David R. Henderson
Good evening, ladies and gentlemen. My name is David Theroux, and I’m the President of The Independent Institute here in Oakland, California. I want to welcome you all to our Independent Policy Forum program this evening.
As many of you know, we hold Independent Policy Forum events like this on a monthly basis approximately, featuring many top scholars and policy experts, and authors of important new books, and tonight is no exception.
Our program today is entitled, “Why Freedom Matters More Than Ever,” and our speaker today is the economist and author, David Henderson. He’s the author of a very important new book, which I hope that everyone will be getting, called The Joy of Freedom: An Economist’s Odyssey.
As many of you know, The Independent Institute is a non-profit public policy research organization. We sponsor studies by different scholars that result in books, and we publish a journal called The Independent Review, edited by Robert Higgs. And we end up covering a huge number of major issues. Our forum this evening is intended to engage audiences in many of these issues.
We’re particularly grateful that Robert Mondavi is kind enough to donate the wine for these programs, and I also want to encourage all of you who are interested in public policy issues, to visit our Website at www.independent.org. I want to particularly welcome our viewers from C-SPAN today, and on our Website you can find information, not only about our publications, events and media programs, and so much more, but also information on our home page specifically about many of the issues involved in the current war on terrorism.
In the aftermath of September 11th, virtually everyone has recognized that the specific individuals responsible for the mass murders have to be brought to justice. And in doing so, everyone is seeking, not only justice, but also security, but not as an end in itself. We seek security to enjoy the blessings of liberty, the American legacy of liberty. And we believe that we must achieve security in a manner consistent with a diverse and open society, individual liberty, and the rule of law.
However, continuing to deny the obvious fact that the horrific events of 911 are related to U.S. policy in the Mideast is, I think, a misgotten sense of what is happening. In the last few months since 9/11, we’ve seen an interesting series of events. We’ve seen a stampede of lobbyists using the cover of terrorism to extract corporate welfare for the airlines, for the insurance industry, for agriculture, and a host of other special interests. A new Office of Homeland Security has been established. Now I thought that the Department of Defense was supposed to be protecting the homeland. [Laughter.] Now if they’re not, the question is: What is the Department of Defense doing?
In addition, we’ve recently seen the passage of what some would consider to be a rather Orwellian USA PATRIOT Act, which has given police and intelligence agencies the opportunity to do virtually unlimited searches and intercept information from all Americans. President Bush has overridden the Presidential Records Act. The President signed into power a new series of secret military tribunals to try non-U.S. citizens. Attorney General Ashcroft further wants to authorize the FBI to go after any religious and political organization in the United States that might be a “suspect.” With nationalized airport security, we even see moves to restore the draft, legalize the use of torture by the police in interrogating suspects, institute a national ID card, and the list goes on and on.
Clearly these are measures that before 9/11, none of us none of us would have considered to be even feasible for discussion in a serious manner. History teaches that periods of crisis, especially during wartime, can often create even greater problems in addition to the crisis itself. And the crises that develop as a result are caused in many respects by the crowding out of civil society by an expanding government. One of our senior fellows is the economist Robert Higgs, who I mentioned is also the author of this book. It’s called Crisis in Leviathan, and it’s a book that discusses many of these crucial matters.
The question that we want to address is in overcoming the new threat of terrorism, and in just generally looking at many social and economic problems that people face, must freedom be restricted? Is freedom during wartime and a recession as important as during peacetime and prosperity? What is the relevance of individual choice in free markets, in such matters as safety, education, health, the environment, community, culture and much more?
David Henderson is Associate Professor of Economics at the Naval Postgraduate School. He’s also research fellow at the Hoover Institution at Stanford University. He received his Ph.D. in Economics from UCLA. He’s taught Economics at Santa Clara University, St. Louis University, and the University of Rochester. And he’s served as Senior Economist for the President’s Council of Economic Advisors.
He’s also the editor of an important book called The Fortune Encyclopedia of Economics, which I also strongly encourage everyone to get. It’s a wonderful book especially for anyone interested in learning about economics. His studies have appeared in many top journals. He’s a very prolific author in the popular press with his pieces having appeared in the New York Times, Fortune, Los Angeles Times, Chicago Tribune and many other publications, including various high tech magazines such as The Red Herring. He’s testified before numerous government agencies. We’re very pleased to have David with us, and after his talk, we’ll be happy to field any questions that you might have. So, David. [Applause.]
Thank you, David, and thank you. Well, David laid out a lot of the threats to liberty, and I will get to those, but I want to talk about some good things for a while, and in fact, as you can tell The Joy of Freedom, I really think freedom is joyous.
I want to start by telling you something that I just learned about a year or two ago. And in fact, this is the first paragraph of my book. For the last two centuries, economics has been called the dismal science. The person who coined the phrase was the British anti-capitalist author, Thomas Carlisle.
Now I’d always thought that what he had in mind was Thomas Robert Multhus, the population economist, who said that population growth would outstrip agricultural output, thus causing mass starvation. Wrong. “Economics is a dismal science,” wrote Carlisle, because the free market economists of his time, who dominated economics in the 19th Century, strongly opposed slavery. Economics is dismal because economists don’t like slavery. Interesting view of dismal.
Well, for me, economics has always been the joyous science, because it says that a good deal of freedom is necessary for prosperity, which means not only can you have freedom, but also you get prosperity as a bonus. So that’s always been the draw on me for economics, of economics.
There’s a chapter in my book titled, “The Joy of Capitalism,” and when I was working on my—just the final little draft of that chapter one Sunday morning about 5:00 a.m., the title of the book suddenly occurred to me. The joy of freedom, that’s what the whole book is about.
And I lead off that chapter with a quote from a friend of mine who died about nine years ago, that some of you in the audience may know him, a man named Roy Childs. And he did say this; I remember writing it down, and fortunately I wrote the date down. He said this in 1988, and this is how I led that chapter off. “Ultimately capitalism will beat socialism because capitalism is more fun.” [Laughter.] A year later the Berlin Wall fell.
Now, I started out as an undergrad in mathematics, and I was reading a lot of economics on the side. I read Ayn Rand, and I really liked a lot of what Ayn Rand had to say, and then my libertarian friends, who were a couple of years older, led me to people like Milton Friedman, Murray Rothbard, Ludwig von Mises, Henry Hazlitt, and I was learning a lot. What I found in almost every discussion I was ever in, in those days and since, is that when people start arguing about their principles, within one or two or at most three rounds of discussion, it turns to practice. The big problem people had with freedom was, does it work?
And I would be arguing with my calculus professor, this one particular person, and I would kind of back him into a corner, and he’d say, “Well, look, I admit you backed me into a corner, but I’m just a humble mathematician. I bet you the economists could take you on. Why don’t you go over to the Economics Department and argue with them?” [Laughter.] And I thought, you know, you’re right; maybe I’m missing something here. So I took economics in my last year of college and we had a book that many of you might be familiar with, by a man named Paul Samuelson.
Oooh. [Laughter.]
