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Book Reviews - January 2008

George C. Leef

The Cure: How Capitalism Can Save American Health Care

by David Gratzer

Encounter Books • 2006 • 233 pages • $25.95

Reviewed by Jane M. Orient

David Gratzer learned one of his most important lessons in medical school on his way to class. He had to wind his way around the gurneys parked in corridors of the emergency department, where elderly patients, stinking of sweat and urine, had been waiting as long as five days for a bed. That destroyed his illusions about what he, like most Canadians, had been taught was the best-run health-care system in the world.

I could identify with the author because I had a similar epiphany in 1970 when volunteering to help out in the emergency room at Columbia-Presbyterian Hospital in New York as a first-year medical student. It too was chaotic, but we did not have patients waiting for days for beds; we did not use the Canadian global budget to put a lid on total expenditures, leading to rationing by limiting supply. What became obvious to me was that the “compassionate” “liberal” ideology of wealth redistribution did not and could not help the social problems that led to most of the ER traffic.

Since 1970 more and more Americans have been funneled into the single-payer systems called Medicare and Medicaid. The waiting rooms at ERs in private hospitals are coming to resemble those of 1970s public hospitals in the inner city, while the inner-city hospitals have become even worse. Just as we’re starting to experience the type of stress so common in Canada, the pressure to finish the job of socializing American medicine grows ever more intense. While our remedies make the patient sicker, reformers suggest applying more leeches. It’s time for regular people to take a field trip to the ER.

Gratzer does a good job of explaining some basic economics. It’s all encapsulated in his graph: “Out-of-Pocket Share Falls and Per Capita Spending Climbs.” The diagnosis is too much third-party payment, not too little.

Doing away with the free-market price mechanism, essential for bringing supply and demand into equilibrium, inevitably leads to “bureaucratic displacement.” Gammon’s Law—that in a bureaucratic system, increase in expenditure leads to a fall in production—was developed by a British physician in the context of the National Health Service. Milton Friedman applied it to American hospitals, as Gratzer recounts.

Gratzer explains many important issues, such as the role of government regulation in increasing the cost of insurance as well as of prescription drugs. He debunks well-worn myths, such as the claim that infant mortality is less in countries with socialized medicine. He outlines reforms that would make the situation better rather than worse: expanded health savings accounts, permitting the purchase of out-of-state insurance, and tax equity.

An important contribution of the book is explaining why the laws of economics don’t seem to apply in medical care. For example, improved technology generally leads to lower prices, not higher ones as in medicine. Basically, “America doesn’t really have a market for health care, it seems, merely a market for health insurance.” The customer—the one spending the money—isn’t the person benefiting directly from the service. Thus normal market processes, such as the role of self-interest, are inverted.

Anyone who understands Gratzer’s account of the government’s role in the current mess will be hard pressed to see it as a potential savior. Consider a couple of paradoxes. Medicaid was supposed to help the poor, but one of its most expensive roles is to serve as “inheritance insurance” for the wealthy. One of the fastest-growing areas of legal practice involves helping the affluent qualify for Medicaid long-term care. And Medicare was supposed to protect the elderly from being financially devastated by medical expenses. Although it covers many small bills, it leaves beneficiaries exposed to potentially catastrophic out-of-pocket expenses. It’s the opposite of sound insurance.

Gratzer fills in what the American media usually omit: the uncounted costs of prolonged pain and disability for Canadians trapped on waiting lists. Allowing people to use their own money to improve their situation has been considered un-Canadian. Fortunately, the situation is changing. In a case involving what Gratzer calls “the hip that changed the world,” the Supreme Court of Canada held in favor of a Montreal physician, Jacques Chaoulli, who took on the system virtually single-handed.

Privatization and free-market reforms are breaking out in all those countries that leftists applaud for having “universal” health care—that is, universally bankrupt, mediocre, and overburdened medical systems. Gratzer looks at Sweden, South Africa, Finland, and Germany, among others.

Americans should benefit from Gratzer’s experience in Canada as well as his mastery of economics. We need to avoid descending further into the chasm of medical-care socialism. At some point, the vortex of socialism could become like a black hole, from which no escape is possible.

Gratzer’s book is a valuable contribution to the struggle to insure against that outcome.

Jane M. Orient, M.D. is executive director of the Association of American Physicians and Surgeons.

