All Commentary
Sunday, July 1, 1973

A Reviewer’s Notebook – 1973/7


At most of the recent Mont Pelerin Society conferences a battle royal has taken place between the Friedmanites, who insist that inflation is a purely monetary phenomenon, and the wage-push critics, who discover the prime villain in the monopolistic labor union. The two sides rather miss each others’ points. Obviously Milton Friedman and Enoch Powell are right when they say that there could be no inflation without an increase in the money supply. Since it is government that controls the currency, the villains come clear: the politicians and the bosses of the Federal Reserve are to blame for their profligate public spending and their pusillanimous refusal to ride herd on the availability of credit.

But the wage-push is there, too: wages are a cost, and costs must be recovered in prices. If the monopolistic labor union can extort a beyond-productivity wage increase, the same politico who lacks the nerve to veto high public spending will hardly have the fortitude to tell the unions that they must accept a penalty in joblessness for pricing themselves out of the market. Friedman and the wage-pushite actually have the same Statist villain, but each persists in emphasizing a different activity of that villain. Friedman says the politico shouldn’t go hog-wild on inflationary welfare state spending in the first place. The wage-pushite would agree that welfarism is bad. But he insists that the villain really sends the inflation racing when, fearful of mass unemployment, he forces a secondary flushing of the money supply in order to let the customer pay a wage-inflated price.

The Friedmanites and the wage-pushites need a moderator, and where could they find a better one than Emerson P. Schmidt, whose Union Power and the Public Interest (Nash, $10) combs over all phases of a complicated subject? Schmidt begins by noting that the aim of most union leaders is to take labor out of competition. This has been done in both craft and mass production industries by laws that exempt the working man (defined as something more than a commodity or a factor) from the Sherman Antitrust Act. The exempted working man achieved a very special favoritism in the depressed Thirties, when the Wagner Act, seeking to “equalize” his power vis-a-vis the big corporation, in reality stacked the process of collective bargaining in his favor. The right to strike was never intended to justify the use of goons and dynamiters, but a society that is far gone in permissiveness does so little to prevent violence on the picket line that businessmen have been thoroughly intimidated. They don’t dare to keep factories open for those brave souls who are willing to work after union “enforcers” have appeared on the scene with their brass-knuckle tactics. So the “bargaining” usually ends with acquiescence to union demands.

Abuse of Special Privilege

As a result of legal exemption from the antitrust laws and the general permissiveness of society, the unions are in a position to push extortionate policies no matter what the level of inflationary public spending. Having made this point clear by his analysis of the “wage-lag myth,” Dr. Schmidt is in a position to arbitrate between the Friedmanites and those who insist on the wage-push theory of inflation. When Friedman argues that he knows of no instance in history where inflation was not preceded by a substantial expansion in the money stock in excess of production, Schmidt says “few scholars would disagree.” He also accepts Friedman’s contention that an abatement of inflation invariably follows when the money stock is brought under control. Nonetheless, Gottfried Haberler’s amendment to the Friedman position has impressed Dr. Schmidt. Haberler agrees that “inflation is basically a monetary phenomenon,” and that it must be fought by Friedmanite means. But, so Haberler adds, the wage-push is a reality on top of the monetary inflation, and if union power is not reduced “all the other measures suggested for fighting inflation would be in vain.”

Dr. Schmidt notes the propensity of economists to change positions, but the “law of cost” (“the price of a commodity tends to equal its cost”) necessarily dictates such changes when monopolistic unions become extortionate. Schmidt quotes Dr. Edward H. Chamberlin as saying that both monetary expansion (creating “demand-pull”) and monopolistic wage bargaining (wage-push) can exist simultaneously. “Both are possible and neither excludes the other,” says Chamberlin. It is not a matter of “either-or.” To which Haberler adds that there is a monetary element in both demand-pull and wage-push inflation. The only difference is in the timing: for “demand-pull,” the flushing of the money supply comes first, for “wage-push” it comes after the monetary authorities have, out of fear of unemployment, decided to “create enough money to permit the rise in prices that is compatible with the rise in wages.”

