The Ancient Chinese Story; D. Russell

There were in ancient China two large cities, Tchin and Tehan. They were con nected by a magnificent canal that had been built to encourage more trade at less transportation cost between the cities. Dr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home in Westchester County, New York. This is one of a series of articles examining current interventions of the welfare state in the light of warn Ings from the French economist and statesman, Frederic Bastlat (1801-1850). But during a depression in that section of China, the Emperor decided to create jobs and prosperity by ordering large blocks of stone thrown into the canal, thus making it useless. The Emperor's Prime Mandarin, when ordered to carry out this plan, said to him, "Son of Heaven, this is a mistake!" The Emperor replied, "Kouang, you talk nonsense!" ("I am here giving you only the substance of their conversa tion," said Bastiat.) At any rate, the quarrying, transporting, and throwing of those blocks of stone into the canal did clearly provide jobs for many Chinese.

And that isn't all. At the end of three months, the Em peror summoned his Prime Mandarin and said, "Kouang, look across the old canal." Kouang looked and saw a multitude of men at work. On the other side of the old canal, workers were busily excavating, filling, leveling, and paving. They were building a new highway between the two cities to facilitate trade! 111 112 THE FREEMAN February When another three months had elapsed, the Emperor again sent for his Prime Mandarin and said, "Kouang, look." And Kouang looked. He saw the road completed. Crowds of carts were carrying goods from one city to the other. And a multitude of Chinese porters were car rying on their tired backs enormous bur dens from Tchin to Tchan, and from Tchan to Tchin. He also noticed that builders were busily constructing inns for travelers along the new highway. Kouang was beginning to be convinced that his Emperor's scheme to create prosperity by filling in the canal was a brilliant and practical idea. But there is still more.

Another three months passed, and the Emperor sent again for Kouang and said, "Look." Kouang looked. In addition to all the activity he had seen before, there was now a great deal more. The hostelries were now completed and full oftravelers. And to supply their needs, there were butcher shops, bakers' stalls, shops for the sale of edible birds' nests, and so on. There were also tailors, shoemakers, sell ers of parasols and fans, and many more. And as those service-people also needed houses, there was a plentiful supply of masons, carpenters, and roofers. Then, of course, there were policemen, judges, and other necessary officials. There was even an increase in the number of persons who employed themselves as smugglers and robbers. Finally Kouang was fully convinced that his Emperor was indeed the most brilliant genius who had ever lived. The Son of Heaven had proved conclusively that prosperity ... [and] jobs can be cre ated by obstructing trade.

As usual, Bastiat followed his sat ire by applying the principle to some current law or governmental scheme designed to create prosperity by ob structing the free market economy. In this particular case, he featured the concepts that, as a result of the make-work scheme, "The people as a whole in Tchin and Tchan were now working harder· and producing less; that prices had gone up and real wages had gone down because of the increased transportation and labor costs of moving goods between the two cities." Less Production, Higher Wages, and Lower Prices These governmental interventions in the market place (including make work and other legal-plunder schemes) are producing precisely the same results in the United States to day. If I'm right, that idea certainly deserves a closer look. So let's briefly develop the results predicted by Bas tiat, i. e., less production, higher prices, and lower wages-all caused by substituting a more expensive factor of production (labor) for a less expensive one ("machinery"). Since all those ideas are inextricably mixed, I'll just include them as they come up.

My students at the University of Wisconsin were usually baffled when I argued that we American people are indeed working hard but, as the government increasingly moves into 1985 AN ANCIENT CHINESE STORY 113 the economy, we're producing less and less. They found that concept hard to grasp; it seemed contrary to what they could actually see around them. As near as I can figure, the reason was this: The students were looking at the Gross National Product, i. e., the amount of products and services produced and sold, whatever the type or quality or cost. That's not too sur prising since, in their courses in ma croeconomics, that's precisely how they were taught to look at it. And true enough, by that measurement, the yearly increase in goods and ser vices is usually impressive; and, of course, we can buy only what's available to be bought. By that GNP measurement, how ever, our government can (literally) increase national production and na tional income by paying people to de stroy what they've already pro duced, e. g., plow the crops under, or kill the little pigs, or build a new and expensive canal alongside an exist ing and under-used and lower-cost railroad (one part of our famous TVA project). Thousands ofprojects of that nature most definitely did create jobs and increase the GNP during the 1930s, and we're still following that same policy today.

