Book Reviews

He shifted as a New Republic editor in the de pression to do some first-rate reporting of the "American jitters" and going on from there to track Lenin's road to the Finland Station. But in late middle age he reverted to his origins as a man of letters. Leo Tolstoy's world-savingwas suspended in midstream to make way for the writing of War and Peace, possibly the world's greatest novel, and Anna Karenina. These were works of true genius. But Tolstoy thought less of them than of his efforts as a self-constituted messiah. Marx "howled gigantic curses" against those who would interfere with the revolution he saw coming, but he brought up his daughters in a thoroughly conventional way. He didn't want them to have vocations. He talked about sci ence, but he himself was incapable of good sci entific research. Engels had to supply him both with cash and information about the working classes.

Shelley could be heartless in his thinking, but his poetry was certainly not heartless. Ib sen, no collectivist,wrote plays about individu als. Sartre wrote under the influence of both drink and drugs. He hoped that Europe could be created as an entity, but he groveled to the Soviets and admitted lying about the things he had seen in Russia. Camus's gibe was that Sartre, as an existentialist, tried to make histo ry from his armchair. Rousseau, among the leftist intellectuals, is the main malefactor. His theory that society should be governed by a "general will" led in exorably to Lenin's totalitarianism. The Amer ican Founding Fathers wanted nothing of any "general will" beyond a commitment to plural ism and the safeguarding of minority rights.

One could wish that Senator Sam Nunn of Georgia, who has suggested that all adolescents should serve a compulsory term in doing good as defined by government, should read Paul Johnson on Rousseau. Nunn's own ideal "general will" would surely be humane, but no group of politicians can be trusted to formulate compulsory goals for a country. That should be left to individuals on a voluntary ba sis, subject to amendment as situations change. The egotism of Johnson's leftist intellectuals is almost incalculable. Johnson quotes a con tributor to a book on Rousseau's Social Con tract as saying that Rousseau was a "masochist, exhibitionist, neurasthenic, hypochondriac, onanist, latent homosexual afflicted by the typ ical urge for repeated displacements, incapable of normal or parental affection, incipient para noiac, narcissistic introvert rendered unsocial by his illness, filled with guilt feelings, patho logically timid, a kleptomaniac, infantilist, irri table and miserly." Johnson documents much, though not all, of this. Yet Tolstoy could say that "Rousseau and the Gospel" were "the two great and healthy influences of my life." John son professes himself to be baffled. He lets So phie d'Houdetot, Rousseau's last lover, sum things up by saying "he was ugly enough to frighten me and love did not make him more attractive. But he was a pathetic figure and I treated him with gentleness and kindness. He was an interesting madman."

The madness of some of Johnson's intellec tuals did not extend to Victor Gollancz, who packaged and sold Rousseauistic literature for his Left Book Club in London between the wars. Money-making is a rational objective. But the West, waiting for the evidence, might have been a little quicker than it was in noting that the Rousseauists were lovers of humanity who did not actually care for human beings. They treated their own wives, children, and friends and relatives abominably. Sartre boast ed he could "run" four mistresses beside Si mone de Beauvoir at a time. Paul Johnson sup plies the evidence with detail that is most amusingly stated. But he really owes us more than that. After all, we have had good conservative, classical liberal, and libertarian intellectuals, too. A counter book could be written around 371 Mises and Hayek, Albert Jay Nock and William Graham Sumner, Bastiat and Adam Smith, Carl Menger, Eugen von Boehm-Ba werk, and Leonard Read. The book would not be as titillating as Johnson's current work: fam ily life on the Right remains generally clear of the sort of scandal that Johnson gossips about so zestfully. But if it is ideas that we care for, the counter book should be forthcoming. D UNFAIRCOMPETITION:THE PROFITS OF NONPROFITS by James T. Bennett and ThomasJ. DiLorenzo Hamilton Press, 4720 Boston Way, Lanham, MD 20706 • 1989 • 214 pages • $17.95cloth Reviewed by Peter Frumkin A t first blush, the operation of a museum gift shop seems harmless enough. Who could care if a worthy institution like the Richmond Museummakes a little cash on the side by selling postcards and other small items?