Dr. Schmidt’s chapter on “Monetary and Fiscal Policies Versus the Wage Push” should end all the arguments between the Friedmanites and the wage-pushites. The “freedom philosophy” economists are not in any significant disagreement about fundamentals. The bridge to concord is supplied by Haberler in his observation about the timing of the monetary element in the two types of inflation.

Faulty Attitude toward Work

Dr. Schmidt thinks the unions’ misuse of their inordinate power is due to a most defective view of man’s attitude toward work. The average union boss rejects the idea that there can be real on-the-job satisfactions, such as ego needs, the desire to grow and create and to achieve a well-rounded experience. Samuel Gompers once defined union policy as “more,” which has been altered in recent years to “more for less.” The pessimistic view of work dominates the union agendas. Professor Douglas McGregor of MIT calls the pessimistic view “Theory X.” The other view, which concentrates on job satisfactions and opportunities, is “Theory Y.”

The trouble with Theory X is that it actually leads to getting less for less instead of more for less. The arithmetic is obvious: when production is diminished by more paid holidays, paid vacations, sick leave, paid personal-birthday time off, paid time for jury duty, for funerals, for the day before or after a holiday, there is less for the totality of the working force to share. In slacking off on productivity while hourly wages go up, the worker cheats himself.

He also cheats the totality of the working force when he compels his political representatives to raise the minimum wage. The “aristocrats” of labor don’t need the minimum wage anyway. But those at the other end of the scale — the untrained apprentice, the eighteen-year-old black from the slum — can’t find jobs when the minimum wage is high. It does not pay an employer to hire and train a man at a wage price that cannot be recovered in the marketplace.

Dr. Schmidt thinks that undue union power must be dispersed. He advocates changes in our basic labor law that would permit local wage settlements, and asks for a discontinuance of the annual wage increase. But, first, the intellectual climate must be changed, which is another story.

 

History of the Canadian National Railways by G. R. Stevens (New York: The Macmillan Company, 1973) 523 pp., $12.95.

Reviewed by Joseph M. Canfield

Railway history is generally considered a highly specialized subject and of no general interest. Most works fall into either of two categories. First, the economic study, of interest only to the statistically minded. Second, there is the hobbyist study which goes into details interesting only to a dedicated collector of switch keys or railroad tickets like myself.

However, anyone who wishes to be informed about the workings of the economy in which he lives should know more about railroads. They are absolutely essential to the economy and its functioning. Macmillan has started a series called “Railroads in America.” The first two volumes avoid the extremes mentioned — they are designed for the general reader. The human side of railroading is present and provides light touches which keep up the interest. But a reader can get a clear view of the importance of railways to a developed or a developing economy. For that reason, readers of The Freeman should be aware of the series.

History of the Canadian National Railways by G. R. Stevens, second in the series, relates a story which confirms the validity of Clarence Carson’s thesis in Throttling the Railroads — that government land grants and subsidies for railways are upsetting and wrong. In Canada, they were disastrous.

The Canadian National Railways came into being as an entity simply because expansion of railways, encouraged by subsidies (both cash and land) failed. The failure resulted in confiscation by the Canadian Government, of Britain’s largest single private overseas investment, the Grand Trunk Railway. Its stock, valued at $629,950,532 was declared worthless by that act.

The first step on the slide was taken by Sir Wilfred Laurier, Prime Minister. He wanted to fill the prairies of Canada with settlers, thus binding the Provinces into a Canadian nation. The settlers surged into an area virtually devoid of railways. Eastern Canada wouldn’t agree to public funds for new railways. British capitalists wouldn’t invest. To forestall construction of a branch of an American railroad into the area, Laurier did get a subsidy for a Canadian Pacific branch through Crows Nest Pass. In return, the Railway agreed to low rates on grain eastbound from the prairies to the ports. And those “Crows Nest Pass” rates of 1897 on grain hold today for the Canadian Pacific and also for other railways undreamed of and unbuilt in 1897, in defiance of market factors and economic reality.

The Canadian Pacific Railway, after this one flirtation with subsidy, went its own way as a private enterprise transport company. But many farmers did not like the Canadian Pacific. Capitalizing on this feeling, Mackenzie and Mann, Contractors, started building lines into the area of new settlement, with government subsidy. They were welcomed with open arms — until they tried to set realistic freight rates for their Canadian Northern Railway.