I’m from Canada and we have the Canadian version, which was Samuelson and Anthony Scott, the Canadian author for the Canadian content part. It didn’t cover any of the issues that libertarians were interested in, but it didn’t really cover any of the issues that liberals were interested in, either. In other words, it wasn’t covering the stuff everyone was arguing about. So I kind of gave up on the idea of going into economics, and then something happened in my last semester of college. Our libertarian group had a man from the University of Chicago come to our school named Harold Demsetz. Demsetz kind of opened my eyes, in three talks over two days, to what economics had to say. And I have a chapter in the book titled, “Hooked on Economics,” and I talk about some of the things I learned from him.
Markets Make Discrimination Costly
One of the things he explained was that free markets make discrimination on racial grounds costly. Free markets make it costly to discriminate against people on any grounds other than their productivity, because if you refuse to hire people who are productive, you’re going to miss out on good people. Similarly, if you’re a landlord and you refuse to rent to someone who’s the wrong color, you’re going to miss out on potentially good tenants.
Now it doesn’t mean that people won’t discriminate. It means that when you discriminate, you pay a cost; and the higher the cost, the less discrimination. Whereas government regulations often make the cost of discriminating on racial grounds zero. And the example Demsetz gave was that in American cities during World War II, governments imposed rent controls. A rent control keeps the price below what the market price would have been, so at the lower price, people want to rent more apartments, but landlords want to rent fewer apartments, they don’t have as much incentive to rent them out, and so you have a shortage. When you have a shortage, the cost of discriminating is effectively zero, because you’ve got lot of people to choose from. And what he found by going through Chicago Tribune ads over the war period was, as the shortage got worse, the percentage of ads in the Chicago Tribune that said, “This is restricted” (“restricted” was the code word in those days)—that percentage went up.
Now, there’s another really great example of this in a recent movie, a movie in the ‘90s, it’s one of my favorite movies, titled Schindler’s List. Who here has seen Schindler’s List? Think about what happened there. Think of the first half of the movie. What Schindler did, he cared about one thing. He cared about making money; that’s all he cared about. He had no concern for these people he employed, but he noticed that the German War Office was charging out Jews at five units an hour (I’ve forgotten the units) and non-Jewish Poles at seven units an hour. And he said, “Ah ha, I can make money hiring Jews,” and that’s what he did.
Now, he didn’t pay them, he paid the money to the German Reich Office, which is, by the way, the way Castro does it in Cuba. When people hire these workers at high wages, they pay the wages to Castro, who then gives a tiny pittance to the workers in Cuba.
But something happened halfway through the movie, and some of the critics—and I talk about this in the book—some of the critics described it as puzzling, contradictory. “This man is strange. He started to like the people he worked with.” Boy, is that strange. [Laughter.] He didn’t have a Marxist cardboard character view of humans. Wow.
Markets and Employer-Employee Relations
And that’s kind of relevant, nowadays. I want to point out a couple of things that happened on September 11th that got a lot of press for the first couple of days and then it just kind of disappeared, because we’ve heard that the heroes are firemen and policemen and medical people. And they were the heroes. But they weren’t the only heroes.
I have a friend who has a friend who ran a small business in the World Trade Center. When the airplane hit the building, the first thing he did was stand up and say, “Everyone out.” He didn’t say, “Hey, let’s get 20 more minutes of work and then let’s get out.” [Laughter.] The point is that we often hear the propaganda that employers are cruel, employers don’t care about people. And yet, if you are an employer, you know this, if you’ve known employers you know this: What’s one of the things employers hate most about their job? Firing people. And that shouldn’t be surprising. And I have a chapter talking about this at greater length, about how markets breed virtue.
The latest hit on capitalism is the following. It’s true that markets produce the goods. It’s true that capitalism works to produce the goods.
By the way, that’s a recent admission. [Laughter.] If you look at Samuelson’s 1985 edition, you’ll find him saying in there that the Soviet Union is going to really produce—it’s producing well, it’s going to grow well because socialism works by forcing labor and diverting resources where they’re most needed and so on. And so it’s a recent admission. Now, in fact, as soon as the Berlin Wall fell, I noticed something interesting, I noticed a lot of liberal economists saying, “Isn’t it great that capitalism works, and isn’t it great that socialism fell?” There was a part of me that wanted to write an article saying, well, but remember what you were saying a few years ago? But there’s another part that said, no, accept them. I mean, if they’re now saying that, that’s great, we’ve got them on our side, let’s go.
Markets and Accountability
But, back to what I was saying. People said, “Sure, capitalism produces the goods but it’s short on virtue.” Well, I’ve got a chapter in there titled, “Market Virtues and Community,” in which I lay out how actually markets do create virtue, because one of the biggest virtues in life is accountability. And that’s what markets create. You don’t make it very far if you’re not accountable. A good comparison is to compare FedEx and the U.S. Postal Service. Compare FedEx and—what do they call the overnight thing that’s kind of overnight?—Postal Express.
When I hired a research assistant when I was working on my Fortune Encyclopedia, I gave her a couple of rules the first day, and the first rule was: Don’t use Postal Express. She said, “Don’t mail things overnight?” I said, “No, no, no. Don’t use Postal Express. Mail them overnight.” [Laughter.] And the point is, why the difference? Because with Federal Express, there’s someone accountable. There’s someone, who in economics jargon is called the residual claimant. There’s someone who’s responsible, whose assets are on the line. In the Post Office, if I have a problem and I work my way up the chain, I get all the way to the top, to William Henderson—no relation—and he can’t do anything even if he wants to. His hands are tied.
But there’s real accountability in our day-to-day activity. And it’s so present—and here’s the problem—it’s so present that we forget to take account of it. It’s so present that we often aren’t even aware of it.
How does that relate to some of the things going on now? Well, look at the issue of airport security. Jay Leno put it best the other night. He said, “Now federal employees are going to be running airport security, so not only are they incompetent, but you can’t fire them.” [Laughter.] How is that going to work? How is that going to get us more airport security? No one laid out how. In fact, the Democrats pitched it as: “This is so important, we want the federal government to run it.”
The obvious comeback for Bush would have been to give the Federal Express, Postal Express, overnight U.S. Postal Express-type comparison, and he didn’t do it. And so the Democrats won by pitching the issue in a way that it’s important. If it’s important, then “of course, the government should run it”; but there was no comeback. Think about the difference. Everyone’s been pointing out that Argenbright and other firms that are running airport security—they’re paying low wages, and they have a high turnover. And it’s a move up to work at Cinnabon, and so on.
But, interestingly, the thing that happened on September 11th wasn’t due to anyone making a mistake. The things that got through were completely legal, so, yes, you could point to incompetence many times. There were people who got guns through airport security in the past. But the point is what airport security did was completely consistent with the rules they were supposed to follow. So it was the rules that were wrong. It wasn’t the enforcers.
And so what do we get? And, by the way, notice that the airlines that were hiring these people had some tradeoff they had to make between security and speed, security and convenience. If the airline hassled you too much, you missed your flight, and then they’re in trouble. But if the Federal Government is running it, and you miss your flight, tough. Too bad. That’s not their concern, and that’s what we’re going to be facing fairly soon.