* * *

Self-Determination: The Other Path for Native Americans

Edited by Terry L. Anderson, Bruce L. Benson, and Thomas F. Flanagan

Stanford University Press • 2006 • 331 pages • $35.00

Reviewed by William L. Anderson

While driving across the American west in 2006, I passed through Indian reservations, their desert landscapes dotted with shanties, trailers—and casinos. It was a classic picture of wealth surrounded by poverty, a comparison that socialists often love to make when denigrating capitalism.

Yet, as former secretary of the interior James Watt so famously said 25 years ago, one need not go to socialist countries to observe failures of socialism; just go to the reservation. Unfortunately, the truth about Native Americans is as unacceptable now as it was then.

The myths surrounding Native Americans have attracted people who believed Indians were communalistic people who lived in perfect harmony with their natural environment. The Oscar-winning movie Dances with Wolves helped to popularize this view of Native Americans, whose idyllic way of life was destroyed by the invasion of whites who, as the main character claimed, “had no soul.” The private-property ethos of these invaders ultimately resulted in Native Americans’ being shunted to reservations, where they lost their way of life, while whites plundered the environment and brought death, chaos, and the near-extinction of the buffalo.

While such beliefs may satisfy the romantic notions of modern political correctness, they are not true. Some important scholars not only are out to set the record straight, but also present alternatives for Native Americans that can give them a better life than exists today on the reservation. Terry Anderson, Bruce Benson, and Thomas Flanagan have edited Self-Determination: The Other Path for Native Americans. It is no accident that they use the term “the other path”; that is what Hernando de Soto urged South Americans to take instead of the “shining path” of communism and socialism.

Anderson is one of the founders of the Property and Environment Research Center, which promotes “free-market environmentalism” (that is, environmental solutions sans the heavy hand of government coercion that goes with statist environmentalism). He long has researched the history of Native Americans and has found many examples of private property ownership among them, ownership patterns that existed long before the arrival of white Europeans. The contributions of Benson and Flanagan to law, property rights, and other such subjects are well known in the economics profession.

The book seeks to do two things, and it does them successfully. First, it seeks to set the record straight about Native Americans and explode the socialistic and environmental mythology that surrounds this subject. As Nobel Prize-winning economist Douglass North writes in the introduction:

The history of Native Americans has been fundamentally colored by the perceptions—or the belief systems, if you will—of the writers. This is true of all history, but is particularly so in this case. Whether written as a story of conquest, exploitation, paternalism, or greed, it deserves a better story—one that tries to comprehend the complex evolution of Native Americans from their lifestyles before the advent of European occupation.

Second, the book outlines strategies by which Native Americans can break free of the governmental paternalism that not only robs them of their individuality, but also leaves them in poverty and ruin. In a series of ten essays, from “False Myths and Indigenous Entrepreneurial Strategies” to “Property Rights and the Buffalo Economy of the Great Plains” to “Indian Casinos: Another Tragedy of the Commons,” the various writers deal with the real history of the indigenous peoples of North America and point toward another path for those who, in North’s words, deserve “a better story.”

While the briefness of this review keeps me from examining each essay, I wish to single out the first two. The first explodes the myths about Native Americans, and the second looks at the near-eradication of the buffalo from the Great Plains. Craig S. Galbraith, Carlos L. Rodriguez, and Curt H. Stiles in “False Myths” lay out the following viewpoints, and then debunk them with historical facts:

•  Native Americans were purely communalistic;

•  Indigenous populations were collectivist in economic relationships;

•  Indigenous people were the original “environmentalists.”

These myths, they point out, are modern in orientation and reflect a romantic view that came more from our own cultural revolution than historical fact.

Likewise, in his chapter on the “buffalo economy,” Benson notes that Indian tribes already had mostly eradicated the buffalo from the Great Plains even before the onslaught of white settlers and the famed buffalo hunters.

For those who believe that Native Americans really do deserve better than the myths of communalism, this is a book worth reading.

William Anderson teaches economics at Frostburg State University in Maryland.

