SECTION 2: REGULATION 22. REGULATORY-INDUSTRIAL COMPLEX September 1990

Socialists want socialism for everyone else, but capitalism for themselves, while capitalists want capitalism for everyone else, but socialism for themselves.

Neither Ted Kennedy nor Jane Fonda practices a vow of poverty, nor are they taking any homeless into their mansions, while too many big companies try to short-circuit the market with government privileges. And one way they do it is through the regulatory agencies that acne Washington, DC.

If I may make a public confession (counting on the charity of Free Market readers): I used to work for the US Congress. I’ve since gone straight, of course, but the experience had its value, much as the future criminologist might benefit from serving with the James Gang.

For one thing, being on Capitol Hill showed me that, unlike the republic of the Founding Fathers’ vision, our DC Leviathan exists only to extract money and power from the people for itself and the special interests.

Ludwig von Mises called this an inevitable “caste conflict.” There can be no natural class conflict in society, Mises showed, since the free market harmonizes all economic interests, but in a system of government-granted privileges, there must be a struggle between those who live off the government and the rest of us. It is a disguised struggle, of course, since truth threatens the loot.

When I worked on Capitol Hill, Jimmy Carter was bleating about the energy crisis and promising to punish big oil with a “windfall profits tax.” But I saw that the lobbyists pushing for the tax were from the big oil companies.

And, after a moment’s thought, it was easy to realize why. There was no windfall profits tax in Saudi Arabia, but it did fall heavily on Oklahoma. And as intended, the tax aided the big companies that imported oil by punishing their competitors, smaller independent firms.

In the ensuing restructuring of the industry, also brought about by the price and allocation regulations of the Department of Energy, the big firms bought up domestic capacity at fire-sale prices, and then the Reagan administration repealed the tax and the regulations. Meanwhile, the big companies received contracts from the Department of Energy to produce money-losing “alternative fuels.”

In every administration, the tools of inflation, borrowing, taxation, and regulation are used to transfer wealth from the people to the government and its cronies.

At times, one or another of these tools becomes politically dangerous, so the government alters the mix. That’s why the Reagan administration switched from taxes and inflation to borrowing, and it’s why the Bush administration, with the deficit a liability, calls for more taxes, inflation, and regulation.

A tremendous amount is at stake in the re-regulation of the economy advocated by the Bush administration. Just one clause in the Federal Register can mean billions for a favored firm or industry, and disaster for its competitors, which is why lobbyists cluster around the Capitol like flies around a garbage can.

While claiming to need more money for—among other vital projects—a trip to Mars supervised by Dan Quayle, the president is boosting the budget of every regulatory agency in Washington.

Here are just some of those agencies, and the way they function: Founded by Richard Nixon, the Occupational Safety and Health Administration is an antientrepreneur agency. Not only does OSHA target small and medium-size businesses, its regulatory cases are easily handled by Exxon’s squad of lawyers, while they can bankrupt a small firm.

Also founded by Nixon, the Consumer Product Safety Commission issues regulations drawn up in open consultation with big business—regulations that often conform exactly to what those firms are already doing. Small businesses, on the other hand, must spend heavily to comply.

Another Nixon creation is the Environmental Protection Agency, whose budget is larded with the influence of politically connected businesses, and whose regulations buttress established industries and discriminate against entrepreneurs, by—for example—legalizing pollution for existing companies, but making new firms spend heavily.

The Department of Housing and Urban Development was founded by Lyndon B. Johnson, but its roots stretch back to the housing policy of the New Deal, whose explicit purpose was to subsidize builders of rental and single-family housing. Since LBJ’s Great Society, HUD has subsidized builders of public housing projects, and of subsidized private housing. How can anyone be surprised that fat cats use HUD to line their pockets? That was its purpose.

The Securities and Exchange Commission was established by Franklin D. Roosevelt, with its legislation written by corporate lawyers to cartelize the market for big Wall Street firms. Over the years, the SEC has stopped many new stock issues by smaller companies, who might grow and compete with the industrial and commercial giants aligned with the big Wall Street firms. And right now, it is lessening competition in the futures and commodities markets.

The Interstate Commerce Commission was created in 1887 to stop “cut-throat” competition among railroads (i.e., competitive pricing) and to enforce high prices. Later amendments extended its power to trucking and other forms of transportation, where it also prevented competition. During the Carter administration, much of the ICC’s power was trimmed, but some of this was undone in the Reagan administration.

The Federal Communications Commission was established by Herbert Hoover to prevent private property in radio frequencies, and to place ownership in the hands of the government. The FCC set up the network system, whose licenses went to politically connected businessmen, and delayed technological breakthroughs that might threaten the networks. There was some deregulation during the Reagan administration—although it was the development of cable TV that did the most good, by circumventing the networks.

The Department of Agriculture runs America’s farming on behalf of producers, keeping prices high, profits up, imports out, and new products off the shelves. We can’t know what food prices would be in the absence of the appropriately initialed DOA, only that food would be much cheaper. Now, for the first time since the farm program was established by Herbert Hoover, as a copy of the Federal Food Administration he ran during World War I, we are seeing widespread criticism of farm welfare.

The Federal Trade Commission—as shown by the fascistdeco statue in front of its headquarters—claims to “tame” the “wild horse of the market” on behalf of the public. Since its founding in 1914, however, it has restrained the market to the benefit of established firms. That’s why the chief lobbyists for the FTC were all from big business.