Also notice, by the way, we’re going to be facing that from the same organization that still thinks it’s important to tell us how to fasten a seat belt. I remember, there used to be an airline around here called Morris Air, which was bought out later by Southwest, I believe. I remember flying Morris Air from San Jose to Phoenix, I believe, and the woman coming on and saying, “For those of you who don’t know how to fasten a seat belt, which means those of you who haven’t been in a car since, oh, about 1962...” I mean that’s the point—they have these crazy rules. Or the other one: “Has anyone unknown to you asked you to carry something? Have you been away from your bag?” All these things they think of as important. I don’t see how we’ve solved anything. I think we’ve added a huge problem.
Moreover, I was giving a talk on this in Washington about six weeks ago, and I was telling some of these same stories, and Chris DeMuth, the head of the American Enterprise Institute, told a story. He said that Delta Airlines about two days after September 11th, had noticed their bookings going way down and were seeing their airline at risk, and came up with a plan. And it was to hire retired FBI agents to carry guns on their planes. And they started thinking through an advertising campaign, “Fly with us and you’re safe.” And they called up the FAA and said, “We want permission to have retired FBI agents carrying guns,” and the FAA said, “No, you can’t.” So not only are they not going to do a good job of providing security, they’re actively preventing airlines from providing security. Interestingly, by the way, Europe has many private airports. Maggie Thatcher denationalized 17 of them. And there’s a whole lot more of a private role in security in England.
Every Action Has Unintended Consequences
I put together in my second chapter, a list of 10 pillars of economic wisdom, and at the start of every course, I always lay out these pillars, and go through various examples of them. And I won’t go through all of them here [Editor’s note: Henderson’s 10 Pillars of Economic Wisdom are listed at the end of this transcript.], but there’s one that I want to point out, and that is what’s sometimes called the law of unintended consequences. When you do something in order to achieve a certain end, you may achieve that end. You also necessarily achieve other ends, some of which might not be your purpose, and sometimes it’s so perverse that you achieve the opposite of your end. And we see that with many government policies.
The example I give in the book, is how Ralph Nader essentially created the SUV. [Laughter.] Ralph Nader—and I’ve got to give credit to where it’s due—and Gerald Ford. Gerald Ford signed into law something called the CAFE law: Corporate Average Fuel Economy. That required that auto companies achieve a certain number of miles per gallon on their whole fleet year. And they had a separate small, lower requirement for trucks. That was what economists call a binding constraint. In other words, it kept that average higher than the market would have yielded, especially when it was passed at a time of very high oil prices. And then, of course, oil prices started dropping, so people wanted the bigger cars.
I should go back; Nixon gets some credit here, too. Why did we have this big problem? It was because there were these price controls that Nixon imposed on August 15th, 1971, that caused shortages throughout the economy. When the OPEC price increase hit in the fall of 1973, prices were not allowed to go up at the retail level, so we had shortages of gasoline. People sometimes murdered to get gas. There were a number of killings at the time. And people were trying to get more gas than was available. The government could have responded by just getting rid of price controls. They didn’t do that. Instead they said, “Look at how wasteful people are.” Huh? We’re keeping the price artificially low, and people are acting as if we’re keeping the price artificially low. [Laughter.] What pigs.
And in fact some of Jimmy Carter’s officials later on called us energy pigs. Well, so, if they’re going to do that, then the next call is for all kinds of regulations to prevent us from using so much fuel, and the CAFE regulations were part of it.
Well, this was one of my issues when I was the energy economist of the Council of Economic Advisers under Reagan in the early 1980s—the CAFE laws—and I wanted to get rid of them. I noticed that stationwagons were disappearing, and I wrote in an article then that it’s obvious why. Stationwagons get less fuel economy and they were bringing down the average too much. And I wrote an article about this after I left the Council. You’re a lot more restricted in what you can write about when you’re there, which is one of the big negatives of the job. You forget how to write. Well, no, you learn how to write memos quickly, but you forget how to write to a general audience.
So I wrote an article on this laying out how the stationwagon was disappearing and would disappear, and also pointing out that it also explained why small-truck sales were rising dramatically, because the small-truck average was 21 miles per gallon, while the car average was 27.5.
What I did not anticipate, but should have, is the creativity of Detroit, because Detroit said, “Hmm, we want something that fits as a truck, but kind of looks like a stationwagon.” Thus the SUV.
Now how does Ralph Nader get in this? Well, I had an hour and a half long interview with Ralph Nader that was really about an hour and twenty-five minute long argument – after the niceties. [Laughter.] And here’s some other background: How do you get a car to fit within the CAFE laws? You make it lighter. But when you make it lighter, it becomes less safe. And economists at Harvard and Brookings Institution found that the CAFE laws in the automobile model year 1989 would cause about 2,000 extra deaths a year. In other words, two-thirds of a World Trade Center every year.
And I was basically trying to get Ralph Nader to admit that in the trade-off between regulation and safety, he had chosen regulation. And he wasn’t going to go there, but it was fun trying. [Laughter.] And in a way his associate, Clarence Ditlow of the Center for Auto Safety, did go there. He said, “You’re never going to get me to admit that.” But that’s kind of like admitting it!
There’s one major unintended consequence of something that Congress is about to pass. I don’t follow it day-to-day because they are doing so much that you cannot follow it day-to-day. By the way, they can’t follow it day-to-day. Most of the people who voted for the USA Patriot Act did not read it.
I believe it has not passed, but it’s close, and that is legislation that would essentially subsidize insurance against terrorism. Now, in the economics of insurance, there’s something called moral hazard. Moral hazard is this: When you have insurance, in other words, when the downside of your actions is somewhat covered, you have less incentive to avoid the downside. Moral hazard is thought of as a negative. If moral hazard is big enough, insurance won’t exist because it won’t be worth it. So, for example, you get life insurance, you’re more likely to do risky activities after you’ve gotten life insurance because you’re covered.
Well, it’s interesting to look at the arguments that are being made for subsidies of anti-terrorism insurance. The main argument made is that there will be moral hazard. Why do I say that? Well, the people who are pushing it are saying, “If terrorism insurance isn’t subsidized, either insurance companies aren’t going to offer it, or they’re going to price it high. If they price it high, people are not going to have an incentive to build in the high-risk areas, and economic activity is going to disperse. So we want to prevent economic activity from dispersing.”
(We have the Federal Government’s fund for flood insurance, by the way, and the Federal Government is acting as if we do want people to locate on flood plains. It’s highly subsidized, and that’s why we get this destruction.)
Now, there are just a lot of little things you hear through your life, and you kind of go along with them, and you don’t really think about them. I think one of the neat things about economics is if it’s done right, it gets you thinking about them. And let me quote one from a Senator from Minnesota named Paul Wellstone. About a year and a half ago, he said words like the following about the pharmaceutical companies, “They want to make money off people’s sickness.”
Really? [Laughter.]
David R. HendersonAnd he said it with a negative connotation. Now it got me thinking, and I realized, you know he’s right. They do want to make money off people’s sickness, just as food companies want to make money off people’s hunger. [Laughter.] But food companies don’t try to make money by making us hungrier. They try to make money by feeding us. Similarly, drug companies don’t try to make money by making us sicker, they try to make money by making us better.