* * *

The Wal-Mart Revolution

By Richard Vedder and Wendell Cox

American Enterprise Institute • 2006 • 199 pages • $20.00 paperback

Reviewed by George Leef

Without a doubt, Wal-Mart is the most demonized business in American history. The company is widely accused of mistreating and underpaying its workers, ruining communities, aggravating the trade deficit, and that all-purpose sin, “putting profits before people.” No Democratic candidate for national office dares to utter anything but condemnation for fear of appearing “soft” on this horrible scourge.

And yet, despite the constant stream of attacks, the firm attracts vast numbers of customers every day. Wal-Mart keeps growing, and whenever it opens a new store—even in “blue” areas of the country—it is thronged with job applicants.

So what’s going on? Has a corporate monster managed to hoodwink the masses to keep them from seeing its villainy? Or are the critics trying to create an enemy to hate, as in 1984, for their own purposes?

In their book The Wal-Mart Revolution, economist Richard Vedder and public-policy consultant Wendell Cox take a clear, unemotional look at Wal-Mart, beginning with its rise from a tiny Arkansas retailer to America’s largest company, and then examine the charges made against it. To summarize the authors’ conclusions: Wal-Mart has been successful because its founders figured out how to satisfy consumers better than their competitors, and the critics’ case against it is much ado about almost nothing.

Regarding Wal-Mart’s efficiency, Vedder and Cox compare founder Sam Walton with that business genius of a century ago, John D. Rockefeller of Standard Oil fame. Both were highly innovative, hard-working, self-made men who set a personal example for their employees. Both knew how to get the most value for a dollar. Both succeeded by cutting prices to expand their customer bases. And both opposed unionization of their operations, seeing it as the enemy of efficiency. The combination of large profits and unwillingness to cave in to demands for collective bargaining made both Standard Oil and Wal-Mart targets for a swarm of egalitarian social critics.

The middle chapters of the book are devoted to an analysis of the charges that Wal-Mart is a social menace. Does the company underpay its workers? Vedder and Cox show that Wal-Mart employees are paid comparably with other retail workers. As to the comparison that is often drawn with big-box rival Costco (which doesn’t resist unionization and therefore escapes criticism), the authors note that while the average compensation for Costco workers is somewhat higher, that is accounted for by the fact that many Wal-Mart stores are located in rural areas where wages are lower.

What about benefits, particularly health insurance? The critics say that Wal-Mart should give most or all of its workers health-insurance coverage, but doesn’t. The greedy company is therefore a drain on taxpayers since some of its employees who don’t have company insurance have to turn to Medicaid. In response, Vedder and Cox observe that there are also many workers at other retailers who don’t have health-insurance coverage; furthermore, many Wal-Mart employees neither want nor need health insurance through the company. They prefer to take their compensation in other forms. Also, the critics ignore two very substantial benefits employees receive—profit-sharing and employee discounts.

If workers felt that Wal-Mart was underpaying them, the company would have trouble maintaining its workforce. It doesn’t.

Another emotion-laden attack against Wal-Mart is that when it opens a new store the result is often the demise of many small mom-and-pop stores in the area. That can happen, of course, when any modern store opens. Unless we want laws to prevent customers from preferring new and efficient things to old and inefficient things, this “problem” is unavoidable. Again, Wal-Mart is being singled out for the crime of competing too well.

It is no coincidence that the rabid Wal-Mart critics come mostly from labor unions. Unions represent many workers in competing retailers, and those companies, beset by inefficient union work rules, fare poorly against Wal-Mart. The supposedly high-minded campaign against Wal-Mart is actually driven by self-interest.

Vedder and Cox are not Wal-Mart fans, though. They merely argue that the company should not be treated differently than other businesses. They come out firmly against tax breaks and other incentives to lure Wal-Mart (or any other employer) to an area. They’re also against Wal-Mart (and any other business) seeking cheap real estate through eminent domain.

Finally, they criticize the company’s recent public-relations efforts as foolish attempts to “appease the unappeasable.” In recent years, Wal-Mart spokesmen have endorsed, for example, a higher legal minimum wage. The authors give that two thumbs down. They’re rightly appalled at the spectacle of successful capitalists trying to cozy up to the enemies of the free market by advocating increasing governmental coercion in voluntary business relationships.

George Leef is book review editor of The Freeman.