When then-Congressman Steve Symms (R-ID) tried to partially deregulate the Food and Drug Administration in the 1970s to allow more new drugs, he was stopped by the big drug companies and their trade association. Why? Because the FDA exists to protect them.

OSHA, CPSC, EPA, HUD, SEC, ICC, FCC, DOA, FTC, FDA—I could go on and on, through the entire alphabet from Hell. I have only scratched the villainous surface. But according to the average history or economics text, these agencies emerged in response to public demand. There is never a hint of the regulatory-industrial complex. We’re told that the public is being served. And it is: on a platter.

23.
THE INCREDIBLE STUFF MACHINE
January 2006

So those scurvy bums at Wal-Mart are finally getting what is coming to them! The state of Maryland will force all companies with more then 10,000 employees to spend at least 8 percent of their payroll on health insurance. Lots of companies have that many employees, but only one falls under the 8 percent threshold, which is You-Know-Who.

It is only the latest legislative blow dealt against the company that is finally accomplishing what everyone throughout all of human history dreamed of: plentiful food and goods available to all people in all places at low prices. What’s to complain about? This is the mystery that cries out for investigation.

That success breeds destructive attacks is part of business lore. A classic in modern libertarian literature, for example, is the poem “The Incredible Bread Machine” by R.W. Grant. It tells the story of Tom Smith, who invents a great machine to bake bread and package bread so cheaply that it could sell for less than a penny. “The first time yet the world well fed, And all because of Tom Smith’s bread.”

But then Tom Smith developed a problem: success. His bread was everywhere, and he was rich. But soon the public began to decry the Bread Trust, and regulation smashed his company. The last two stanzas:

Now bread is baked by government.

And as might be expected,

Everything is well controlled.

The Public well protected.

True, loaves cost a dollar each,

But our leaders do their best!

The selling price is half a cent....

Taxes pay the rest.

The key to the story is antitrust regulations pushed by business competitors and cheered on by an envious public ignorant of economics. It’s pretty much the same with Wal-Mart. Companies with whom Wal-Mart competes are only too happy in the short term to see the company get hammered for undercutting them on price. If you have been trying to fob off products for high prices for years—and these are essential to your profit margins—it must be torture to see Wal-Mart doing so well selling at a fraction of the old market price.

Herein lies not only the origin of antitrust but of vast numbers of business regulations. They are advocated by dominant firms that seek to impose harmful costs on smaller competitors (such as when Wal-Mart itself was pushing for a higher minimum wage) or by smaller firms that hope to impose punishing costs on more successful firms. The notion that these regulations are designed to benefit the public is just the ideological junk food that is fed to Congressional committees and the general public.

The way to address this problem is for the state to cease to offer business the chance to unfairly compete in this way. If there were no regulations and no antitrust laws, businesses would not face the near-occasion of sin to use government as a way to clobber its enemies. They would face no choice but to innovate, cut costs, and serve consumers better than the other guy.

Much more troubling and mysterious are public attitudes. Wal-Mart was made successful because people like buying there. They like the prices and convenience. The public could bankrupt the company in a matter of weeks simply by failing to show up to make purchases. People are free to do so. That’s the way the market works.

Maybe you hate Wal-Mart. Fine. Don’t shop there. What’s so hard to understand about that?

Why would the same people who enjoy the fruits of Wal-Mart’s entrepreneurship also celebrate laws that harm the company? They believe that they can have their cake and eat it too. There is a lack of economic understanding in operation here. They have failed to understand that one of the reasons Wal-Mart can offer such good deals is that they are running an efficient enterprise.

But does it not come at the expense of the labor force? Of course all workers want raises in all forms, just as all consumers want products and services to be available at the lowest price. These are conflicting demands. At some point in the scale of wages and prices, the tradeoff between the two demands finds a clearing point. What that point is cannot be worked out by a central planner. It has to be discovered by the market.

The moral import of the market is its noncoercive core. The workers who work at Wal-Mart would rather be doing so than any other activity that is open to them. So too for the shoppers. It is the matrix of exchange that has made Wal-Mart a success. Unlike with government, no one has a gun pointed at his head. Everyone is making a noncoerced choice in favor of exchanging as versus not exchanging. Everyone benefits.

Does that seem elementary to you? Then you understand something that most sociologists, literary scholars, news commentators, preachers, and government officials apparently do not understand. You understand that mutually beneficial exchange is the cornerstone of civilization itself.

You probably also understand that this law is not going to be good for Maryland. Fewer Wal-Marts will start up in that state than otherwise would. A legal climate hostile to business will deter future businesses from locating there. Some businesses may leave. Also, a less competitive environment for business will mean higher prices and less consumer choice. And why? So that Wal-Mart’s competition can thrive on an inefficient business model. This law, then, rewards waste and punishes efficiency.

Now, there is a further complication in this case. A main complaint against Wal-Mart’s wage policies is that its employees were draining too much from the state’s Medicaid budget. This is an interesting point. Is it possible that Wal-Mart was, in effect, free riding off the taxpayers? Would it then be better just to roll those costs onto the back of the company itself? There is a superficial logic at work here, but it is the logic that leads to all-out business regimentation.

It is doubtful that in a truly free market business would normally provide any health benefits at all, anymore than they provide you shoes, movie tickets, or scotch delivered to your door. These are things that you buy on your own. Medical benefits tied to employment originated as a scheme to get around government wage controls.