To my way of thinking, the net re suI t of those uneconomic projects (and most other similar governmen tal schemes) to increase work and jobs is a constantly decreasing rate of growth of goods and services we can use for the improvement of our material welfare. Unfortunately, we have no reliable figure for the amount of wanted goods not pro duced because our money is spent by government on something our con gressmen quite openly refer to as "pork barrel" projects, i. e., uneco nomic projects designed primarily to create jobs in their congressional districts. Sometimes they even joke about it. The Auto Industry Restrictions against trade are, of course, imposed by government for this same purpose of creating jobs. The automobile industry offers an excellent example. We're all familiar with quotas and tariffs against foreign cars. And as advertised, that policy most defi nitely does create more jobs in the automobile industry in the United States, as well as more "tariff jobs"

in government. Surely all of us are also familiar with the fact that the constantly-rising prices we must pay for our cars (both foreign and do mestic) is due directly to that make work scheme. But just in case there's one person somewhere who hasn't made that connection, I'll here de velop it briefly. We'll never know precisely how much more we must pay for our cars because ofthis governmental scheme to increase jobs and production in the 114 THE FREEMAN February United States. We can't know it be cause the only accurate measuring device (i. e., you and I buying cars in a free economy) has been abolished by government in this particular area. Even so, we can look at histor ical prices and compare the perti nent relationships when there was a free market. And we can compare prices in existing protected and non protected industries in general. By those measurements, we can esti mate with reasonable accuracy that almost all of the $3,500 (average) price increase (since 1981) you paid for your new car was the direct re suI t of our government's policy to bring prosperity to our country by restricting trade.

We're talking many billions-of-dol lars that you and I and all the rest of us would have spent for goods and services we want but can't buy be cause we must pay several thou sands of dollars more for our car than would be the case if the market were free. It's doubtful, of course, that prices on all protected products have increased by more than one-third (the automobile rate) because of these governmental "prosperity schemes." But surely a figure of 15 percent is realistic. By any economic measurement, however, we're in the range of hundreds-of-billions-of-dol lars of lost production of wanted goods and services that'll never be produced because our government is protecting us from competition. That's why I'm convinced that the production of wanted goods and ser vices in the United States is going down, not up. Backed by Force Most people obviously disagree (sometimes almost violently) with my reasoning. They're the ones who have such sublime faith in our gov ernment officials. I'm impressed with their sincerity, and a couple of times I've been tempted to give some credence to their arguments for in terventions by government. But then I remember where I last saw a large number of them; they were leading the parade to cut our defense budget by at least $100 billion.

At that point, I get the strange feeling they've stolen my argu ments. They count in great detail all the real (i. e., consumer-productive) jobs that would be created if that $100 billion of "useless spending" were cut from the defense budget. They sometimes even. refer to ar mament production as a vast make work scheme to make the rich even richer! I'm not about to get involved in the "defense controversy," but I'm al ways astounded when I hear the op ponents of that "wasteful military budget" actually using Bastiat's ar gument of the "broken window fal lacy," i. e., recounting what can't be seen because what is seen blocked it out. I do wish, however, they'd sug1985 AN ANCIENT CHINESE STORY 115 gest the "saved money" be returned to you and me. Instead, however, they just want it transferred to the various "social service depart ments." At that point, they re-find their faith in the omniscience of the officials of government-and, of course, they immediately adopt ar guments directly opposed to the ones they were just using against the de fense budget.

I wonder if they'll accept this fact: The government officials in any de partment are no more (or less) effi cient or omniscient than the officials in any other department. They're just you and me-with their deci sions backed by the police force. Per sonally, I'm always distrustful of people who want to have that power over you and me. If that sounds a bit harsh, I'll happily apologize to the offended officials of government, but I doubt I'll change the sentiment. I'm convinced that Lord Acton was correct when he spoke of the cor rupting influence of power, and said that "absolute power corrupts absolutely.' , When it comes to administering "justice," I'm aware we must give power to our officials. But let's keep it restricted, slow, and inefficient, with all sorts of checks and balances. I'm quite willing to pay the high cost of that vital but noneconomic ser vice on behalf of "justice." But when it comes to economic goods and ser vices, I'm after the lowest possible price for the best possible product in the shortest possible period of time.

