Book Reviews

Francis Wilson, described by Kirk as ,"an aus tere-looking, dryly humorous gentleman and scholar" who had retired from the University of Illinois to live at the Cosmos Club in Washington, was more than happy to be among those who proved Trilling's lack of prescience. But Wilson does not pretend to be a perfectionist. He is quite aware that the major political parties often echo each other, and that elections are won by narrow margins that shift from time to time with pressure group changes. He thinks that conservatism is a philosophy of social evolution "in which certain lasting values are defended within the framework of the tension of political conflict." When given values are at stake, a conservative may even become a revolutionary-though not as a Marxi an, with the theory of class struggle, might assert. Wilson thinks class war ideas are abominable. We have to live, says Wilson, with the results of past revolutions. Conservatism "is a spirit of poli tics rather than a fixed program .... Intellectual conservatism has at its command the whole range of philosophy and science that the centuries of Western civilization have provided."

This identification of conservatism with West ern civilization itself may be regarded by to day's liberals as thievery. But between what is known as "old-fashioned liberalism" and Wil~ son's conservatism there is little difference. What are Wilson's own descriptions of the com mon characteristics of the conservative mind in the West? He lists five that seem to him of special importance. First, he says, "conservative thought has attempted to find a pattern in history that may give some clues as to the possible and impossible:: in politics. Second, conservatives have generally been somewhat distrustful of human nature, view ing it as a mixture of the rational and irrational. Third, the conservative has in general believed there is a!inoral order in the universe in which man participates and from which he can derive canons or principles of political judgment. Fourth, conser vative thought has accepted as sound politics the idea that government should be limited in its pow er and that such limitations should run on behalf of individuals and groups. And fifth, the conservative mind has defended the institution of property, I think, long before the rise of modern capitalism.

... Certainly the defense of property is a more steady principle than the defense of particular arrangements by which goods are manufactured and distributed." The moral order, says Wilson, "is one of the old est products of Western society,for it begins in the Greek distinction between nature and convention; it flowers in the concept of natural law in Roman civil law and in Christian philosophy .... any democracy that has long survived has believed that government is responsible to the community, but that responsibility must be exercised with restraint and moderation, under the rule of law." The preconditions of majority rule have been stated in the Bill of Rights, primarily the rights to life, liberty, and property. That, after all, is the case for conservatism. D THE LIABILITYMAZE:THE IMPACT OF LIABILITYLAW ON SAFETYAND INNOVATION Edited by Peter Huber and Robert Litan The BrookingsInstitution,1775 MassachusettsAvenue, NW, Washington, DC 20036-2188 • 1991 • 514 pages $35.95cloth,$16.95paper Reviewedby DougBandow T he Brookings Institution has a long liberal pedigree, but it continues to surprise. Insti tution scholars have criticized environ mental regulations, praised airline deregulation, and promoted educational choice. Now Brookings scholar Robert Litan has joined with Peter Huber of the Manhattan Institute to edit a book that shows the high costs of litigation to the American consumer.

Others, Huber as well as Walter Olson, also from the Manhattan Institute, have documented the liability revolution that has created a kind of legal lottery, enriching and penalizing irrespective of causation and fault. The focus of The Liability Maze is more limited: the book, 'composed of papers from a Brookings conference, explores the impact of litigation on business il}novation and safety. The issue is as complex as it is important. Write Huber and Litan: Expressly or by implication, most of the authors in this volume agree that the effects of the liabil ity system, whatever they may be, depend on much more than the narrow question of whether liabilityis imposed, or on the still narrower ques tion of what legal standard (like "negligence" or "strict liability") is applied. The authors all rec ognize that jury trials, contingency fees, long-tail liability,the sheer size of awards, and the stigma tizing effect of punitive damages, along with adverse publicity, market forces, and regulation are at least equally important.

Nevertheless, some general conclusions stand out. Where liability remains modest, litigation appears to have encouraged innovation-a not surprising conclusion, since a well-functioning tort system will force a firm to internalize more of its products' costs, and thereby provide it with an incentive to take cost-effective countermeasures. However, as liability and damages expand, the 45 impact on innovation becomes highly negative. This effect seems to be strongest on the general (lighter plane) aviation industry. Serious problems are also evident in the medical and pharmaceutical fields.The only dramatic counter-example appears to be chemical production. the findings on the effect of liability on safety are more equivocal. For one thing, lawsuits oper ate in tandem with private and public regulatory systems-doctors' professional standards of responsibility and the National Highway and Transportation Safety Administration, for instance. It appears that the conclusion of Judith Swazey of the Acadia Institute, that litigation has "had only a marginal impact on the development of safer drugs" because it is only one of several factors involved in their production and market ing, is generally applicable. While liability has caused manufacturers to expand warnings, that step has had no obvious impact on safety.

