Book Reviews

283 A REVIEWER'S NOTEBOOK ThePoverty of Communism by John Chamberlain N. ick Eberstadt calls his challenging book . The Poverty of Communism (New Brunswick, N.J.: Transaction Books, 315 pages, $29.95 cloth). For the most part he trains his spotlight on China, Cuba, the Soviet Union, and the satellite countries of eastern Eu rope, all of which have been under Marxist Leninist-Stalinist rule for decades. There are, however,plenty of references to countries such as Panama, Chile, Uruguay, Jamaica, and Guyana that have been brushed by Marxist doctrine. This is a wide-ranging book that realizes ideologies go beyond physical boundaries, and it is the better for it. But Eberstadt is confusingin the way he jumps from eyewitness evidence of poverty in Commu nist nations to the statistical averages of mortality tables. The eyewitness stuff, which takes us to Solzhenitsyn's Gulag, is dramatic and irrefutable.

But the statistical evidence, to my mind, is unreli able. To do Eberstadt justice, he himself is careful to indicate his skepticism about reliance on official numbers. He says the official Soviet life ex pectancy figure of 69 years would be lower than the most recent numbers quoted by the World Bank. Moreover, the countries that Eberstadt concentrates on are definitely not above playing politics with health and literacy figures. The Cas tro regime in Cuba is concerned with AIDS, the incurable disease that has jumped boundaries in sub-Saharan Africa. Since some 300,000 to 400,000 Cubans have been rotated through Africa between 1975 and 1985, there must have been considerable contact between Cubans and blacks in Ethiopia, Angola, and elsewhere. Eberstadt says that for "reasons of state" the Castro regime "might well wish to downplay AIDS' source of contagion.... " While Eberstadt is to be commended for his distrust of the Communist use of mortality statis tics, there are ironies that he ignores. One irony is posed by the arbitrary notion that fetuses are not living human beings. This allows govern ments that run their economic systems by top down planning to exclude abortions from their figures bearing on life expectancy. The Chinese, at the moment, have decreed that their women must be limited to one child per family. Forced abortions are common, much to the dismay of the women. Dismaying or not, they enable the Peking government to make a good stab at con trolling the population.

What population control of this drastic sort does is to make the life expectancy figures practi cally meaningless. If only one child per family is allowed to live, that child might easily have a fa vored life expectancy. He will get the best avail able nutrition. If he hits 70 years it will be no sur prise. The average of such favored life expectancies would be high. But if the abortions of unnumbered fetuses were to be included in the averages, we would be dealing in negatives. Skipping to the Soviet Union, Eberstadt says Russian women have an average of six to seven abortions. If these were to be factored into the general statistics, we would get minus-quantity life expectancies. Despite the prevalence of epidemic diseases in Cuba, the mortality statistics offered in Havana seem to be in line with the general figures for the Caribbean region. But who should get the credit 284 THE FREEMAN • JULY 1989 for this? As Eberstadt knows, the conquest of yellow fever and malaria was a hard-earned by product of the efforts to make it possible for the U.S. to build the Panama Canal. The French had been defeated by yellow fever. But President Theodore Roosevelt and George Goethals per sisted in fighting the yellow fever and malaria mosquitos as the French had been unable to do.

Once the scientific knowledge of mosquito con trol had become common, it was easy for local Havana hospital authorities to move in. Actual credit for finding the cause of malaria belongs to an English physician named Ronald Ross, who had addressed the problem of mosquito control in Secunderabad, India. The "poverty" of Cas troite Communism would have been far greater if British and North American capitalism hadn't cleaned up the Canal Zone first. Eberstadt is chary of making foreign policy recommendations beyond a broad caution that the West must stop "subsidizing the Soviet imperium." He is worried by the fact that "Japanese, European, and even American corpo rations and government bodies make the Soviet task of controlling its allies far easier than it might otherwise be by granting Moscowfinancial room to maneuver." Eberstadt singles out Angola, where Soviet proxies are making "the jungles safe for ... 'so cialism.' This is an expensive task: by some esti mates, it costs as much as $3 million per day. The U.S.S.R. has been spared the necessity of footing this bill. Instead, Gulf Oil has stepped smartly into the breach, and is currently paying $5 million a day in royalties to the Luanda government."

