Book Reviews

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN An American Renaissance LoNG AGO Albert Jay Nock made a key distinction between political power and social power. When one waxes, the other wanes. In the great periods in history social power has been dominant, with wars localized and infrequent. Nineteenth-century America is an important case in point: here, on an open continent, inventiveness went hand in hand with low taxation, industry thrived, and great universities were founded on the basis of voluntary giving. Nock was not a person to quantify his concepts; he relied on common sense observation to make his points. But common sense is not enough, particularly in a world in which there is so little of it. We have needed economists to demonstrate in cold arithmetical terms just how the seizure of the usufructs of social power by the political arm can di minish all our lives. Recently Jude Wanniski, in The Way the World Works, has popularized and expanded upon the thinking of some of the new pro social power anti-Keynesian economists, notably Arthur Laffer of the University of Southern Califor nia, and Robert' Mundell of Colum bia University. Between them, Laf fer and Mundell have proved the case for the Nockian insight that taxation, when pushed to progres si vely high levels and combined with inflation, can asphyxiate an economy. But how do you get this across to politicians who thrive on the transfer of resources to the State?

Luckily, there are some politi cians who care more for their productive-minded constituents than they do for themselves. One of them is Jack Kemp, the Congress man from Buffalo, who was once a most effective professional football 121 122 THE FREEMAN February quarterback. An observant man, trained to read an enemy's defenses, Jack got into politics without much knowledge of economics. But he was, as he says in his An American Re naissance: A Strategy for the 1980s (Harper and Row, 207 pp., $8.95), an expert in incentive. In football, he says, ((your success is easily measurable. You have three seconds to get the ball, get back, and choose a receiver from four or five different possibilities. It's incentive. It's price theories, a reward-risk ratio." This is a little fanciful, but the subject of reward-risk ratios led Kemp into the deeper waters of price theory. ((Clearly, work and saving,"

he told an interviewer in 1978, ((are more important than just consump tion and leisure, and a society that rewards consumption and leisure more than it rewards saving and work is a society, black or white, rich or poor, Third World or de veloped world, that is on the de cline." The Incentive to Produce At first Kemp had difficulty see ing the whole problem. He thought that the only way to increase the nation's productivity was to lower business taxes as an inducement to greater profits and production. Taxes on labor seemed to be in a different category, for workers were consumers, and, theoretically, if they kept more of their income they would be using it to bid up prices. But Jude Wanniski, then of the Wall Street Journal, pointed out to Jack Kemp that he was still thinking in Keynesian terms. He had not stopped to consider that labor, if it could keep more of its wages after taxes, would also have more incen tive to produce.

Once Jack Kemp had grasped the idea that both capital and labor had the same interest in tax reduction, he was ready for Professor Laffer's theory of the ((wedge." Taxes on cap ital, taxes on labor, inflation, bu reaucratic regulation, minimum wage laws, are all slices of the wedge that stands between maximizing individual effort and reward. True enough, some taxes are inevitable as long as people pre fer limited government to anarchy. But it seemed obvious to Laffer and to Kemp, as a reader of Laffer-that reduction of the wedge should be a prime concern of the statesman interested in productiv ity. Productivity, of course, is the source of taxes. It follows that there can be two tax rates along a produc tivity curve that will produce the same revenue. A high tax rate on low volume won't generate any more government income than a low rate on high volume. The duty of the statesman is to find the point on the HLaffer curve" that will produce enough revenue to run the govern1980 AN AMERICAN RENAISSANCE 123 ment without cutting into the indi vidual's marginal incentive to pro duce that last widget, or pair of shoes, or whatever.

Kemp, in his book, has digested Laffer's thinking. His response, as a Congressman, has been to introduce the so-called Kemp-Roth bill calling for a thirty per cent reduction in taxes over the period of a few years. Kemp is fond of quoting Jack Ken nedy's phrase, ~~a rising tide lifts all boats." Kennedy, though sur rounded by Keynesians, had hit upon the Laffer solution before Laf fer had ever been heard of. The trouble with the Kennedy tax reduc tion is that it couldn't get the coun try moving fast enough to sustain both the Vietnam War and the Lyn don Johnson Great Society. There is a necessary limit to the miracles that a low-tax-rate-high-volume theory can work, as Jack Kemp himself realizes. Budget balancing can't be put off forever, or the infla tion will get us all. A Question of Priorities But what should come first, budget balancing or tax reduction? Kemp has his own theory of priorities here. Americans, he says, ~~have two complementary desires.

