Book Reviews

A REVIEWER'S NOTEBOOK OuTOFWORK by John Chamberlain A fter last fall's election George Bush said he beat himself. But history asks of Bush no such abasement. History tells us that when unemployment is high, presiden tial incumbents always lose. In a fantastically detailed book called Out of Work: Unemployment and Government in Twentieth-Century America (New York: Independent Institute, Holmes and Meier, Foreword by Martin Bronfenbrenner, 326 pages, $27.95, $16.95), Richard Vedder and Lowell Gallaway controvert Bush's assess ment. I'll take Vedder's and Gallaway's word for it. They seem to know every bit of evidence about unemployment going well back into the nineteenth century. Their conclusion is that government action aimed at eliminating unemployment of more than seven percent defeats itself. The best way, they say, to reduce unemployment is to do nothing. In 1929, when Herbert Hoover was run ning things, we had an activist who had fed the Belgians and Russians. He thought he knew everything about stabilizing markets by government interference. The word that went out from the White House was that money wages should not be cut. High wages would maintain purchasing power. The pur chasing power fetish, with Hoover's sanc tion, became the orthodoxy of the time.

When Franklin Roosevelt took over, he saw no reason to change things. After all, he had been an activist too. Simply put, this meant that there was a bottom rigidity to a key factor ofproduction. The free market was not allowed to work. To force things, deficit financing was resorted to in various combinations. The National Industrial Recovery Act set prices under the so-called Blue Eagle until the Supreme Court invalidated it, but this was by no means the end of the high-wage story. The Wagner Act, the Social Security Act, the Fair Labor Standards Act, all contrib uted to maintaining high labor costs. The Smoot-Hawley tariff added a protectionist bias that provoked foreign retaliation. American employers went along with Franklin Roosevelt (Ford and Thomas Ed ison were with them), but only up to a point. When a person could not earn the minimum wage he was understandably jettisoned. Quoting from a National Review sum mary of their book, Vedder and Gallaway say that "market forces tend to end reces sions naturally by forcing a fall in the ad justed real wage .... " The 1920-21 recession, infinitely worse at the outset than the Great Depression, dissipated itself within a year under" do nothing Presidents" (Wood row Wilson was too seriously ill to pursue his natural inclinations, and Warren Hard ing wasn't interested).

The Great Depression, by contrast to that of 1920-21, got worse after continual market meddling. More recently, the 1982recession lasted only about a year, with no special attempt on the part of the Reagan Admin istration to end it. As labor markets soft ened, real wages fell. Vedder and Gallaway take four vivid impressions from reading American macro economic history. One is that the worker needs prosperous capitalists to provide for job opportunities. The second is that gov ernment efforts to reduce unemployment must worsen the problem. The third is that 116 long-term improvement in living standards requires improvements in productivity, bet ter understood by reading Adam Smith than John Maynard Keynes. The fourth impres sion is that "experts" are dangerous and should be listened to skeptically. Being "kinder and gentler" by approving a morass of new environmental, civil rights, minimum wage, and other legislations has hurt Amer ican workers. The "experts" are to blame.

As they keep reiterating, Vedder and Gallaway are bent on keeping government out of it. They pound this in: the best thing to do in dealing with unemployment is to leave it alone. 0 Pride, Prejudice, and Politics: Roosevelt Versus Recovery, 1933-1938 by Gary Dean Best New York: Praeger, 1991 • 267 pages. $45 Reviewed by C. Lowell Harriss T his study documents President Franklin D. Roosevelt's hostility to business. In his 1933 inaugural address he spoke of the "plenty ... at our doorstep" whose "gen erous use . . . languishes because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated." As the months and years passed, business leaders could see that such antagonism was not merely political hyperbole. FDR gave every indication of believing what he had said. So did persons close to him.

To help in the campaign of 1932 FDR's advisers had recruited a "brain trust" from academia (chiefly Columbia University). "Only men ... who could come to the many conferences . . . on a five cent fare" wrote Judge Rosenman, the recruiter. The economist, Professor Rexford Guy Tugwell, had just published an article decrying the profit motive. The inauguration brought no substantial program for recovery. Throughout the pe117 riod covered by this book (to 1938) reform seemed to take precedence over recovery as the key concern of persons close to FDR. This scholarly, well-documented study there are 1055 endnotes-makes a convinc ing case that FDR's prejudices, antipathies based on emotion, worked against recovery. Despite evidence of the willingness of busi ness leaders to cooperate in the early months, the President's suspicions contin ued. "Businessmen who headed giant cor porations were belittled . . . by Roosevelt for lack of intelligence.' , Recovery of the economy would be re covery of business. And business recovery would depend, in part at least, upon the beliefs and expectations, the "animal spir its," of heads of businesses. Although one can never know how different the record would have been if FDR had not been so antagonistic, the author believes, I think correctly, that Americans suffered need lessly from FDR's antipathies.

