration of Independence and the suffering, both per sonal and financial, they endured as a re sult of their having done so is presented in summary form in Fehrenbach, Great ness to Spare (1968).

1971 CONFLICT OF WHOSE INTERESTS? 685 preservation of ordered liberty where individual freedom of choice could be maintained and where voluntary exchange of goods and services could be practiced with out any intervention or coercion from governmental authority. They understood, as did the recent Secretary of Defense, that what is good for business is good for the country. Tariffs "Protect" Producers at the Expense of Consumers But a government can he so or dered and the governmental func tion so conceived that the private interests of particular individuals or particular business enterprises do conflict with public duties. This occurs most frequently when sub sidies, tariffs, or other forms of special privileges are established. A steel manufacturer might reap substantial short-term benefits from a tariff law imposing a duty on imported steel. When such du ties are imposed, the price of the imported product will have to go up or else the product will have to leave the market. In either event the domestic producer will be given an opportunity to sell at a higher price than would be ob tainable under free market condi tions. While this might be of im mediate benefit to the domestic producer, it will mean higher prices for the consumer of steel products and therefore a detri ment to such consumers.

But the detriment to the imme dia te users of steel is not the end of the story. The cost of every thing dependent upon the use of steel will tend to rise. When this happens, the quantity of consum able goods the ordinary citizen can afford will tend to decline. For even if he can find some desired goods that have no direct relation ship to steel (a supposition that is itself unlikely), the fact that he has had to spend more for those goods that do have that relation ship will reduce the amount of money he will have available for the unrelated products. This is but another way of saying that there will be a decline in the general standard of living, or if not an ac tual decline, the standard will not be permitted to rise to the levels that would otherwise be achieved. What has been said about the steel industry is equally applicable to every other item of commerce upon which import duties are im posed. A tariff on imported textile products might be of immediate benefit to the domestic textile pro ducers, including the employees in that industry, but it is hardly beneficial to either the 20-year-old office girl or the 70-year-old widow living on a fixed income when both ladies are trying to outfit them selves with garments appropriate 686 THE FREEMAN November to their respective needs. And a tariff law that can keep a foreign automobile off the domestic mar ket might appear advantageous to the domestic producer, whether he is the president of the company, a stockholder, or a laborer on the assembly line, but it is less than helpful to the school teacher seek ing low-cost transportation.

Special Privileges The common characteristic of each of the illustrations cited above is that in each instance a particular individual or a particu lar industry is seeking a special privilege. In each instance some body is trying to escape the rig orous discipline-of the free mar ket. The market is a system that tends to reward those who pro duce the things people want at the lowest possible price. In that sense it is a system that rewards the best producers. It is a system in which the only way one can serve himself is by serving others, by producing the things or offering the services others want. But the erection of a tariff barrier is a means of artificially keeping the most desired goods or the most de sired services beyond the reach of the customer. It is a system under which the customer is coerced into accepting something less than his first choice, a system for keeping marginal and substandard producers in business at the expense of consumers.

Thus it becomes clear that in the tariff cases there is a private in terest that conflicts with the best interests of the public. But in each instance it is a conflict created by the departure of government from its proper function of maintaining the peace and its entry into the nongovernmental role of interfer ing with the operation of the mar ket. It is a conflict created by at tempts to use force rather than customer choice to dictate the pro duction and distribution of goods. The proper way out of this pre dicament is to get rid of the law creating the conflict and permit government to return to its proper function of maintaining order, thereby enabling its citizens to peacefully pursue their own hap piness in the manner pleasing to them. But until that step is taken the presence of the conflict must be recognized. And if the conflict is to be avoided, the particular businessman reaping a benefit from a particular tariff law must not be permitted to participate in any decision concerning the rate or the administration of the tariff involved. Neither should he be per mitted to vote for or against can didates who might be called upon to participate in such decisions.

Such a regulation of the fran chise would be cumbersome indeed.

1971 CONFLICT OF WHOSE INTERESTS? 687 It might even prove to be totally unworkable in its operation but it is an essential part of the opera tion if conflict of interests is to be avoided while the tariff law re mains. And it should be kept clearly in mind that what is being dealt with is, not the interests of businessmen as a. group, but the special privilege the government is extending to a particular business man or a particular group of busi nessmen at the expense of all other businessmen and of society as a whole. The Farm Bloc What has been said about the tariff laws is equally applicable to all forms of subsidies and produc tion controls the government might attempt to impose. When farmers are being subsidized for growing certain crops or when they are being paid not to grow others, the funds from which they are paid must be taken from other members of society. From whom shall such funds be taken and who is to decide when, how, and how much to take? These are political questions to be decided in the po litical arena.. And any serious con cern about conflict of interests would appear to dictate that farm ers be excluded from the electorate when these special privileges for farmers are being voted upon either directly or indirectly.

