Book Reviews

BOOKS Everybody Wins! A Life in Free Enterprise by Gordon Cain Chemical Heritage Press. 1997 • 342 pages. $24.95 Reviewed by Robert L. Bradley, Jr. O n the surface, this autobiography describes how an individual well past retirement age restructured major assets in the domestic chemical! petrochemical industry through leveraged buyouts (LBOs) to create several billion dollars of wealth for himself and many associates. This interesting and unique business history aside, Gordon Cain's story has a much deeper message-how a "captain of industry" working in a market setting where political barriers and patronage do not apply can create great wealth and opportunities for thou sands of people. As Cain notes in his introduction, the book was inspired by the need to defend his honor against the commonly portrayed notion that debt-financed buyouts in the 1980s benefited a few quick-buck artists at the expense of displaced workers and the general good. He argues that the failure behind massive business restructuring is prior manage ment, not new management. Draconian layoffsand abrupt change could have been mitigated by better managerial decisions and, in turn, more account able boards of directors. It is passive boards, Cain contends, that can create the "Imperial CEO," an example of that rare species called market failure.

But even when the dirty work must be done, Cain explains, a sound entrepreneurial vision can more than offset the transition costs by empowering remaining workers, freeing marginal workers and other nonspecific assets to find more productive employment, and increasing output and lowering prices to benefit consumers. Cain orchestrated five major business restruc turings in the 1980s, all of them LBOs, that handsomely benefited himself, the institutional investors, over 100 key managers, and some 5,000 employees who received several times their salary in stock participation. His largest deal, circa 1989, was his best. Cain Chemical increased 44 times in value for shareholders in the nine months between 707 when Cain put the company together and Occi dental bought it. (Cain did not want to sell, but too many people stood to make significant wealth for the first time.) Soon after, Cain opened up his copy of the Wall Street Journal to find a full-page advertisement with a "thank you, Gordon Cain"

surrounded by signatures from all 1,337employees, the lowest paid of whom had received a six-figure payout. While returns of this magnitude always reflect fortuitous circumstances, Cain clearly was doing some highly innovative things that the incumbents (the asset sellers) were not. One innovation that simultaneously cut costs and enhanced corporate decision-making was to increase the involvement of rank-and-file employees. This was accomplished using Edward Deming's "total quality control" concepts and setting up employee stock ownership and profit-sharing plans. By betting on the collec tive wisdom and drive of the on-the-spot employ ees rather than intermediate management, Cain had tapped into the same knowledge dynamo that "Austrian School" economists such as Ludwig von Mises and F.A. Hayek had conclusively shown make market economics inherently more wealth creating than centrally planned ones.

The double win of reduced management costs and improved decision-making allowed Cain to slash overhead from 15-20 percent of sales to around 5 percent of sales and make innumerable process improvements. This endogenous improve ment, leveraged by debt financing, was powerfully joined by improved external factors driving the highly cyclic businesses he invested in. Cain re peatedly demonstrated that he understood where he was in the chemical-petrochemical price cycle better than the prevailing view. It is surprising, in retrospect, that so many companies would sell their assets to Gordon Cain. The crucial element that put Cain's entrepre neurial vision into play was debt financing-and hence his inspiration to offer a revisionist view of the social beneficence of LBOs. Cain had very limited venture capital but a proven management record. Before, this would not have been enough to compete for corporate control. But in the early 1980sa new investment vehicle came of age-high risk, high-return "junk" bonds to finance leveraged buyouts. Cain's success belies the widespread idea that "junk bonds" and LBOs were evil and fraud ulent.

As unique as Cain's late success in business life was his appreciation and support for consistent free-market public policies. While many business executives typically are strong supporters of the free-market economy in the abstract, very few 708 THE FREEMAN • NOVEMBER 1997 resist the temptation to actively court government favor as short-run business interests dictate. The widely recognized "forest problem" of pervasive special-interest interferences with the market is really a "trees" problem of political opportunities to individual businesses. Cain, a man "not com fortable in either political party," never found himself in a business predicament of having to exercise the political means to get ahead. And he never forgot the lessons from a slim book he read when it was published in 1944: Hayek's Road to Serfdom. Now, with his newfound fortune, a per sonal lifestyle that has remained unchanged (ex cept for a private plane that he apologizes for in the book), and a quest to improve society in the near term, he scoured the think-tank spectrum for foundations supporting limited government and libertarian ideals.

