Book Reviews

Goodman and MarotzBaden had quite inno cently stated that a free enterprise candidate had defeated a traditional socialist for the presidency of Brazil. They had followed this by saying that in Peru, the leading candidate for the presidency is a former socialist who now strongly endorses free markets. But after their writing, the president of Brazil revealed himself as a currency freak. His constituents woke up to the fact that they could not put their hands on 80 percent of their money. The repercussions of the Brazil situation were quickly felt in Peru, where the popular novelist Mario Vargas Llosa was supposed to be a shoo-in to succeed Alan Garcia as president. Vargas Llosa had indicated sympathy for the decision that had so drastically curtailed the Brazilian money supply. When news of this got abroad there was a quick rush to abandon Vargas Llosa. It is all a great mix up. The upshot of the business has been most peculiar: a son of Japanese immigrants, Alberto Fujimori, beat Vargas Llosa in a runoff. He did it by working out of a store front in Lima, with no money, capitalizing on the deep-rooted fear that no government could be trusted with a people's savings.

If the whole of the Goodman/MarotzBaden entries had to be subjected to such footnoting, it would not be worth much as information. Good man and MarotzBaden do much better when they stick to trends. Their various case studies are all on the upbeat side insofar as hopes for a free enter prise hemisphere are concerned. Chile has created a workable private social security system. In Guatemala, Manuel Ayau, a former president of the Mont Pelerin Society, is in the running for the presidency of his country. Two decades ago he started the free enterprise Francisco Marroquin University, whose graduates are now playing con structive roles in Guatemalan politics. Ayau has brought many Mises and Hayek scholars to his campus, induding Milton Friedman, a three-time lecturer. It costs more to study at Francisco Marro quin than at state schools, but voluntarists have raised the necessary supplementary funds for scholarships. The university has, according to Goodman and MarotzBaden, "home grown near ly 40 of its 200-plus faculty members, including its Dean of Economics. Recently, its Theology School opened satellite schools in Costa Rica, Honduras, EI Salvador, and even Nicaragua."

We have touched on Peru, where Hernando de Soto's El Otro Sendero (The Other Path) battles with the terrorist organization incongruously titled "EI Sendero Luminoso" or "The Shining Path" for adherents. The underground-or "informal" economy in Peru, which has constructed $8.3 bil lion worth of houses in 20 years in comparison to the government's $174 million, will go with Alber to Fujimori in easy preference to tougher taskmas396 THE FREEMAN • OCTOBER 1990 ters who would force a waiting time of many years to get legal title to land. Fujimori has announced that Peru, which has stopped paying on its interna tional debts, will "rejoin the world economy" meaning that it will develop a plan to stabilize its economy with the help of the International Mone taryFund. Venezuela and Mexico offer little puzzlement to Goodman and MarotzBaden. The oil bonanza of 1974-83 might have put five important Western nations on Easy Street. But Venezuela and Mexi co, which had high-priced oil to sell along with Norway,Holland, and Great Britain, muffed a glo rious opportunity. Instead of paying off debts, all five of the oil-possessing nations immediately increased public expenditures.

"In Venezuela," we are told, "government spending as a percent of GDP [Gross Domestic Product] varied between 30 and 35 percent from 1962 and 1972; yet government spending climbed to 57 percent of GDP by 1984." In Mexico, public spending peaked at 61 percent of GD~ Holland hit 62 percent, Norway 48 percent, and Britain 46 per cent. The oil-money spending went for all sorts of public projects, and it was accompanied by increased government borrowing for parallel expenditures. "In all five countries, the rationale behind these government policies was the belief that public spending would create and distribute wealth. In each case the opposite occurred. As resources were diverted from the productive pri vate sector to the inefficient public sector, the con sequences were devastating. In many cases the increased spending took the form of acquiring, expanding, or starting government-owned enter prises. Invariably, these firms incurred losses, which required even more government subsidies.