If this were done, it would no longer be possible for legislators from the farming regions to win elections by promising their con stituents to support laws impos ing heavier burdens upon city laborers in order to hand out greater rewards to farmers. This is but another way of saying that candidates for office would no longer be permitted to use the tax laws to raise funds to support their own campaign efforts and to perpetuate themselves in office. Farmers would be left to seek their rewards by producing in the most efficient manner of which they are capable the products people actu ally want. Their rewards would be for more efficient production rather than for the precarious cir cumstance of being represented in legislative halls by friendly but unscrupulous power-grabbing poli ticians. ... and Other Subsidies But the so-called "farm pro gram" is only one example of spe cial privilege being supported by government at the present time.

Similar discriminatory advantages are being extended on a large scale to selected individuals or groups at all levels, Federa.l, state, and local. Exclusive franchises to power and transportation compa nies, subsidies for airport con struction, Federal support to rural 688 THE FREEMAN November cooperatives operating electric, telephone, or other business enter prises, direct financial help to cer tain segments of the housing in dustry, government guaranteed loans to individuals or business enterprises within certain classi fications, and numerous other il lustrations that could be cited are instances where the taxpayers are being forced to sacrifice their own well-being in order to support in dividuals or industrial organiza tions the taxpayers have not volun tarily chosen to support. The truth is that in most in stances where these discrimina tory practices prevail the benefi ciaries of the special privileges are individuals or organizations whom the taxpayers, acting in their ca pacity as consumers in the market place, have already affirmatively rejected in favor of others who are offering goods and services more in accord with consumer wishes. If this were not so, the special privilege would not be needed. And aside from the wis dom of the sage remark of Ludwig von Mises that "the average man is both better informed and less corruptible in the decisions he makes as a consumer than as a voter in political elections,"2 a de cent respect for simple human dig nity would seem to demand that the individual person should be 2 Socialism 21 (1951).

permitted to spend his own earn ings for the goods and services that are most pleasing to him. The Vote-Buying Process If all the concern about conflict of interests were both genuine and informed, it is doubtful if any of the recipients of special privilege would be permitted to vote in po litical elections. It seems a little ridiculous to permit one group of citizens to vote themselves sub sidies at the expense of other citi zens. Permitting them to do so ex tends to them the opportunity of using the power of the state, the state being the only agencyauthor ized to use force, to impose their wills upon the nonprivileged group without regjard to whether they are performing any services that are needed or desired by the non privileged citizens. Under such a coercive system the continued production of un wanted products is inevitable and so is the perpetuation of incompe tent and inefficient producers. It is far different from the free market where only the most efficient pro ducers of the most wanted prod ucts can survive, where the only reward is that of a voluntary pur chase by a willing customer.

A business enterprise might suf fer financial embarrassment be cause of inefficient management or because it has misjudged market 1971 CONFLICT OF WHOSE INTERESTS? 689 demand or for any number of other reasons. Regardless of the reason for the difficulty, if the rules of the market are permitted to oper ate, that enterprise will have to either reform its approach or go out of business and that right early. But if government can be depended upon to rescue a failing business, the need for improvement is removed. Inefficient mana,gement is left free to continue in opera tion and unwanted products may continue to be produced. In either event the profits earned by the ef ficient producers of products the citizens want will be expropriated to subsidize the continued opera tion of the incompetent producers or the producers of products the citizens do not want. Consumers will be compelled to buy less, com petition in foreign markets will become more difficult, and the gen erallevel of industrial activity will be forced to decline. In the short run all this will be beneficial to the inefficient producer of unwanted goods, but in the long run it will benefit no one.