From 1903 until the collapse of the Canadian Northern in 1917 and of the Grand Trunk in 1919, and their incorporation into the Canadian National Railways, there was a mad sequence of political maneuvers; building of needless railways, many in previously unexplored territory; interest charges mounting to astronomical figures; managerial stupidity. Millions and millions of dollars of private investments were wiped out (or confiscated). The Canadian taxpayers were placed under growing burdens which they have carried ever since. A review cannot convey the story. The book must be read to see the demoralizing effect the open government purse had on managers, contractors and directors. The denouement was incredible. The moral qualities which we consider inherent in our Anglo-Saxon tradition seemed to have evaporated at Crows Nest Pass.

The years since the Canadian government took over the railways have been remarkable for two men, Sir Henry Thornton and Donald Gordon. Both men tried (and were substantially successful) running the railways as much like a privately owned system as was possible. And considering the property they headed and the problems they faced, each did, in his own time, a remarkable job. But it is a sad comment on the supposed democratic process to read of the abuse and falsehood heaped on Thornton and Gordon for doing well a job that politics had made almost impossible in the first place — another instance of the political corruption that generally follows government interference in economic life.

A closing note: In the face of all the government activity, the Canadian Pacific Railway is today virtually the last bastion of private enterprise railway in the world. It has at times had government help, but has generally paid its own way and paid its stockholders in the process. It has always received more attention from historians. A study was issued about two years ago, one is planned for this series and still another study is in preparation on the operation of the Canadian Pacific Railway. In contrast, the Canadian National story, told by Mr. Stevens, should be noted as a warning on the role of government and the consequences thereof.

The first volume of the Macmillan series is the History of the Louisville & Nashville Railroad by Dr. Maury Klein (New York: The Macmillan Company, 1972) — $10.95.

Throttling the Railroads by Clarence B. Carson is available from The Foundation for Economic Education, Irvington-on-Hudson, New York 10533 at $4.00 clothbound or $2.00 in paperback.

 

THE CASE FOR AMERICAN MEDICINE by Harry Schwartz (N. Y.: David McKay Co., Inc., 1972) 240 pp., $6.95.

Reviewed by Allan C. Brownfeld

Recently there has been a mounting attack upon the American system of private medical practice. While many Americans have accepted at face value the idea that there is, in some sense, a “health care crisis” in the United States, a few have sought to look at the facts. One of these is Harry Schwartz, the distinguished correspondent of The New York Times.

In his volume, The Case For American Medicine, Schwartz discusses in detail each of the charges leveled against the American medical system.

Responding to critics who say that Americans are less healthy than they were twenty years ago, Schwartz provides some illuminating data. On the average, an American baby born in 1971 could expect to live 11.4 years longer than an American baby born in 1930. Concerning infant mortality, he notes that in 1930, 64.6 American babies out of every 1,000 live births died before the age of one year. In 1950, the toll had been cut to less than half and in 1970 it was significantly lower than in 1950, an improvement that translated into the survival of 35,000 babies who would have died in 1970 if there had been no progress in the past twenty years.

While doctors are frequently charged with profiteering, the data in this book shows that physicians’ fees actually increased slightly less rapidly between 1965 and 1967 than average hourly compensation in the total private economy of the country. They rose more slowly than hourly earnings of construction workers and local transit workers, and slightly more rapidly than wages of printers and truck drivers.

Showing the failure of government involvement in medicine, Schwartz discusses in detail the blunders made by the Medicare and Medicaid systems — the manner in which they have increased demand without increasing supply, leading to an increase in costs. If there is, in any sense, a “crisis” in medical care today it is one which has been brought about by government involvement in this field.

The author quotes Dr. Sidney Garfield, founder of the Kaiser Permanente prepaid group medical plan: “The cause of today’s medical care crisis has been the inexorable spread of free care. The effect is an expanded and altered demand that is incompatible with the existing sick-care delivery system — wasting its medical manpower and threatening the quality and economics of the service it renders… The result should not be surprising to anyone. Picture what would happen to air transportation if fares were eliminated and travel became a right. What chance would you have of getting any place if you really needed to? Even the highly automated telephone service would be staggered by removal of fees; necessary calls would become practically impossible. The change from fee to free would disrupt any system, no matter how well organized, and this is particularly true of medicine with its highly personalized sick-care service.”

