Constitutional Restraints; R. Shannon

IN his new book Bound to Be Free2 economist Richard B. McKenzie echoes this constitutional proposal from Ayn Rand's epic novel. He urges us also to impose limitations on fed eral tax revenues and monetary growth. Through this approach, he believes we can restore the personal freedom which promotes both our individual growth and economic de velopment. Professor Shannon teaches in the Economics De partment, Clemson University. His is, of course, not a solo voice merely one in a growing chorus which includes Nobel economists Friedrich Hayek and Milton Fried man as well as tax reformer Howard Jarvis. Together they seek to con strain not only liberal idealists with their social schemes but also conser vative businessmen who seize gov ernment powers for their selfish ends. Of course, government policies are not the only source of current dis content; disappointment with the enterprise system and distrust of business are also widespread. 3 But much of such distress flows from fail ure to analyze and understand market forces. A while back, for ex ample, I overheard a lady excoriate American automobile companies for failing to produce more fuel-efficient cars. She apparently believed that General Motors and Ford, not to mention Chrysler, are managed by 45 46 THE FREEMAN January idiots and incompetents. Yet the "failure" she perceives is quite read ily explained without resorting to such charges.

After all, the American auto com panies have for over two decades been producing such small cars as the Ca maro, the Falcon, and the Valiant. Even before that, American Motors devoted its main productive efforts to this end. But the American public treated these offerings with disdain. Small was not beautiful. And no wonder! Gas was so cheap that it made economizing unnecessary, even silly. And for those who worry about safety, there continues to be much evidence that bigger is better. 4 In fact, government regulation has frequently been the factor that frus trated moves toward fuel efficiency. Mandatory guidelines for safety equipment-some of it amazingly redundant, like seat belts and pad ded dash boards-not to mention stringent goals for improved auto emissions, have been hopelessly contrary to efforts to improve engine economy. Now in desperation GM has announced it will import greater numbers of Japanese cars for sale here under its own name. 5 Wasteful Use of Resources Indeed, there is much evidence that the free market, overall, does a far better job of allocating our scarce re sources to their socially optimal use than government bureaucrats can.

A vivid example showing that gov ernment management is not inher ently superior is the approach taken by the Forest Service in managing our timber resources. As explained recently by Thomas M. Lenard of the Office of Management and Budget, the Forest Service imposes a "non declining even flow" scheme for cut ting trees which, Lenard says, "ar bitrarily limits the timber harvest in anyone period and stretches it out for decades beyond the point of economic efficiency." In another pol icy the Service prevents trees from being cut "until they reach the age that maximizes average annual growth. It is based on biological cri teria and has no economic ratio nale," Lenard notes. 6 According to one estimate Lenard quotes, if these policies were elimi nated and timber production were concentrated in the most productive areas of our national forests, wood production might increase by as much as 74 percent-requiring 27 percent fewer acres! And the mar velous fact is that this process would not only allow more timber produc tion (with the associated benefits of reducing construction costs, which would give the housing industry a needed boost); it would also "triple the amount of forest land in the area on which timber harvesting is not permitted," thereby greatly increas ing the area available for recre ational purposes. Under such an im1983 CONSTITUTIONAL RESTRAINTS ... AND INDIVIDUAL FREEDOM 47 proved management system, both private and public uses of our valu able timber resources would flour ish.

Of course, a privately managed firm may similarly excel at ineffi ciency. In fact, it would be easy to offer a long list of examples. But if a business is poorly run, its profits will drop, its shareholders will dispose of their stock, and the company will quietly disappear. Like W. T. Grant, it may not even be remembered by a tomb. Or, as in the case of General Motors with its Frigidaire appli ances, if the parent company can no longer manage a subsidiary effec tively, it will sell it off. Free of Competition But how often can we anticipate that process with government? We are usually far less certain that pressure will come to bear to assure that, if a government agency is not using resources efficiently, it will be replaced by someone who can. In fact, private producers so envy the security which government management provides that they fre quently seek to take advantage of it. Chrysler and Lockheed are but two of the companies which in recent years have benefited from govern ment bailouts. A multitude of other producers have received assistance in substantial but far less obtrusive ways.