The last mechanism I look to for that performance is our cumbersome form of government with its frequent and disruptive elections that remind me of a particularly vicious proxy-fight to take over a company. Costly Intervention I'm aware of the contrary argu ments. And I'm especially aware that many people argue quite sin cerely that, "Man, I'm an American. I was born here. And I'm entitled to a job that pays a living wage. If that means more governmental interven tion in the economy and higher prices for you, so be it." While I won't endorse that popular argument, at least I can understand why poor and sometimes-ignorant people frequently use it, i. e., legal plunder is acceptable if it's for needy and deserving people. But when our highly educated politicians and in dustrialists try to hide their own greed and lust for power behind fal lacious economic arguments-or be hind a plea for plunder "to help oth ers" or even behind patriotism itself-I become unhappy. The auto mobile industry offers an excellent example of this trend.

Three or so years ago a leading au tomobile company executive was pleading with Congress for "tempo rary breathing room" to get his com pany going again. The "law factory"

116 THE FREEMAN February in Washington produced what he or dered. Today, he's dropped the "breathing room" simile for the even more poetic one of laws to insure "a level playing field," i. e., permanent restrictions against competition, so that the less-talented players can compete on equal terms with the bet ter players, a sort of golfer's handi cap arrangement in the production of goods and services. Or to phrase it brutally: To bring the highly automated and more efficient Japa nese automobile industry down to the level of the comparatively labor intensive and less efficient Ameri can automobile industry-at your and my expense. The result of that first grant of "le gal plunder" was (and is) easily pre dictable. Since Congress awarded it in 1981, the prices for automobiles to you and me have gone up by more than one-third, more than $3,000 per car. And if he and his fellow-execu tives who've joined him are success ful in the current campaign to make that "breathing room" permanent, the prices for automobiles in the United States are likely to go up again by another $3,000 or so per car.

Now for a brief look at the primary reason American cars cost more to build and buy than do Japanese cars. You may recall that "the emperor son of heaven" in Bastiat's story be gan his job-creating scheme by first hiring men to destroy the canal with its cheap transportation costs. Then he created still more jobs by building a new road from Tchan to Tchin. This, in turn, created a vast number of additional jobs for men to pull loaded carts from one city to the other or (the traditional method of transportation before those canal barges came along) to carry the goods on their backs. He replaced a cheaper factor of production (a waterway and wind-power) with a more expensive factor of production (human labor). In short, he hit on the ancient (but ever-present and always-popular) idea of creating jobs by destroying machines. And that's precisely the reason the cost of American-made cars is at least one-third higher than the cost of Japanese-made cars. The Japa nese use as little as possible of the most expensive factor of production (labor) and as much as possible of the cheapest factor of production (capitaD.

Capital Creates Jobs As you doubtless know, the result of this low-cost method of production is not fewer jobs. Actually, more jobs are thereby created; they're better jobs but found in other areas that support the cheap machines and the highly paid people who produce and run them. There're far more jobs to day in highly-mechanized Japan than ever before, and those jobs pay as much as ten times the pre-World War II wage rate. The result of mas1985 AN ANCIENT CHINESE STORY 117 sive capital formation in a free mar ket economy is more jobs, shorter hours, higher pay, and better prod ucts at lower prices-in any country that follows the principles of free trade, domestic and foreign. Try to tell that to the president of the United Automobile Workers union-or to the president of any American automobile company. Save your breath. The answer will invar iably be that those sneaky Japanese are just "dumping" their cars in the United States by selling them cheaply-"probably below the cost of producing them." (There's that old joke: "If they sell below their costs, how do they make a profit?" The an swer: "Mass production; they sell so many of them.") There's just no way that our in dustrial and labor leaders are going to admit that the Japanese are bet ter managers than we are, or that the Japanese understand the reali ties of production-costs and market pricing better than do the American managers, or even that low-cost ma chine production provides more and better jobs for people in general.

I suspect you'd even put your phys ical safety at risk if you made those comments in any UAW meeting, es pecially if you concluded with the flat statement that the reason our cars are more expensive to build than the Japanese cars (and also probably inferior mechanically as well) is that we use too much of the most expensive factor of production (labor) and too little of the less ex pensive factor (machines). Now for a summary of those spe cific predictions Bastiat made in his "Ancient Chinese Story," i. e., less production, higher prices, and lower wages. 1. Well, obviously we're produc ing fewer goods and services we our selves would select if the inefficient and protected and subsidized com panies were compelled to meet mar ket demands instead of merely gov ernment requirements that permit them to continue to receive the legal plunder. Our laws are surely protecting millions of jobs that would soon dis appear if you and I could decide in the market by voluntarily spending our own money. That automatically incl udes all jobs in any company that must have tariff protection to con tinue to exist. Without it, they would all fail or be radically reorganized. I have no count ofjust how many com panies are being kept alive by those noneconomic subsidy and tariff laws; it could quite easily run into more than one hundred thousand.