Cain's story offers much useful insight and experience about business restructuring, manage ment philosophy, and public policy. Cain's revi sionism casts fourth-and-Iong business restructur ing in new light. Debt financing is shown to have a human face after all. And thanks in part to Cain's new competitive standard, America's chemical! petrochemical industry remains a world leader today. Everybody Wins! is thus a powerful antidote to many poisonous myths about capitalism. D Mr. Bradley is president of the Institute for Energy Research in Houston, Texas. Dynamics of the Mixed Economy: Toward a Theory of Interventionism by Sanford Ikeda Routledge. 1997 • xiv+296 pages. $69.95 Reviewed by E. C. Pasour, Jr. I n Dynamics of the Mixed Economy, a mixed economy is defined as any political-economic system that lies between the extremes of laissez faire capitalism and pure collectivism.In a critique of interventionism published in 1929, Ludwig von Mises found the mixed economy to be contradic tory, illogical, and inherently unstable. This find ing, coupled with what we observe throughout the world, poses what is referred to in this book as the "Misesian paradox"- how can a mixed economy subject to these grave defects continue to be the most widespread and persistent form of political economic system in the world today?

Ikeda extends Mises's work in light of recent developments in market process theory to provide an explanation of the tendency of the state to expand and contract-swinging back and forth toward either more or less government control. The book draws heavily upon work by F. A. Hayek and Israel Kirzner-especially Hayek's notion of the spontaneous order and insights about the use of knowledge in society and Kirzner's concept of entrepreneurial discovery and critique of equilib rium analysis in mainstream economic theory. Readers not familiar with the ideas of Mises, Hayek, and Kirzner willfind this book to be a hard read. Why is it, as Mises argued, that government intervention tends to lead to outcomes that are inferior, as measured by the interventionist's own standards? Ikeda traces the unintended conse quences to three factors-dispersed knowledge (discussed by Hayek a half century ago), radical ignorance, and systemic complexity. The interac tion between government and market processes magnifies the problems created by dispersed knowledge and radical ignorance as the relative size of the public sector increases.

Moreover, the act of intervention itself weakens the moral aversion or psychological resistance to statism, further contributing to the growth of the public sector. In the case of direct income transfers, for example, intervention fosters a mentality of dependency and personal irresponsibility. Further government action is then taken to cope with intervention-spawned problems. When the results of interventionism become sufficientlyper verse, the mixed economy reaches the crisis stage and governmental officials must make a radical move-either toward more or less intervention. Despite the contradictions and instability, Ikeda concludes that the mixed economy will tend to be the most prevalent form of political-economic system and is likelyto be more enduring than either pure collectivism or capitalism. What are the implications for controlling Levi athan? While the inner contradictions of interven tionism can be eliminated only by eliminating the state, Ikeda holds out some hope for a less drastic approach-the minimal state. The inherent ten dency of government to grow in the minimal state can be overcome, he suggests, if the ideological preferences of public choosers for limited govern ment are sufficientlystrong.

Decision-makers in the political process face two kinds of problems: incentive problems, the focus of public choice theory; and knowledge problems, Ikeda's primary concern and that of Austrian political economy generally. In Dynamics of the Mixed Economy, Austrian and public choice approaches are considered to be complementary but independent This position, however, cannot withstand careful scrutiny. The likelihood of increases or decreases in government intervention at any particular time is not independent of the institutional framework. The kinds of political structures and procedures in place, as emphasized in constitutional political economy (a public choice subdiscipline), can pro foundly affect both the amount of transfer-seeking intervention and the likelihood that political deci sion-makers will act in ways consistent with the interests of the publicat-Iarge. Dynamics of the Mixed Economy contains a wealth of insights on the perils and results of government intervention-it also provides some hope for advocates of a free society. A strong ideological commitment of public choosers to limited government-preferences rooted in polit ical philosophy, morality, and religion-can pro vide an institutional framework conducive to pol icies consistent with that goal. However, Ikeda is silent on the really important question-how can we achieve a consensus in favor of limited government? [] Dr. Pasour is prOfessor of agricultural and resource economics at North Carolina State University, Ra leigh.