A striking case in point is the "filbert fracas" in Oregon. A couple of years ago that state tightened up quality standards for filberts to pre vent "decayed" nuts from appearing on the market. Consumers had not complained; it was producers who sought the rule. As reported in Reg ulation, this new rule automatically became part of the federal market ing standards and thereby was im posed on the entire nation. 7 Here is what followed: "imported filberts, most of which come from the Black Sea regions of Turkey, are air-dried in the traditional way and shipped at ambient temperatures, whereas the American nuts are uniformly machine dried, inspected as soon as they are shelled, and then shipped under refrigeration. According to Agriculture Department estimates, 46 percent of shelled filbert imports surveyed recently would fail the new and stricter test. Importers often would not know in advance whether a particular shipment would pass the test, however, .and a nutty cargo turned back at an American port would have to spend another eight weeks at sea for the return trip. The combination of uncertainty and ex pense would be enough, importers say, to keep out 80 percent of the foreign nuts." In effect, the ruling neatly disposed of much, if not all, foreign filbert competition, to the benefit of Oregon filbert farmers but to the detriment of consumers. In fact, some activist consumer groups 48 THE FREEMAN January have condemned the filbert ruling and urged its repeal.

Of course, this is but one example from a large array of cases where American producers have sought protection from foreign imports. Some attempts at stifling free mar kets, such as those by producers of cars and textiles, have received widespread publicity. Most, how ever, like the case of filberts, are un known and go unnoticed. A while back, the Washington Post noted that import restrictions have been sought on such diverse items as canned Bartlett pears, ice cream sandwich wafers, bicycle speedometers, plas tic mattress handles, water circulat ing pumps, and dried eggs.8 Why do economists object to such trade restrictions? Primarily be cause they raise costs and reduce choices for consumers. While pro ducers find their profits enhanced, consumers are impoverished. But as McKenzie stresses in his book, such policies designed to help producers and maintain employment in one industry also have the secondary impact of hurting producers and re ducing employment in other indus tries. 9 In effect, businessmen are us ing government to wage a wasteful war among themselves.

A notable example involves poli cies designed to inhibit "dumping" of foreign steel in our markets. Whatever the justice of helping our steel industry may be, one baleful effect is to raise the cost of steel for American automobile producers. They are now forced to pay more for steel, even if they don't actually buy from foreign sources. As a result, GM, Ford, and Chrysler find it more dif ficult to compete with their German and Japanese rivals, who can produce cars using less expensive foreign material. But that too is just one example among a vast multitude of others. Peter Paul Cadbury and Enten mann's have opposed the filbert rul ing because it would raise the prices of their candies and pastries, thereby discouraging sales and dampening profits. A more notable current case involves the quotas on sugar im ports imposed by the Reagan admin istration. Although designed to re lieve distressed domestic sugar growers, the quotas came as a cruel blow to some independent U.S. re finers of sugar imports. A few even foresaw the possibility of having to close down.10 Minorities vs. Majorities Too often, these secondary effects of selfish policies sought by produc ers are not foreseen. Moreover, those who benefit are commonly concen trated; those who are harmed are usually dispersed. Thus a minority may readily achieve its goal at the expense of the majority. In the end, the social costs outweigh the social benefits.

1983 CONSTITUTIONAL RESTRAINTS ... AND INDIVIDUAL FREEDOM 49 But along with selfishness is an other fault-simplicity. A crucial underlying failure of advocates of government regulation and control is that they almost always ignore the variety of individual talents and tastes. This profound fact provides a vital, underlying thrust in Mc Kenzie's work. 11 For emphasis and illustration, McKenzie refers to economist Frank Knight, who "used to puzzle his stu dents at the University of Chicago with the elementary question, 'What is an apple?' If called on, we can all identify an apple, but once we reflect seriously on the puzzle, we begin to understand that apples are different things to different people."12 For growers, they are a source of profits; for cooks, the basis of pies; for stu dents, a gift to teachers. Spelled with a capital A, they are now a vibrant force in the burgeoning computer industry!