Six years ago, I had an incident where I started to lose bodily fluids, and I lost 10 pounds in 24 hours. And I was so delirious, I couldn’t even make a decision about what to do, and my wife decided to send me to the hospital. So I went to the hospital, and it’s the Community Hospital of the Monterey Peninsula – we locals call it CHOMP. And they put me in this beautiful white bed, and they pumped these fluids in my arm, I still remember how cold it felt, and I slept for 22 out of the next 24 hours. When my wife and daughter came to visit me in the morning, I didn’t even know they were there. And my doctor later told me that they saved my life, that if I hadn’t gone in, my body would have been destroyed. And it had already gone to the point where he said every cell in my body was damaged. It took me weeks to recover.
Think about that. And by the way, I did think about it. Not just am I ever glad my life was saved, but thinking more about the economics of it, too, because the people who saved my life were people I didn’t even know. They were strangers. And yet, they gave their best effort, or at least good enough effort, to save me.
And for the next few months after that, when I would drive by CHOMP, if I had a passenger in my car with me, I’d cheer, and if I didn’t have a passenger, I’d blow a kiss. That’s how happy I felt about them. I wanted them to make money off my sickness. See, I’m 51, and I don’t want to get Parkinson’s, and I don’t want to get Alzheimer’s, and I don’t want to get, what was that other one? [Laughter.] I don’t want to get cancer, or if I get them I want them to be low – not that bad, and I don’t want my friends to get them either. And this is the really neat thing about capitalism and free markets, that there are people out there in the world, whom I don’t know, whom I’ll never know, who are spending their time up late at night trying to figure out ways to make me well. They don’t know about me. They don’t care about me. If they met me, they might not even like me. And yet they are doing this.
Now, this is essentially the—I call it the Adam Smith/“I, Pencil” insight. Two stories. Adam Smith—everyone’s heard of him. He once said, and its one of the most famous line of his book, “It is not from the benevolence of the brewer, the butcher or the baker that we expect our dinner, but from their regard for their own self interest.” In other words, they aren’t doing it to be nice guys to us, but they find the way to do well for themselves is to be nice guys to us by producing the goods.
Well, similarly, there’s a famous man named Leonard Read who wrote an article, it’s a classic article in 1958, called “I, Pencil” in which he holds up a—oops, I’ve got an I-pen—the best I can do, he holds a pencil—Milton Friedman drew on this in his Free To Choose book and series. It’s the pencil talking, and the pencil says, “No one knows how to make me. It’s a literally true statement that no one knows how to make me. Well, then, how do I get made? Well, because each individual, in a division of labor of millions of individuals, knows one little piece of it. No one even knows how to make the wood in me—that’s an incredible division of labor! No one knows how to make the lead—that’s an incredible division of labor! And it’s brought together all in one.”
If we were to try to do it on our own, we would fail. But the thing is, the market leads to this division of labor, where there are people all over the world working together coordinating—the price system coordinates them without any central planner. And as a result you get this pencil that costs a couple of pennies to produce. Now think about that. If you tried to produce it on your own, you could spend a year, and you would not have as good a pencil as you can get for about 10 cents at the store. That’s incredible.
And when I was a kid, I grew up in a small town in mid-Western Canada. When we’d go into the city, the city of Winnipeg, half a million population, I would worry a little. I mean, I knew pretty much everyone in my town, but I didn’t know these people, these strangers in the city. I got there and I wanted to get something, and thought, who will do it for me? How will I get it? Why will they be nice to me? They don’t even know me. And bit by bit I understood the market—that they had incentives to be nice to me. And a matter of fact, I’ve got to admit, even now when I travel to a place like New York, you know the little hick in me comes out. I get all worried about how will they treat me, and of course, people in New York are wonderful, and the market works.
On that issue, I just want to point out that there’s an economist who just really nailed this issue some years ago—and his name was Joseph Schumpeter—about the incredible productivity of the market. And I quoted this in my chapter, the “Joy of Capitalism,” he pointed out that the virtue of capitalism is not he says, “Queen Elizabeth had silk stockings. The virtue of capitalism is not that rich people get silk stockings, the virtue of capitalism is that poor people get silk stockings, or get nylons, or get whatever after the rich people have had them a few years.”
And it’s real interesting just to look back. There are two kinds of comparisons to me. One is with 300 years ago and now. And one I always like to do is think about travel. Think about when you traveled 300 years ago. The only two groups really traveled: really rich people, who had a horrible time of it; they had to be in the elements, the cold, the heat, and so on, without air conditioning, without warmth; and the really poor people who were drafted and sent off to the Crusades. That was it. Now, we can travel half way around the world for what, in America, is less than half of an average person’s monthly salary, and we can do it in about 7 to 15 hours. And our idea of a tough trip is one in which our knees were cramped and the person beside us talked too much. [Laughter.] And we got a little dry. That’s our idea of a tough trip. Capitalism is that great. Capitalism is that productive.
But you can make comparisons even with much shorter time periods. I’m 51. When I was 10 years old we spent Christmas with a family, and their precocious five-year-old daughter had a crush on me. So she chased me around the house until my pants split. We were half a block from home, so I went home and changed pants, came back, she chased me again. My pants split. I was out of options. I had two pairs of pants. I had one pair of shoes. And I wasn’t from some poor family, I was from just a family of income below the median in Canada, which is only a little below the median in the United States at the time. That’s the way things were.
Think now, I have a friend who makes $15,000 a year, and he showed me his closet one day, and he’s got these beautiful sweaters and shirts and pants, got a lot of them at Goodwill, but isn’t that interesting that Goodwill sells these things, really nice things, cheap.
How Government Works
Now I’ve kind of talked a lot about how markets work, and I haven’t really talked about government, except that one case with Postal Express. So I want to say a few things about government, and then I want to say a few things about civil liberties, if I can get there.
I have a chapter in this book titled, “A Tour of Washington.” I had two tours in Washington, in a sense. I was a summer intern in The White House when that meant something a little different. [Laughter.] One difference was, I was paid. And at the Council of Economic Advisors, as a matter fact, and I remember my first day in Washington. I flew overnight, through Atlanta on the cheap Delta Airline out of LA to Washington. I got out of the cab—I hadn’t slept at all on that flight—I got out of the cab at the Old Executive Office Building, and I looked. And there over the Old Executive Office Building was a huge Soviet flag! And I just had little enough sleep that for a split second I thought, oh, my God, they took over overnight! [Laughter.] And then I saw people kind of walking normally along the street, and then the thought was, uh, oh, invasion of the body snatchers. So I went to the Old Executive Office Building and checked in, and while I’m waiting to be allowed in past the Secret Service, I asked one of the Secret Service guys about why the Soviet flag was there. And he says, “Oh, because Brezhnev is in town, and we’re doing it as a courtesy.”
And I thought, wow, Brezhnev represents the most murderous regime in history, and in fact they haven’t admitted even that they’ve murdered, let alone apologize for it! And we’re putting up his flag. I wondered what other tyrant might come to town whose flag we would put up. I didn’t have to wait long. That summer, the green flag from Iran was up as the Shah visited. And as I went through the day, I noticed that people, when I’d ask secretaries, senior economists, anyone about this, they didn’t seem at all surprised. It was just normal—of course, this is what you do—which made me go back to the body snatchers again. And I realized that Washington was going to be a strange place. [Laughter.]