If the Medicaid free ride is a problem, there is a more direct solution. Get rid of this program too. What we need are Wal-Marts in the medical industry, firms that provide great services at low prices. But they won’t come about until we rid ourselves of the subsidies attached to public provision.

Meanwhile, the Incredible Stuff Machine will pay and pay for all the glorious things it has brought the world population, and the ignorant among us will clamor for the machine to be destroyed. Then the only big companies will be those created, run, and subsidized by the government.

24.
WAL-MART WARMS TO THE STATE
October 2005

The CEO of Wal-Mart, H. Lee Scott, Jr., surprised many by calling for an increase in the minimum wage. And what accolades were heaped on him! The company was even cast in a new role, from the exploiter of workers to the responsible advocate of pro-worker policies.

And how selfless, for who has to pay such higher wages but companies like Wal-Mart? And thus do we see a corporation set aside its business interests on behalf of the long-term interests of society.

The whole thing befuddled Wal-Mart haters as much as it disgusted its free-market defenders.

Ted Kennedy wouldn’t go so far as to praise the company, but he did say that “If the CEO of Wal-Mart can call for an increase in the minimum wage, the Republicans should follow suit on behalf of the millions of working men and women living in poverty.”

Other lefties just wouldn’t believe it. The spokesman for Wal-Mart Watch said that Scott’s call for a higher wage floor was “disingenuous and laughable.”

And yet, let us think this through. Might there be another reason Wal-Mart would advocate a higher minimum wage?

Before looking at the evidence, let’s do some a priori theorizing based on the history of US corporate regulation. Historians such as Robert Higgs, Butler Shaffer, Dominick Armentano, and Gabriel Kolko have chronicled how the rise of business regulation, including intervention in market wages, was pushed by large companies for one main reason: to impose higher costs on smaller competitors.

This is how child labor legislation, mandated pensions, labor union impositions, health and safety regulations, and the entire panoply of business regimentation came about. It was pushed by big businesses that had already absorbed the costs of these practices into their profit margins so as to burden smaller businesses that did not have these practices. Regulation is thus a violent method of competition.

Think of it this way. Let’s say you run a retail coffee shop that sells only “fair trade” coffee, which is expensive to acquire, but for which consumers are willing to pay a high price. All is going swimmingly until a competitor shows up and sells unfair coffee that tastes just as good for half the price.

Let’s say consumers begin to change their minds about the merit of your “fair trade” coffee and your profits fall. You must make a change to survive. You can compete by offering a wider range of choice. Or you can lobby the local government in the name of “social responsibility” (oh, such high ideals!) to require that all coffee sold in your town be “fair trade.”

Who does that benefit? Your company. Who does it hurt? Their company.

Moving from theory to reality, we find that this is precisely what Wal-Mart is up to. The hint comes from the news stories: “Wal-Mart maintains that it pays above the current $5.15 an hour minimum wage to its employees.”

Now, most readers might just look at this as a case of leading by example. Would that everyone were as fair as the wonderful Wal-Mart! But a second look suggests another interpretation, namely that it wants to slam its smaller competition, which will be seriously harmed by having to pay more for labor.

The current minimum is $5.15. According to studies, Wal-Mart pays between $8.23 and $9.68 as its national average. That means that the minimum wage could be raised 50 percent and still not impose higher costs on the company.

Wal-Mart itself makes even more elaborate claims on Walmartfacts.com: “The national average for regular hourly Wal-Mart wages is nearly twice the federal minimum wage, and higher in urban areas.” If true, the national minimum could be raised by 100 percent and leave the company unaffected.

So who would it affect if not Wal-Mart? All of its main competitors. And the truth is that there are millions of businesses that compete with it every day. Many local stores have attempted to copy Wal-Mart’s price-competitive model, but face lower costs and can actually thrive.

There are many ways to compete with Wal-Mart. Not all shoppers like sprawling stores. Others like better service with more experts on the floor. Others just hate crowds. But a main way to compete is to hire lower-priced labor. This could mean that your employees are from a “lower” rung on the social ladder, but they too need opportunities. The savings can be reflected in other amenities that Wal-Mart does not offer. There can be nonstandardized products otherwise not available. The location might be better. Even prices for goods can be lower.

Even similar stores such as K-Mart can pay lower wages, and that can make the margin of difference. K-Mart pays over a much wider range, as low as $6.75 an hour. A major competitor is mainstream grocery stores, where workers do indeed start at minimum wage. Target too pays starting employees less than Wal-Mart, if members of Target’s labor union can be believed.

Now, if Wal-Mart can successfully lobby the government to abolish lower-wage firms, it has taken a huge step toward running out its competition. The effect of requiring other firms to pay wages just as high as theirs is the same as if the company lobbied to force other companies to purchase only in high quantities, to open large stores only, or to stay open 24 hours. By making others do what Wal-Mart does, the company manages to put the squeeze on anyone who would dare vie for its customer base.

Now here is the great irony. The left has long been in a total frenzy about how Wal-Mart saunters into small towns and outcompetes long-established local retailers. They claim that the company’s success always comes at a huge social cost.

Now, most of this rhetoric is overblown and ignorant. Wal-Mart would not have made any profits or grown as it has without having convinced the consuming public to purchase from the store. Consumers could put the company out of business tomorrow, just by failing to show up to buy.