Everything for Sale: The Virtues and Limits of Markets by Robert Kuttner Alfred A. Knopf. 1997 • 410 pages. $27.50 Reviewed by Raymond J. Keating R obert Kuttner's Everything for Sale carries the subtitle The Virtues and Limits of Markets. Unfortunately, Kuttner sees few, if any,virtues and many limits when it comes to free markets. Of course, it will surprise few that Kuttner holds this view. After all, he is a ubiquitous, outspoken proponent of big government. Open a newspaper, a magazine, or turn on a public-policy-oriented television show, and chances are unusually high you will come across Robert Kuttner. In television sound bites and his rather short newspaper columns, Kuttner manages to sound naIve, misguided, misinformed, and even danger ous, all at the same time. What Everything for Sale clearly demonstrates is that such cloudy thinking is not a function of the medium, but lies at the core of big-government liberalism.

BOOKS 709 In Everything for Sale, Kuttner conveniently argues against his own perverse, ill-informed ideas of what free markets are all about, forcing the reader to plod through a field of straw men which the author delights in knocking down. The most obvious of these straw men is his attack on perfect competition. Kuttner wrongly asserts that market proponents view the perfect competition model as a reflection of market realities; then he shows that markets are not perfectly competitive, proclaims market failure, and calls for widespread govern ment intervention. In reality, of course, few if any, economists see perfect competition as a reflection of actual mar kets. Indeed, most freshman economics students quickly understand. this fact. As James Gwartney and Richard Stroup explain in their fine, market oriented textbook Economics: Private and Public Choice, perfect, or pure, competition is an abstract, simplified model whose purpose is to "help us develop the economic way of thinking." Beyond perhaps certain parts of the agriculture industry, this model has little direct application to the dynamic, day-to-day functioning of actual markets.

However, the constant use of the perfect compe tition model in economics instruction, I think, can confuse people outside the economics profession, and apparently, as exemplified by Kuttner, a few inside it as well. Kuttner also suffers from serious lapses in logic. Much of his case for continuing to regulate such markets as health care, banking, finance, labor, and so on, rests on nothing more than the idea that these markets have long been highly regulated. In the case of health care, for example, he goes so far as to assert inanely that true market reform "turns out to require massive government regulation." All of the trite liberal views of the marketplace are given full voice in Kuttner's book. The author sees markets only producing winners and losers. He seems incapable of grasping the fact the market produces winners on both ends of each transac tion-both buyers and sellers are better off.

In Marxist fashion, Kuttner vastly discounts the critical aspect of individual freedom in the mar ketplace, favoring bankrupt notions of class war fare and exploitation instead. And, of course, in contrast to centuries of economic progress through free markets, the author believes that markets are inherently short-term in outlook, yet offers no evidence in support of this thesis. In addition, while Kuttner criticizes free-market economists for ap plyingeconomic analysisto noneconomic decisions (a criticism that may apply to some but certainly not the majority of such economists, despite what Kuttner implies), he fails to consider the impor710 THE FREEMAN • NOVEMBER 1997 tance of incentives in his own analysis of straight forward economic decisions. There is much in this book to identify the author as an extremist when it comes to his opposition to free markets and in his support of government action. Consider the following statements: • "Yet in a Keynesian sense the war [i.e., World War II] was stunningly efficient."

• "Trust, civility, long-term commitment, and the art of consensual deliberation are the antithesis of pure markets, and the essence of effective politics." • "[W]e need the habits and institutions of a strong democracy preciselyto keep markets in their place and to provide resilience during those his torical periods when the market goes haywire and makes ordinary people vulnerable to the appeals of tyrants." • "In this century, the expansion of state con straints on the market and the expansion of the province of personal liberties have gone hand in hand." Oddly, for the free-market reader, Everythingfor Sale is at once both frustrating and encouraging. The book frustrates due to its misrepresentations and misunderstandings of the workings and ben efits of markets. However, the book proves to be so intellectually bankrupt that it should encourage those looking to advance economic freedom. If this is the best the opposition has to offer, free-market economics is in a much better position than many of us might previously have thought. D Mr. Keatingis chiefeconomistfor the Small Business SurvivalFoundationand authorofNew York by the Numbers: State and City in Perpetual Crisis (Mad ison Books, 1997).

