Who'e Locked In to What; D. Boudreaux

Faced with solid evidence of the robustness of unregulated markets, most economists grew appropriately skeptical of claims that markets are prone to monopolization. The perceived need for antitrust enforcement declined. Donald J. Boudreaux is president ofFEE. 4 New Justification for Government Activism But government's thirst for power is unquenchable, .as is the willingness of some economists to provide intellectual cover for regulatory activism. Evidence of how such activism is bolstered by new theories is the current antitrust case against Microsoft. Crit ical to this case is the government's charge that consumers continue to purchase Microsoft software only because they are "locked in" to these products. The allegation is that most consumers want to purchase software from other suppliers, but Microsoft's very dominance locks these con sumers into its products, now and forever. After all, the story goes, because a great majority of other computers currently use Microsoft's Windows operating system, it doesn't pay for you-to buy another software maker's less-expensiye or technically superior operating system. If you did, your computer couldn't communicate with all those many others that use Windows.

The market, therefore, locks consumers into products and suppliers that by right ought to lose their market shares to firms offering superior deals. Naturally, the story concludes with the assertion that such inefficient "lock in" is a widespread threat in markets and that only government can spring consumers from these traps. This "lock-in" theory is dead wrong. Anyone who cares to look will discover the incredible entrepreneurial dynamism that has long characterized our market economy. If the "inefficient lock-in" tale were true, we would all still be listening to AM radio, for no one would have built an PM transmitter when vir tually no one owned an FM receiver. And no one would have bought an FM receiver when virtually no one broadcast FM signals. Like wise for color televisions. And for CD play ers. (I recall a conversation during the early 1980s with a fellow graduate student who insisted that compact-disc recordings would never catch on because too many people owned vinyl LPs. I hope he isn't now an investment adviser.) In each of these cases, the market smoothly performed the complex task of coordinating the switch by millions of peo ple from a less desirable to a more desirable product standard.

Not surprisingly, there's no evidence that the market dynamism that assured substantial progress for consumers in the past isn't work ing now in the computer industry. In a thor oughly researched new book, economists Stan Liebowitz and Stephen Margolis document not only how the market has never been inef ficiently locked into old technologies or prod ucts, but also that Microsoft owes its current success to its consistency in offering quality deals to consumers.1 Stuck with Government Ironically, those who demand that govern ment police against inefficient lock-in are oblivious to the fact that it is government, not the market, that locks people into bad situa tions. Once created, government power sel dom disappears. Statutes, regulations, and bureaucracies remain cemented in place long after their original justifications have evaporat ed. In short, government-not the marketis the principal source of inefficient lock-in.

Consider, for example, one of America's most regrettable government programs: Social Security. Aside from those with naked political or material stakes in this deluxe boondoggle, no one today argues that it works. That argument would be ludicrous-as 5 was shown recently by Professors Richard McKenzie and Dwight Lee, who calculated that a 38-year-old worker today, earning no more than $40,000 annually, must live to be 143 years old before getting as good a return as he would by investing. And a worker of the same age earning at least $68,400 per year has to pray for true earthly immortality, for only if he or she lives forever will Social Security pay off.2 Social Security has long been known to be disastrous for young people. No sensible per son would today voluntarily join this system. But join they must. The reason is that Social Security-by its very existence, by the fact that it transfers wealth from the many to the few-has created its own hardcore con stituency who benefits directly from its forced continuation. Because of the gargantuan polit ical clout of today's Social Security recipi ents, Americans are locked into this nefarious scheme.

Of course, there are good people working now to help liberate Americans from the Social Security trap. (For two excellent efforts, see www.socialsecurity.org and www.praonline.org.) These efforts, though, ultimately require politicians to release citi zens from Social Security. Perhaps it will hap pen. I'm hopeful. But no significant scale-back in govern ment power can occur until large numbers of people are educated and mobilized to support the change. In contrast, inferior products and programs supplied by the market are assured ly and quickly doomed. No political consen sus is necessary to free consumers from unre sponsive suppliers. All it takes in the market is a creative idea, entrepreneurial gumption, and consumers who recognize superior bargains. If government is to launch a campaign against programs, products, and institutions that are protected from competition-"locked in"-it had best look in the mirror. D 1. Stan J. Liebowitz and Stephen E. Margolis, Winners, Losers, and Microsoft (Oakland, Calif.: The Independent Institute, 1999).

2. Richard B. McKenzie and Dwight R. Lee, "Security in Old Age-and We Mean Old Age," Wall Street Journal, June 17, 1998, p.AI6.

Legalized Theft Is Good for the Poor? It Just Ain't So! F ormer u.s. Secretary of Labor Robert Reich spent the 1980s at Harvard's Kennedy School of Government spreading lies in the service of socialism. Not socialism as government ownership of the means of production but rather, as F. A. Hayek defined it in The Road to Serfdom, "chiefly the exten sive redistribution of incomes through taxa tion and the institutions of the welfare state." He's at it again now that he's back in academe as a professor of social and economic policy at Brandeis University. Reich began the decade of the '80s writing books and articles with the Marxist economist Barry Bluestone about the "deindustrializa tion of America," which, in their view, could only be stopped by the introduction of central planning, euphemistically called "industrial policy." But America wasn't deindustrializing. In a 1984 study published by the Heritage Foundation, I showed that the U.S. Commerce Department's Index of Manufacturing was at an all-time high, and that manufacturing as a percentage of GDP was about the same in 1980 as it was in 1950. American industry was evolving, as it always has, but it wasn't disappearing.