* * *

On the Wealth of Nations

by P.J. O’Rourke

Atlantic Monthly • 2007 • 242 pages • $21.95

Reviewed by Raymond J. Keating

Here’s a great idea for a book: Have the leading libertarian, free-market humorist and satirist P.J. O’Rourke show readers why An Inquiry into the Nature and Causes of the Wealth of Nations ranks as a book that changed the world. Whoever came up with that idea at the publishing house deserves a bonus.

After all, few books have had such a monumental and positive impact on mankind as Adam Smith’s Wealth of Nations. But anyone who has read this weighty tome also understands that Smith offered little evidence of a sense of humor. So, enter O’Rourke.

P.J. O’Rourke’s On the Wealth of Nations is well worth reading. It’s fun—with some laugh-out-loud observations one expects from him—and sometimes insightful. However, it also falls glaringly short on occasion.

O’Rourke grasps the basics from Smith. He observes in the first chapter, “Smith illuminated the mystery of economics in one flash: ‘Consumption is the sole end and purpose of all production.’ There is no mystery. Smith took the meta out of physics. Economics is our livelihood and just that.” A bit later O’Rourke continues: “Even intellectuals should have no trouble understanding Smith’s ideas. Economic progress depends upon a trinity of individual prerogatives: pursuit of self-interest, division of labor, and freedom of trade.” He declares that the essence of Smith’s thinking on the economy is: “It’s none of our business.”

O’Rourke does an able job in laying out the essentials of Smith in these areas, including the importance of property rights and why the private sector works better than government. On government planning, for example, he pithily proclaims: “Smith’s strategy was to convince the people who guide the world’s economy to get lost.”

It should be noted that this is not just a book about The Wealth of Nations. Also featured is an entire chapter on Smith’s earlier book, The Theory of Moral Sentiments. O’Rourke realizes that one cannot fully understand Smith and The Wealth of Nations without also grasping what he had to say in The Theory of Moral Sentiments.

Indeed, O’Rourke’s chapter on Sentiments perhaps ranks as the best in the book. He ably explains the roles that sympathy and imagination play in Smith’s thinking on morality. O’Rourke notes, “Adam Smith personified these conscious imaginative judgments and named our brain’s moral magistrate the ‘Impartial Spectator.’” Taken together, O’Rourke explains, “It’s a mistake to read The Wealth of Nations as a justification of amoral greed. Wealth was Adam Smith’s further attempt to make life better.”

But there are areas where O’Rourke is muddled. That’s most seriously the case when it comes to money. For example, O’Rourke writes that Smith “realized that money was not a government asset, but a government liability.” Wrong—money is neither a government asset nor a liability.

On trade deficits, O’Rourke correctly notes Smith’s arguments against the mercantilists’ emphasis on the balance of trade, and rightly bemoans the fact that those notions persist today, especially in politics. But it’s unclear if the author gets the whole story straight, with money again perhaps causing some confusion. For example, O’Rourke notes that trade deficits mean that money is sent overseas and therefore “American IOUs are piling up.” While acknowledging that “an international ‘current account deficit’ is not comparable to a private debt,” he can’t shake the mistaken notion that it is some kind of debt. In reality, a U.S. current account deficit usually reflects a growing U.S. economy resulting in more purchases of imports and/or increased investment from abroad.

Smith’s simplest declaration on money was: “The sole use of money is to circulate consumable goods.” O’Rourke should have quoted that line, offered an amusing anecdote, and left it at that. He also quoted Smith’s statement that “Nothing can be more absurd than this whole doctrine of the balance of trade.” Again, it would have been better to stop right there.

Adam Smith can be a joy and a challenge. Does P.J. O’Rourke provide some help in better understanding Smith in On the Wealth of Nations? Most of the time, the answer is yes, but not always.

Without a doubt, though, P.J. O’Rourke is funnier than Adam Smith. O’Rourke also is funnier than today’s economists. Don’t get me wrong. There are some very amusing economists out there. Just flip on CNBC most days. The difference is that O’Rourke means to be funny. Those economists do not. We laugh with O’Rourke. But we laugh at those economists because their misguided pronouncements on how the economy works reveal a drift far from the fundamentals laid out by Adam Smith. So, what should the reader do? It’s simple. Read Adam Smith, read P.J. O’Rourke, and change the channel when one of those hilarious economists comes on television.

Contributing editor Raymond Keating is chief economist for the Small Business & Entrepreneurship Council and a columnist with Newsday.

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