Constitutional Restraints, the Market Economy, and Individual Freedom

Professor Shannon teaches in the Economics Department, Clemson University.

He sat at a table, and the light of his lamp fell on the copy of an ancient document. He had marked and crossed out the contradictions in its statements that had once been the cause of its destruction. He was now adding a new clause to its pages: “Congress shall make no law abridging the freedom of production and trade . . . .” —Atlas Shrugged[1]

In his new book Bound to Be Free[2] economist Richard B. McKenzie echoes this constitutional proposal from Ayn Rand’s epic novel. He urges us also to impose limitations on federal tax revenues and monetary growth. Through this approach, he believes we can restore the personal freedom which promotes both our individual growth and economic development.

His is, of course, not a solo voice—merely one in a growing chorus which includes Nobel economists Friedrich Hayek and Milton Friedman as well as tax reformer Howard Jarvis. Together they seek to constrain not only liberal idealists with their social schemes but also conservative businessmen who seize government powers for their selfish ends.

Of course, government policies are not the only source of current discontent; disappointment with the enterprise system and distrust of business are also widespread.[3] But much of such distress flows from failure to analyze and understand market forces. A while back, for example, I overheard a lady excoriate American automobile companies for failing to produce more fuel- efficient cars. She apparently believed that General Motors and Ford, not to mention Chrysler, are managed by idiots and incompetents. Yet the “failure” she perceives is quite readily explained without resorting to such charges.

After all, the American auto companies have for over two decades been producing such small cars as the Camaro, the Falcon, and the Valiant. Even before that, American Motors devoted its main productive efforts to this end. But the American public treated these offerings with disdain. Small was not beautiful. And no wonder! Gas was so cheap that it made economizing unnecessary, even silly. And for those who worry about safety, there continues to be much evidence that bigger is better.[4]

In fact, government regulation has frequently been the factor that frustrated moves toward fuel efficiency. Mandatory guidelines for safety equipment—some of it amazingly redundant, like seat belts and padded dash boards—not to mention stringent goals for improved auto emissions, have been hopelessly contrary to efforts to improve engine economy. Now in desperation GM has announced it will import greater numbers of Japanese cars for sale here under its own name.[5]

Wasteful Use of Resources

Indeed, there is much evidence that the free market, overall, does a far better job of allocating our scarce resources to their socially optima] use than government bureaucrats can. A vivid example showing that government management is not inherently superior is the approach taken by the Forest Service in managing our timber resources. As explained recently by Thomas M. Lenard of the Office of Management and Budget, the Forest Service imposes a “non-declining even flow” scheme for cutting trees which, Lenard says, “arbitrarily limits the timber harvest in any one period and stretches it out for decades beyond the point of economic efficiency.” In another policy the Service prevents trees from being cut “until they reach the age that maximizes average annual growth. It is based on biological criteria and has no economic rationale,” Lenard notes.[6]

According to one estimate Lenard quotes, if these policies were eliminated and timber production were concentrated in the most productive areas of our national forests, wood production might increase by as much as 74 percent—requiring 27 percent fewer acres! And the marvelous fact is that this process would not only allow more timber production (with the associated benefits of reducing construction costs, which would give the housing industry a needed boost); it would also “triple the amount of forest land in the area on which timber harvesting is not permitted,” thereby greatly increasing the area available for recreational purposes. Under such an improved management system, both private and public uses of our valuable timber resources would flourish.

Of course, a privately managed firm may similarly excel at inefficiency. In fact, it would be easy to offer a long list of examples. But if a business is poorly run, its profits will drop, its shareholders will dispose of their stock, and the company will quietly disappear. Like W. T. Grant, it may not even be remembered by a tomb. Or, as in the case of General Motors with its Frigidaire appliances, if the parent company can no longer manage a subsidiary effectively, it will sell it off.

Free of Competition

But how often can we anticipate that process with government? We are usually far less certain that pressure will come to bear to assure that, if a government agency is not using resources efficiently, it will be replaced by someone who can.

In fact, private producers so envy the security which government management provides that they frequently seek to take advantage of it. Chrysler and Lockheed are but two of the companies which in recent years have benefited from government bailouts. A multitude of other producers have received assistance in substantial but far less obtrusive ways.