The critical point which Knight and McKenzie stress is that all of us are essentially different. In fact, hu man beings are as unlike as snow flakes-or our fingerprints. One man who has dwelt at length on individ ual variety, Roger J. Williams, past president of the American Chemical Society, points out in a book called Free and Unequal: The Biological Basis ofIndividual Liberty that even our handwriting and breathing pat terns are distinctive. 13 What is particularly crucial here? however, is the variety in people's tastes. It has been revealed through tests with a substance called phen ylthiocarbamide. According to Wil liams, in one study involving over six thousand people, "65.4 percent said it was bitter, 21.3 percent pro nounced it tasteless, 5.4 percent said it was sour, 4.8 percent said salty, 2.1 percent said sweet, and the re maining 1.9 percent thought it tasted like miscellaneous fruits and vege tables-rhubarb, lemons, cranber ries, etc."14 Williams even notes a dramatic difference in our ability to smell. "I know of three individuals,"

he says, "who have ordinary sense of smell in most respects, but are unable to smell the odor of skunk, even when it is very strong. To most people the skunk odor is most un pleasant. I know of two individuals whose reaction is different. One likes the odor. The other likes it if it is not too strong."15 With such dispar ity of tastes, no wonder there are now so many kinds of cars, clothes, and even breakfast cereals! The WondrousBrain Carl Sagan gives further evidence of individual variety in his discus sion of the human brain, which, Sa gan says, functions through the use of connecting links called "syn apses." According to Sagan, "the hu man brain is characterized by some 1013 synapses. Thus the number of different states of a human brain is 50 THE FREEMAN January 2 raised to this power-i.e., multi plied by itself ten trillion times. This is an unimaginably large number, far greater, for example, than the total number of elementary parti cles (electrons and protons) in the entire universe."16 These amazing numbers boggle the mind. It cannot comprehend itself1 What are the implications? Sagan continues: "It is because of this im mense number of functionally dif ferent configurations-of the human brain that· no two humans, even identical twins raised together, can ever be really very much alike. These enormous numbers may also ex plain something of the unpredict ability of human behavior and those moments when we surprise even ourselves by what we do. Indeed, in the face of these numbers, the won der is that there are any regularities at all in human behavior."

Confronted by this astonishing variety, Sagan reaches a dramatic conclusion. "The answer must be that all possible brain states are by no means occupied; there must be an enormous number of mental config urations that have never been en tered or even glimpsed by any hu man being in the history of mankind. From this perspective, each human being is truly rare and different and the sanctity of individual human lives is a plausible ethical conse quence." How does an economist view this variety? At least one has spoken di rectly to the point. Friedrich Hayek notes that"the knowledge which any individual mind consciously manip ulates is only a small part of the knowledge which at anyone time contributes to the success of his ac tion. "17 No one knows fully the fac tors which enter into his motivation and his behavior. But, more impor tantly, no outsider can possibly dis cern all that dwells within another's brain. Furthermore, Hayek says, "the sum of the knowledge of all the in dividuals exists nowhere as an inte grated whole. The great problem is how we can all profit from this knowledge, which exists only.dis persed as the separate, partial, and sometimes conflicting beliefs of all men."18 No One Knows The futility of trying to plan and organize human activity centrally is admirably evoked in a recent state ment by Dennis O'Brien, a deputy assistant secretary of our Depart ment of Energy. "All forecasters, both in the government and in the pri vate sector," O'Brien states, "have been awful at figuring out where the energy markets were headed the past few years."19 No one possesses suffi cient information and insight to pre dict even the energy future accu rately.