The left’s claims of unfair practices would be valid if Wal-Mart did indeed work to impose legal disabilities on its competitors—in effect making it illegal to outcompete the company. And yet that is precisely what raising the minimum wage would do: impose a legal disability on those companies engaged in lower-wage competition with Wal-Mart. So the economically ignorant left advocates raising the minimum wage.

Thus has our CEO friend Mr. Scott discovered a viciously devious tactic. He sees a way to drive out the competition by doing precisely what Wal-Mart’s biggest critics are advocating! And what will be the result? Wal-Mart’s share of the market will go up, and its degree of cartelization over the mass consumer market will increase, not by market means but through government intervention. Then we can expect the left to once again fly into another hysteria about the size and growth of the company—totally oblivious to how they worked to bring it about.

Free-market advocates who have long defended Wal-Mart can only be disgusted at this shift in the company’s methods from competing on market grounds to calling for the state to crush its competition. Even more disgusting is how the company can count on the economic ignorance of its critics to help do it.

The minimum wage should not be raised but abolished. If free competition and a nonmonopolized market are what you favor, you too should favor abolishing the minimum wage. In a purely free market, Wal-Mart would discover that there are indeed limits to growth, and that others are willing and able to learn from its successes.

25.
THE TROUBLE WITH LICENSURE
August 2000

Not too long ago, the Tennessee Dental Society sued to stop a “danger to patients”: professional tooth cleaning. Not that they had anything against professional tooth cleaning; they wanted the professionals to be dentists and their employees, not dental hygienists in independent practice.

One of the hygienists protested that her price was lower, and therefore people would get their teeth cleaned more often. “It also helps that they don’t have to fear the drill, although I refer any problems I see to dentists.” But she was driven out of business because she wasn’t licensed as a dentist. What her customers thought meant nothing.

A few years before, the Oklahoma State Dental Society lobbied for a toughened law against “denturists”: dental technicians who make false teeth directly for customers, bypassing the dentist.

At a press conference, the head of the dental society was asked if this wasn’t already against the law. Yes, he said, but a patient had to bring a complaint, and none would. It seems the denturists would give dissatisfied customers their money back—and let them keep the teeth in the bargain. A reporter wondered aloud whether a dentist had ever returned an unhappy patient’s money, and was told the question was irrelevant.

I like my dentist, and would never go to a less qualified if cheaper professional. But why should it be illegal, in a free market, for me to do so?

For centuries, professionals have sought to cartelize their occupations, that is, to limit competition. The stated reason is protecting consumers, but the real reason is financial.

Just recently, a legal secretary was threatened with jail in Florida. She was helping people fill out legal documents, something she had done in a law firm for 20 years. But now she was doing it on her own, for pay. In Florida, as in all other states, the actual crime is practicing unlicensed law, medicine, or dentistry for money, which alone tells us the real nature of the offense.

Medical organizations argue that only licensure enables us to distinguish the qualified from the goof-off. In fact, it is the reverse. Licensure endangers consumers by making them less watchful, since they assume that any state-licensed doctor is competent.

With specialists—where the market process of certification rules—consumers are very watchful. Any doctor may legally do plastic surgery, for example, but customers look for a highly qualified, well-recommended, board-certified surgeon. The same is true in every other specialty, as it would be for all physicians without licensure.

Why should it be illegal for a pediatric nurse to set up an independent practice in Harlem, or a geriatric nurse in West Texas? Yet both would be tossed in jail.

Again, I would never go to anyone but my family doctor. But why, in a free society, should I not be allowed to choose?

Restricting the supply of medical care has a long history. Hippocrates built a thriving medical center on the Greek island of Cos in the fourth century B.C., and taught any student who could pay the tuition. But when the great man died, there was fierce competition for students and patients, and the doctors sought to cartelize the system with the Hippocratic Oath.

The oath pledged devoted care to the sick, but also that “I will hand on” my “learning to my sons, to those of my teachers, and to those pupils duly apprenticed and sworn, and to none others.”

In the modern world, England’s Royal College of Physicians (RCP)—a state-approved licensing agency—has long been the model medical monopoly, exercising iron control over its members’ economic conduct. But this guild-like system wasn’t salable in laissez-faire America.

In 1765, John Morgan tried to start an intercolonial medical licensing agency in Philadelphia, based on the RCP. He failed, thanks to bitter infighting among the doctors, but did begin the first American medical school, where he established the “regular mode of practice” as the dominant orthodoxy. Those who innovated were to be punished.

After the Revolution, said historian Jeffrey Lionel Berlant, “a license amounted to little more than a honorific title.” In Connecticut and Massachusetts, for example, unlicensed practitioners were prohibited only from suing for fees. And in the free-market 1830s, one state after another repealed penalties against unlicensed practice.

By the mid-nineteenth century, there were virtually no government barriers to entry. As economist Reuben A. Kessel noted, “Medical schools were easy to start, easy to get into, and provided, as might be expected in a free market, a varied menu of medical training that covered the complete quality spectrum.” Many were “organized as profit-making institutions,” and some “were owned by the faculty.”

From time to time, doctors attempted to issue tables of approved fees—with price-cutting called unprofessional—but they failed, because price-fixing cannot long survive in a competitive environment.

Organized medicine’s lobbying against new doctors and new therapies began to be effective in the middle of the century, however. The official reason was the need to battle “quackery.” But as historian Ronald Hamowy has demonstrated in his study of state medical society journals, doctors were actually worried about competition lowering their incomes.