As the subsidies to inefficient state-owned enter prises grew,efficient companies in the private sec tor were starved for capital." The Mexican economy, despite its abundant natural resources and its industrialization after 1949, has turned into a nightmare. The runaway inflation "has resulted in a tremendous outflow of capital in the last ten years. An estimated $60 bil lion in private Mexican money has poured into the U.S. and at least another $8 billion has been iden tified in Swissbank accounts. What went wrong?" The editors tell us about the ejidal system of landholding, under which land was split into parcels too small for the peasants to eke out a subsistence living, let alone produce food for sale. To give up the ejidalsystem would require a tremen dous rejection of one of the Mexican revolution's most cherished traditions. But, say Goodman and MarotzBaden, "As this book goes to press, there is mounting evidence that President Salinas is serious about free market reformsthat he favors real reform, not merely cosmetic changes designed to appease internation allenders. "

Salinashas announced his own conversion to the cause of privatization. If we could establish a gen uine free trade area from Canada and Alaska to the Panama Canal it would be a tremendous victoryfor freedom. But the problem of Castro, who keeps pouring arms into Central America, would remain. And there is the warning attributed to Jack Kemp: "The International Monetary Fund is a greater threat to Central America than the Sandinistas." Fujimori, though Peru is not in Central America, should take note of Kemp's general reasoning. D INSIDEPERESTROIKA:THE FUTURE OF THE SOVIETECONOMY by Abel Aganbegyan Harper & Row,KeystoneIndustrialPark,Scranton,PA 18512•1989 241 pages• $19.95cloth Reviewedby RussellShannon A bel Aganbegyan has been one of Mik hail Gorbachev's chief economic advis ers. In his book, which is written for gen eral audiences, Aganbegyan indicates clearly that he has had ample opportunities to observe the operation of a centrally controlled economy and is vividly aware of its failings. He also reveals not only a firm grasp of, but also a strong admiration for, some of the most basic characteristics of a free market economy. Yet his understanding of and dedication to market principles is so flawed that one puts the book down with a sense of sorrow. If these are the views of one of the Soviet Union's staunchest freemarket advocates, then it seems likely that paternalism will prevent perestroika (economic restructuring) from being more than partial.

For years, tales have leaked out of the Soviet Union about the grotesque absurdities which result from centralized control of the economyhow, for example, a shoe factory made all its shoes the same size to satisfy Gosplan's quota rather than serve the desires of consumers through the market. Now we are treated to such examples coming from the "horse's mouth," as Aganbegyan puts it. All such problems he blames on the Soviet system of diktat, or centralized command, which features monopolies in most realms of production. Competition, Aganbegyan notes, has been· pre vented in order to avoid the problems of unem ployment and bankruptcy. But the monopolies have produced vast quantities of largely useless items, such as the "bulldozer" built by a tractor factory which simply added a blade to a caterpillar tractor and proclaimed it to be a "bulldozer." Tens of thousands of these ersatz bulldozers were produced by the Chelyabinsk factory each year, primarily for use in the far north. Aganbe gyan states that "no bulldozer lasted even a season, and every year each one required a total overhaul costing several times more than the orig inal purchase." Nor is this an isolated instance, for Aganbegyan states that what he calls the "dicta torship of the producer over the consumer" causes the story to be repeated "in every branch of the automobile, shipbuilding and machine-tool indus tries."

Clearly, Adam Smith's precept that "consump tion is the sole end and purpose of production" has been ignored, with disastrous results. Aganbegyan has several ideas about what needs to be done. He proclaims the need to control mon etary growth in order to prevent inflation-sound ing much like Milton Friedman, whom he has met. He also advocates opening up the Soviet economy to international trade, providing the double bene fits of greater international division of labor and a strong incentive for domestic firms to improve product quality. And he stresses the importance of allowing individual contractual arrangements to replace the diktat of central supervision. Of course, as Aganbegyan realizes, the Soviet Union has engaged in such periods of reform in the past-under the New Economic Policy instituted by Lenin in the 1920s as well as more recently under Khrushchev and then Kosygin. Yet all these reform phases failed, and the Soviet system sank back into costly centralization.