And that was the summer of price controls, when the price controls were causing all these shortages. I have a number of stories about that in the book, about how I tried successfully to avoid working in favor of the price controls. And then I went back again in the early ‘80s as a senior economist to the same place, Council of Economic Advisors, and I had other experiences there. But when I started that summer with an unsettling thought, but I am an empiricist. (It’s one reason, by the way, I’ve never been an Austrian economist, sorry David, they aren’t nearly empirical enough for me.) And I always liked to look at the facts, and not just go with a priorism, not just theory, but look at some facts. And so I didn’t start out being positive of this, but I was wondering, does government care about us? Do government officials in their day-to-day activities really care about us? And I was starting to think they don’t. That’s what I was starting to think based on things I’d read at the start of the summer. By the end of the summer I had an even higher probability on the idea that they don’t, and then I went back there in the ‘80s for about two-and-half years, and came out positive that they don’t.
In my chapter titled “A Tour of Washington” there’s the analogy that I make with Washington and with government generally. It’s from a movie that they keep showing on American Movie Classics, called The Getaway with Ali McGraw and Steve McQueen, who are bad guys, but they aren’t quite as bad as the other bad guys, and there’s fighting over the loot. And in their fighting over the loot, they’re destroying lots of property held by innocent people. I would guess $50,000 worth of property at least—an elevator, a bunch of cars, etc. And they don’t care about the property they’re destroying. And about the third time I saw that on AMC one night, I thought, you know what, that’s the government. [Laughter.] The government does things because it’s pursuing very narrow ends. The government officials are pursuing their ends, and they don’t care about—what will we call it?—collateral damage.
Good example: steel quotas. Economists have estimated that steel quotas designed to save U.S. jobs cost the U.S. consumer $750,000 a year per job saved. That’s a year per job saved, and a job is a $40,000 job. Why? Because they are focusing on the interest group that wants those jobs. They don’t care about the consumers whose interests are dispersed, and they aren’t even aware of the cost to them.
And that for me stands for a lot of what government does. We hear that government has incentives to take account of everything, but in fact, it’s just the opposite. Markets—if things are privately owned—markets take account of everything because someone has everything, each individual thing at risk. But if governments are making decisions, and they don’t have to pay the consequences, they don’t take account of everything. In fact they don’t take account of much. And there are many examples like this.
And this gets me to civil liberties. I wrote an article in Red Herring in November ’99, I urge you to check my Website, www.davidrhenderson.com, and check an article called “How Booming Cannons Hurt Booming Economies” in which I anticipated something like a terrorist attack that would kill a few thousand people.
And I even anticipated that one of the big things that would happen would be a push to remove civil liberties. I guess I didn’t anticipate that it would be so quick or so massive, but I think that government has this very narrow end, at its best. The narrow end is to prevent future terrorist attacks. That’s at its best. But in fact if you look at the details, each agency coming forth with its pet program has its own narrow ends.
So, for example, the FBI comes up with Carnivore, which by the way, they had come up with some years ago, and they aren’t just going to use it to go after terrorists. They’re going to use it to go after lots of people, including maybe people in this audience, maybe people watching it on TV. The Office of Homeland Security basically was set up based on a draft that had been created over the last few years. The new regulations on financial regulations, where the government is going to know even more about your bank account, were regulations that were rejected because of a massive writing campaign a couple of years ago. It’s called “Know Your Customer,” and they were knocked down like crazy. And now they’re back, they’re in.
And so these various people, these various players, had their own narrow ends they were trying to achieve. Here was a crisis that was a great excuse to do it.
Now, am I sympathetic with the idea of maybe on the margin cutting back on some civil liberties in order to go after specific cases of terrorism? I am—not in the sense that I favor them but in the sense that I’m willing to look at them. But that’s not what’s going on. What’s going on is wholesale, massive reductions in civil liberties, with no focus, going after lots of people that have nothing to do with terrorism. By the way, one of the things defined in the USA PATRIOT Act is domestic terrorism.
The attack on September 11th broke three different terrorist laws. In other words we already have laws on the books that they broke. And of course, they murdered. But the domestic terrorism includes threatening government officials. It also includes harboring people who might have committed some kind of violence.
Now, I’m not someone who believes in violence, but let’s say my daughter, who turned 17 yesterday, becomes a Marxist in two years—perish the thought—but let’s say she does, and she becomes one of these anti-global people who wants to keep people in Third World countries starving. I hope she doesn’t, but let’s say she does. And she goes to an IMF conference, and she hits a cop or something, and then she comes home and lives with me. I’d be harboring a domestic terrorist, and that’s a serious crime.
So the government is actually going to put people in the position of being criminals who never thought they’d be criminals for the standard, normal, everyday things they’re doing. That’s the kind of thing that’s going on. Now, I want to wrap up, but I don’t want to –
You’ve got another five minutes.
David R. HendersonI’ve got another five minutes, OK –
AudienceGive him a little longer than that. [Laughter.] Come on, David.
David R. HendersonI want to go to a heavy topic, but with a little light note for a minute. I have a chapter in here titled, “Maybe We Can’t End Death But Let’s Take a Shot at Taxes.” [Laughter.] And as you’ll see if you read the book, I like starting off a lot of these chapters with my own story, and then going to other people’s stories. I remember just the shock when I was 18, and had gone up to a city in Northern Canada for a summer job working in a mine to make money to pay for my last year of college. I hadn’t filled out the form right, and so I had all this money withheld, and then I had to beg them with the equivalent of a 1040 Form to get it back. But I couldn’t fill it out because I was begging the government. I could not make myself fill it out, so I had to get my brother to do it for me, and I signed it.
And I was reminded of that when I read a news article about Venus Williams in September of 2000. Miss Williams had just won the U.S. Open at the tender age of 19, and had received a check for $800,000. President Clinton called to congratulate her, and Miss Williams recounted that conversation to a LA Times reporter. This is her talking, “The President said, ‘You really worked hard.’ I said, “I did work hard and I want to keep this for me. I’m a good citizen, can you lower my taxes please?” [Laughter.] Clinton then had the gall to say there wasn’t much he could do about it, although maybe he could go out and get a lower rate for athletes.
Wasn’t much he could do about it?! That’s not what he thought in 1993 when the tax increase he proposed, signed and bragged about was implemented. A tax increase that cost Miss Williams more than $80,000 of her $800,000 winnings. The President can do a lot about taxes. If he had decided to seek repeal of his ’93 tax increase, he would have had enough Republican votes—that was the summer of 2000—to pull it off. And he could have cut taxes retroactively also just as he imposed them retroactively.
I know this may sound shocking, but President Clinton lied. [Laughter.]
Maybe Miss Williams knew some of this history, and maybe that’s why she went on to ask him whether he was asking her to read his lips. [Laughter.]
Freedom in Our Time
Now, the last chapter of my book is titled, “Freedom in Our Time,” and I lead it off with one of my favorite quotes from Aristotle. “The philosophy that can’t help you do things does nothing.” So the whole point of this is to do something.
And I lay out a number of things you can do, and I don’t want to just dwell on them, I want to just mention a couple things, one is to be creative. I’ll give you an example. My mother died of cancer. My wife had cancer—she’s alive and well—and I give to the American Cancer Society. But what I’ve been thinking about lately is, there’s probably an even more effective way to fight cancer, and that is to fight the regulations and drug companies, because the people who are going to solve cancer are not likely to be the American Cancer Society, as wonderful as those people are. The people who are going to fight cancer are the people who are going to make a lot of money doing it. And I want them to do it quickly, which means I want the FDA to deregulate. I lay out in my health chapter how that can be done with everyone being better off, and I owe some of that reasoning to my friend, Charlie Hooper, who’s in the audience, who’s a consultant to drug companies. So there’s one.