We'll never find out as long as we permit them to hide from reality. 2. In 1980, prices were rising at the yearly rate of as much as 20 per cent. The new administration initi ated unpopular measures to bring the yearly rate of increase down to 118 THE FREEMAN February less than five per cent, but it's still a situation of steadily rising prices and there seems little doubt but that the increase will accelerate again. 3. While jobs are indeed increas ing, there are millions of Americans whose current pay won't buy as much as their pay did a few years ago, i. e., there has been a decrease in real wages for a large percentage of the American people. Free to Try In short, our rejection of a free, open, and competitive economy has cost us dearly, and will cost us even more as time goes on. It's not that we're bad people; we most definitely aren't. In fact, there's good evidence to support the belief that the pri mary reason we favor these "make work" measures is a misguided ef fort to help people who need help.

But if we continue to confuse charity and economics, I wonder if we'll con tinue to produce enough to go around. Perhaps the following short story of two young Americans who set out to "make their fortunes" more than three-quarters of a century ago will demonstrate what made America great, and how far we've now degenerated. My Uncle Elliot was an excellent harness and saddle maker. In 1908, he went into business for himself in Burlington, North Carolina-The Russell Harness Shop-with $5,000 capital, a whale of a lot of money at that time and place. By chance, an other skilled artisan (a wagon maker) also went into business for himself that same year-Frederick J. Fisher, in Detroit; The Fisher Body Company. Both those young men-each a hardworking and skilled artisan with an eighth-grade education-had an equal chance to "make their for tunes." And that's what they set out to do. The founder of the Fisher Body Company realized his dream. The founder of the Russell Harness Shop didn't. After several years as a fairly successful businessman with four employees, he went broke; his big gest account, the Burlington Fire Department, changed from horses to trucks. And when Uncle Elliot died, we had to "pass the hat" to get enough money to bury him.

It would've been nice if my uncle had been the one who bet on the car instead of the horse. But it's not im portant. The vital element at stake is this: Both were free to try. Noth ing else is of any great consequence. It doesn't really make much differ ence how it comes out-just so long as everyone is free to try. And that's the vital mainspring (freedom to try) that's being eroded in America today. And of all things, it's being destroyed in the name of giving everyone an equal chance! There's just no way everyone can be equal (we aren't) or have an equal 1985 AN ANCIENT CHINESE STORY 119 chance; for there's no possible ar rangement whereby unequal people can have equal chances. And there's nothing our government can do about it. But we can quite easily arrange for everyone to be free to try. All we need do is repeal all subsidies, tariffs, and similar interferences by government in the market economy. Then any one can try who wishes. How he goes about it is his problem and privilege.

Ifhe "bets on the car instead of the horse" and produces a product or service you and I want at a price we're willing to pay, he'll get rich and provide good jobs for the many people who throw in their lots with him. If he fails to provide you and me with what we want, however, he'll fail, as he should. And, of course, all those who bet on his success will suf fer the consequences of their poor judgment. I simply can't imagine a better ar rangement to encourage maximum production at minimum prices for the largest number of people-just pass no law that prevents anyone from trying. @Rl THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which underlies the law passed by legislatures or declared by rulers. It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise.

This remarkable volume, translated in 1950 by Dean Russell, has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom. 76 pages Cloth $3.50 Paperback $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Russell Shannon Trade Barriers WHEN he wrote Wealth ofNations in 1776, Adam Smith referred to "a cer tain propensity in human nature ... to truck, barter, and exchange one thing for another."! Even children are known to be prone to swap such items as stamps, bubblegum cards, marbles, and other items of mutual desire. But enjoyable and beneficial though trade may be, there is also a propensity to stifle it. Even the Rea gan Administration, with a strong and outspoken penchant for free markets, has succumbed to pres sures to curb imports of cars, steel, textiles, motorcycles, and other products from foreign lands.