The policies of the first four New Deal years failed to produce sustained recovery. The economy suffered a serious and quite unexpected decline late in 1937. Treasury Secretary Henry Morgenthau informed the President in a telephone conversation· on November 3, 1937, that another serious depression was under way and that the Federal Reserve should do something. Mor genthau recorded at the time: "From then on the President got very excited, very dictatorial and very disagreeable." He quoted at great length a man whom he described as a "wise old bird" who had told him that there were 2,000 men in this country who had made up their minds that they would hold a pistol to the Pres ident's head and make certain demands of him, otherwise they would continue to depress business. He quoted a lot of other generalities. I [Morgenthau] said, "A great deal depends on who this person is" and like a crack from a whip he said, "It is not necessary for you to know who that person is," which led me to believe that the "wise old bird" was himself . . . .

118 THE FREEMAN • MARCH 1993 Did the President really believe in such a conspiracy? Could such a thing possibly have been kept secret then or since? FDR's repeated refusals to accept and take seriously business leaders' efforts to cooperate must have aggravated their alien ation resulting from opposition to what the New Deal called reforms. Some advisers were unsuccessful in convincing the Presi dent that many of his policies on taxation, securities regulation, labor union organiza tion, and so forth discouraged investment and business recovery. The evidence in this study of FDR's continuing anti-business allegations-one quotation after another, year after year must .convince the ... reader that something quite irrational influenced him profoundly. The author, Professor of History at the University of Hawaii at Hilo, does not presume to present a complete history of the first five years of the New Deal. But no history of the period can be complete with out taking account of the evidence in this study. The closing chapter presents a pic ture that supports the assessments of con temporary observers, some certainly of un questioned stature, who found "pettiness and spitefulness" in FDR, a person "who was intolerant of criticism and critics, and who grasped for dictatorial power . . . ."

The Roosevelt of the pre-World War II years does not, the author believes, rank among the great presidents. D C. Lowell Harriss is Professor Emeritus ofEco nomics, Columbia University. Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein The Free Press, 340 pages, $24.95 Reviewed by Raymond J. Keating P eter Bernstein documents in workman like fashion not only the unusual intel lectual origins of many modern financial instruments and strategies, but also how financial economists have struggled to gain the full acceptance of their economic breth ren. Finance was long neglected by econo mists. The author gently, yet at times un evenly, mixes personal anecdotes about individuals-including not only economists but engineers and physicists as well-with an interesting overview of their contribu tions to the theory of finance. The genesis of modern financial innova tions largely came from cloistered academ ics with little securities market experience, rather than from street-smart analysts and investors, for example. In fact, modem developments in finance spring from a cen tral tenet not often accepted by such secu rities professionals. The overarching theme of Capital Ideas is that securities markets are efficient. Efficient financial markets seemingly present a conundrum for securi ties analysts and investors. On the one hand, market efficiency largely condemns the analysis profession to futility. That is, if markets are efficient, with prices immedi ately reflecting all information, one cannot regularly "beat the market." However, without hard-working and talented securi ties analysts and investors seeking out new information, the markets would not be so efficient. Bernstein points out that efficient securities markets and the concomitant fact that most investors will do no better than average is actually "a compliment to the avidity and intelligence and self-interest that motivate informed investors. If more inves tors were to become less zealous in pursuit of their fortunes, the keen and the swift would find the market a lot easier to beat. ' , Bernstein examines several innovations in finance theory, from Harry Markowitz's development of the "Efficient Frontier" of securities portfolios to Hayne Leland's idea for insuring such portfolios. James Tobin's "Separation Theorem," William Sharpe's development of the "Capital Asset Pricing Model," Eugene Fama's "Random Walk Theory, " Modiglianiand Miller's assertions that the market value of the firm is indepen dent of its capital structure, and Black and Scholes' analysis of option pricing are all surveyed to varying degrees.

Two aspects of Bernstein's book are par ticularly intriguing however. Ironically, the first is his closing chapter. All authors seek to neatly tie together the themes and ideas strewn throughout their books in the final chapter. Bernstein does so splendidly. He takes the many financial innovations ex plained in the preceding fourteen chapters, and expresses their importance to everyday economic life. Bernstein illuminates the critical role fi nancial markets play in economic develop ment and growth, a point of particular im portance today as socialism continues its descent. In fact, the author unequivocally declares: "In socialist economies it is the absence of free and active markets for corporate ownership that deprives citizens of the goods they want, with the quality they demand, and at the prices they can afford." Without functioning financial markets, re sources are misallocated with" catastrophic effects on living standards, employment and economic growth."