A Sacred Union of Citizens-George Washington's Farewell Address and the American Character by Matthew Spalding and Patrick Garrity Rowman & Littlefield. 1996 • 217 pages. $27.95 Reviewed by George C. Leef O f all the Founders, George Washington is the most famous, but arguably the least well known. Washington's life is well chronicled, but when it comes to his thought, he is largely a mythic figure. People carefully study the writings of Jefferson, Madison, Hamilton, et a!., but as for Washington, he is known almost entirely for his deeds-defeating Cornwallis, presiding over the Constitutional Convention, serving as the first president-rather than for his words. What did he believe? A SacredUnion of Citizensby Matthew Spalding (director of lectures and educational programs at the Heritage Foundation) and Patrick Garrity (senior fellow at the Claremont Institute) helps to answer that question by focusing on Washington's most famous writing, his Farewell Address. The authors have produced a lovelyvolume that sheds a great deal of light on Washington's own character and his hopes for a national character that would emerge in his countrymen. There are many good biographies of Washington, but for a vision into the workings of his mind, this book is an excellent beginning point.

The book is structured around the Farewell Address, its history and meaning. Interestingly, Washington did not actually deliver the address; rather, he sent it to Philadelphia's American Daily Advertiser,where it was published on September 19, 1796. The message was the culmination of Washington's public life and in it he painstakingly expressed (the authors even discuss some of the material he deleted and reproduce part of the handwritten manuscript showing some excisions) his counsel to the nation he had done so much to create. In fact, the Farewell Address is a lot like Washington himself in that many people have heard of it, but few know much about it. Many politicians, for instance, can tell you that in it, Washington advised against foreign alliances and interference in the affairs of other nations, but would be hard-pressed to relate any other idea contained in the Farewell Address.

For their benefit, here is one. The problems of political parties and factionalism concerned Wash ington as much as did the dangers of foreign entanglements. In Paragraph 21 (the entire Ad dress consists of 50 paragraphs) he writes, "The alternate domination of one faction over another sharpened by the spirit of revenge natural to party dissension, which in different ages and countries has perpetuated the most horrid enormities, is itself a frightful despotism." How very true. Unfortunately, Washington did not immediately give a prescription for the avoidance of these evils, but elsewhere in the Farewell Address, Washing ton extolled the virtues of just minding one's own business. If the character of most if not all of the people were to be formed around that simple maxim,people would turn awayfrom the seduction of politics.

Washington also warned in the Farewell Ad dress against allowingeven the slightest weakening of the Constitution's restraints upon governmental power, writing, "But let there be no change by usurpation; for though this, in one instance, maybe the instrument of good, it is the customary weapon by which free governments are destroyed. The precedent must alwaysgreatly overbalance in per manent evil any partial or transient benefit which the use can at any time yield." Alas, many members of the Supreme Court have been willing to ignore Washington's counsel, if they know of it at all. The Constitution's limits on government power have been shredded, thanks to the arrogance of justices who thought that achieving what they regarded as socially good results was more important than preserving the Constitutional plan of limited gov ernment based on a few enumerated powers and many unyielding restrictions.

Readers who take up this book expecting to find BOOKS 711 unfailing Washingtonian support for minimalist government will, however, be disappointed. The authors note that he favored the establishment of a national university, for example, not seeing the long-run dangers of allowing the government to become active in the provision of education. He also favored a national bank and held an ambiva lent attitude toward foreign trade, maintaining that the nation might develop better if the people produced more of their own goods. Bastiat came along half a century too late to have enlightened our First President on the folly of government involvement in any of these areas. A Sacred Union of Citizens is an intriguing project, well executed. For Americans interested in learning more about the workings of George Washington's mind, this book is indispensable. 0 Mr. Leef is the book review editor of The Freeman.