Will things be different this time? Aganbegyan ardently believes they will. He puts his faith in the growing democratic elements in the Soviet Union OTHER BOOKS 397 which Gorbachev has introduced. But if he were to cast his eyes to the Soviets' great southern neigh bor, India, he would observe that democracy is no guarantee of an end to bureaucratic control and widespread economic waste. In fact, Aganbegyan himself is reluctant to relin quish much of the centralized control which guides production through five-year plans, guarantees workers' employment, and provides certain mini mum needs. He does recommend allowing work ers to buy their own homes, partly in order to soak up some of the "ruble overhang" which has devel oped because the lack of suitable consumer goods has resulted in an extraordinary accumulation of savings. But land and mineral wealth, he believes, should remain basically under state control, and 20 to 30 percent of the Soviet Union's annual output would be directed by the state.

What will be the outcome of perestroika? At the turn of the 20th century, Henry Adams visited Russia and in The Educationof Henry Adams wondered, "Could inertia of race, on such ~ scale, be broken up or take new form?" Adams wasn't overwhelmed with optimism. Nor will such a feel ing pervade the reader of Aganbegyan's book. It does seem reasonable to suggest that the ugly caterpillar of Communism has entered a sort of cocoon. Will it emerge as a beautiful capitalist but terfly? That seems unlikely. One suspects that, instead, it is apt to appear as a much more drab and modest socialist moth. D Professor Shannon teaches in the Economics Depart ment at Clemson University. PREFERENTIALPOLICIES: AN INTERNATIONALPERSPECTIVE by Thomas Sowell WilliamMorrow& Co.,P.O.Box1219,39PlymouthStreet,Fairfield, NJ 07007 -1990 - 221 pages - $17.95cloth Reviewedby DavidM. Brown A dvocates of preferential policies can't afford to ignore this book-at least, not if they care about how their policies are working in practice.

With the diligence and insight his readers have come to expect, Thomas Sowell doesn't skimp when itcomes to presenting and analyzing the rel398 THE FREEMAN • OCTOBER 1990 evant empirical data. He looks at the often bloody results of coerced preferences in a variety of polit ical and social contexts around the globe and comes up with some disturbingly similar patterns. By preferential policies, Sowell means "gov ernment-mandated policies toward government designated groups," policies "which legally man date that individuals not all be judged by the same criteria or subjected to the same procedures when they originate in groups differentiated by govern ment into preferred and non-preferred groups." In the first part of his book, Sowell dIscusses three major contexts for such policies: "Majority Preferences in Majority Economies," "Majority Preferences in Minority Economies," and "Minority Preferences in Minority Economies,"

in three riveting chapters of economic and histor ical analysis. By labeling economies "minority" or "majori ty," Sowell is specifying which group or groups tend to dominate economically in a particular soci ety. In the United States, the majority (roughly speaking) dominates, while the government preferred minority (e.g.,blacks) is regarded as dis advantaged and requiring special government help. Minority economies include places like Malaysia, Nigeria, and Sri Lanka, where an ethnic or racial minority-often composed of better-edu cated and/or better-motivated outsiders-eco nomically outstrips the indigenous majority and so incurs at least some of that majority's envy,resent ment, and political wrath. The motivation of concern over unfair discrim ination, which we are familiar with in this country, doesn't wash when the beneficiary of preferential policies is the majority. After all, the minority has no evident means, aside from political force, of sys tematically excluding the rest of the populace from certain economic or social contexts (which is why South African apartheid is not, and could not be, a freemarket institution). But neither, it turns out, does the majority have any such means. Majority preferences have had to be imposed by force in both majority economies (as in the pre-'60s South, with the Jim Crow laws) and minority economies such as Malaysia.It had to be by coercion because, in the marketplace, discrimination is costly. And the individual who indulges in unjust discrimina tion, forgoing a more economically rational alter native, must pay those costs. "When apartments remain vacant longer because minority tenants are turned away,the landlord pays a cost for discrimi nating. So does the discriminating employer whose jobs remain unfilled longer or can be filled more quickly only by offering higher pay." In the free market, the more rational, nondiscriminating businessman has a competitive edge-regardless of his own group membership or that of the other parties involved.