Then came the myth of the "great U-turn" in wages, with the average worker allegedly suffering a decline in wages and living stan dards. This myth was debunked by Richard McKenzie, who showed that if one considers total employee compensation, and not just wages, there is no "U-turn." Reich and Ira Magaziner also championed the view that the Japanese system of crony capitalism was the key to that country's eco6 nomic success and should be imitated by the United States. Now that the Japanese system has collapsed in a sea of corruption and bank ruptcy, Reich is silent on the issue. The late Murray Rothbard once asked Lud wig von Mises if he thought there was one single thing that designated an economy as primarily capitalist. Mises's response was yes, a vigorous private capital market. For it is capital markets that facilitate the constant reallocation of capital, guided by consumer sovereignty, in a capitalist economy. So, natu rally, Reich next wrote a book and a series of magazine articles criticizing private capital markets as essentially useless, part of a "paper economy" that supposedly adds nothing to production.

The Latest Crusade In a May 16, 1999, Washington Post article titled "To Lift All Boats," Reich is back to his old tricks. This time he endorses the Clinton administration's scheme to use tax dollars to set up "Universal Savings Accounts" worth up to $2,000 for citizens with incomes under $40,000 per year. Another variant of this scheme that Reich writes approvingly of is Senator Bob Kerrey's plan to give each new born child $1,000 in tax money, along with $500 per year every year until age 21, to be deposited in a government-operated "savings account." Then there's Yale Law School's Bruce Ackerman, who favors giving every 21 year-old $80,000 of someone else's hard earned income, no questions asked. This latter proposal really gets Reich excited. It can be funded, he says, with a mere "2 percent wealth tax on the wealthiest 40 percent of Americans." That's any family with an annual income of more than $40,000 per year, hardly what one would consider to be "wealthy." (For those who believe the tax rate under such a scheme would remain at 2 percent, I've got some oceanfront property in Arizona I'd like to sell you.) All these socialistic share-the-wealth plans are based on profound economic ignorance.

The most fundamental problem is a problem of socialism generally, as Mises pointed out in his 1922 classic, Socialism: "The socialist community is characterized by the fact that in it there is no connection between production and distribution. The magnitude of the share [of income] which is assigned for the use of each citizen is quite independent of the value of the service he renders." Reich's share-the-wealth plans are just another "entitlement" (to other people's money) that will continue to destroy the work ethic by paying people for not working. Since economic reward is divorced from one's ser vice to consumers, the principle is the antithe sis of how a market economy works. Reich, however, absurdly claims that it would expand "the benefits of a market economy." It would induce people to save less on their own, just as Social Security does. But once again, Reich gets everything backwards, argu ing that it would "encourage saving." In reali ty, the reduced savings rate .would diminish the rate of capital accumulation and reduce economic growth. The annual cost of the pro grams, which would run in the tens of billions of dollars, would in itself depress the private sector because the opportunity cost of such programs is returning those tax dollars to their rightful owners, the people who earned them.

Static View Reich's case is based on a static view of the economy and the old socialist canard that there is a "lump" of wealth out there: if one person has more, others must have less. But the econ omy is dynamic; there is great mobility in a capitalist economy, and that mobility is driven 7 by people's desire to better themselves finan cially and materially. Giving some of them something for nothing, as Reich's proposal does, can only diminish that incentive. In their book, Myths of Rich and Poor, Michael Cox and Richard AIm examine a sample of more than 50,000 Americans from all socioeconomic backgrounds whose incomes have been tracked for more than 20 years. They found that those who started out in the bottom fifth of income earners in 1975 gained more than four times the income by 1991 than did the top fifth in 1975. In a dynamic, capitalist economy the "rich" may get richer, but the "poor" do even better.

Reich argues that the enormous flow of funds into the stock market in recent years doesn't seem to have benefited "the bottom 30 percent" very much. But those funds have financed the capital expansion and job cre ation that have made the U.S. economy the envy of the world. The "bottom 30 percent" has benefited as much as anyone, if not more. Reich's share-the-wealth plan is nothing but another Ponzi scheme, not unlike Social Security, that is designed to help politicians buy the votes of a majority (the "bottom 60 percent") by taxing a minority. As Rothbard wrote in The Ethics of Liberty, "the State is a coercive criminal organization that sub sists by a regularized large-scale system of taxation-theft, and which gets away with it by engineering the support of a majority ... through securing an alliance with a group of opinion-moulding intellectuals whom it rewards with a share in its power and pelf."

Professor Reich, take a bow. -THOMAS J. DILORENZO Professor of Economics Loyola College, Maryland 'Economies The "Berry Bikes": A Lesson in Private Property by Daniel L. Alban and E. Frank Stephenson B erry College is a private college located on a large campus adjacent to Rome, Georgia. In March 1998, the Berry College Student Government Association (SGA) used student activity funds to purchase 20 bicycles for student use on campus. The bright red bicycles, each with an iden tifying plate reading "Berry Bike," were avail able to all students on a "first-come, first served" basis, making them a common prop erty resource. In spite of the relatively favorable environment for common-property bicycles at Berry, it took less than two months for many of the bikes to be lost, stolen, or abused. This story illustrates the importance of private property rights and the folly of common property.