So I remember one time when my father wanted to give some money in my mother’s name to an old folks home, and in my name. I had him give it to an organization in Washington instead that was fighting to relax laws against drugs.
Also there’s one thing we can do that I think people underestimate that I think is really important. And that is to speak out. Milton Friedman tells a story in his and his wife’s book, Two Lucky People, about how over the years people have said to him, “Professor Friedman, you are so courageous to say those things.” And he said, “You know, I never felt courageous, and when I looked at the consequences, I never saw any really bad consequences from speaking my mind. People just imagine there are all these bad consequences from speaking their mind.” And by the way the important thing is to listen to what the other person says back, not just speechify; then there’s very little to lose.
When someone says, let’s raise taxes, ask them if you can have their wallet. [Laughter.] When a male says, let’s prevent gays from getting married, ask them if they would have liked the government to prevent them from getting married to their spouse. If someone says let’s regulate drug companies, ask them if they want their children to have a better chance or a worse chance of surviving in life. There’s a lot of things we can do, and we just have to be a little creative about it.
I also think we should thank people who do little things for freedom. I spoke at an event a few years ago where one of the other speakers was Charles Stenholm, a Democratic Congressman from Texas. I remembered that almost 20 years earlier, his crossover vote had been important in getting Ronald Reagan’s package of budget cuts approved; they were small, but they were real. So I thanked him. Did that man look surprised! I don’t think Congressmen are used to getting thanked at all, let alone for a vote they had 20 years ago.
And I want to end with one of my favorite quotes about a famous libertarian—and about the most libertarian, the most pro-freedom fight in our nation’s history, and that was the fight against slavery—and the libertarian was Frederick Douglass. And he said the following:
“If there’s no struggle, there’s no progress. Those who profess to favor freedom, and yet deprecate agitation, are men who want crops without plowing up the ground. They want rain without thunder and lightning. They want the ocean without the mighty roar of its awful waters. This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to, and you have found out the exact measure of injustice and wrong, which will be imposed upon them. And these will continue until they’re resisted with either words or blows or both. The limits of tyrants are prescribed by the endurance of those whom they oppress.”
So let’s stop settling. Let’s speak out when our freedom is violated. Even better: let’s do the same when the freedom of others is violated. It’s not too late to seek a freer world. Thank you. [Applause.]
Thank you, David. We have time for questions. Carl has a microphone, and if you’d hold it horizontally you speak, and please make your questions short if you can.
Audience Member #1I want to add to your concerns. The Secretary of Health Tommy Thompson has sent a model Emergency Healthcare Act to all the states asking the governor, the state legislatures to pass an act that would allow the governor, by fiat, to take over the entire health care of his state upon his decision. And no one could interfere with that decision in less than 60 days when the legislature could vote it out. If you’re not aware of this existence, one should look into it because there are penalties and possibly jail terms for those that, let’s say, won’t allow themselves to be vaccinated, or a doctor who won’t do a vaccination. Be aware, look into it, it’s Draconian.
David R. HendersonYes. I was just reading about it the other day. One of its other provisions is to actually allow the government to draft doctors. To draft doctors!
Audience Member #2So much of what you said is very agreeable, it seems to me, and reciprocity as a device for producing accountability seems very, very necessary. But what you did, it seemed to me, was to denigrate government and what it really does produce. And it seemed to me there were some cheap shots that were taken. After all, the reason why we can travel safely and so comfortably all of us, is that we do have some protection against marauders and pirates, and so forth, that only kings had in the old days.
So government does some things well, and it does some things badly, and there is almost an invisible hand that works in government the way it works in the marketplace. After all, what you said was that business people really don’t care about the people that they’re helping and assisting, but there is a kind of unintended consequence that it does help. And government in the same way does, especially because of the fact that we have two houses of Congress, or two houses everyplace else. We have appeals. We have tons of people participating. We have an open market of ideas, and the result is that all those horrible examples that you were throwing out probably aren’t going to be passed into law. And the few that get through are probably going to be knocked down by courts.
You know, I was going along with a lot of what you were saying. Government does provide protection, and by the way, I’m an agnostic on this; I don’t know how good a job it does. I do know that we did pay $300 billion a year, and we thought we were getting homeland defense, and it turns out we weren’t. But it does provide protection. I think the oceans do an awfully good job at it, too. That’s a major factor in our protection from foreign invaders.
But, no, the fact is that a lot of these laws do get through, and they become part of what we accept as a given. And in fact, Robert Higgs, whom David mentioned earlier, in his really good book, Crisis and Leviathan—I reviewed this for Fortune in 1987, it’s one of my favorite books of the ‘80s—points out that during war, government takes on crisis powers and loses some of them after the war. But it never goes back completely. One example is prohibition. We think of prohibition starting in 1919 or 1920; it turned out it started during the war because of price controls. Price controls kept the price of grain artificially low, so it caused a shortage of grain. It was hard to justify allocating limited grain to people who were going to distill it into whiskey. So the government refused to allow it to be made into alcohol, and we got, I think it was called the Lever Act; we got prohibition during the war, and that softened up the American people; it was easier to accept it back then in 1920.
The draft was introduced during the World War I. It was eliminated at the end, but then it was introduced in 1940. It was eliminated for only one year, 1948, and then we had it until 1973. So the reality is that we lose freedoms and we get only some of them back. I’ll give another example, taxation.
Before the World War II, there was no withholding of taxes. You paid it every quarter, and you probably didn’t pay it, or your counterparts didn’t pay it, because it was the class tax. It was taxed; it was on the highest income people. The government lowered the threshold at which to tax people during World War II, and introduced withholding to make them pay it on the installment plan, and never got rid of withholding, and from then on, taxed a large percent of the American people.
Restrictions in freedom of speech, most of those go away, but not all of them. So, no, I disagree. I mean look we got division of powers. We’ve got two houses. But what this President is doing is trying to get rid of that. He’s trying by executive order and other things to get rid of that. And that’s very dangerous, and Congress is letting him in a lot of these things. Congress still hasn’t heard that in the Constitution, it’s supposed to decide whether we’re at war. It’s alleged that we’re at war, but the Congress has not declared war. And so there’s one that went away sometime in the last century and we’ve never got back. We’ve never had that division of powers.
My question involves rent control. Could comment on that, and explain why Congress so rarely gets involved in the debate on rent control.
David R. HendersonLet me give a couple of examples from New York, which I’m more familiar with. Former Mayor Ed Koch had an apartment, I don’t know if he still has it, but he had a beautiful apartment for $200 some dollars a month in Manhattan. Mia Farrow, similarly, had a nice apartment well under the market rent. And so it is people who know the rules better who get to take advantage of this. The losers are people who are new to the area. It’s hard to move into a place like that.
For example, in Prague, they’ve got heavy rent controls, and that’s limiting the growth of the Czech economy. The unemployment rate in Prague is 2%. The unemployment rate in the Czech Republic is a multiple of that. But people can’t move there. And property owners are badly hurt.