Cuba, in short, has been allowed to spread itself in Africa by a capitalist American concern. The Poverty of Communism is a combination of essays written at different periods for publica tion in a variety of magazines. While this gives a disjointed quality to the whole, the general tonal effect is not unduly impaired. The inevitable rep etitions are acceptable in their various contexts. Overall, the book is reassuring to the West. The "poverty" of Communism, described in de tail by Eberstadt when he gets away from analy sis of statistics that he himself distrusts, is so obvi ous that one can be sure that Gorbachev in the U.S.S.R. and Deng in China will continue with their cautions, meanwhile allowing capitalistic motivations·and incentives to creep in. D THE mEORY OF MARKET FAILURE Edited by Tyler Cowen George MasonUniversityPress,4400 UniversityDrive,Fairfax, VA 22030. 1988. 384 pages. $21.75cloth Reviewed by Jeffrey A. Tucker E conomists favoring government interven tion often base their views on "market failures." These alleged failures occur when the free market appears unable to over come certain barriers preventing goods or ser vices from being satisfactorily provided through voluntary means. Some of these barriers are "ex ternalities," "high transactions costs," or are in herent "public" qualities of the good or service.

The theory of market failure, it seems, has al ways been with us, but it wasn't until the 1950s that Keynesian economist Paul A. Samuelson, along with other elaborators, defined and formal ized it. The argument they gave sounded com pelling at the surface, but many scholars later showed it to be, in many respects, fallacious. "Externalities" are a key part of the theory. They occur when an economic exchange affects someone not party to the original exchange. These can be positive or negative effects. For ex ample, factory pollution creates a "negative ex ternality," but when a neighbor improves his land and your property value goes up, you get a "posi tive externality." Not all externalities are cause for worry, how ever: only those that create a large "divergence between private and social cost" which diminish es, in some mechanistic sense, social welfare at large. The free market can't solve this divergen cy, some economists say, because the "transac tions costs" are too high. The factory, for exam ple, cannot work out a satisfactory deal with every person in a city to correct the negative ex ternality because of the costs involved in con tracting, bargaining, and enforcing agreements.

Government is therefore needed to correct the problem. Similarly, the existence of transactions costs also plays a part in creating what economists call public goods, that is, those goods (or services) that everyone wants, but that the market "fails" to provide, because of the good's "special charac teristics." Some traditional examples are national defense, fire departments, roads, and schools. The lighthouse is a common example of a good that supposedly embodies all the problems asso ciated with public goods. The lighthouse service can't be restricted to paying customers since when the beam is on, every ship in the harbor can see it. This is the condition of "non-excludabili ty"; non-subscribing boaters receive the benefits of the lighthouse (a "positive externality") cour tesy of the subscribing boaters. If the service is provided to one boat, it becomes useful to all. This creates what is called "non-rivalrous con sumption," which in turn leads to the problems of shirking and free-riding.

Why should some lighthouse customers pay, while others receive a light they are not paying for, that is, when they can free-ride? And as long as there is the chance for free-riding, why shouldn't everyone try to shirk in hopes that someone else will pay for the service? Faced with these problems, say some economists, the market won't provide lighthouses. The only al ternative, it appears, is to have the government provide the lighthouse and charge everyone equally for the service through taxation. Fortunately not all economists accepted the theory of market failure at face value. The classi cal liberals had long provided critiques of the log ic underlying market failure. But the newly for malized neoclassical theory of market failure called forth a formal response. Starting in the mid-1970s,and continuing to the present, a string of brilliant scholars have taken the model apart piece by piece. As a result, this once invincible case for government interference has severely malfunctioned. Some say the theory now stands on the verge of intellectual collapse.

