Book Reviews

38 A REVIEWER'S NOTEBOOK The Midnight Economist by John Chamberlain P rofessor William R. Allen, who for ten years has been giving economic instruc tion to thousands of listeners over 200 ra dio stations, calls himself the Midnight Economist. He has collected his broadcasts, along with some other essays, in a book called The Midnight Economist Meditations on Truth and Public Policy (San Francisco: ICS Press, 332 pages, $12.95 paper). Milton Friedman, in a wise introduction, notes that Allen's genius is for bringing into the open the elementary principle involved in an issue without being hortatory about it. Friedman marvels at Allen's versatility, the wide range of problems and issues that he covers. We can join Friedman in his admiration. In addition to being instructive, Bill Allen is a lot of fun. He professes to givingshelter in his of flce to two mice. One goes by the name of Karl.

The other is called Adam. Karl doesn't like economists. They are too gloomy with their eter nal insistence on scarcity.Adam humors Karl. He defends economic truth by expressing a general sympathy for Karl's "sickness." Karl has been snarling about the concept of market equilibrium and announcing that economists "want equilibri um at any price." "You may be sick for wrong reasons," says Adam. "We don't want equilibrium at any price; rather, we want a price at which there is equilibri um. And we want an equilibrium price, not be cause that will solve all problems, but because it generally avoids making a hard life still harder." Karl, not really listening, snaps "we mice of sensitivity and compassion want government to make things better. One way is to stipulate fair prices." It takes Adam Mouse, reasoning like Adam Smith, a little while to make Karl Mouse see the connection between unhappiness and uncleared markets. But Adam Mouse gets there because he has common sense on his side.

Karl Mouse accuses Adam of having no soul. But Adam has been "blessed with companion ship of my rabbit Bunnie and my dog Winnie." Neither Bunnie nor Winnie add to the Gross Na tional Product, but they contribute to happiness. "All our cleverness and wit," says Allen, inter jecting at this point, "all our tools and technolo gy, will leave us poor, indeed, a disgrace in the eyes of the Deity, as long as we lack the good ness and grace and gentility of Bunnie Rabbit and Winnie." When he is not listening to his two mice, Allen is concerned with general economic dumbness. His midnight commentary assails as "mythology" such statements as "the minimumwage laws raise the income of the poor," or "government jobs programs increase employment," or "tariffs increase domestic employment and wages," or "we could have enough of everything if we were fully to exploit our fantastic productive power."

Our Congress spends most of its time trying to put 20 separate "myths" into new laws that will become drags on our economy. A few states-Connecticut is one, New Hamp shire is another-frown upon the income tax. Allen finds it significant that the states that grow most rapidly have the lowest level of income tax and property tax per person and the highest level of per capita sales taxes. The proof of the pudding is in the record. "Af ter New York lowered its progressive income tax rates in 1977," says Allen, "its economic growth increased and its unemployment fell in relation to the national average." Tax cutting, Allen con cludes, is not a panacea. "But higher income and property taxes certainly are not a long-run road to prosperity-and since 1980 such state and lo cal taxes have been rising rapidly." Allen finds our Latin American policies to be mainly stupid. There have been calls for a Latin American Marshall Plan. But Europe in the late 1940s and early 1950s bore little resemblance to the Latin American circumstances of the 1980s.

Anyway, contrary to nearly universally held mythology, the Marshall Plan was not a signifi cant economic factor in European postwar re covery. It was, says Allen, basically a political strategy in economic clothing-a statement of in tent to preclude further Russian advance in western Europe. A lot of the Allen columns are pure historical exposition. He tells the story of the Roman Em peror Diocletian, who minted so many new coins that inflation from a superfluity of metal worked as do the printing presses of modem governments. As I write this review, the homeless are de scending upon Washington to demand govern ment support of new building programs. Allen reminds us that rent control has greatly dimin ished financial incentives to build new housing. "Substantial homelessness," says Allen, "is man made. And men perversely make it mainly with rent control." D PROTECTIONISM by Jagdish Bhagwati The MIT Press,55 HaywardStreet, Cambridge,MA 02142 • 1988 168pages • $16.95cloth Reviewedby RussellShannon I n recent years, some economists have been lured away from the profession's traditional attachment to the principles of free trade.

Instead, they advocate "strategic trade policies" in which governments subsidize favored domestic firms to help them gain an international advan tage. However, one who hasn't lost his moorings, Jagdish Bhagwati of Columbia University, has written a strong defense of the laissezfaire line. 39 Although some passages in his book are a bit cryptic, he generally avoids technical jargon. In deed, the book is a delight to read, for in addition to being salted with Bhagwati's wisdom, it is pep pered with his wit. Bhagwati begins by discussing the growth of trade and economic development since World War II. Under the auspices of the General Agreement on Tariffs and Trade (GATT), sever al series of multilateral negotiations have dramat icallyreduced tariff barriers. The author poses an intriguing question: does economic growth cause trade-or vice versa? In part, the answer depends on one's point of view.