Back in Print! GOVERNMENT-AN IDEAL CONCEPT by Leonard E. Read New Introduction by Hans F. Sennholz To Leonard Read, government was neither a manager of economic activity nor an almoner of gifts to the people, but a necessary instrument of social order. Its only basis is justice, not pity. Government is represented by agents who are expected to enforce and defend man's natural rights and protect him against wrongs of his fellowmen. But these agents should not do what the individual must not do. The agents of government should be men and women of integrity. Unfortunately, Read observed, political office tends to rob a person of modesty, humility, and integrity, which make it advisable never to accept a political office. Leonard Read's eloquent discussion of the nature of government and a new beginning in freedom will endure as a principled work of great value. It is a guidepost for readers seriously interested in the limits of public regimen and the cause of liberty.

152 pages, indexed, paperback $12.95 A few years before Leonard E. Read authored this book, he created The Foundation for Economic Education. He was convinced that every generation must defend its freedom anew against the intellectual forces that seek through ever new devices to enslave it. Therefore, he dedicated his great strength and ability to the study and dissemination of freedom ideas. He managed the Foundation from its beginnings in 1946until his death in 1983.

Critic a eVlew An interdisciplinary journal focusing on the effects of market and state on human wellbeing. "An exciting corner in the great luarketplace of cOlupeting ideas. Most readers will usually find that Critical Review contains luuch to disagree with, but little that is boring, unilnportant, or anything other than stituulating or provocative." - Israel M. Kirzner "A breath of fresh air for libertarian scholarship .... a tuuch needed outlet for truly critical expression within the libertarian acadeluy." - Chris M. Sciabarra "Already a lnajor force, it is well written and well edited; its scholarship is sound, and free froln the elnbarrassing lack of sophistication that has plagued so l1luch classicalliberal scholarship and opinion .... I have never shown it to a colleague, left, right, or center, who wasn't ilupressed by it." - StephenCox "The l1l0St fascinating interdisciplinary journal in existence, it is especially ituportant for classical liberal scholars, since it encourages a realistic and elnpirically grounded, yet philosophically rigorous appraisal of different social systelns." - PeterJ. Boettke IN RECENT ISSUES (back issues available): F.A. Hayek Hayek's Critique of Modern Econolnics PctcrJ. Bocttkc Hayek's Econolnics and His Politics J~ffrcy Fricdman DavidJohnston, Stcven Lukes on Hayek's critique of social justice Delnocracy and the Rule of Law Julict Williams Hayek's Conservative Liberalisln Ryszard Legutko The Non-Neutrality of the Market Gus diZercga Democracyvs. Truth Nationalism Capitalismand Happiness Communitarlanism RationalChoiceTheory Individualismand Evolution MANUSCRIPT SUBMISSION GUIDE AND BACK ISSUE LIST AVAILABLE UPON REQUEST --------------------------.---------------------------------------Single issues $10, double issues $20. I-year (4-issue) subscriptions: $29 U.S., $35 foreign, $15 students with copy of 10, $54 institutions; add $15 for air mail. Send check,money order, or Visa/Me number and expiration date to: CRITICAL REVIEW, P.O. BOX 1254, Dept. 307L, Danbury,CT 06813, or fax credit card information to (203) 270-8105, or e-mail info@criticalreview.com.

(issn 0891-3811) THEFREEMAN IDEAS ON LIBERTY FEATURES 716 722 725 733 738 744 749 Center 731 741 752 714 754 768 Freedom and the Car by Loren Lomasky Answering the critics of the automobile. Paparazzi and Public Property by Tibor R. Machan Defining freedom of the press in public places. Where Does Law Come From? by Bruce L. Benson The motivations for developing rules and governing institutions. The Efficiency of Natural Rights by Wendy McElroy Important insights from Ludwig von Mises and Benjamin Tucker. The Future of the Union Movement: Clues From the UPS Strike by Charles W Baird Reports of a union resurgence are erroneous. What's So Bad About Big Government Anyway? by George C. Leef There is a "right" size for government. Or Else ... by Russell Madden Combating legal extortion. COLUMNS NOTES from FEE-Benefits of Immigration by Donald J. Boudreaux IDEAS and CONSEQUENCES-Will Retirement Become a Personal Responsibility?