In The Theory of Market Failure, Tyler Cowen has collected primary critiques of market-failure theory, most of which appeared in economics journals during the last 30 years, and organized them into an accessible volume. He also includes some previously unpublished essays that are es pecially notable. Cowen's excellent introduction details the important points of each article, ex plains the contribution each makes to the litera ture, and makes suggestions for further research. Contributors include Robert Axelrod, James M. Buchanan, Earl R. Brubaker, Steven N. S. Che ung, Ronald H. Coase, Harold Demsetz, Jerome Ellig, Kenneth D. Goldin, Jack High, Robert W. OTHER BOOKS 285 Poole, Jr., and Robert 1. Smith. As the contributors demonstrate, the market has an array of ways to overcome its alleged fail ures. The "special characteristics" of public goods turn out to be not so special, as Goldin points out, since most if not all goods can be sup plied with either "restrictive access" or "equal ac cess," which brings into question the inherent "publicness" of some goods over others. Dem setz shows that when "non-excludability" is not in question, as in a movie theater or park, en trepreneurs can charge consumers different prices based on differing consumer values. This allows public goods to be supplied privately. Sim ilarly, Buchanan explains in a now-classic article how private clubs and social groups can provide public goods in ways never imagined by the mar ket-failure economists.

But what about cases where the service of the public good cannot be excluded from nonpaying consumers? As a private solution, these goods can be connected, through tie-in arrangements, to other goods that are excludable. For example, the lighthouse beam is not ex cludable but space in the harbor is. Harbor own ers can charge a fee to boats entering the private port which can pay for the lighthouse. In fact, Coase shows that contrary to the assertions of economists, prior to 1842 British lighthouse ser vices were provided privately through a port-en try charge. Coase concludes that "economists wishing to point to a service which is best provid ed by the government should use an example which has a more solid backing." Another example of market failure debunked in these pages is that of the beekeepers and the apple-growers, whose services create externalities for each other (bees both eat and fertilize the ap pies). Economists use this example to illustrate how taxation and subsidies are the only way to correct some externalities. Cheung, however, demonstrates that beekeepers and apple growers have been arranging private contracts with each other for many years, with no apparent failures in the market.

The same is true for education, another alleged public good that government must provide. High and Ellig show how before the advent of govern ment schools, in both Britain and the U.S., pri vate enterprise did a fine job of providing educa tion, even to the poor. Of special note, their 286 THE FREEMAN • JULY 1989 article describes how the government used public schools to crowd out competitive private ones. The contributions of Poole and Smith show how the "market failures" of fire protection, public parks, and nature conservation also have been privately provided. As a caveat, most of the contributors to this volume are neoclassical economists and there fore assume the postulates of "perfect competi tion" and utility scales that are interpersonally measurable, both of which are untenable in a world of action. For a more fundamental critique of market failure, one that takes into account the insights of subjectivism, readers must look to ward economists writing within the tradition of Austrian economics.

Cowen's volume is nonetheless an outstanding research tool. Many economists will continue at tempting to justify government intervention by pointing to "market failures." But this collection puts them on the defensive. Their claims will not be regarded as self-evidently true, as they were only a few years ago. D Mr. Tuckeris afellow of the Ludwig von Mises Institute. MONOPOLY MAIL: PRIVATIZING THE U. S. POSTALSERVICE by Douglas K. Adie Transaction Publishers, Rutgers University, New Brunswick, NJ 08903 • 1989 • 197 pages • $34.95cloth, $19.95paper Reviewedby MelvinD. Barger O nce a venerated and honored govern ment institution, the U.S. Postal Service is steadily losing public favor and sup port. With amazing speed, private competitors have outgunned it for market share in package and bulk mail, while the resourceful overnight services have created a new industry out of time sensitive letters. The Postal Service has a last bas tion of defense in its legal monopoly of first-class mail, but even that position is now under sus tained attack. Either the Private Express Statutes that protect this monopoly will be repealed, or new electronic technologies may simply bypass the USPS and leave it with a shriveled husk of its former empire.