To those who would like to substitute a system of socialized medicine for our current system of private practice, Harry Schwartz urges a careful look at countries such as Great Britain and Sweden. While visiting in Stockholm, the author was told, “Don’t get sick in Sweden. You have never seen such impersonal care and such long waits in your life. Every time you go to the clinic, you see a different doctor. And if you’re hospitalized and are seen by a physician three times in one day, it will almost certainly be three different doctors.”

The experience in socialized systems shows clearly that increasing demand by making medical care a “free” commodity simply makes it impossible to obtain for those really in need — and dramatically increases the real cost, expressed in higher taxes, as well.

The health problems we see around us, states the author, are usually not the fault of our medical system, but are factors of our society and economy. We ride in cars when we should bicycle or walk. We overeat. We smoke too many cigarettes. Then we blame the medical system for our self-inflicted difficulties.

To reorganize what is probably the most effective and efficient medical system in the world makes little sense — it ignores the fact that medical service, because it is both wanted and scarce, is an economic good and that the market is the best device for conserving and allocating such goods. Harry Schwartz has made an impressive case for continuing to permit the market to work in this area.

 

THE ESSENTIAL VON MISES by Murray N. Rothbard (Lansing, Mich. 48904, Box 836: Oakley R. Bramble, 1973) 62 pp., single copies $1.

Reviewed by Henry Hazlitt

Two festschrifts have been issued in honor of the great economist Ludwig von Mises, now in his ninety-second year. The first, On Freedom and Free Enterprise, edited by Mary Sennholz, appeared in 1956, and contained essays by nineteen distinguished scholars. The second appeared in 1971, on the occasion of Mises’ ninetieth birthday of that year. It was in two volumes, published by the Institute for Humane Studies at Menlo Park, California, and carried essays by no fewer than 66 contributors from 17 countries.

Both publications contained many fine essays. In addition, there have been other tributes to the achievements of Ludwig von Mises. But no one has yet done what Murray N. Rothbard has so brilliantly succeeded in doing in this little tribute of about 11,000 words. He has given us, in a brief but remarkably comprehensive form, an outline of Dr. Mises’ outstanding contributions to the sciences of human action. Biography, history, exposition and criticism are superbly interwoven.

Dr. Rothbard begins with the birth of Mises in 1881 in Lemberg, reminds us that Mises grew up during the high tide of the “Austrian School” of economics, describes what this was, contrasts it with the classical Ricardian economics that it displaced, explains what Carl Menger and BoehmBawerk, Mises’ teacher, had already contributed, and then, point by point, tells us how Mises pushed beyond this: his unification of monetary theory with the Austrian analysis, his new theory of business cycles, his demonstration that socialism was not a viable system because it could not solve the problem of economic calculation, his great contributions to methodology, and a score of other illuminations to be found especially in his three masterpieces, The Theory of Money and Credit, Socialism: An Economic and Sociological Analysis, and Human Action.

Rothbard’s pamphlet is a beautiful exposition of Mises’ thought and an admirable introduction to his writings. It is more than that. It is a compact history of economics since the 1880′s; it pays tribute to others who made contributions; and it briefly indicates the fallacies in such fashionable diversions as Keynesianism, institutionalism, econometrics, and mathematical economics.

But with all the territory that it covers, it never loses sight of Mises the man, reacting “to the darkening world around him with a lifetime of high courage and personal integrity,” never bending to the winds of change, never swerving a single iota from pursuing and propounding the truth as he saw it, and never complaining about the shameful neglect of his contributions by the bulk of the academic world.

Rothbard concludes by quoting a tribute from the eminent French economist Jacques Rueff:

“Ludwig von Mises has safeguarded the foundations of a rational economic science…. By his teachings he has sown the seeds of a regeneration which will bear fruit as soon as men once more begin to prefer theories that are true to theories that are pleasing. When that day comes, all economists will recognize that Mises merits their admiration and gratitude.” 


  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.