Given the variety and essential mystery of human tastes and drives, 1983 CONSTITUTIONAL RESTRAINTS ... AND INDIVIDUAL FREEDOM 51 what are the implications for social organizations? How can we best tap these various skills and tastes? For Hayek as well as for McKenzie, Friedman, and others, the answer is simple and straightforward: free markets. This suggestion is, of course, not new. Two hundred years ago Adam Smith wrote in a famous passage which McKenzie quotes: "by direct ing that industry in such a manner as its produce may be of the greatest value, [an individual] intends only his own gain, and he is in this ... led by an invisible hand to promote an end which was no part of his in tentions. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he fre quently promotes that ofsociety more effectually than when he really in tends to promote it."20 Almost a century later in his fa mous essay On Liberty John Stuart Mill echoed Smith: "it was once held to be the duty of governments, in all cases which were considered of im portance, to fix prices, and regulate the processes of manufacture. But,"

Mill continued, "it is now recog nized, though not till after a long struggle, that both the cheapness and the good quality of commodities are most effectively provided· for by leaving the producers and sellers perfectly free, under the sole check of equal freedom to the buyers for supplying themselves elsewhere."21 He further noted, in complete accor dance with the illustrations previ ously presented, that "restrictions on trade . . . do not really produce the results which it is desired to produce by them." Mill was so outspoken an advo cate of individual liberty that a few years ago the American economist Paul Samuelson commented in his presidential address to the Ameri can Economic Association: Mill's "views on liberty will, even in the post-Freud world, never go out ofdate and can perhaps best be summa rized in the words of Mrs. Patrick Campbell, Bernard Shaw's pen-mis tress: People should be allowed to do anything they like-provided only they don't scare the horses in the street."22 Can Consumers Be Trusted to Guide Economic Action?

But do the ideals of Smith and Mill still hold? After all, the scale of in dustry has vastly changed. Can we depend, in this complex and cosmo politan age, on the luxury of allow ing self-centered individuals to be the fundamental guiding mechanism for production? In fact, there .is evidence that we not only can but must. After all, even now, in order to make a profit, par ticularly over the long haul, produc ers must provide a good or service which consumers want. Somehow, if they are to survive, they must deter52 THE FREEMAN January mine what it is that millions of Americans truly desire. Indeed, as McKenzie points out, the invisible hand and free markets evoke the very essence of individu alism. "If we were all alike in pref erences and abilities-identical there would be no basis for so many of the markets we Qbservein the real world."23It is because, while some of us are gardeners or golfers, others are numismatists, philatelists, spe lunkers, and scuba divers that the multitude of markets exists.

There is another element besides individual tastes to consider and that is individual talents. Since they also differ, we need a system of social or ganization which encourages all people to develop their own individ ual skills. This certainly entails self ishness of sorts, but it has some ad mirable social advantages. Two modern writers have expressed the matter as follows: "Concern for oth ers implies concern for oneself in the following way: to be concerned for the well-being of another is to want to contribute to that well-being; but we can contribute nothing of worth to others unless we have taken the trouble to cultivate resources in our selves, and this implies self-con cern."24 As John Stuart Mill put it: "In proportion to the development of his individuality, each person be comes more valuable to himself, and is therefore capable of being more valuable to others."25 We cannot, in short, give to others unless we have something of our own to give.

The Virtue of Individualism Individualism thus construed is not the epitome of selfishness or self centeredness. It is not a social vice but rather a social virtue. It is in finding ourselves that we can best use our talents for the social good. In his work The Constitution of Lib erty, Friedrich A. Hayek quotes a passage from H. B. Phillips which underlines this point: "In an ad vancing society, any restriction on liberty reduces the number of things tried and so reduces the rate of progress. In such a society freedom of action is granted to the individ ual, not because it gives him greater satisfaction but because if allowed to go his own way he will serve the rest of us better than under any or ders we know how to give."26 In studies of American and Brit ish industrial development over the last two centuries, much is often made not only of the sordid state of working conditions but also of the "Robber Barons" whose greed seemed bound to destroy both our natural and our human resources. Too little has been said of inventors and en trepreneurs whose new ideas and initiative unlea~hed a plethora of revolutionary innovations.