From the perspective of macro-economics,the chain of causation runs from growth to trade, for, as people become more prosperous, they tend to purchase more imports. In the context of micro-economics,however, the relationship is reversed: opening up trade (as the U.S. and Canada have recently done) permits increased specialization which yields more effi cient use of resources, spurring economic growth and raising living standards. And since economic growth makes it easier to adjust to problems caused by increasing imports, it becomes easier to strike down the barriers which inhibit trade. In the author's felicitous phrase, we have a "virtuous circle" of tariff reductions, trade expansion, and economic growth. With the success of GATT, protectionists have had to resort to new tactics. Although their argu ments are generally fallacious, they often have a convincing ring. Just as it appears that the sun re volves around the earth, so too many people with a myopic economic outlook see only the job loss es that result from the competition of imported goods. It takes a broader view to understand that consumers benefit from the lower prices that free trade brings, that flourishing export industries provide new job opportunities, and that the over all benefits of free trade swamp the losses.

Capitalizing on the failure of many people to take this broader view,protectionists have argued that we should impose tariff barriers to offset similar restraints imposed on our exports by for eign countries. Bhagwati points out, however, that as far back as Adam Smith, economists have spurned this approach on the grounds that the harm outweighs the good. Unable to rely on tariffs to achieve their ends, 40 THE FREEMAN • JANUARY 1990 protectionists have advocated quotas and "volun tary" export restraints to curb imports. Such non tariff protection, Bhagwati notes, is usually "porous," since foreign producers can usually de vise ways to evade it by relocating facilities to other areas (as Hong Kong producers have shift ed apparel production elsewhere) or by slightly altering their products (as the Japanese have switched to larger automobile models in the face of export limits). Yet we still have a ldistortion of resource use which violates the fundamental principles of sound economics.

Often, American producers complain that their foreign rivals are being unfairly subsidized or are selling their products below cost. Yet we, too, often subsidize our producers (such as farm ers and the merchant marine), and as Bhagwati caustically notes, forbidding all producers from selling below costs would effectively prevent post-Christmas sales! Bhagwati is encouraged by the fact that our government's executive branch has generally tak en a pro-trade stance and that in recent years it has been particularly emphasizing the need to open up foreign markets for agricultural products and services, items for which the U.S. has a com parative advantage. However, there is also a dark side to the stress on export markets. Some people contend that we should have trade balances with each and every country, and even in specificitems such as textiles. Yet no one would suggest that a nurse should maintain a trade balance at her local supermarket by check ing the temperature and blood pressure of the Get Organized!

clerk who runs· up her bill. Nor do we expect Maryland to have a trade balance with Okla homa. Is anyone alarmed about our banana deficit? Then why should a deficit with Japan alarm us? We do, after all, have offsetting sur pluses with such countries as The Netherlands, which is as it should be. Finally, Bhagwati rejects the argument that "manufacturing matters." We need not, he notes, rely on manufacturing to be technically progres sive; just look, after all, at the many improve ments in medical services. Nor is it true that only manufacturing jobs are character-forming. Is a steelworker morally superior to a dentist? Yet poking fun at these arguments may not suffice to deflate them. Bhagwati argues that, if we want the idea of free trade to triumph over the pressure of special interests, we must reform our institutions. For example, when the Interna tional Trade Commission investigates charges that foreign firms are dumping products in our markets, it considers only the harm being done to domestic firms. Bhagwati suggests that the Com mission look at both the costs and the benefits of providing relief to our firms. Taking a more bal anced and reasonable approach would likely re sult in fewer barriers.

So long as some economists can present such lively arguments in defense of free trade, there is reason to hope that we can turn back protection ist pressures that would greatly reduce all the world's livingstandards. D ProfessorShannonteachesin the EconomicsDepartment, Clemson University. Attractive blue binders for twelve issues of The Freeman will keep your thoughts in order for the new year, or store your 1989 magazines. Special price until March 31, 1990:$7.00 postpaid. Order from: The Foundation for Economic Education 30 South Broadway Irvington-on-Hudson, New York 10533 THEFREE IDEAS ON LIBERTY 44 The Writingsof Adam Smith Julio H. Cole Remembering the author of The Wealthof Nations. 47 The Other Side of Adam Smith WilliamB. Irvine A careful reading of The Theoryof MoralSentimentsyields some surprises. 50 Soviet Admissions:Communism Doesn't Work PeterJ. Boettke Economic self-criticism in the age of glasnost.