Withhold the Right to Vote The proper solution to this de structive and debilitating situation is to abolish special privileges and return to the constitutional prin ciple of giving all citizens equal treatment before the law. But until that is done, it would seem appropriate to at least take more seri ously the much-vaunted abhor rence of conflict of interests. A suitable beginning place would ap pear to be that of withdrawing the right to vote from persons to whom the government is extending spe cial advantages above and beyond those that are accorded to other citizens. This doctrine should be . applied to all citizens who are re ceiving special privileges of any kind and the term special privilege should include any privilege that is offered on an individual or group basis but not extended to the citi zenry as a whole. Presumably all citizens are enti tled to the benefits of protection from murderers, thieves, marauders, or robbers. It is protection pro vided by government but it is pro tection offered to all citizens. Even the murderer is entitled to protec tion against being murdered.

Therefore, this kind of protection is not a special pri vilege. It is not discriminatory. It is a privilege of fered to all citizens equally. But suppose the law against murder applied only to the killing of members of a particular occupa tion, religion, race, economic classi fication, or other identifiable group. In that rather ridiculous imaginary situation it would be discrimina tory to call upon the unprotected groups to pay taxes to support a police department for the benefit 690 THE FREEMAN November of the recipients of the privilege of protection. It would be equally ridiculous to permit the members of the protected group to cast their ballots to decide whether the cost of their special protection should be shared by the unprotected citi zens. Unwarranted Discrimination It is easy to comprehend the dis criminatory nature of the imagi nary law against murder that is re stricted to the killing 0 of a particu lar group while treating the vast majority as free game to be plun dered and slain at will. But the fact that precisely the same type of dis crimination is actually practiced in numerous other areas is often overlooked. Whether it is the manu facturer calling for a tariff law to give his product an advantage his customers have already decided it isn't worth, a farmer asking for "parity" prices which his skill and judgment as a farmer cannot main tain, or a failing business asking the government to use its power of coercion to provide it with a low cost loan which its business per formance is unable to justify, all are alike in that they are all asking that the power of the state be used to enable them to obtain by force that which they could not obtain by willing exchange. And a more di rect illustration of conflict of inter ests could hardly be imagined than that of allowing the recipient of anyone of these special privileges to vote for the granting or the con tinuation of the privilege.

One of the clearest illustrations of conflict of interests is that of giving the right to vote to persons on the welfare rolls. The illustra tion is perfect because the conflict is direct. It is permitting a nono worker who is receiving a direct subsidy at the expense of the work ing members of the community to participate in a decision as to whether or not the workers should have their real wages reduced in order that the special advantage to the nonworker may be continued or enlarged. So long as the nonworker is permitted to participate in the decision there can be little doubt as to how his vote will be cast. And the influence of even a small number on the welfare rolls or other special-privilege cate'gory should not be underestimated. A significant feature of the two party system, a system that has dominated the political process in the United States throughout most of its history, is that in most po litical campaigns the contest is be tween two parties whose constit uencies have usually been fairly evenly divided. Several years ago office seekers learned that if a par ticular group could be singled out for special privilege and if an ap peal on its behalf could be made on 1971 CONFLICT OF WHOSE INTERESTS? 691 humanitarian grounds, either real or imagined, the-favored group could be won almost unanimously without significantly upsetting the balance within other groups. This meant that the purveyor of special privilege could be reasonably sure of victory. As the nonprivileged citizens became more aware of the discrimination being practiced upon them, resentments began to accumulate. The political remedy presenting itself to the officeholder was that of enlarging the privi leged group in order to stay in power.

This has been done with great regularity. The spiraling effect has continued at an accelerating rate as each party has tried to outdo the other in its promises of special privilege. It is the easiest and least expensive means of win ning elections. The result has been that the number of privileged groups has multiplied and the population within each group has grown. In the meantime the politi cal process has become largely a game in which the winner is little more than the fellow who can demonstrate the greatest degree of skill in selecting for special favors such groups and classifications as will round out a majority while leaving in the nonfavored, working group a sufficiently productive body of 'citizens to provide the favors. Raising the IIPoverty Level ll In any welfare system some fig ure must be chosen as the income level at which subsidies will begin. Regardless of what that figure is, it is inevitable that there will be at least some fully employed work ers whose earnings are only slightly above that level. As the meager incomes of this low-in come group are expropriated for the benefit of the nonworkers, the low-income workers can hardly be expected to escape discourage ment. They cannot be blamed if they begin to ahandon their jobs in favor of a march to the welfare office. In that way they can have more leisure time and often enjoy even higher incomes at the same time. They can claim their maxi mum welfare benefits while keep ing themselves available for the earning of additional income as handymen, yardmen, domestic workers, seasonal agricultural em ployees, and similar positions taken on an irregular and unre ported basis. In this way they can avoid income tax worries and en joy a real income substantially above that of their employed friends who continue to work at regular jobs.