They want an open, promising lad der of opportunity. And they want a safety net of social services to catch and comfort those less fortunate than themselves and those unable to share in the producti ve processes when the economy goes sour." Kemp's advice is to begin cutting taxes across the board now and w'orry about money for the ((safety net" later. ~~A vibrant economy," he says, ~~can afford to leave the safety net in place and at the same time ensure that the net is as empty as possible." With ~~real economic ex pansion" resulting from tax reduc tion, people would be bouncing out of the safety net into productive jobs. We wouldn't need all those ap propriations for the Department of Health and Welfare, or for urban renewal, or for unemployment in surance or whatever. There would be a short-term prob lem in accepting Jack Kemp's priorities if his fellow politicos hap pened to be laggard in getting away from old institutional habits. With people bouncing out of the social service ~~safety net" to take produc tive jobs, the need for a huge net tending bureaucracy in Washing ton, D.C., would be diminished. But would the bureaucrats be inclined to depart in peace? And would Con gress have the fortitude to fire net tenders who had long-term records of party reliability?

These are questions that Jack Kemp thinks can be settled as trans fer payments to individuals become less of a government problem. With less work to do, bureaucracies can wither. Or so we must hope.

124 THE FREEMAN February Some two thirds of Kemp's book are devoted to the problems of incen tives in society. The remainder goes into energy matters and into foreign and military policy in an extremely intelligent way. There is a great chapter on ~~exporting the American idea." The book is much more than a campaign document; it is a prod to high and serious thinking about problems that will be with us well into the twenty-first century. i THE MADISONS: A BIOGRAPHY by Virginia Moore (McGraw-Hili, 1221 Ave. of the Americas, New York, N.Y. 10020) 1979 568 pages. $15.00 cloth THE GREAT RIGHTS OF MANKIND: A HISTORY OF THE AMERICAN BILL OF RIGHTS by Bernard Schwartz (Oxford University Press, 200 Madison Ave., New York, N.Y. 10016) 1977 279 pages. $11.95 cloth Reviewed by Haven Bradford Gow J AMES MADISON firmly believed that human beings possessed certain rights; inalienable, ungrantable rights that emanate not from the generosity of society or the govern ment but, rather, from the hand of God. The duty of government, then, is to preserve and protect these God-given rights.

Madison had a trenchantly realis tic view of human nature. If men were angels, he said, government would not be necessary. But human nature is a mixture of good and evil. The faculties belonging to man's higher nature-conscience, sense of justice, capacity to love, the ability to subordinate his private, selfish interests to the common good, and the inherent capacity to make free choices and judgments-are traits which make self-government possi ble; but characteristics of man's lower nature such as envy, hatred, greed, selfishness and violence re quire a government of law to curb those who offend against the rights of others. And to further safeguard the individual Madison advocated the addition of a Bill of Rights to the Constitution to provide legal safeguards against both a ~~tyran nous majority" and abuses of gov ernment power. When the first Congress convened in Old City Hall on Wall Street in New York, in April, 1789, Madison was at his peak, physically and in tellectually, a slender, short statured and soft-spoken man of thirty-eight, but a giant, morally and intellectually.

President George Washington, in his first message to Congress, had mentioned the widespread popular demand for amendments to the Con1980 OTHER BOOKS 125 stitution, but had declined to make ttparticular recommendations on the subject," leaving that responsibility to Congress. In an Address to the President drafted by Madison, the House responded that the question of amendments ttwill receive the at tention demanded by its impor tance." The story is well told in the second book under review, written by New York University Professor of Law, Bernard Schwartz. Madison addressed the first Con..; gress on the 8th of June, 1789, to explain his nine amendments. He defended the bill as a much-needed check on a potentially tyrannous majority, and concluded that a bill of rights would have ((a salutary effect against the abuse of power," because ((independent tribunals of justice will consider themselves in a pecu liar manner the guardians of those rights." Madison emphasized his fifth amendment, which forbade the states to violate the rights of con science, freedom of the press, or jury trial, because, as he put it, ((It is proper that every Government should be disarmed of powers which trench upon those particular rights."

Significantly, as Professor Schwartz points out, the Madison amendments cover all the articles that eventually became the Federal Bill of Rights. Four of Madison's amendments, though, were eliminated during the congressional de bates: the first, containing the gen eral declaration of the theory of popular government; the fifth, pro hibiting state violations of freedom of conscience, freedom of the press and trial by jury; the sixth, which limited appeals; and the eighth, which dealt with the separation of powers. Two of Madison's amend ments failed to achieve ratification: the second and third, concerning congressional size and compensa tion. The other Madison amend ments, though, survived substan tially as the Bill of Rights itself: a very remarkable achievement in deed. The rights protected by the Bill of Rights can be grouped under five general classifications: (1) freedom of religion; (2) the rights of expres sion and of association; (3) the right to privacy; (4) the right to due pro cess; and (5) freedom from punish ment that is ,cruel and unusual and from arbitrary restraint.

Does the Bill of Rights have popu lar and widespread support among the American people today? A 1970 national survey conducted by CBS Television revealed that three-fourths of those polled said they would restrict the right of peaceful assembly for protests against the government; a majority would abridge the right to free speech and free press for criticisms of government, and the right of crimi126 THE FREEMAN February nal defendants to confront the wit nesses against them, as well as the guarantee against double jeopardy and the privileges against self incrimination. One-third of those questioned would permit the police , to search homes for drugs, guns, or other criminal evidence without warrants, and one-fifth would per mit secret criminal trials. The survey should cause those who still value the Bill of Rights to redouble their efforts to protect their rights, and to recognize just how much Madison and his colleagues accomplished for this nation. , THE GOVERNMENT AGAINST THE ECONOMY by George Reisman (Caroline House Publishers, Inc., P.O.