It’s a myth, by the way, that all property owners are wealthy. I wrote something on rent control, and I used to live in the Bay Area in 1979, in the San Francisco Chronicle. And a group of property owners in Berkeley invited me to speak, and I showed up wearing my suit on a Saturday morning. They showed up wearing blue jeans but it wasn’t like the yuppies wearing blue jeans, it was kind of working class people and for many of them they owned one or two units. They had planned for those to be for their retirement. And that was just eye opening to me.
Now why do economists not get involved? There’s a long answer, and I’ll try to give the short one. In a poll taken of economists in the late 1970s, 98% agreed—and this was out of 211 economists—98% agreed that rent control destroys housing. It’s not controversial within economics. So if you could get economists involved, they would say that. The problem is economics has gone far away from having much to do with public policy, or with communicating with the public. If you go to an economics department nowadays in the United States, almost invariably you will find courses and reading lists that don’t seem to be about anything that would matter to you.
And I remember running into a reporter in the Bay Area some years ago, who had been through the Stanford program but had dropped out. And I said, “Why did you drop out of the graduate program in economics in Stanford?” He said, “Well, when I got to the second course of an industrial organization class, and it was just proof, lemma, proof lemma, and we hadn’t yet heard the word, the firm, I thought: there’s something wrong here.”
So economics is more and more about kind of how many angels dance on the head of a pin, and less and less about the real world.
Now, if you can get an economist to let his hair down, you’ll hear some very sensible things. And in my Fortune Encyclopedia of Economics that was my goal. I was noticing this real coalescence around a lot of issues, but it wasn’t coming out to the public and I wanted to do that. So I got economists who could write, and I found a whole lot of them. But if you look at what is taught in graduate economics programs today, it isn’t very useful.
In Thomas Sowell’s most recent book, Basic Economics, there’s a great chapter on rent control. Again, it started during wartime in Europe and in the United States.
Audience Member #5To answer the gentlemen’s question over here that was talking about maybe the legitimate roles of government. Sometimes that even gets skewed. Recently somebody asked a question to the Swiss, who pay out a large amount in defense as a percentage of the budget. “He said, why do you continue to pay these huge defense expenditures when you haven’t been invaded in 300 years?” But he didn’t understand it.
Audience Member #6It hasn’t been invaded in 300 years because they have a standing army that trains continuously.
David R. HendersonThat’s his point.
Audience Member #7Since taxes tend to discourage what is taxed, a number of groups have focused on the idea of taxing pollution as a way of reducing pollution. Milton Friedman has also said that the least bad tax is the tax on the bare value of land. Granted that many of the things that we do tax are awful, can you comment on whether there is any such thing as a good tax, and to the extent that we should have government, how should it be funded?
David R. HendersonGood question. There are about three issues you raised. About taxing pollution: I used to be an advocate of taxing pollution, but the more I’ve read about, the more I’ve thought about it. I have a chapter in here I didn’t get to tonight titled, “The Environment: Own It and Save It.” The key to having the environment treated well is to just have someone own it. And the second best—but it’s a distant second best—is to tax pollution. And if you start thinking through the problems with taxing pollution, it just doesn’t work well. You don’t know what level to set, and people’s rights can still be violated because they’re still being polluted. I’ll give you one little story.
In Ohio, there was this famous incident in the 1960s where the Cuyahoga River that goes through Cleveland, caught on fire because of all the pollution. It turned out that wasn’t the first time. The first time was in the early 1950s. Something interesting happened in the late 1940s. The Ohio common law was moving to allow people on the river to sue people up river who polluted. And it was working. People were actually stopping to pollute, and it was working. The legislature got together in 1948 and overturned that, and said, “We want to give permits to pollute, and we’ll decide who gets the permit.” So they chose what are the industrial rivers, in other words, what are the sinks for the pollution, and we’ll give people liberal permits to pollute there, and that’s what led to it.
So what didn’t get tried very much, but to the extent it did get tried, was starting to work, was property rights. And so my first preference would be property rights. Milton Friedman did say once that the least bad tax is a tax on site values. Not improvements on land, because that discourages improvements, but the site value of the land. And he’s right. That is the least bad tax.
That was Henry George.
David R. HendersonRight. I know. And then, right, Lord George taxed everything. [Laughter.] So, yeah, there is a point to that.
Now, in my ideal society I actually think we might need taxes, and I don’t like that, because I do think taxation is theft. But I think we might need a certain amount of theft, and I hate to say it that way. But I think we need taxes, for every level of government, to be a total of under 3% of GNP. And so if they’re under 3% of GNP, you really have to mess up badly to have really damaging taxes. Whether taxes are on income, or on property, or on sales—that matters. But what matters more is the level—and I want it to be a lot lower. So take any tax that exists today and I think it’s too high.
Audience Member #10Well, I got it first. [Laughter.] David, on 9/11, the World Trade Center, notably one of the symbols of capitalism in the world, was attacked. What can capitalists do to strike back?
David R. HendersonYeah, yeah. Well, first of all, I want to point out it was a government building owned by the Port Authority of New York because Rockefeller wanted to unload some land, and he found a government agency willing to buy it, so that’s just an important part of history, there.
Audience Member #8Can you address the War on Terrorism?
David R. HendersonFirst of all, 19 people are covered, right? The nineteen people who murdered are taken care of. So then the question is, who else is there who’s involved in it? And I think that’s something we should find out. Now, what are the best ways to do that? There is this part of the Constitution called “Letters of Marque and Reprisal.” (That’s really something when you talk to an informed audience and they know more than you do about a lot of these things. [Laughter.] So I can just kind of mouth them and you’ll get the words exactly right.)
And the idea of Letters of Marque and Reprisal is very clever. President Jefferson used it, I guess, to go after some pirates. And the idea is to give private people incentives to go after the bad guys. And now, it is going to be hard to know who are the bad guys. But I can tell you who aren’t the bad guys: it’s the one-and-a-half-year old in Afghanistan who got killed the other day when the roof on her house collapsed. It’s a whole lot of people who lost their families. Those aren’t the bad guys. And so I think, you have to go after the bad guys. I don’t think you throw out all the rules and just say, “They killed a whole bunch of our innocent people, therefore, we should kill a whole bunch of their innocent people.”
When you bring up these issues, you think about history, politics, economics, debates going back to Hamilton and Jefferson, and when Jefferson made the Louisiana Purchase, the Federalists were violently opposed. They used tax money to pay for it. So if you were on the Council of Economic Advisors then, what would you have said, Dr. Henderson?
David R. Henderson[Laughter.] One of the things that protects us is competition among governments. The more competition you have among governments, the less they can tax us, and the less they can regulate us. So I believe in having as little government as possible at the Federal level, and have it down as low as possible. I would have rather have seen, frankly, the 13 states, which had their 13 governments, and not a strong Federal government. Jefferson and I were together on that one. And then the Louisiana Purchase: just not have it, and have some other government, or some other political affiliation.