How did this come about? Monopoly Mail, sponsored by the Cato Institute, traces the major currents of change that are converging on the Postal Service. Author Douglas K. Adie, an Ohio University economics professor who took his doctorate at the University of Chicago, leaves lit tle doubt that the current USPS is in great peril. And he insists that there's virtually no alternative but to change the organizational structure of the Postal Service. The only really workable solution is some form of privatization that will enable the service to survive and compete. Professor Adie also offers convincing evidence that the legal mail monopoly-a seeming advan tage-has been the Postal Service's Achilles' heel. The traditional justification for a govern ment postal monopoly was its "public service" status and the need to bind the country together with effective communications. Whether this rea soning was sound or not in earlier days, Professor Adie shows that it's certainly outmoded in this day of multiple communications systems. He also shows that early private postal ventures were widely patronized and had the healthy effect of forcing the government service to improve its practices.

Private postal companies eventually disap peared, however, with passage and strict interpre tation of the Private Express Statutes. The postal monopoly also prevailed because it had strong Congressional support that only began to wane in the 1960s. With the Postal Reorganization Act, which became effective in 1971, an exasperated Congress tried to shed its responsibility for the service and to make it a self-supporting govern ment corporation. Though it resembles a private corporation in form, the new USPS has never functioned like one. While losing ground in other classes of deliv eries, the USPS still holds a monopoly on first class mail which enables it to shift a large part of its costs to this group of users. Postal managers also have been either unwilling or unable to inno vate, and efforts to improve or speed mail han dling often fail. The worst malady is soaring labor costs which now comprise about 84 percent of postal expenses. The postal managers have been ineffective in opposing the demands of the pow erful postal unions or were undercut later when arbitrators granted liberal increases. As a result, according to Professor Adie, USPS employees now get about 35 percent more pay than they would receive in comparable private sector em ployment.

While the postal unions are still powerful enough to resist direct cuts and changes, they cannot prevail indefinitely. Professor Adie be lieves, for example, that the Reagan Administra tion's success in facing down the air traffic con trollers' (PATCO) illegal strike set a new pattern in Jabor relations for Federal employees. Any President with enough backbone now has the public's support in resisting high pay discrepan cies and refusing to support useless institutions. There are also some excellent lessons for the Postal Service in the AT&T divestiture, in the deregulation of airlines, and in Canadian and British experiences with privatization and/or deregulation. Professor Adie shows how each change has been beneficial in its way. The use of the AT&T example for monopoly divestiture is a bit ironic, because some of us once cited the Bell system as a standard while criticiz ing the poor performance of the Postal Service.

We know today, however, that AT&T looked good only in comparison with government com munications systems around the world. Once shed of its monopoly, AT&T could no longer force one class of telephone users to subsidize other classes. Market realities also force AT&T and others to move more quickly with innova tions that will cut costs and improve service. If the government finally elected to divest the Postal Service, how could it be done? Professor Adie does not propose selling the Postal Service as a single unit, because he feels its very size would make it too much of a competitive·threat (as others feared AT&T would be if deregulated and left intact). He suggests spinning off its five regional divisions as independent Postal Operat ing Companies (Poes). This would precede the repeal of the Private Express Statutes, and might give the POCs breathing time to become compet itive with the new delivery systems and technolo gies that would arise to challenge them in the market. Professor Adie goes on to suggest other methods that might characterize the new POCs and their processes for working together. He also argues that a privatized Postal Service would of fer tremendous opportunities for profits. This prospect, of course, would tend to enhance the share prices of the new POCs followinginitial of ferings.

OTHER BOOKS 287 What's most needed, however,is not a detailed plan for carrying out privatization, but simply a decision to do it. The postal unions and other vested interests still have some power to block a direct Congressional move to privatize the Postal Service. What they don't have is the muscle to block new technologies that are coming on stream as alternatives to first-class mail deliver ies. The USPS and its unions also are in deepen ing trouble with the public, which is tiring of disproportionate increases in first-class mailing rates. And now they face the reality of new books, like Professor Adie's, that deal with pri vatemail as an idea whose time has come. D Mr. Barger was a business writer associated with Libbey-Owens-Ford Company and one of its sub sidiary firms for nearly 33 years. THE AMERICANJOB MACHINE by Richard B. McKenzie Universe Books, 381 Park Avenue South, New York, NY 10016 1988 • 274 pages • $24.95cloth, $12.95paperback Reviewedby Robert W McGee The issue of "jobs" has become a sacred cow.