Probably no one. But what about a nonprofit YMCA that serves young professionalsat a low er cost than a local private health club, driving the club out of business? In this case, the issues become less clear and the questions more com plex. Are some nonprofits using their nonprofit status to compete unfairly with their for-profit counterparts? Do nonprofit organizations enjoy subsidiesthat make true competition impossible? How can the need of nonprofits to raise funds be balanced with the concern of the business com munity that an unfair advantage existswhich dis torts the market? These are just some of the questions that James T. Bennett and Thomas J. DiLorenzo raise in their stimulatingnew study of the nonprofit economy,UnfairCompetition. Tax-exempt organizations are one of the fastest growing segments of the economy. In 1987, annual revenues exceeded $300 billion-or about 8 percent of the gross national product.

They have, however,only begun to attract signifi cant attention from researchers. The very fact that many nonprofits are actively engaged in for-profit commercial activities may come as a surprise to some. After all, thoughts of the nonprofit community hardly conjure up im372 THE FREEMAN • SEPTEMBER 1989 ages of profitable operations generating signifi cant revenues. In reality, however,many nonprof its are growing increasingly dependent on the funds which their various business ventures gen erate. Is this a development that should be greeted with enthusiasm as a harbinger of lower costs to consumers? If the analysis contained in UnfairCompetitionis correct, there may well be hidden costs-and stiff ones at that-which need to be weighed before we accept the continued profiteering by the nonprofits. Bennett and DiLorenzo argue in fact that the phenomenal growth of the nonprofit sector has been achieved on the back of private business, with small for profit firms suffering the most from the unfair competition of tax-exempt commercial organiza tions.

Nonprofits enjoy a whole host of advan tages-chief among them being tax-free status and reduced postal rates-that give them an un fair advantage in the marketplace: "The effect of these special privileges is that governmental poli cy not only reduces the costs of nonprofit organi zations, but it also raises the costs of doing busi ness for their for-profit competitors. Profit-seeking firms must pay higher taxes and postal rates to offset the subsidies accorded non profits. Thus, because of this preferential treat ment, competition between nonprofits and for profits is inherently unfair." Attempts by government to address the prob lem of unfair competition have been few and far between, and those few measures that have been taken have been largely ineffective.The Unrelat ed Business Income (UBI) Tax which was intend ed to level the playingfield by taxing the revenues of nonprofits has, for example, proven difficultif not impossible to enforce. Bennett and DiLoren zo explain that the courts have not been able to give a rigorous and consistent definition of just what constitutes an "unrelated" business activity by a nonprofit. And because the UBI tax was to apply only to "commercial activity which is not significantlyrelated to the purposes for which the nonprofit organization was established," enforce ment and collection by the IRS has been less than successful. For their part, nonprofits have taken an extremely expansiveviewof what constitutes a related purpose, making the under-reporting or non-reporting of revenues commonplace.

Even if nonprofits enjoy an unfair advantage over private businesses due to tax breaks and postage subsidies, why should anyone worry? Bennett and DiLorenzo's answer is simple: unfair competition impedes the development of small business by making it hard for them to enter mar kets and compete. This is significantbecause two thirds of all new jobs are created by businesses with fewer than 20 employees. The authors note that because commercial enterprises run by non profits are exempted from taxes and receive oth er subsidies, taxpaying businesses must bear an extra burden by paying higher taxes than they would otherwise to make up for exemptions en joyed by their "nonprofit" competitors. Bennett and DiLorenzo conclude that unfair competition ends up crowding out of the market precisely those firms which are the principal source of new jobs-ultimately reducing the rate of economic growth.

The solution to unfair competition that Ben nett and DiLorenzo offer is clear: "Nonprofits entering a commercial undertaking must form a for-profit subsidiary that must obey all the same laws and regulations that apply to for-profit en terprises." For according to the authors it is only when we move beyond hidden subsidies and the ineffectual regulations of UBI taxes that both consumers and producers will be able to enjoy the benefits of even-handed competition. UnfairCompetitionmakes a powerful case that the time to crack down on the profiteering of nonprofits is upon us and the future of free mar kets and fair competition rests in the balance. Some may differ with the recommendations of the book and favor less radical and sweeping re forms. One may hope a solution can be found which will both allow nonprofits to continue to operate on a fee for service basis and which will also ensure that the interests of private for-profit businesses are not damaged in the process. Any such compromise must, however, start from the premise that free enterprise and a level playing field are non-negotiable items. D Peter Frumkin is a graduatestudentat GeorgetownUni versitywherehe is studyingpublicpolicy.