I wrote an article in the Wall Street Journal a few years ago—as I said I’m from Canada—laying out why most Canadians would be better off if Quebec were allowed to secede. And I think that’s right: you’d have more competition. And I think, I think we would not have America throwing its weight around in the world the way it is if there weren’t an America, in other words if there were, say, 10 governments instead of one, or five or three, or 50. And I think that would be preferable. And, by the way, for that reason I’m not in favor of what’s going on in the European Union. I think that we’re going to get this massive government over there.
I’d just like to comment on what a pilot told me the other day. I was asking about security in the airplanes, and he was suggesting that September 11th could not have happened, except for the fact that we didn’t give our pilots freedom. Instead we gave them a policy that said: If you ever get a hijacker, you have to go along with whatever he says. And he said, “The simple fact of changing that policy will make all the difference in the world, much more than all the billions we’re spending on extra security.” So sometimes ideas of freedom actually give us more security.
David R. HendersonYes. And I want to just amplify that. One of my big heroes, and I talk about him a bit in my book, is Friedrich Hayek. And I had an article in the Wall Street Journal in October when the Nobel prizes were awarded. They were all given to people who work in information economics, as I pointed out. Although you could argue that two out of the three of them deserved the Nobel Prize, they did work on asymmetric information. But I think they missed the most important asymmetry. And the most important asymmetry information is between decentralized information held by participants in the market and centralized information held by government.
Look back at September 11th, and think about the one thing that went right on that horrible day. It was Flight 93. It was people with their cell phones responding in a decentralized way to decentralized information. They knew what would happen if they didn’t take over the plane, and that change, as you said, changed it all; suddenly the stakes were different.
And so, if the government had done nothing about airport security after September 11th, we would have been safer than before. Now, in fact, they could have even gone further, and that is to deregulate it, and let security be an issue for the airlines to choose. Do they allow pilots to carry guns or not? There was an attempted hijacking in the 1950s where a pilot shot the hijacker dead in the United States and ended the hijacking. So those are options, and, now, I don’t think that, I’m not saying the Federal Government should require that airlines have their pilots carry guns. I say, airlines have strong incentives to make good decisions about that. Let them choose, and there’ll be different choices.
I want to point out one other thing. I was watching C-SPAN the other day, and it’s unbiased. [Laughter.] One Senator was saying we’ve got to have uniform standards at airports for security. And I thought, does this guy ever play poker? [Laughter.] Uniform standards? Which means once you figure them out, you know how to do it anywhere. What you want is changing standards that aren’t predictable. And that’s what we would get with private airports with private airlines and so on.
One of the things you talked about was the ability to travel. The other day I heard a statistic—I don’t know if it’s accurate—that less than 5% of the population in this country has a passport. And one of the things that has profoundly affected me in my life is the ability to travel. And I think you’re right about our oceans, and the size of our country, and you go to Europe and you forget for what us is a state is a country. And you’re constantly crossing through borders, and it’s a totally different sense of government. And I also had the fortune of being in Germany when East Germany still existed. And I saw that border, and that has ultimately very much affected my thoughts on government and what I do.
And then taking this back to the fact that people in this country haven’t had a lot of exposure, and you have, in my mind, a sanitized and liberalized media. How does capitalism come into effect in terms of educating people more? I mean you don’t see capitalistic news happening. Well, you don’t see a station yet that has been really pro- libertarian or capitalism. You don’t see these coming up. And I guess my last comment in terms of yours on the Louisiana Purchase is in having more governments: Do you every think that there’ll be a viable third party in this country?
I think that it does help clearly to have competition in the media, but the major competition is not Fox, as I heard a few people saying. The major competition is the Internet.
I haven’t watched the network news in a few decades, as a regular. I watch it once in a while, but I used to watch regularly. I haven’t watched it regularly in a few decades. And most of my information now I get off the Web. I find out what they’re saying in London newspapers. I read something in the Times of India this morning—all these things—and it’s wonderful. And by the way, I highly recommend that you read what people in other countries are writing about us. It’s very eye opening.
I have a chapter in this book—again, I didn’t talk about it—on education in which I lay out the problems with government schooling, so-called public schools. And I think that the major reform that could make all the difference in the world would be to get the government out of schools. And I lay out the Prussian roots of our government schooling. [Applause.] How it was actually intended to propagandize, and how it’s succeeding. It was intended to make it hard to read, and it’s succeeding. And I actually tell that story in there. And so, so I think that would be the major change, and I have some hope about that. Homeschooling is growing, and so I have some hope.
Now your last thing about a third party, I don’t know. What’s happened is that the two major parties have carefully colluded using campaign finance laws to do what monopolists do, or duopolists do, and that is to try to rig the rules against outsiders. And so it’s very hard now to compete as a third party. And I just don’t know whether third parties will be viable. But the good news is that they would not ever have to be viable in the sense of winning elections to be effective. And I want to tell the story that my friend, Joe Fuhrig in the audience, told recently in a speech that I knew part of and I didn’t know the last part of.
A man named Norman Thomas ran for President starting, I think, in around 1928, and in 1932, he ran and Roosevelt won against Hoover. Roosevelt’s platform called for diminishing the size of government, cutting taxes, cutting government spending, cutting government employment. He broke all his promises. A book came out in 1936 laying out a platform and saying, look at all these things this platform calls for, and look at all the things Roosevelt did. And Roosevelt had done what the platform called for. He said one little problem: the platform was Norman Thomas’s Socialist Party Platform. Roosevelt had implemented it. Well, Norman Thomas ran again and again and again, never won a state, never won a huge percent of the vote, but in 1956 he decided not to run. That was when Stevenson and Eisenhower were running. Eisenhower was running for his second term. He decided not to run, and the media, who liked him because he was a colorful character to follow, asked him why? And he said, “Well, the Republican Party has accepted everything I ran on in 1928.”
So, the way you can have an impact as a third party is by doing what you should do, and you take the positions you should take, and let the other parties follow. For example, in the drug war, call for the end of the war, and then the other parties will move around the edges towards that position. That’s what Ralph Nader did with the Green Party, to some extent; he talked about the end of the drug war, or at least diminishing it. And Harry Browne called for the outright end of the drug war for the Libertarian Party, and said that if he were elected, he would pardon every non-violent drug criminal in prison, which would have, by the way, solved our prison problem.
I want to thank David for his talk, and please join with me in thanking him. [Applause.] It’s not just that this The Joy of Freedom really a great book, but David is a very good writer. So if you enjoy a good read, you can learn a lot from it, so I highly recommend it again. For those of you who have not gotten copies, there are copies upstairs still, and I’m sure he’d be happy to autograph them for you. Thank you all for coming and making this a very successful evening for us, and we look forward to seeing you at our next Independent Institute event. Good night. [Applause.]
END
Appendix: The Ten Pillars of Economic Wisdom, from chapter 2 of The Joy of Freedom: An Economist’s Odyssey, by David R. Henderson
1. TANSTAAFL: There ain’t no such thing as a free lunch.
2. Incentives matter.
3. Economic thinking is thinking on the margin.
4. The only way to create wealth is to move it from a lower valued to a higher valued use. Corollary: Both sides gain from exchange.
5. Information is valuable and costly.
6. Every action has unintended consequences.
7. The value of a good or service is subjective.
8. Costs are a bad, not a good.
9. The only way to increase a nation’s real income is to increase its real output.
10. Competition is a hardy weed, not a delicate flower.