On the other hand, the discrimination costs for government are negligible. When a legislator pass es a law or a bureaucrat enforces it, neither is obliged to pay the resulting costs to the businesses or other institutions that must obey it. These differing incentives manifested them selves in the wake of the Jim Crow Jaws, the net work of restrictions against blacks that were im posed in the post-Reconstruction South. When streetcars were a private, profit-making, relatively unencumbered enterprise during the 19th century, streetcar owners in the South did not segregate blacks and whites into different compartments; that would have entailed new costs (the disaffec tion of black customers) without new profits. (They did, however, segregate passengers into smoking and non-smoking cars, a move justified by economic demand.) As racial segregation was legally mandated around the turn of the century, furthermore, streetcar companies in towns like Mobile, Montgomery, and Augusta initially re fused to comply with the law. In Tennessee, Jim Crow legislation was delayed (and later over turned in court) through the opposition of the streetcar company there. Sowell notes that, because of the economic burdens involved, eva sion of legally enforced racial discrimination is common in other industries and countries as well.

With infuriating insensibility,government imposes arbitrary costs on innocent citizens. Preferential policies have been instituted throughout the world. Almost always, in the name of some "higher goal" of equality among groups, reason, economic efficiency, and simple civility are scrapped, with a small elite typically benefiting at the expense of everyone else-not excluding the intended beneficiaries. Often, those in a position to benefit from preferential policies are already the more· advanced members of their group, with the education or income needed to take advantage of the politically imposed opportunities others cannot touch. In Malaysia, a majority economy dominated by an outside minority (the Chinese), political prefer ences for Malaysians benefited "at most 5 percent" of Malays. "While the statistical representation of Malays on corporate boards of directors in Malaysia rose under preferential policies, so did the proportion of Malays among the population living below the official poverty line," Sowell notes. "In short, the Malay masses provided the political support for preferential policies that ben efited the Malay elite-in the name of the masses."

In the United States, "the largest gains in black wages relative to those of whites between 1960and 1970occurred in private sector industries less reg ulated by government and lesslikely to be govern ment contractors." Furthermore, "Black males with more education and more job experience have advanced in income, both absolutely and rel atively to whites, while black males with less edu cation and less job experience have retrogressed relative to whites over the same span of years. In short, the gains have gone to those already more fortunate, as with preferential policies in other countries." That's one pattern that Sowell notes. Another pattern is violence. One is struck by the extent to which preferential policies stir up and exacerbate the racial resentments which often motivated those policies to begin with. Blacks against whites in the United States, Assamese against Bengali in India, Hausa-Fulani against Ibos in Nigeria. In Nigeria, where the Moslem North lagged behind the South in areas like edu cation and jobs, group polarization attending pref erential policies for Northerners led to mob vio lence, the hunting down and slaughtering of Ibos, and ultimately civilwar.The Ibos, who had tried to split off from Nigeria and form their own country, ultimately surrendered, and fortunately at least some preferences were rescinded (in one of the few instances of such backtracking anywhere).

The consequences of preferential policies, which Sowell covers exhaustively, are disastrous. But what if consequences don't matter to the poli cy molders? One of the most startling passages in this book is from an ethnic "spokesman" conced ing the generally superior qualifications of a com peting ethnic group, but concluding, "Maybe they are better qualified but why is merit so important? We can have some inefficiency.That willbe neces sary if our people are to get jobs. Are we not enti tled to jobs just because we are not as qualified?" One would suppose that qualifications were OTHER BOOKS 399 important so that you could do the job for which you have been hired; but, alas, that's irrelevant if the real point of ajob is not production but the sat isfaction of arbitrary racial demands, and costs be damned. The more theoretical second part of the book discusses the illusions of knowledge, control, and morality that have influenced support of preferen tial policies.There are echoes of the Hayekian per spective on the distribution of knowledge through society here, and of Sowell's own analysis in Knowledgeand Decisions,which make this section particularly intriguing-and devastating.

Regarding the question of morality in particular, the book provides convincing evidence that if being moral has anything to do with the promotion of human life, racism at the point of a gun has little to do with it. D David M. Brown is the managing editor of the Laissez Faire Books catalog and a freelance writer. SOUTHAFRICA'SWAR AGAINST CAPITALISM by Walter E. Williams Praeger,One MadisonAvenue,New York,NY 10010• 1989 • 159 pages • $37.95cloth Reviewedby MatthewB. Kibbe M any p.eople are justifiably outraged by South Africa's apartheid system. Oth ers offer apologies. What often unites these two seemingly disparate views is the belief that apartheid is somehow the result of profit seeking under freemarket capitalism. Starting from this belief, one must either rationalize the existence of a government-imposed system of legalized racial discrimination or embrace some form of socialism. These extremist views are rein forced by the statements of South African leaders such as former President ~ W. Botha, who pro claimed that South Africa "is a symbol of ... free enterprise," and black anti-apartheid activist Bishop Desmond Tutu, who declared that he is fundamentally "opposed to capitalism."