Politicians, business and labor leaders all advo cate creating more of them, yet nobody dares ad vocate destroying them. But this outlook is short sighted, as Richard McKenzie points out. Creating jobs is easy-just outlaw farm machin ery. If the health of an economy is measured by the number of jobs its citizens have, then China should have the strongest economy on earth. Yet it does not, partly because of an absence of farm machinery. Economies grow stronger through what Joseph Schumpeter called creative destruction. Some firms go out of business while others are born. By not allowing some companies to fold, govern ment prevents resources from being freed for more productive uses. This book points out some unrecognized advantages of job destruction. The central message is that job creation and job de struction go hand in hand. McKenzie destroys a number of myths about the U.S. economy. The pace of economic change is not accelerating, although increases in produc tive efficiency have enabled more workers to go into the service sector. Concern over the expan sion of the service sector is mostly unwarranted 288 THE FREEMAN. JULY 1989 and misplaced. We are not becoming a nation of hamburger flippers.

Part of the problem lies in how we classify goods and services. Hamburgers are goods when purchased in a supermarket, but they are services when bought in a fast food restaurant. Comput ers are goods when they are purchased, but are part of a service when leased. Truck drivers are classified as manufacturing workers when they move their company's goods from one site to an other, but are service workers when they work as independent contractors to transport the same goods. America is not de-industrializing. Manufactur ing output has varied between 20 and 24 percent of GNP rather consistently over the past 40 years. Yet manufacturing jobs, as a percentage of total employment, have been declining because com panies can produce more goods with fewer work ers' and because businesses have been changing the way they produce goods. For example, some accounting, payroll, and data processing func tions that formerly were done internally have been contracted out to independent providers.

The result is that jobs in the "goods" sector have declined while jobs in the "service" sector have increased. Yet the same jobs are being performed for the same companies. Furthermore, the rela tive decline in goods-producing j\obs has not caused a general downward shift in income. Government officialsin recent years have stat ed that the displaced worker problem is large and that government should play a more active role in reducing this problem. Yet an analysis of the statistics shows that most displaced workers soon find jobs. Attempts to alleviate the problem, such as plant closing laws, may actually make matters worse. The proliferation of low-income employment is generally seen as bad. But McKenzie shows that such a view is simplistic.One reason for the increase in low-income jobs is that the baby boom generation has entered the work force, and they had to start at the bottom, just like every body else. Also, many students and housewives have entered the job market on a part-time basis, and older workers are cutting back to part-time work rather than retiring completely. The result is often that family income has improved, al though the statistics show that more individuals are earning low pay.

The trade deficit "problem" may not be a problem at all. The trade deficit is measured by the difference between imports and exports, so a decline in exports will increase the trade deficit if imports remain constant. Yet exports may decline because an expanding internal economy has si phoned domestically produced goods away from world markets. American producers are sellingto other Americans rather than to foreigners. So a trade deficit can be caused by an expanding do mestic economy-which is a sign of economic health rather than sickness. McKenzie points out that attempts by government to restrict imports also have a tendency to hamper exports, so re strictions on trade tend to be self-defeating. Many jobs in the textile and apparel industries have disappeared in recent years. But few of the job losses,especiallyin textiles, have been caused by imports. Mechanization and increased produc tivity have caused most of the job losses, and in creased productivity has come about partly be cause of worldwide competition. Reducing the pressure of foreign competition by imposing trade restrictions will reduce the incentive to find additional ways to be more productive. In short, imposing trade restrictions is counterproductive.

In the final chapters, McKenzie exposes some fallacies in the popular thinking on minimum wage laws, government retraining, and mandated fringe benefit programs. The common thread that runs through each chapter is that govern ment intervention and "tinkering" in the econo my retard rather than expand employment. D ProfessorMcGee holds a law degreeand teachesaccount ing at SetonHall University.