Litigation, irrespective of the outcome, may, however, have a significant impact if it becomes the focal point for media attention. Writes Har vard's John Graha~, the "indirect effect of liability on consumer demand-operating through adverse publicity about a product's safety and a manufacturer's reputation-is often the most sig nificant contribution of liability to safety." Although this effect is probably most evident for autos, Andrew Craig from Wichita State Universi ty found a similar impact on the sale of small air craft. Unfortunately, for all of the research that went into The LiabilityMaze, the analysts don't really answer the most fundamental question: Is today's litigation explosion providing us with the "right" amount of safety? Although it may seem a hereti cal concept, it is possible to be too safe in the sense of paying more than we want in order to avoid infinitesimal risks. For instance, Murray Mackay of the University of Birmingham estimates the cost of the average car to be several hundred dol lars higher because of liability.Yet,writes Graham, safety "has historically been a minor consideration in consumer choices."

The expansion of litigation appears to have had a far more expensive impact on the general avia tion industry. The liability charge for a light plane rose to between $70,000 and $100,000, figures attorney Robert Martin, with naturally devastat ing consequences for this industry. "The price. of 46 THE FREEMAN • JANUARY 1992 new airplanes reached the point at which prospec tive buyers increasingly chose to purchase a used plane rather than a new one. Margins were cut, manufacturing plants were closed, engineering staffs were trimmed, and factory employees were laid off," writes Martin. But consumers, too, lost, for the amount of safety purchased at such a high price seems to be miniscule. If people are now safer, it may be because they are not buying prod ucts and undertaking activities that they desire: indeed, several of the volume's researchers believe that liability has "increased" safety by reducingthe demand for goods and services.

Furthermore, there are at least some cases where litigation appears to have reduced safety. Some auto executives fear adopting prudent changes that might be viewed by a jury as evidence that the previous design was negligent. Moreover, the expansion of medical malpractice lawsuits has created a veritable industry devoted to "risk man agement" of practices with high-liability potential. In this way, writes Stanley Joel Reiser from the University of Texas, "the liability ethos diverts a significant activity, risk management, away from its proper focus on the patient's welfare to a con cern with professional and institutional liability protection." Pervasive litigation may also hinder experimental procedures and products because of fears of liability. What is to be done, ask Huber and Litan. One could argue, they observe, that we don't know enough about the effect of liability on innovation and safety to formulate a policy. After all, if Swazey is correct in contending that there are "vir tually no solid data" on the impact of litigation on the safety of drugs, then how can one know how to act? But, as Huber and Litan point out, "the one issue beyond dispute is that legal rules are policy, and policy willbe made, in courts if not in legisla tures, with or without data."

Thus, they offer some thoughtful if modest sug gestions. First, the legal system needs to do better at incorporating positive rewards for product experimentation and improvement. In particular, the liability system needs to reflect the fact that to fail to innovate may actually be riskier than not to modify a product or service. "Legal rules, jury instructions, and evidentiary standards can all be crafted to give more equal weight to these sym metric considerations," write Huber and Litan. Second, efforts should be made, in their view,to re-connect liability to risky behavior. One doctrine they single out is "the ability of plaintiffs to recover for product-related injuries decades after products have been on the market and previously not been held liable for injury." Huber and Litan suggest a statute of repose to limit the period of liability and constraints on punitive damages. Third, they propose a broad review, buttressed by systematic analysis and research, of America's legal system combined with a willingness "to apply the same cost-benefit standards to the liability sys tem that the liability system applies to doctors, drug companies, and the manufacturers of planes, chemicals, and cars." Particularly important would be a thorough assessment of the impact of differ ences between the U.S. and foreign systems, such as America's failure to force the loser to pay the lit igation expenses of the winner, which encourages frivolous and nuisance suits.