In Britain two centuries ago there was, for example, the remarkable coterie including James Watt, Mat1983 CONSTITUTIONAL RESTRAINTS ... AND INDIVIDUAL FREEDOM 53 thew Boulton, Josiah Wedgwood, and others who comprised the Lunar So ciety of Birmingham. 27 In the U.S. during the late 1800s there was an· even greater host of innovative in dividuals, most conspicuously Thomas Edison but including also many others such as Borden, Swift, Armour, Walgreen, Eastman, and Birdseye. Their stories have been marvelously retold by Daniel Boor stin in his book The Americans: The Democratic Experience. 28 Nor have we any reason to believe that individual variety and initia tive are any less lacking today than in the past. Examples run the gamut from such medical advances as CAT scanners and interferon, to cable TV and video games, even to a report in the Wall Street Journal that, despite all the furor over nuclear weapons and waste, residents of one town in Colorado are actively seeking estab lishment ofa low-level nuclear-waste dump in their area for the jobs it would provide. (Their promotion of the project inel udes bumper stickers which read "Nuelear Power Plants are Built Better Than Jane Fonda!")29 To solve all our energy, environ mental, and economic problems, is it not essential that we allow all pos sible opportunities for the full devel opment of individual talents and di versity? In his book, McKenzie rightly deprecates many Keynesian economists for prescribing govern ment deficits which have unleashed an unwarranted (and often un wanted) expansion of government's role. However, it should be noted that the famous British economist is not always well read by his own disci pIes. If they paid close attention to his famous work, The General The ory of Employment, Interest and Money, they would discover toward its end what may well be one of the most eloquent passages ever written about the advantages of individual ism.

"Let us stop for a moment to re mind ourselves what these advan tages are," Keynes wrote. "They are partly advantages of efficiency-the advantages of decentralization and of the play of self-interest. The ad vantage to efficiency of the decen tralization of decisions and of indi vidual responsibility is even greater, perhaps, than the nineteenth cen tury supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogenous or totalitarian state. For this variety preserves the traditions 54 THE FREEMAN January The Authoritarian Society THE authoritarian society is the natural and stable form of society because it is in solid conformity with the survival characteristics of the human being. It is dominant in history. Once established it tends to perpetuate itself because those wielding power seldom give it up short of bloodshed.

If an authoritative state is overthrown through organization and exercise of still greater physical power, then the wielders thereof won't let their power go after they have won. They just become the new set of rulers. Hence, much of human history is the story of a squirrel-cage succession of one authoritative regime after another from which the people almost never break out, as you may see in many countries of the world. George Washington was the exception. He refused to become our king; he gave up his wartime powers and insisted upon establishment of a representa tive·republic of limited power. He uniquely opened the door to the squirrel cage. We can, of course, crawl back into the cage, well-baited with prom ised security; and the door will then snap shut. -BRADFORD B. SMITH, "Our Unique Economic System" which embody the most secure and successful choices of former genera tions; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future."3o In Keynes' view, both the individual and society reap a great harvest from planting the seeds of free choice and initiative.

Thus it is that McKenzie and oth ers advocate adoption of Constitu tional constraints on government. Surely, some flexibility will be sac rificed. Moreover, it remains true that government has important roles to play, providing for "public" goods such as defense· and dealing with "externalities" such as pollution. Some people would also reasonably require efforts to protect consumers from fraud. A Dangerous Course While it can be admitted that the distribution of income provided by a free market economy may not be ideal, it is still not clear that gov ernment intervention will improve on matters. In fact, the danger in our present course is that, without some effective constraints on both liberals' and conservative business men's redistributive schemes, both economic growth and the individual freedom that enable incomes to rise will be eroded to the point of extinc tion. That is a possibility no less awesome than a nuclear holocaust.