THE HIGHCOST OF FARMWELFARE by Clifton B. Luttrell Cato Institute,224 SecondStreet SE, Washington,DC 20003 • 1989 149 pages • $19.95cloth,$9.95paper Reviewedby E. C. Pasour,Jr. G.... ovemmentprogramshaven'tsolved the . economic woes plaguing U.S. agriculture. Despite record expenditures on farm programs during the 1980s, financial stress in U.S. agriculture during the Reagan era was at its highest level since the Great Depression of the 1930s.Luttrell's short book describes government farm programs and demonstrates why they have been an expensive failure. The book is divided into 11 chapters. Chapters 1 and 2 describe government intervention in agri culture following World War I that culminated in the Agricultural Adjustment Act of the Roose velt New Deal. Chapters 3 through 6 analyze price support programs for crops from their be ginning in the 1930s until the present time. Chap ters 7 through 10 discuss other programs, includ ing food stamps, subsidized credit, and price supports for milk and sugar. Chapter 11 describes the winners and losers, emphasizing that farm programs are a "high-cost way to aid low-income farmers."

Historical data are presented for a range of ac tivities including production and exports of farm products, levels of price supports and market prices, sugar imports, government expenditures on food stamps, Farmers Home Administration loans, farm income by farm size, and expendi tures by the U.S. Department of Agriculture (USDA). Farm programs today are remarkably similar to those instituted during the 1930s. And govern ment expenditures on farm programs, adjusted for inflation, have increased dramatically during the past 50 years, despite remarkable changes in the farm economy. Indeed, USDA outlays since 1980 have been higher each year than net farm income. Luttrell pinpoints numerous inconsistencies and inefficiencies of price supports, subsidized credit, and other farm programs. For example, milk, sugar, and peanut programs raise food prices to consumers. At the same time, more than $10 billion is spent on food stamp programs to make food more available to lower-income conOTHER BOOKS 373 sumers. Again, while espousing self-help and pro viding foreign aid to assist less developed sugar producing nations, the United States has imped ed economic development in these countries, notably in the Caribbean area, through sharp de creases in sugar quotas which limit their econom ic independence.

Of course, farm programs are inconsistent with competitive markets. Price supports that raise do mestic prices above world price levels not only spawn protectionism to prevent the substitution of lower-priced imports by U.S. consumers, they also create the "need" for export subsidies to make U.S. products competitive in international trade. The massive export subsidies under Public Law 480 ("Food for Peace") and similar pro grams not only continue today but have been substantially increased in recent years. Luttrell shows that most of the benefits of farm programs go to farmers whose incomes, on aver age, exceed those of the nonfarm population. For example, in 1985 the top 4 percent of farms (mea sured by value of products sold), with average net income of well over $100,000per year, received about one-third of all government price support payments. In this reverse Robin Hood approach, the programs provide the lion's share of govern ment payments to a relatively few higher-income farmers. Moreover, the benefits of higher product prices are quickly incorporated into higher prices and costs of land and other farm assets. Conse quently, farm programs have little effect on the long-run profitability of U.S. agriculture.

What is the reason for this apparent anomaly in which the "government taxes so many for the benefit of so few"? Although Luttrell briefly ad dresses this topic, it would have been helpful to devote more space to the reasons why govern ment tends to spend great sums on agricultural programs. There are two explanations for the persistence of government farm programs - "market fail ure" and income redistribution. In the former view, government farm programs persist because the decentralized market process isn't capable of coordinating economic activity in agriculture. Luttrell demonstrates that the evidence doesn't support this conclusion and that government in tervention in agriculture frequently destabilizes markets for farm products. The income distribution explanation appears 374 THE FREEMAN • SEPTEMBER 1989 to be more consistent with the evidence. The po litical process is short-run oriented, and farmers (and other groups) often exert disproportionate amounts of influence in the political process be cause program benefits (as Luttrell stresses) are highly concentrated and the costs are widely dif fused. For example, the sugar program that costs the average U.S. family no more than $50 per year benefits the 12,000 to 13,000 domestic pro ducers of sugar and sugar substitutes, on average, by thousands of dollars per year. It isn't surprising that sugar producer interests exert more effort to influence the political process than do con sumers!