Under this system the cost of government will go up but the poli tician knows that taxes are un popular; therefore, he will prefer deficit spending to current financ692 THE FREEMAN November ing. As the government debt in creases, the supply of money will increase without a comparable in crease in the supply of goods. The result is higher prices. Welfare benefits at the established level will become less attractive. But the officeholder must remain in power at all costs; therefore, he proposes an increase in benefits. This invades a still higher level of the comparatively low-income workers. They now find it advan tageous to give up their jobs for the dole, thus starting another round of the boresome process on its way. Each round of increases will be come larger and will move from one phase to the next with increas ing rapidity. To see the process in operation in its most carefree, runaway form one need look no further than the United States of the 1960's. That was a time when the political parties in power (and in some sections of the country that meant one party and in some sections another) were claiming unparalleled prosperity while wel fare rolls were increasing at an unparalleled rate. The reasons for this inconsistent situation are not . difficult to see nor was its develop ment difficult to predict. In fact it was inevitable. It is equally easy to predict both the increasing ac celeration and the ultimate conse quences if established policies are continued. The next development to expect is an economically fatal but politically attractive system of wage and price controls. 3 From there the move is toward the ra tioning of goods and the drying up of production as scarcity mounts and the point is eventually reached when there are no longer any goods to ration. 4 Trends Can Change But none of this has to happen.

The trend can be stopped. History teaches that there is little likeli hood that it will be stopped short of disaster but history also teaches that all the necessary means for changing the course while still on safe ground are readily at hand. The downward trend is actually the fruit of man-made schemes for interfering with the productive ca pacity of individuals. The free operation of the market is being replaced by the coercive power of the state. And as soon as the power of the state is applied to tinker with any segment of the market in any degree, some citizen some where is being given a special benefit which could not exist if it were not being expropriated from citizens who are actively engaged 3 This article was written prior to President Nixon's announcement of the wage-price freeze on August 15, 1971. Ed. 4 For an outline of the route to ration ing see Read, "When Rationing Comes,"

THE FREEMAN, July, 1971.

1971 CONFLICT OF WHOSE INTERESTS? 693 in the production of wanted goods. And if the power to tinker is ac cepted as a proper function of government, the temptation to use the power is too strong. for the politician to resist. Its use enables him to expand his popularity, and hence his personal power base, by the simple technique of enlarging the area of benefit while charging the cost to the productive citizens who are made the victims of the crudest form of discrimination. Special benefits are extended to an ever enlarging group of citizens. But every time a citizen is added to the special privilege category one is removed from the produc tive sector. Production declines. The politician's tenure in office comes to depend, not upon his in tegrity or his skill in statecraft, but upon his shrewdness and his skill in the selection of the favored groups to become the recipients of the state's bounty. But as the groups are shifted and as their numbers increase, as they inevita bly must, the number left to sup ply the benefits is constantly di minished and the arrival at the breaking point is only a matter of time.

The overriding characteristic of this seemingly irreversible course is that production is being penal ized and nonproduction is being rewarded. That is the crux of the matter and that is the point to touch if the trend is to be re versed. This can be done by an honest enforcement of a rule against conflict of interests. But enforcement will not come until there is recognition of the con flict. Let those who are receiving special privilege be excluded from the decision-making process. If they complain that they are being deprived of their political rights, remind them that they have re moved themselves from the politi cal arena and that they may re store themselves by abandoning their special privilege and joining with other citizens in a willing ness to be treated equally before the law. And if a rule against con flict of interests is to be applied, its application should begin where the conflict is most direct and therefore most indisputable. If that were done the office seeker could no longer use the dole or any other form of special privilege as a scheme for buying votes. The temptation to use the power of the state to frustrate the operation of the market would decline. The in flexible rule of freedom, which is a rule that the only way one can serve himself is by serving others, might be allowed to assert itself and a period of burgeoning pros perity and well-being, such as has characterized all periods of maxi mum freedom in· past ages, might be seen again. ~ The SIOEY of NegEo Gains HENRY HAZLITT THE MYTH still assiduously culti vated in some quarters is that the Negro community has been sunk in hopeless poverty and despair, because it has not been allowed to participate in the general eco nomic prosperity of the last ten or twenty years. The actual record does not support this.