Book Reviews

But I've seen the shacks of squatters on the hillsides in back of Caracas in Venezuela and in the land around Santiago in Chile, and it is easy to visualize the same ring of unfin ished tin and cardboard huts around Lima. The shacks are illegallysituated, but nobody does much to disturb them. For where else can propertyless people go except back to the country, where life is all too hard for a mere peasant field hand? The shacks around Lima belong to what Hernando de Soto, a Peruvian who runs a fact-finding agency called the Insti tute for Liberty and Democracy (ILD) calls the informal, as opposed to the formal, econo my. This economy, which de Soto disdains to call black, is the natural response to an impos sible situation of people who, quite under standably, refuse to die. The story of "the invis ible revolution in the Third World" is ably told in de Soto's The Other Path (New York: Harp er and Row, 271 pp., $22.95).

The older inhabitants of Lima, with legal businesses staked out and their own housing needs taken care of, don't welcome newcomers from the country, but they bow to faits accom plis when these come with impressive planning and power. De Soto tells how the invaders from the country move in to seize empty stretches of land on the Lima periphery. One evening there may be nothing stirring on the land. But, come morning, a whole group of in vaders will have marked out their plots and set up the first approximations of scores of houses. Normally the police look on. The police know that the invaders represent a potential political power that they may have to reckon with some day. The invaders speak of something they call an "invasion contract" based on "an expectant property right." De Soto's ILD found in 1985 that out of every 100 houses built in Lima, 69 were governed by the extra-legal system.

After the first seizure comes the long wait. There are 159 bureaucratic steps which resi dents must complete in order to legalize, or formalize, their settlement. The process of for malization takes an average of 20 years. To start a legal business is almost as forbid ding. First, there must come an adjustment of land. This takes 83 months to complete. The cost of an adjustment is $590.36, which is 15 times the monthly minimum wage. Sewage and water functions must be arranged for, and there must be access to transport, which is largely illegal. It takes 12 months to obtain documents that allow building to start. Study ing cases, the ILD found that "the cost of ac cess to formal markets, in terms of time, was an average of seventeen years, from the forma tion of a minimarket until the market· proper comes into operation." The difficulties of building their own markets explains why so many people decide to become street vendors.

Even when one has a legal, or formal, business going, 40 percent of an administrator's working hours are used up by bureaucratic procedures. It is small wonder, then, that newcomers to Lima are inclined to say to hell with formal procedures. They choose "the other path." Their time is their own, though they may have to pay an occasional bribe. And their money is their own. There are, however, certain costs of being informal. One is that the contracts between buyers and sellers are not enforceable in law. People must trust each other. Another cost is that credit to buy expensive machinery is hard to come by. De Soto's theory is that Peru, and much of the rest of Latin America, is still living in the seventeenth and early eighteenth centuries, when the system of mercantilism governed business dealings. Mercantilist economies ulti mately stagnated because, as de Soto puts it, "their elite entrepreneurs specialized in ex ploiting regulations which favored them over new methods of production." The changes in England came relatively peacefully as Parlia ment, impressed by Adam Smith, passed some good laws. In France there had to be a violent revolution followed by Napoleonic dictator ship. Napoleon's wars smashed mercantilist practices in most of Western Europe.

Michael Novak, Zbigniew Brzezinski, Sena tor Bill Bradley, and Jean Fran~ois Revel are among those who are quoted on the jacket of The Other Path. Their laudatory comments are not surprising. What is surprising is to find Richard Nixon, who once imposed price controls, leading a chorus of praise for what Nixon calls "the clarion voice of economist Hernando de Soto, whose book ... is a piv otal study of the extraordinary entrepreneurial dynamism of Peru's underground economy." De Soto says of his book that there is noth ing in it "that needs to be confirmed by com plex laboratory experiments. You have only to open the window or step into the street." What you will encounter in the Lima streets besides the illegal bus lines are 91,000 street vendors who "maintain a little over 314,000 relatives and dependents." Besides the street vendors there are 39,000 proprietors of informal mar ket stalls whose businesses are valued at $40 million. So it is really a misnomer to speak of Peru's "underground economy." It couldn't be more in the open. The "visibility" of it all mocks de Soto's own subtitle, "The Invisible Revolution in the Third World."

245 American readers of The Other Path will find it. exciting enough even though de Soto tosses the names of unfamiliar Lima mayors and Peruvian military dictators and civilian presidents into his text with no effort to specify what they stood for individually. For native Pe ruvians who know their own history and have a detailed map of Lima in their heads the book must be incredibly exciting. D ADVERTISING AND THE MARKET PROCESS:A MODERNECONOMICVIEW by Robert B. Ekelund, Jr., and David S. Saurman Pacific Research Institute for Public Policy, 177 Post Street, San Francisco, CA 94108 • 1988 • 212 pages • $29.95 cloth, $12.95 pa perback Reviewed by Robert W McGee P rofessors Ekelund and Saurman take the neo-Austrian view that advertising pro motes human welfare by providing market information and lowering search costs. They see this view as a minority perspective, but one that is growingin popularity.

The majority perspective, espoused by Alfred Marshall, John Kenneth Galbraith, and others, sees advertising as wasteful at best and monopoly enhancing at worst. The authors show that the majority view of advertising is incorrect on sever al counts, and present one of the most thorough cases yet written for the neo-Austrian view. Rather than verging on the unethical and manip ulative, advertising helps consumers to discover what goods and servicesare available. The book starts with a foreword by Israel M. Kirzner, one of the leading exponents of Austrian economics. The first chapter traces the historical development of advertising and discusses the modern criticismsof mass marketing. As far back as the Middle Ages, advertising was regulated by government, which gave monopoly powers to those who were permitted to advertise. In France, for example, only town criers who were franchised by the government could advertise a Parisian tavern keeper's wine. In England, the advertising tax helped retard the spread of litera cy because it made newspapers more scarce.