The LiabilityMaze,written and edited by schol ars, is a fine volume that should enhance any read er's understanding of the so-called liability crisis. The book raises more problems than it solves, but that reflects the intricacies of the issue rather than any shortcomings on the part of its authors. D Doug Bandow is a Senior Fellow at the Cato Institute. A graduate of Stanford Law School, he is a member of the California and District of Columbia bars. THE PRIZE: THE EPIC QUEST FOR OIL, MONEY, AND POWER by Daniel Yergin Simon and Schuster,1230 Avenue of the Americas, New York,NY 10020-1991 - 877 pages- $24.95cloth Reviewedby RaymondJ. Keating O il has often been referred to as the lifeblood of any economy. While this is an overstatement, oil has been the most crit ical, nonhuman economic resource throughout most of the 20th century. Daniel Yergin illustrates the economic, political, societal, and geo-strategic importance of this commodity.

Yergin takes the reader on an enjoyable and thorough journey through the history of oil, from the drilling of the first well by Colonel Edwin Drake in Pennsylvania in 1859 up to Saddam Hussein's invasion of Kuwait in a mad grab for wealth and oil in August 1990.Yergin explores oil's role in war, describes the ever-changing structure of the oil industry, and discusses the prominent and often colorful petroleum players. The Prize is a well-written and well-researched addition to a branch of history that, until very recently, had been sadly neglected-business history. My sole criticism ofYergin's effort is his periodic indifference to the role of markets in the oil indus try. At times he acknowledges the benefits of inno vation, entrepreneurship, productivity, organiza tion, and the price system that markets bring to bear. However, he also issues caveats relating to the old "instability" straw man as it pertains to free markets.

For instance, Yergin declares in the book's epi logue that "The years of past oil crises have demonstrated that, given time, markets will adjust and allocate." Earlier, he even summarizes the development of the oil pricing system as it led to today's futures markets: "Once it had been Stan dard Oil that had set the price. Then it had been the Texas Railroad Commission system in the United States and the majors in the rest of the world. Then it was OPEC. Now price was being established, every day, instantaneously, on the open market, in the interaction of the floor traders on the Nymex [New York Mercantile Exchange] with buyers and sellers glued to computer screens all over the world. It was like the late 19th-century oil exchanges of western Pennsylvania, but reborn with modern technology. All players got the same information at the same moment, and all could act on it in the next." A vast improvement, one might say. However, when discussing the ill effects that the 1986drop in oil prices had on the U.S. domestic oil industry, the author wonders: "Perhaps when it came to 'market forces,' there could be too much of a good thing."

In fact, Yergin is inconsistent in his view as to whether the private sector or the government should control oil production. In analyzing the ear ly days of oil production in Russia, Yergin writes: "The development of the industry was severely restricted by the region's backwardness and its remoteness [i.e., in Baku] and the corrupt, heavy handed, and incompetent Czarist administration, which ran the minuscule oil industry as a state monopoly. Finally, at the beginning of the 1870s, the Russian government abolished the monopoly system and opened the area to competitive free enterprise. The result was an explosion of OTHER BOOKS 47 entrepreneurship. The days of hand-dug oil pits were over. The first wells were drilled in 1871-72; and by 1873, more than twenty small refineries were at work." Yet, in contrast, Yergin's discussion of the anemic state of current Soviet oil production doesn't address these critical issues of private property, entrepreneurship, and profit incentives.

Yergin does explore the legitimate debate as to when national security takes precedence over the market, and when the two might be in conflict. It seems clear that the burden of proof lies with the national security advocates who argue for limita tions on the market. The author makes no clear declaration in either direction on such matters, but seems tacitly to lean toward the national security/market limiting agenda. Having acknowledged various inconsistencies and shortcomings on matters of economics, I still can heartily recommend The Prizeon the basis of its great historic breadth. Yergin explores the sig nificance of and roles played by, for example, Win ston Churchill, Standard Oil and John D. Rocke feller, the Middle East and OPEC, Mexico, the United States government and its often schizo phrenic policies toward the oil industry, Axis and Allied World War II strategies, the Shah of Iran and his successor the Ayatollah Khomeini, Israel, Egypt's Nasser and the Suez Canal, discoveries in the North Sea and in Alaska, and even T. Boone Pickens. Such a list merely scratches the surface, however. Yergin's tome must be read to gain a true appreciation of its vast scope.