A striking case in point is the “filbert fracas” in Oregon. A couple of years ago that state tightened up quality standards for filberts to prevent “decayed” nuts from appearing on the market. Consumers had not complained; it was producers who sought the rule. As reported in Regulation, this new rule automatically became part of the federal marketing standards and thereby was imposed on the entire nation.[7] Here is what followed: “imported filberts, most of which come from the Black Sea regions of Turkey, are air-dried in the traditional way and shipped at ambient temperatures, whereas the American nuts are uniformly machine dried, inspected as soon as they are shelled, and then shipped under refrigeration. According to Agriculture Department estimates, 46 percent of shelled filbert imports surveyed recently would fail the new and stricter test. Importers often would not know in advance whether a particular shipment would pass the test, however, and a nutty cargo turned back at an American port would have to spend another eight weeks at sea for the return trip. The combination of uncertainty and expense would be enough, importers say, to keep out 80 percent of the foreign nuts.” In effect, the ruling neatly disposed of much, if not all, foreign filbert competition, to the benefit of Oregon filbert farmers but to the detriment of consumers. In fact, some activist consumer groups have condemned the filbert ruling and urged its repeal.

Of course, this is but one example from a large array of cases where American producers have sought protection from foreign imports. Some attempts at stifling free markets, such as those by producers of cars and textiles, have received widespread publicity. Most, however, like the case of filberts, are unknown and go unnoticed. A while back, the Washington Post noted that import restrictions have been sought on such diverse items as canned Bartlett pears, ice cream sandwich wafers, bicycle speedometers, plastic mattress handles, water circulating pumps, and dried eggs.[8]

Why do economists object to such trade restrictions? Primarily because they raise costs and reduce choices for consumers. While producers find their profits enhanced, consumers are impoverished. But as McKenzie stresses in his book, such policies designed to help producers and maintain employment in one industry also have the secondary impact of hurting producers and reducing employment in other industries.[9] In effect, businessmen are using government to wage a wasteful war among themselves.

A notable example involves policies designed to inhibit “dumping” of foreign steel in our markets. Whatever the justice of helping our steel industry may be, one baleful effect is to raise the cost of steel for American automobile producers. They are now forced to pay more for steel, even if they don’t actually buy from foreign sources. As a result, GM, Ford, and Chrysler find it more difficult to compete with their German and Japanese rivals, who can produce cars using less expensive foreign material.

But that too is just one example among a vast multitude of others. Peter Paul Cadbury and Entenmann’s have opposed the filbert ruling because it would raise the prices of their candies and pastries, thereby discouraging sales and dampening profits. A more notable current case involves the quotas on sugar ira-ports imposed by the Reagan administration. Although designed to relieve distressed domestic sugar growers, the quotas came as a cruel blow to some independent U.S. refiners of sugar imports. A few even foresaw the possibility of having to close down.[10]

Minorities vs. Majorities

Too often, these secondary effects of selfish policies sought by producers are not foreseen. Moreover, those who benefit are commonly concentrated; those who are harmed are usually dispersed. Thus a minority may readily achieve its goal at the expense of the majority. In the end, the social costs outweigh the social benefits.

But along with selfishness is another fault—simplicity. A crucial underlying failure of advocates of government regulation and control is that they almost always ignore the variety of individual talents and tastes. This profound fact provides a vital, underlying thrust in McKenzie’s work.[11]

For emphasis and illustration, McKenzie refers to economist Frank Knight, who “used to puzzle his students at the University of Chicago with the elementary question, ‘What is an apple?’ If called on, we can all identify an apple, but once we reflect seriously on the puzzle, we begin to understand that apples are different things to different people.”[12] For growers, they are a source of profits; for cooks, the basis of pies; for students, a gift to teachers. Spelled with a capital A, they are now a vibrant force in the burgeoning computer industry!

The critical point which Knight and McKenzie stress is that all of us are essentially different. In fact, human beings are as unlike as snow-flakes—or our fingerprints. One man who has dwelt at length on individual variety, Roger J. Williams, past president of the American Chemical Society, points out in a book called Free and Unequal: The Biological Basis of Individual Liberty that even our handwriting and breathing patterns are distinctive.[13]

What is particularly crucial here, however, is the variety in people’s tastes. It has been revealed through tests with a substance called phenylthiocarbamide. According to Williams, in one study involving over six thousand people, “65.4 percent said it was bitter, 21.3 percent pronounced it tasteless, 5.4 percent said it was sour, 4.8 percent said salty, 2.1 percent said sweet, and the re maining 1.9 percent thought it tasted like miscellaneous fruits and vegetables—rhubarb, lemons, cranberries, etc.”[14] Williams even notes a dramatic difference in our ability to smell. “I know of three individuals,” he says, “who have ordinary sense of smell in most respects, but are unable to smell the odor of skunk, even when it is very strong. To most people the skunk odor is most un pleasant. I know of two individuals whose reaction is different. One likes the odor. The other likes it if it is not too strong.”[15] With such disparity of tastes, no wonder there are now so many kinds of cars, clothes, and even breakfast cereals!