The American Medical Association (AMA) was formed in 1847 to raise doctors’ incomes. Nothing wrong with that, if it had sought to do it through the market. Instead, its strategy, designed by Nathan Smith Davis, was the establishment of state licensing boards run by medical societies. He attacked medical school owners and professors who “swell” the number of “successful candidates” for “pecuniary gain,” fueled by the “competition of rival institutions.” These men advance “their own personal interests in direct collision” with “their regard for the honor and welfare of the profession to which they belong.” The answer? “A board of examination, to sit in judgment” to restrict entry and competition, which he did not point out could only have a pecuniary motive.

As philosopher William James told the Massachusetts legislature in 1898: “our orthodox medical brethren” exhibit “the fiercely partisan attitude of a powerful trade union, they demand legislation against the competition of the ‘scabs.’” And by 1900, every state had strict medical licensure laws.

The Flexner Report of 1910 further restricted entry into the profession, as legislatures closed non-AMA-approved medical schools. In 1906, there were 163 medical schools; in 1920, 85; in 1930, 76; and in 1944, 69. The relative number of physicians dropped 25 percent, but AMA membership zoomed almost 900 percent.

During the great depression, as Milton Friedman notes, the AMA ordered the remaining medical schools to admit fewer students, and every school followed instructions. If they didn’t, they risked losing their AMA accreditation.

Today, with increasing government intervention in medicine—often at the AMA’s behest—the organization exercises somewhat less direct policy control. But it still has tremendous influence on hospitals, medical schools, and licensing boards.

It limits the number of medical schools, and admission to them, and makes sure the right to practice is legally restricted. The two are linked: to get a license, one must graduate from an AMA-approved program. And there is a related AMA effort to stop the immigration of foreign physicians. The AMA also limits the number of hospitals certified for internships, and licensure boards will accept only AMA-approved internships.

The licensure boards—who invariably represent medical societies—can revoke licenses for a variety of reasons, including “unprofessional conduct,” a term undefined in law. In the past, it has included such practices as price advertising.

Medical licensure is a grant of government privilege. Like all such interventions, it harms consumers and would-be competitors. It is a cartelizing device incompatible with the free market. It ought to be abolished.

26.
ILLUSIONS OF POWER
December 2003

Critics accuse libertarians of reveling in government failures. Yes and no. No one is pleased to see the destruction caused by government policies, whether small scale, as when a tighter regulation causes business failures, or large scale, as when wars destroy life for millions.

The kernel of truth to the claim is this: the failure of government illustrates something extremely important about the structure of reality that most people are likely to forget. It comes down to this: statesmen and public officials, no matter how powerful they may be, cannot finally control social outcomes.

If I might offer a summary of a point emphasized in all of Mises’s works: the structure of society and world affairs generally is shaped by human actions, stemming from imaginative human minds working out individual subjective valuations, and their interactions with the material world, which is governed by laws that are beyond human control.

What that means is that you and I cannot on our own, even if we have maximum political power, control all of human society, and especially not its economic side.

Let’s first consider an example from current popular wisdom about the manufacturing base. Many products that were once made in the United States—thinking here of televisions, pianos, firecrackers, plastics, and bicycles—are now made in China. This has caused a great deal of alarm—all unwarranted, so far as sound economics is concerned.

But let’s say we have the ambition to change this social outcome. Anyone is free to build a bicycle and attempt to market it to willing buyers. Let’s say you rent some property, hire the workers, acquire all the necessary capital, and then put your bike on sale. In order to cover your costs and make a profit, you find that you must price your bikes above the going market price. Maybe you can persuade people that you have a special product that is better than the others. Or maybe yours will sit on the floor. Or maybe you will have to lower your price and you will find that your revenue does not cover your costs, and you have to go out of business.

No matter what you decide, this much is clear: you are not dictating the outcome. You wanted to build bikes, but it is the consuming public that decides whether it is in our interest to do so. There is nothing you have to say about it. You cannot make people fork over the money. I would venture to suggest that you will ultimately come to the conclusion that you should be doing other things besides attempting to keep up with other businesses that have lower labor and capital costs and hence can make a profit through selling goods at much lower prices.

But let’s say you decide that you don’t want to bow to the realities of the market. Instead you lobby Congress to tax everyone who buys a bike from overseas. The tax is high enough that you can continue to charge exorbitant prices for your bikes. You make a profit. But at what expense? The consumers who buy your bikes have less income left over for other pursuits, whether consumption, saving, or investment. The workers you are employing are being kept from other pursuits as well, and the capital you are consuming is not available for other projects.

Ultimately, you have skewed the entire economic system in a way that benefits you at everyone else’s expense. Others have found a way to do what you are doing much more efficiently, but because you lobbied and got your way, society is prevented from benefiting from others’ innovations. And how long must this distorted system last? That you managed to tax everyone to benefit you does nothing to change the reality that others can do what you are doing more cheaply and better. Do workers really want to be employed in an industry that is something of an artifice? Do consumers really want to pay high prices just so that you can continue to indulge in your bike-making passion?

Clearly not. At some point, people will catch on to the racket, and find other ways to go about acquiring bikes. Maybe they will exploit loopholes in the law that allow them to import bike parts. An industry of do-it-yourself bike building becomes a threat to your profits. Or perhaps black markets will take over. Or maybe people will turn away from bikes altogether and starting trying out new forms of informal transportation. Skateboards are fitted with handlebars. Gas-powered scooters develop a peddle-only option. The very definition of a bike comes into question. Increasingly, enforcement will have to become ever more onerous.