1983 CONSTITUTIONAL RESTRAINTS ... AND INDIVIDUAL FREEDOM 55 Right now, many people, out of deep concern for both ourselves and our posterity, seek to avoid that awful destiny by advocating a nuclear weapons freeze. Isn't it equally es sential to lend our efforts to devel oping policies to assure that mar kets and individuals are free? @ID -FOOTNOTES1Ayn Rand, Atlas Shrugged (New York: Sig net, New American Library, 1957), p. 1083. 2Richard B. McKenzie, Bound to Be Free (Stanford, Cali£.:HooverInstitution Press, 1982). 3"The Recession Sours Voters on Business," Business Week, May 31,1982, p. 13. 4". . . the death rate, calculated per regis tered vehicle, for subcompacts from 1978 to 1980 was more than twice that for full-size cars." DaleD. Buss, "Small Cars May Save Fuel but Cost Lives, Safety Experts Think," Wall Street Journal, April 27, 1982, p. l. 5John B. Schnapp, "GM Shakes Up the Auto Industry," Wall Street Journal, May 26, 1982, p.30.

6Thomas M.Lenard, "Wasting Our National Fbrests," Regulation, July/August 1981, pp. 29 36. 7"Dispatch from the Nut Wars," Regulation, January/February 1982, pp. 8-10. 8Jane Seaberry, "Dumping Cases: Ice Cream, Steel, Carts and Pears," Washington Post, May 4, 1980, p. Gl. 9McKenzie, pp. 120-22. lO"Sugar Imports to Be Limited, Reagan De cides," Wall Street Journal, May 5, 1982, p. 4; "Sugar Refiners' Group Files Lawsuit to Halt Quotas on Imports," Wall Street Journal, May 12, 1982, p. 47. Indeed, the Reagan Adminis tration's stance on "free trade" has been the subject of some sharp attacks; see Sheldon L. Richman, "Examining Reagan's Record on Free Trade," Wall Street Journal, May 10, 1982, p. 30, and Clifton B. Luttrell, "Reagan's Farm Economics," Competition, III (May 1982), pp. 8-9. llSee especially Chapter 3. 12McKenzie,p. 55. 13RogerJ. Williams, Free and Unequal: The Biological Basis of Individual Liberty (India napolis: Liberty Press, 1979), Chapter 4.

14Ibid,p. 63. .15Ibid.,p. 70. 16Carl Sagan, The Dragons of Eden: Specu lations on the Evolution of Human Intelligence (New York: Random House, 1977), p. 42. 17Friedrich A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), p. 24. ISIbid, p. 25. 19George Getschow, "More or Less Oil Will Go Up or Down or Maybe It Won't," Wall Street Journal, May 5, 1982, p. l. 2°Adam Smith, An Inquiry into the Nature and Causes of the Wealth ofNations (New York: Modern Library, 1937), p. 423. 21John Stuart Mill, On Liberty, in Edwin A. Burtt (ed.), The English Philosophers from Ba con to Mill (New York: Modern Library, 1939), p.l024. 22Paul A. Samuelson, "Economists and the History of Ideas," American Economic Review, LII (March 1962), p. 11. 23McKenzie,p. 63. 24David L. Norton and Mary Kille Norton, review of Sex Without Love by Russell Vannoy, in Reason, May 1982, p. 57. 25Mill,p. 998.

26Hayek, p. 9; quotation is from H. B. Phil lips, "On the Nature of Progress," American Scientist, XXXIII (1945), p. 255. 27LordRitchie-Calder, "The Lunar Society of Birmingham," Scientific American, June 1982, pp.136-45. 28Daniel J. Boorstin, The Americans: The Democratic Experience (New York: Vintage Books, Random House, 1974). 29Eric Morganthaler, "To Keep Their Town Alive the Residents of Naturita, Colo., Want a Nuclear Dump," Wall Street Journal, July 1, 1982, p. 21. 30JohnMaynard Keynes, The General Theory ofEmployment, Interest and Money (New York: Harcourt, Brace and World, 1964), p. 380.