The importance of risk-taking does not elude the author's purview. Bernstein ob serves: "Because the stock market makes diversification easy and inexpensive, the average level of risk-taking in society is enhanced." And very simply, "Institutions that encourage risk-taking are essential if a society is to grow and raise its living standards. ' , Bernstein also describes how theoretical BOOKS 119 innovationsmet specific,"real world" needs. For example, the "markets for futures and options allow dealers to hedge the risks they incur, " and the junk bond market "satisfied the needs of both the investors who bought junk bonds and the relatively small compa nies" seeking much needed capital for growth and job creation "that their banks either could not or would not supply." The second intriguing aspect of Capital Ideas is buried between the lines. Several of the economists Bernstein discusses, such as James Tobin, Paul Samuelson, and Franco Modigliani, are Keynesian macroecono mists. Yet, the truly interesting aspects of their life's work have been accomplished on the micro-level, for example, verifying the efficiency of securities markets and explor ing its implications. One can only imagine what these individuals might contribute if they would finally let go of their fallacious macroeconomic analysis and prescriptions, such as fine tuning aggregate demand, and apply their intellects and microeconomic analytical tools to issues like economic growth, taxation, employment, and living standards. The dichotomy between the microeconomic and macroeconomic en deavors of such individuals is apparent to many, except themselves and others schooled in the failed Keynesian system. D Raymond J. Keating is New York State Director of Citizens for a Sound Economy.

FEE / 1993 Summer Seminars July 12-17 August 9-14 Join us in Irvington to explore the philosophy of freedom. Our 5-acre facilities in suburban Westchester County provide the ideal setting for intellectual pursuit. For full details and applications, write or tele phone Barbara Dodsworth, Director of Seminars, The Foundation for Economic Education (914) 591-7230: fax: (914) 591-8910.

"The most comprehensive book ever on unemployment in the United States." - GEORGE GILDER "Out of Work is a triplehit: an engaging narrativeofacenturyof u.s.economichistorythat focuseson real wageratesadjustedfor productivity changesto explainunemploymentpatterns;an attackon the mythologythathigh wageratesand governmentspendingreduceunemplOyment;a critiqueofwrongheadedpublicpoliciessince1930 thathave raisedunemploymentlevels." -ANNAJ.SCHWARTZ National Bureau of Economic Research "Out of Work is fascinatingand brilliant-a comprehensiveand importantbook." - LAWRENCE A. KUDLOW Senior Managing Director and Chief Economist Bear Stearns & Company "Out of Work is essentialfor economists, historians,othersocialscientists,and especially policy-makerswho are interestedin andconcerned about u.s. unemployment." - JAMES T. BENNETT Editor, JournalofLaborResearch INDEPENDENT, INSfITUTE The specter of unemployment is increasingfy used to justifYever bigger government programs - from continuing high military expenditures to a return to New Deal-type make-work agencies.

Now, Out of Work amasses relentless and devastating evidence that the major cause of high unemployment, both cyclical and secular, is government itself. Out of Work challenges Keynesian fiscal demand-management and shows that such policies as minimum wages, legal privileges for unions, civil rights legisla tion, unemployment compensation, and welfare have all played significant roles in generating joblessness. Too, Out ofWork fucidly and absorbingly recounts the history of American unemployment. It demonstrates, for example, that the policies of both presidents Herbert Hoover and Franklfu Roosevelt not only prolonged and exacerbated the unemployment of the Great Depression, but directly contributed to the depression's banking crisis as well. In short, Out of WorK redefines the way we think about one of the most explosive issues of the twentieth century. "Vedderand Gallaway'smasterfulbook demonstratesthat the invisiblehandofthe market worksbetterin preventinghigh unemploymentthan the visiblefoot ofgovernment."

- CONGRESSMAN RICHARD ARMEY Joint Economic Committee of Congress "Vedderand Gallawayshowconvincinglythat we needonceagain to rethinkourentirenotionof unemployment.Sixtyyearsofthe welfarestate togetherwith intruslvegovernmentregulations havegiven us problemslargelyunreachableby federal policiesdesignedto copewith cyclical unemployment.In effect,you cannotturnastan dard screwwithaPhillips(curve)screwdriver." - JONATHAN R. T. HUGHES Professor of Economics, Northwestern University "Out of Work is averyimportantbookaboutone ofthe mostimportanteconomicproblemsofour times. It shouldbe widelyreadand haveastrong influenceon publicpolicy." - GOTTFRIED HABERLER Senior Fellow, American Enterprise Institute 31 Figures· 48 Tables· Index· 320 Pages· Paperback Holmes & Meier, Publishers, New York and London $16.95 plus postage ($3.00/book, CA residents add sales tax) The Independent Institute, Dept. B89, 134 Ninety-Eighth Avenue, Oakland, CA 94603 THEmE ...........