At some point in this game, we face a choice. We can continue to impose an ever more absurd and preposterous system of regulations and protections just so that you can benefit, or we can bow to reality and let in foreign bikes for consumer purchase. Let’s say your tariff lasts a year or even 10 years. What will it accomplish? In that time, vast resources are wasted. Consumers of all sorts are exploited. Capital is consumed in economically wasteful ways. People are pushed around and the police powers of the state grow. It does society no good at all.

My point is that whatever the fate of the so-called manufacturing base, there is nothing in the long run that can be done to turn it in one direction or another. The fate of manufacturing is in the hands of consumers at large, and subject to the laws of economics which no man can repeal. It is the outcome of human choice.

Now, the Bush administration has thought otherwise and imposed a huge range of protections to benefit its supporters and people who the administration hoped would become its supporters. The result has been to skew the world economy, hobble markets, delay inevitable transitions, and impose massive social costs.

What this example shows is that governments are not omnipotent. Many try to be, and no government is liberal by nature. But there are limits. Governments bump up against human valuations time and again. Even in the highly rarified event of a despotic government that rules a population unanimously in support of despotism, government still bumps up against the structure of the world, which resists control.

Let us consider another example. Let us say that government desires a strong dollar. But it still wants to print dollars and ship them around the world. In this case, there is nothing that government can do to insure the dollar’s strength against depreciation. Nothing. This is due to the laws of economics. All else equal, the value of a currency in terms of goods falls as its quantity increases. Governments that desire otherwise can only shake their fist in anger.

The same is true domestically. The government wants economic recovery before a recession has fully run its course. It thereby drops interest rates, spends vast amounts of money to gin up demand, and otherwise encourages as much consumption as possible. These tactics can result in some short-term gains but it doesn’t work in the long run. These tactics deplete savings and capital and weaken the foundation for solid future growth.

The issue of the price of prescription drugs will be a big one in this coming campaign. The problem is high prices. Popular wisdom has it that this is because of the greed of the medical industry. The truth is that these high prices are partly a result of subsidized demand due to Medicare and Medicaid, insurance regulation, and the restricted supply due to patent laws. In other words, the political class is responsible for the high prices. It’s true that the pharmaceutical industry is not complaining. In fact, high prices are precisely what its friends in government want to bring about.

They may regret that the poor have to pay the higher prices, but not enough to do anything substantive about it. Prices would plummet today if patents were repealed, free trade (including re-importation) allowed, and subsidized demand ended by the abolition of Medicare and Medicaid. But no one wants to consider that solution, so Congress creates ever more intrusive programs designed to control prices, keeping the prices high enough to satisfy the industry but low enough to reduce the political clamor.

The problem is that the government can’t have it both ways. It cannot reward its friends with high prices and keep consumers happy at the same time. The current system with its large subsidies is only creating massive new liabilities in programs that cannot be funded in perpetuity without massive tax increases that no one is willing to advocate. Absent tax increases, the only answer is inflation, which taxes us in other ways.

One way to think about government is as a rat wandering through a maze with no escape. There is no magic solution to getting around basic economic laws. All lunches must be paid for by someone, prices cannot be both high and low at the same time, and all attempts to coerce generate counter-reactions. In short, there is no alternative universe in which the fantasies of politicians come true.

But try telling that to the political class. The last thing they want to hear is that their power is limited, that their will is not a way. They are prone to believe that membership in the political class comes with the privilege of shaping the world to their liking. If you read the social science literature, you find the same error at work on a nearly universal basis. Very rarely does anyone come along and say: great theory but it has nothing to do with reality. You are just playing intellectual games.

Socialism was really nothing other than an intellectual game. People from the ancient world to the present conjured up some vision of how they would like the world to work and then advocated a series of measures of how to achieve it. Mises and his generation explained that their vision was fundamentally at odds with reality. In the real world, capital must have prices rooted in the exchange of private property in order for it to be employed in its highest-valued capacity. It solves nothing to say that everyone should own capital collectively. This was the equivalent of pointing out that the Emperor was wearing no clothes.

In some ways, what we do as commentators on economic affairs is to follow this model again and again. The other day, a candidate for president suggested that the answer to our economic woes was more regulation. He had it all figured out in his mind. Immediately, free-market economists from all over the world joined forces to point out that his goal of higher economic productivity could not be achieved this way. It was an unwelcome message but one necessary to deliver regardless.

The experience of Iraq has provided myriad examples of the same. The US government wants to pump oil. It wants to start factories, stores, and commerce generally. But it refuses to put private owners in charge. As a result, all its military muscle has amounted to very little at great expense. It is a classic example of how governments fail when they try to fight against forces they cannot control. Factories in Iraq that have gone into operation have done so without support of the occupying government.

And think of the war generally. At the outset, the visionaries in the Bush administration imagined that Iraq was really a very simple problem to solve. It only needed to be decapitated and the magic dust of the US presence would otherwise create an orderly and prosperous society that would be a model for the region.

Then reality hit. Crime was unleashed. Feuding political factions clamored for control. Production stopped. Society flew into chaos. This was not because of the absence of political leadership. It was because of the presence of foreign martial law in a country that was seething in resentment against the United States.