While Yergin was writing a history of oil's role in the world, and seemed to tie this role·into most historic events of the past century, he still pos sessed the ability to discern the limits of oil. He deserves credit for acknowledging the economic successes of West Germany and various Pacific Rim countries, all huge oil importers. While oil's stature in the world economy will remain high, even Yergin notes the ascendency of the informa tion or knowledge economy. The silicon chip, cre ated out of sand, is emblematic of the economy of the mind, in which limits won't be set by amounts of oil but only by the restrictions placed on human innovation and creativity. Perhaps the develop ment of this knowledge economy will be the sub ject of another epic treatise of business history a century from now. D Mr. Keating is New York Director of Citizens for a Sound Economy.

48 THE FREEMAN • JANUARY 1992 THE WORLDTRADINGSYSTEMAT RISK by Jagdish Bhagwati PrincetonUniversityPress,41 WilliamStreet,Princeton,NJ 08540• 1991 • 164 pages • $16.95cloth Reviewedby WilliamH. Peterson T he laissezfaire wisdomof Adam Smith and David Ricardo (with his profound Law of Comparative Advantage on behalf of free trade) is well reflected here in a work by Jagdish Bhagwati, formerly Arthur Lehman Professor of Economics at Columbia University. Professor Bhagwati provides an incisive and authorative essay on the current position and future potential of GAlT, with special attention to a prominent GAlT member, the United States. GAlT is the General Agreement on Tariffsand Trade, founded in 1947,a U.N.-affiliated agency based in Geneva, Switzerland.It is an organization of some 100 member countries aiming at mutual tariff reduction along with removal of nontariff barriers such as import quotas and exchange con trols. Extended GAlT negotiations generally take place in member countries such as Japan (the Tokyo Round) in 1973-1979 and Uruguay (the Uruguay Round) in 1986-1990.

The aim of easing trade is not always accurate, even though the history of post-World War II glob al commerce has been on the whole positive. The protectionist germ is noted by Dr. Bhagwati, who is now economic policy adviser of GATT: many GATT members, including the United States, remain muddled or lukewarm to the idea of free trade, goaded as they are by powerful domestic interests such as farm, labor, and textile organiza tions. In fact, it was farm interests, most notably European and Japanese, that tripped up the final Uruguay Round of GATT tariff reductions in December 1990, causing trade diplomats to go back to the drawing board. For its part, the United States suffers from a trade neurosis that the author christens "the diminished giant syndrome," an affliction charac terized today by plaints in Congress and the media of "unfairness," "foreign subsidies," and, in the case·of Bangladeshi textiles, "pauper labor." Pro fessor Bhagwati sees America as a parallel of Britain at the turn of the century when the United States and Germany arrived on the world scene.

Today the new kid on the trade block is Japan, and Japan-bashing is in vogue. Recently Japan, along with India and Brazil, was cited for unfair trade practices under the "Super 301" provisions of the 1988 Omnibus Trade and Competitiveness Act. The Act spurred a "Structural Impediments Initiative" that had American and Japanese negotiators scurrying and probing such arcane "trade" topics as mutual antitrust policies, retail distribution systems, infrastructure spending, savings rates, and work ers' rights. Professor Bhagwati says the American "shopping list" was reputed to have included 240 such items. Hardly a way to win friends abroad. In fact, U.S. Trade Representative Carla Hills is reported to have relied on her advisers to assert during a negotiating visit to Tokyo that foreign baby bottles couldn't make it to Japan. Her Japanese hosts immediately refuted her assertion, producing evidence of their availability in shop ping centers. Again, after being persuaded by another Japan-basher that Kodak film was not available in Tokyo's stores ("while Fuji was in New York's"), she was shocked to discover on investi gation that the charge was simply not true.

These incidences point up the problem of world trade inside and outside GATT. Trade negotia tions are inevitably politicized, bureaucratized, and, in the scheme of things, compromised, espe cially from the viewpoint of the consumer whose interest in world commerce is, or should be, first and foremost. But GAlT negotiations are off-the record, and the consumer is almost always "the forgotten man." What tradeoffs are made? Whose industry is gored? Who gets what in what Yale economist William Graham Sumner called "the great scramble and the big divide"? So my onlycomment about this otherwise excel lent book is the author's seeming beholdenness to GAIT with its key principle of reciprocity.GAIT is a dubious crutch. Surely it is the overwhelming case for free trade, even unilateral free trade, that should spur the thinkers and doers to dismantle domestic trade barriers to foreign imports without, if need, a quidpro quo. The consumer deserves no less. D Dr. Peterson, an adjunct scholar at the Heritage Foun dation, holds the Burrows T. and Mabel L. Lundy Chair of Business Philosophy at Campbell University, Buies Creek, North Carolina.