How should the nation move to restore market forces in agriculture? Luttrell suggests a five-year adjustment period in returning to a competitive system. He also puts forth a controversial "de coupling" proposal in which farm programs would be dismantled, and current farmers would receive government payments unrelated to agri cultural production until death or the age of 70. Luttrell recognizes that economic theory cannot be used to justify income redistribution to farm ers. Moreover, he staunchly advocates the dis mantling of farm programs, leaving no doubt about the inevitable result if agriculture isn't de controlled: ". . . ever-increasing costs to taxpay ers and consumers, resulting in further regulation and more highly inefficient, centralized decision making." 0 Dr. Pasour is professor of economicsat North Carolina State Universityat Raleigh. A THEORY OF SOCIALISM AND CAPITALISM: ECONOMICS, POLITICS, AND ETHICS by Hans-Hermann Hoppe Kluwer Academic Publishers, 101 Philip Drive, Assinippi Park, Norwell, MA 02061 • 1989 • 275 pages. $40.00 cloth Reviewed by Robert W McGee T his book is an interesting blend of scholarship and polemic. The text is 210 pages, followed by 48 pages of notes, a 13-page bibliography, and a brief index, which makes it a good source document for anyone who wants to research any of the many interesting points that Hoppe raises. It is decidedly anti-statist and presents a strong case for capitalism on both a priori and em pirical grounds.

When I read a book, I make marginal nota tions and underline the points that I think are worth reading a second time. With this book, I found that I had to restrain myself because I was making so many notations that it slowed my reading. Practically every paragraph has at least one point worth reflecting upon. Hoppe's writing style is entertaining in spots, and some of the examples he gives do a good job of pointing out the absurdity of commonly held collectivist viewpoints. The text is also heavy in spots, as is often the case with philos ophy, but Hoppe partially overcomes this weightiness by summarizing what he has just said in the first few paragraphs of the next chapter. These short summaries provide a good overview of the previous chapter and give readers a second chance to digest what has just been read. After a brief introduction, Hoppe explains the relationship of property, contract, and ag gression to the two economic systems----eapi talism and socialism. Capitalism is the institu tionalized policy of nonaggression that recognizes and respects property and con tract. Socialism is the system that aggresses against property and contract. One who ag gresses increases his or her satisfaction at someone else's expense. Someone gains and someone loses. One who enters into a con tract, on the other hand, is part of a win-win situation because both parties expect to bene fit by the voluntary exchange. Socialism is an economically inferior system because, by rely ing on aggression, it causes less property to be created, and the property that is created is not put to optimal use. Politics and force, not eco nomics and voluntary exchange, determine how property is allocated. Aggression is used to take from some people to give to others.

Hoppe spends the next four chapters ex plaining how different ways of deviating from a pure capitalist system lower investment, in crease consumption, and cause a change in the composition of the population by favoring nonproductive over productive people. Under Soviet-style socialism, the style advocated by Marxian socialists, the means of production are nationalized. Investment must be made by caretakers of property rather than by owners, since there are no owners. Such an arrange ment is inferior to capitalism for a number of reasons. For one, caretakers do not have the same incentive to care for "socialized" prop erty as they would have to care for their own. Second, there is less incentive to maximize utility of the property since the caretakers do not get to keep what they produce. Also, the lack of a pricing system makes it impossible to plan rationally. Less urgent needs get satisfied at the expense of more urgent ones. Socializ ing the means of production causes relative impoverishment, a conclusion that can be drawn logically, since socially owned assets must necessarily be used less efficiently than privately owned ones. Where the incentive to produce is lessened, there will be less produc tion.