Time and again, we have seen evidence that the Iraq war only accomplished the opposite of its aims. Its purpose was to find weapons, punish terrorism, and bring order to the region. Instead it has fueled terrorism and brought new levels of disorder to the region. Having failed to achieve its stated goals, the administration then redefined the war in terms that reflect whatever was accomplished: namely to toss out and capture Saddam.

In this sense, the war was like any other government program: bringing about the opposite of its stated intentions and doing so at greater expense. Thus do we see the intersection between foreign and domestic policy. Government is famously ham-handed at home and similarly incompetent abroad. No matter how much government claims that it is master of the universe, it constantly confronts forces beyond its control.

In all the talk of the calamity of this war, never forget the broader picture: what an incredible opportunity was squandered after the end of the Cold War. The West had emerged as the universally acknowledged ideological victor in that 40-year struggle. That the Cold War was not actually an ideological struggle so much as a classic standoff between two empires is irrelevant for understanding the implications of this fact: totalitarian communism collapsed while the free economic system of the market remained standing in total triumph. The world was ready for a new period of genuine liberalism, and looking to the United States. On the verge of an amazing period of technological advance, we were perfectly situated to lead the way.

There had never been a time in US history when George Washington’s foreign policy made more sense. A beacon of liberty. Trade with all, belligerence toward none. Commercial engagement with everyone, political engagement with as few as possible. The hand of friendship. Good will. This was the prescription for peace and freedom. It was within our grasp. Our children might have grown up in a world without major political violence. A world of peace and plenty. It could have been.

But it was not to be, mainly because George W.’s father decided that he wanted to go down in the history books for doing something big and important. What else but war? The United States was now the world’s only superpower and itching for some fight somewhere. It’s a bit like a playground filled with wimps and one boy with a black belt in karate who never absorbed the lesson in how and where to use his fighting skills. And then there was this oil-drilling dispute between Iraq and Kuwait, and Bush decided to intervene. Twelve years later, US forces are still there, causing unrelenting havoc for those poor people.

Here at home we are given constant examples of the huge gulf that separates government’s perceptions of itself versus the reality. The Bush administration wanted to give the steel industry a boost. The administration established tariffs, which amounts to a tax on all consumers of steel. American manufacturers faced a choice of paying the tax to buy imported steel or paying the higher prices for domestic steel. Those who could do neither had to cut back production and hiring in other areas. Other consumers had to pay higher prices, which diverted income from other pursuits.

As for the steel industry itself, the tariffs did nothing to help it achieve greater efficiency, which is the only way to deal with more efficient competitors. They only ended up subsidizing inefficiency. Even then, it wasn’t enough. During the period of tariffs, the industry dramatically consolidated in order to become more efficient in other ways.

Once faced with the prospect of trade wars—the ultimate cost of protectionism—the Bush administration pulled back and repealed the new tariffs, thereby landing the industry in exactly the same predicament it was in before the tariffs were passed. As for commercial society as a whole, it paid dramatically higher steel costs, and faced sporadic shortages, for absolutely no reason.

Faced with failure on every front, the Bush administration did the right thing and repealed the tariffs. Not that it was honest about the failure. Instead it claimed its policy worked so well that it could now repeal it. This is like a physician prescribing poison and then changing his mind. He can’t but try to put the best spin on it, I suppose.

But what a beautiful example of the powerlessness of government this is! The Bush administration wanted to save American industry and only ended up vastly raising the costs of doing all forms of business. More cutbacks are inevitable as steel production shifts to other countries and the United States finds its comparative advantage elsewhere.

Much legislative energy is poured into helping some groups gain favorable treatment in the workplace. I’m thinking here of the usual litany of victim groups as identified according to race, ability, sex, national origin, religion, and the like. Have these laws actually helped the group in question? The results are mixed at best. If you send people out into the workforce with a high price attached to their heads—and the prospect of a lawsuit is a very high price indeed—you only make employers less likely to hire them.

I don’t doubt that some people have been helped by these laws, but they are not the people most in need of help. Today, the disabled, blacks, women, and religious minorities go in search of jobs with a major problem: employers fear them on the margin, and, on the margin, are less likely to hire them relative to others, provided they can get away with it. It is the least qualified among them who pay the highest price. A good test case is disability: it is a documented fact that unemployment among the truly disabled is higher today than it was when the Americans with Disabilities Act was passed.

Because libertarians know in advance that government policies are destructive, we tend to focus our editorial energy on pointing to its destructive effects. But in our zeal to draw attention to issues others ignore, let us not forget the bigger picture. There are always limits to what the government can do, and the government’s destruction is always accompanied by examples of great creativity on the part of the market.

Even as government dominates the headlines, private entrepreneurs are busy every day working to improve products and services that improve our lives. They do it without taxing us or regulating us, or making us suffer through tedious elections or political debates. They make their products and offer them to us in a way that pleases the consuming public the most. We can choose whether we want them or not.

Consider the success of Wal-Mart. If government had set out to create a volume discounter that made a world of material goods and groceries available to the multitude in all countries, it might have tried for a thousand years and not created anything resembling this company. Even the military has relented and now routinely points its employees not to its on-base stores but to Wal-Mart, Office Depot, and others for the best prices.

Foreign development aid is another example. It took decades to get the message across, but today finance ministers in the developing world understand that they have far more to gain through integration into the world economy than from development aid and all the restrictive policies that come with it. Today, as Sudha Shenoy points out, the largest resistance to new trade deals comes from the developing world, not because they don’t want trade but because they desire trade without the labor and environmental controls the US demands.