Box 738, Ottawa, 11I.61350) 1979 207 pages. $12.95 cloth Reviewed by Roger R. Ream ((This book is about the destructive effects of price controls," the author tells us. HIt explains why price con trols are destructive in principle and shows how they have actually been destructive in practice." But the book is more than this. Reisman details how the profit mo tive and private ownership operate in a free society to produce conse quences beneficial to all. He con trasts this with socialism, which destroys the possibility of rational economic activity and maintains control through compulsion. He demonstrates how housing is pro vided efficiently in a free market, then examines the chaos of rent con trols. He explains why shortages cannot exist in a free economy, then explodes the myths surrounding the energy crisis. But by far the greatest impor tance of this book is that it comes at a time when ttvoluntary" wage and price guidelines are upon us and calls are increasing for the imposi tion of mandatory controls. This book demonstrates once again that you cannot fight inflation (an in crease in the quantity of money) by trying to hide one of the symp toms-rising prices-with price controls. Reisman uses fresh argu ments and examples to do bat tle with this worn out economic con cept.

One of the blessings of a free econ omy is the peaceful social coopera tion that results from free exchange. Reisman describes the free market as tta truly awe-inspiring complex of relationships in which the rational self-interest of individuals unites all industries, all markets, all occupa tions, all production, and all con sum ption into a harmonious, pro gressing system serving the well being of all who participate in it." The consumer is sovereign. ttThe real advocates of the consumers1980 OTHER BOOKS 127 their virtual agents-are busi nessmen seeking profit, not the leaders of groups trying to restrict the freedom of businessmen to earn profits." Under price controls, the relation ship between buyer and seller consumer and businessman-is dramatically altered. Price controls cause shortages; rather than sellers seeking and serving buyers, the sell ers have more buyers than they can possibly supply. As you may have noticed, your gas station attendant no longer routinely cleans your windshield and checks under the hood. If he loses your business, he suffers no financial loss since there are others in line-more than he can accommodate-hoping to buy his product. In fact, as we observed in the summer of 1979, consumers were offering gifts to gas station owners and taking their cars in for unnecessary tune-ups and minor re pairs, all in an effort to keep on good· terms with the seller. Price controls allow sellers to disregard consumer desires.

To understand this, it is impor tant to see the distinction Reisman makes between a scarcity and a shortage. ((An item can be extremely scarce, like diamonds, Rembrandt paintings, and so on," Reisman writes, Hyet no shortage exists." Shortages exist when buyers de mand more goods than sellers are willing to supply. This can only occur when prices are not free to reflect the constantly changing de mand for, and supply of, the goods being exchanged. In a free market, if demand increases or supply de creases, prices tend to rise. This has two effects: it discourages the mar ginal uses of a product, while simul taneously encouraging the produc tion of more goods. Controls prevent prices from approaching market clearing levels. Editor's Note: For a more ex tensive sampling of this book, see the article, "Price Con trols and Shortages," page 72. Also, note on page 81 the publisher's special price for the book ordered by FREEMAN readers.

A shortage, in other words, means that prices are held too low. There fore, ((in order to blame the oil com panies for the shortage [of oil], one would have to show that the oil companies deliberately charged too low a price for their oil. That would be the only conceivable way they could have caused the shortage. But that is absolutely absurd. It was not the oil companies that were respon sible for too low a price, but the government, with its price controls." Reisman also shows how govern ment acted directly to limit the sup ply of oil and was responsible for an 128 THE FREEMAN enormous artificial increase in de mand for petroleum products. Reisman's analysis of price con trols is hard-hitting. He uses bril liant examples to drive home his points. Unfortunately, his approach is sometimes holistic, rather than focusing on the individual. Also, his explanations of profit and what de termines price are unclear. But the overall forcefulness of his conclu sions concerning the central thesis of the book more than compensates and makes this a book well worth reading.

Americans experienced the chaos of comprehensive price controls in the early 1970s and again, on gas and oil last summer. Let us hope that Reisman's arguments get the attention they deserve, so that the destructiveness controls have caused over the centuries will be avoided in the years to come. @ HANDSOME BLUE LEATHERLEX FREEMAN BINDERS $3.00 Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 the Freeman VOL. 30, NO.3 • MARCH 1980 Two Kinds of Sabotage Robert G. Anderson 131 Market disruptions may be as destructive as terrorist bombs. The Outcome of the Income Tax Scott W. Hahn 134 A historical review of the graduated income tax and today's consequences in the U.S. Government Regulation of Mass Media Communication Bettina Bien Greaves 141 Study questions for the national college debate topic. How to Produce Human Beings P. Dean Russell 147 It is human nature to respond to incentives and to penalties.