Where advertising has been unhampered, con sumers have benefited and markets have been more open. Restrictive practices, on the other hand, have tended to help establishedproducers at 246 THE FREEMAN • JUNE 1989 the expense of newcomers. Far from being a barri er to entry, advertising is one of the principal means by which new competitors can enter a mar ket. For example, before cigarette advertising was banned from television in 1970, an average of . one new brand a year successfully penetrated the market. Between 1970 and 1974, no new brand was successfully introduced. The beneficiaries of the ban were the firms with established brands. The losers were the companies that couldn't in troduce their products and consumers who never learned of the new products' existence. The theories that advertising raises overall profits and increases concentration ratios also are dismantled by Ekelund and Saurman. (Concen tration ratios measure the sizes of the leading firms in an industry, versus the size of the entire industry.) Unrestricted advertising makes it easi er to enter markets, which leads to increased competition and lower prices.

Ekelund and Saurman offer some telling ex amples: When MatteI started advertising toys on the Mickey Mouse Club television show in the 1950s, some toy prices dropped by 30 to. 40 per cent in areas where advertising was relatively fre quent, while prices remained relatively stable in areas where advertising was infrequent or nonex istent. The prices of eyeglasses are lower where eye doctors haven't been able to push through bans on commercial advertising. Legal services are cheaper where advertising is permitted. Un restricted advertising also reduces the prices of drugs, gasoline, and numerous other products and services. There is even some evidence that the qualities of goods and services improve when restrictions on advertising are lifted. The chief beneficiaries of advertising restric tions are established firms that already have a share of the market. They often defend these re strictions by claiming that advertising bans pro tect the consumer, who presumably isn't capable of making rational decisions. But as Ekelund and Saurman point out: "There is no validity in the notion that consumers can properly evaluate pro posed national policies when selecting officehold ers but are somehow unable to choose between and evaluate the merits of two different cans of beans."

ProfessorMcGee teaches accountingat Seton Hall Uni versity. ROBERT LEFEVRE: "TRUTH IS NOT A HALFWAY PLACE" by Carl Watner The Voluntaryists,Box 1275,Gramling,SC 29348• 1988•236 pages.- $14.95paperback Reviewedby K. E. Grubbs Jr. A mong libertarian philosophers, Robert LeFevre was sui generis,one of a kind. That is how the self-proclaimed autarchist would want to be remembered, of course: as an individualist who packed several ca reers into one life, and who made his mark on his times by teaching an ethical code defiant of the prevailing collectivism. Consider those careers. He had been a failed actor, a radio announcer, a struggling hotelier, an innovative television news caster, a newspaper editor, and the founder and president of a small college. I remember Bob, who died in 1986 at the age of 75, as the most stimulating lecturer I had ever heard, vastly more thought-provoking than my college professors. He vaguely resembled Mark Twain, and his wry humor could keep a class's at tention for twelve hours a day, five days a week.

Seriously. Freedom Newspapers, the nationwide media chain that employs me, would periodically send its editors through his course, which he called "The Fundamentals of Liberty." Uniniti ates, hearing about the regimen, would imagine a scene from A ClockworkOrange:strapped into a chair, eyelids pinned back, attention fixed on the lecturer, who would ladle The Truth into the now-robotized participant's brain. No such nightmare. Bob simply drew on his multitude of experiences as a communicator and sustained our keen interest. He never took any courses in educational methodology; indeed, he possessed no college degree. Had he such a cre dential, or had he suffered through the pedagogi cal techniques stressed in the teachers' institu tions, his considerable capability would surely have been spoiled, his students reduced to snores. As a teaching phenomenon, he awakened us to the competing natures of man and political government, the latter coercively hobbling all creativity in the name of some collective good.

He explored the alternatives of voluntarism, even challenging us to imagine how seemingly neces sary functions of the state could be conducted without taxation or force. Come on, we would think. Could interstate highways be constructed without taxpayers' money or the invoking of emi nent domain? You bet they could, if we but disci plined our imagination and our morality.Such, of course, were the exercises of the ideological purist, but I daresay such kernels, planted back at "Freedom School," a.k.a. Rampart College, blos somed into the privatization movement of today. It is well that someone should write a biogra phy of this man, this exceedingly gentle man. (Bob was a pacifist, though he shunned the word.) One of his dedicated students, Carl Wat ner, has produced a biography, a project autho rized by LeFevre himself,who cooperated by fur nishing papers and an oral self-history. LeFevre also led Watner through several revisions before his death. Perhaps because the writer had such an unfree hand, Robert LeFevre: "Truth is Not a Half-wayPlace"suffers drastically.

Alas, if one wanted one's moral philosophy taken seriously,this is not the sort of introduction to it one would want published. Or so I should think. Though again, perhaps it is to Bob's credit (and I can well imagine him being so brutally honest with himself) that he wanted it all out, warts and all. Here is a man who spent about the first third of his life deeply involved in-or trying to extricate himself from-a truly odd religious cult, the "I Am" movement. Bob, it seems, allowed a couple of peripatetic charlatans to explain, in terms of a gnostic formu la that fueled their enterprise, some astonishing mystical occurrences that he had experienced in his early years. Somewhere in this world or the next, or both (if 1 have this right), there existed "masters" who possessed true wisdom; they pos sessed such wisdom by being in touch with "St. Germain," who benevolently guided the earnest seeker's life. Bob was an earnest seeker, indeed some thought a "master"; but he pursued "St.