The same is true in the area of communications. In the last century, governments aspired to control them all: the phones, the mails, the media. Today, we see that government, in practice, controls very little of the communications industry, despite every attempt to hobble private enterprise.

In that same vein, a major issue for everyone these days is computer viruses and spam, which threaten to make our chief mode of communication less reliable. Congress passes ineffectual legislation against spam and viruses, while private enterprise has given us dozens of means of winning the battle.

Private enterprise creates; government destroys. That is the great economic lesson of our times and all times.

Of course there is one way in which government never fails. It can loot. It can gain footholds into society’s command centers. It can punish enemies. It can even indoctrinate people in its preferred vision of the world through propaganda.

This is the best way to understand the public school system. It doesn’t work to educate but it does work to transfer vast sums from the private to the public sector. And here too, we see the power of private enterprise: booster clubs in public schools represent a de facto source of privatization, and the clubs and groups connected to them are the only really successful things going on in public school.

We’ll hear much in the coming months about all the wonderful reforms politicians are going to bring us. This is the time when politicians vie for our allegiance by telling all about their ideas and vision for the future. As usual, they will parse their words in ways to maximize the numbers of people who are persuaded and minimize the amount of trouble they get into for inadvertently telling people something they don’t want to hear.

As an aside, whoever came up with this idea of a mass democracy just wasn’t thinking things through very clearly. Nothing runs well by majority vote, to say nothing of the fact that a truly free society shouldn’t be “run” at all; it works on its own without would-be masters-and-commanders grasping at the helm.

Let me then offer to you my own top 10 list of political lies you are told, all designed to make you believe that government should have more power than it already has, so that it can create more of the disasters we are accustomed to:

(10) My new program will generate jobs.

Truth: Only the market generates jobs on net.

(9) My education program will reform schools so that they leave no child behind.

Truth: The public schools do not work for the same reason no government program can work. They exist outside the market economy.

(8) My program will save industry X.

Truth: Industry must be part of the market or else it is not really industry at all.

(7) I won’t raise your taxes but I will pass lots of new programs.

Truth: All programs must be paid for.

(6) As president, I will pursue a humble foreign policy.

Truth: Nothing in the office of the president encourages humility.

(5) This war is humanitarian and winnable.

Truth: War is nothing but a government program on a massively destructive scale, and just as error-prone.

(4) My reform will bring market-based competition.

(Note: Be on the lookout for this lie, which market partisans are likely to believe.)

Truth: There is only one kind of genuine market, and it is rooted in private property and nothing else.

(3) We will secure the nation.

Truth: Government cannot provide security better than markets, any more than it can provide food or houses better than the market.

(2) Government is compassionate.

Truth: Men who seek power over the lives of others are the coldest, cruelest humans of all.

(1) You can’t love your country and hate your government.

Truth: A person who loves his country loves liberty first.

One hundred years from now, the great story of the latter part of the twentieth century and the first part of the twenty-first century will be the vast improvements in life wrought by technology. Consider the web, the cell phone, the PDA, the affordable laptop computer, advances in medicine, and the spread of prosperity to all corners of the globe. What has government had to do with this? The answer is: nothing contributory. It has worked only to impede progress, and we can only be thankful that it hasn’t succeeded.

Through all of human history, governments have caused frightening levels of bloodshed and horror, but in the end, what has prevailed is not power but the market economy. Even today governments can only play catch-up. This is because of the reasons that Mises outlined. Government cannot control the human mind, so it cannot, in the long run, control the choices people make. It cannot control economic forces, which are a far more powerful and permanent feature of the world than any government anyway.

Governments have a propensity to overreach in so many areas of life that their exercise of power itself leads to their own undoing. The overreach can take many forms: financial, economic, social, and military. In this way, and with enough passion for liberty burning in the hearts of the citizenry, governments can be responsible for their own undoing. It comes about as a result of overestimating the capacity of power and underestimating its limits.

I believe this is happening in our time. It may not be obvious when taking the broad view, but when you look at the status of a huge range of government programs and institutions, what you see is a government that is at once enormously powerful and rich, but also fragile and teetering on the brink of bankruptcy. Events of the last year indicate just how far the government has slipped in its ability to manage the economy, society, culture, and world order. Despite the exalted status of the state today, the vast and sprawling empire called the US government may in fact be less healthy than it ever has been.

A few months back, we had a special speaker come to Auburn, probably the most famous man who has visited us since the Country and Western star Alan Jackson was in town. He was Mikhail Gorbachev, a very interesting figure in the history of nations. He came to power with the reputation of a reformer and instituted many reforms that were designed not to give more liberty to the people, but to stop the unraveling of an empire before it was too late. But it was too late. All his talk of perestroika and glasnost couldn’t fool the people, who had become convinced that the Soviet machine was something of a hoax.

The empire unraveled not because of him, but despite his efforts to save it. When it came time to make the critical decision of whether to try to hold the empire together by more and more force, or not, history had already made the choice for him. The empire dissolved in the blink of an eye. Not too many months later, he was out of a job, not because he was recalled in some formal process, but because the forces of history had run him over.

Democratic governments are not immune from the forces of history that overthrew Soviet tyranny. All governments overreach and no government is permanent. So let us fear government but not exaggerate its powers. It can cause enormous damage and it must always be fought. But in this struggle, we are on the right side of history. The power of human choice, aided by the logic of economics and the laws that operate without any bureaucrat’s permission, are our source of hope for the future.