This book cuts through the emotionally charged rhetoric surrounding racism to get to the root of the apartheid system. Professor Williams shows that the problem in South Africa is not the free market process, it is the existence and dominance of centralized government power. As he puts it, 400 THE FREEMAN • OCTOBER 1990 "... South Afriea's apartheid is not the corollary of freemarket or capitalist forces. Apartheid is the result of anticapitalistic or socialisticefforts to sub vert the operation of market (capitalistic) forces." To prove this thesis, Williams develops a broad, interdisciplinary study of South Africa's apartheid system, weaving theoretical economic analysis into a rich historical, legal, and institutional cloth. This interdisciplinary approach makes Williams' findings all the more persuasive. Still,as one might expect from a Walter Williams book, this volume is driven by the logic of markets and prices. "Under market allocation of re sources," he observes, "price is the major determi nant to resource usage-which is not to say that racial discrimination is absent. It is recognized that market allocation tends to exact a penalty from those who engage in racial discrimination. As such, the free market is no respecter of race, eth nicity,religion, sex, or nationality."

Unfortunately, it has been specialinterest poli ties-not the market-that has held sway in South African racial affairs for the better part of this cen tury. The policy of apartheid, a term made popular by South African Prime Minister Daniel Fran~ois Malan in 1948, originated in a myriad of govern ment-imposed laws designed to keep nonwhites from participating and competing in the market process. As early as 1911,under the coercive influ ence of white labor unions, the South African gov ernment passed the first in a series of restrictive labor lawswhich became known as the "color bar." The Mines and Works Act of 1911,under the guise of safety,required "certificates of competence" for many types of work. Such certificates were largely unavailable to nonwhite natives. The white labor unions and other white su premacists lobbied for other regulations which, in effect, prohibited blacks from being hired. These groups demanded that the hiring of blacks and other nonwhites be subject to the same compulso ry employer compensation and minimum wage requirements granted to white union members.

The intent of such legislation, Williams contends, is obvious. Such labor lawstook away the only bar gaining chip available to the blacks and other non whites-their willingness to work for a lower wage. Many whites recognized this. In 1925, for example, the report of the Mining Regulations Commission proposed a mandatory system of minimum wages per job "in order to rescue the European miner from the economic fetters which at present render him the easy victim of advancing native competition." Contrary to the view accepted by many on the political left, apartheid is not the result of white businessmen attempting to maximize profits by enslaving cheap black labor. It is instead a product of political privilege. Says Williams: The mere existence of South Africa's extensive racial regulatory laws is evidence enough that racial privilege is difficult through free market forces. Consider South Africa's job reservation laws, which mandate that certain jobs be per formed by whites only.... The presence of job reservation laws suggests that at least some employers would hire blacks in the "white jobs." The fact that they would hire blacks to do white jobs neither requires nor suggests that these employers be necessarily any less white supremacist than anyone else. It does suggest that those employers who would hire blacks considered such a course of action to be an at tractive alternative because blacks were willing to work for lower wages-"uncivilized wages"

-than white workers. The business pursuit of profits-which caused employers to be less ar dent supporters of the white supremacist doc trine-has alwaysbeen the enemy of white priv ilege. This is why South African white workers resorted to government. "The whole ugly history of apartheid has been an attack on free markets and the rights of individ uals, and a glorification of centralized government power," Williams concludes. Only when South Africa's people-black, white, or colored-"de clare war against centralized government power" will there be genuine progress toward freedom. Walter Williams' new book provides powerful intellectual ammunition for that war. 0 Matthew B. Kibbe is Director of Federal Budget Policy at the United States Chamber of Commerce, and a doc toral student in economics at George Mason Universi ty's Center for the Study of Market Processes. Nothing written here is intended necessarily to reflect the views of the United States Chamber of Commerce.