Substantial empirical evidence also exists to verify this conclusion. East and West Ger many are offered as examples. The popula tions are homogeneous, yet the West German economy thrives while the East German economy stagnates. The difference is caused by the economic systems used to allocate re sources. The second variety of socialism is the so cial-democratic model. Under this system, the idea of socialized production is exchanged for taxation and equalization. The means of pro duction can be privately owned, with some exceptions, such as education, traffic, commu nications, central banking, the police, and the courts. Individuals have the right to own and produce, but not to keep all of the fruits of their labor. Some of these fruits belong to "society," which means the rights of the natu ral owner have been aggressively invaded. Thus, the difference between Soviet-style and social-democratic-style socialism is one of de gree. In the first case, private ownership isn't permitted. In the second case, private owner ship is permitted, but the state determines how much of the fruits can be kept by the rightful owner. Ownership rights are purely nominal. Social-democratic socialism settles for partial expropriation and the redistribu tion of producer incomes. The results, as with Soviet-style socialism, are reduced incentives OTHER BOOKS 375 to produce and relative impoverishment.

The third form of socialism is the socialism of conservatism, the ideological heir of feu dalism. Like social-democratic socialism, con servative socialism allows private ownership, but not the right to keep all the fruits of pri vate ownership. But whereas social-democrat ic socialism distributes from the producing haves to the nonproducing have-nots, conser vative socialism distributes from the produc ing haves to the nonproducing haves; it aims at maintaining the status quo rather than in creasing equality. The difference between the two kinds of socialism lies in the group of nonproducers who receive the fruits of other people's labor. Also, whereas the social democratic form uses taxation to achieve its goals, conservative socialists favor the use of price controls, regulation, and behavioral con trols. Again, the result is relative impoverish ment, since use of any of these techniques causes productive resources to be misallocat ed from higher uses to lower uses.

The fourth form of socialism is that of so cial engineering. Whereas the Soviet, social democratic, and conservative brands of social ism all fail on economic grounds, the fourth type of socialism doesn't claim to be economi cally superior to capitalism. It states, in effect, that even though socialism might be economi cally inferior to capitalism, it is morally supe rior. This empiricist-positivist Popperian style of socialism sees empirical proof of capital ism's superiority as ill-conceived. Socialism is made immune to criticism because any fail ures can be explained away as caused by some as yet uncontrolled intervening vari able. We can never know in advance what the outcome of some policy will be. We must try it first. Then, if the policy fails, we can explain it away. Hoppe then defends capitalism on ethical grounds and shows why socialism is indefensi ble. Under socialism, an individual's rights are determined by his class. Some individuals have an obligation to pay taxes, and others have a right to consume them. The computer industry, for example, must pay to subsidize farmers, the employed must subsidize the un employed, individuals without children must subsidize those with children. The whole sys376 THE FREEMAN • SEPTEMBER 1989 tern is based on aggression.

The remainder of the book is devoted to the theory of the state, capitalist production, the problem of monopoly, and public goods theory. The state exists on the principle of di vide and conquer, and the continuous threat of violence. It attempts to control basic ser vices such as education, traffic and communi cations, the supply of money, and the produc tion of security. Hoppe points out that monopoly cannot exist without government support, and that many of the services provided by the state can be provided more eco nomically by the market. Public goods do not exist. Anything that is worth providing can be provided by the market. If the market does not provide a particular good or service, it is because consumers have determined that it isn't worth producing. Having the state step in to provide something that the market does not results in misallocating resources from higher to lower uses. D Professor McGee teaches accounting at Seton Hall University.

THE FOUNDATION FOR ECONOMIC EDUCATION, INC. Irvington-on-Hudson, New York 10533 * 1989-1990* ESSAYCONTEST "Education for a Free Society" HIGH SCHOOLDIVISION First Prize, $1,500 $econd Prize, $1,000 Third Prize, $500 COLLEGE DIVISION First Prize, $1,500 Second Prize, $1,000 Third Prize, $500 For complete contest information call or write: FREEDOM ESSAY CONTEST Foundation for Economic Education 30 South Broadway Irvington-on-Hudson, NY 10533 (914) 591-7230 THEFREE IDEAS ON LIBERTY 380 A Triumph for Bootstraps Capitalism Clint Bolick Ego Brown's battle against arbitrary economic regulation. 383 Speculators: Adam Smith Revisited Christopher L. Culp and Fred L. Smith, Jr. The "forestallers" of Smith's era were as reviled as the "insider traders" of the 1980s. 386 High-Definition TV: Government or Market Choice? Gary McGath Consumer decision provides the ultimate method for setting standards.