The Wondrous Brain

Carl Sagan gives further evidence of individual variety in his discussion of the human brain, which, Sagan says, functions through the use of connecting links called “synapses.” According to Sagan, “the human brain is characterized by some 1013 synapses. Thus the number of different states of a human brain is 2 raised to this power—i.e., multiplied by itself ten trillion times. This is an unimaginably large number, far greater, for example, than the total number of elementary particles (electrons and protons) in the entire universe.”[16]

These amazing numbers boggle the mind. It cannot comprehend itself! What are the implications? Sagan continues: “It is because of this immense number of functionally different configurations of the human brain that no two humans, even identical twins raised together, can ever be really very much alike. These enormous numbers may also explain something of the unpredictability of human behavior and those moments when we surprise even ourselves by what we do. Indeed, in the face of these numbers, the wonder is that there are any regularities at all in human behavior.”

Confronted by this astonishing variety, Sagan reaches a dramatic conclusion. “The answer must be that all possible brain states are by no means occupied; there must be an enormous number of mental configurations that have never been entered or even glimpsed by any human being in the history of mankind. From this perspective, each human being is truly rare and different and the sanctity of individual human lives is a plausible ethical consequence.”

How does an economist view this variety? At least one has spoken directly to the point. Friedrich Hayek notes that “the knowledge which any individual mind consciously manipulates is only a small part of the knowledge which at any one time contributes to the success of his action.”[17] No one knows fully the factors which enter into his motivation and his behavior. But, more importantly, no outsider can possibly discern all that dwells within another’s brain. Furthermore, Hayek says, “the sum of the knowledge of all the individuals exists nowhere as an integrated whole. The great problem is how we can all profit from this knowledge, which exists only dispersed as the separate, partial, and sometimes conflicting beliefs of all men”[18]

No One Knows

The futility of trying to plan and organize human activity centrally is admirably evoked in a recent statement by Dennis O’Brien, a deputy assistant secretary of our Department of Energy. “All forecasters, both in the government and in the private sector,” O’Brien states, “have been awful at figuring out where the energy markets were headed the past few years.”[19] No one possesses sufficient information and insight to predict even the energy future accurately.

Given the variety and essential mystery of human tastes and drives, what are the implications for social organizations? How can we best tap these various skills and tastes? For Hayek as well as for McKenzie, Friedman, and others, the answer is simple and straight-forward: free markets.

This suggestion is, of course, not new. Two hundred years ago Adam Smith wrote in a famous passage which McKenzie quotes: “by directing that industry in such a manner as its produce may be of the greatest value, [an individual] intends only his own gain, and he is in this . . . led by an invisible hand to promote an end which was no part of his intentions. Nor is it always worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.”[20]

Almost a century later in his famous essay On Liberty John Stuart Mill echoed Smith: “it was once held to be the duty of governments, in all cases which were considered of importance, to fix prices, and regulate the processes of manufacture. But,” Mill continued, “it is now recognized, though not till after a long struggle, that both the cheapness and the good quality of commodities are most effectively provided for by leaving the producers and sellers perfectly free, under the sole check of equal freedom to the buyers for supplying themselves elsewhere.”[21] He further noted, in complete accordance with the illustrations previously presented, that “restrictions on trade . . . do not really produce the results which it is desired to produce by them.”

Mill was so outspoken an advocate of individual liberty that a few years ago the American economist Paul Samuelson commented in his presidential address to the American Economic Association: Mill’s “views on liberty will, even in the post-Freud world, never go out of date and can perhaps best be summarized in the words of Mrs. Patrick Campbell, Bernard Shaw’s pen- mis-tress: People should be allowed to do anything they like—provided only they don’t scare the horses in the street.”[22]

Can Consumers Be Trusted to Guide Economic Action?

But do the ideals of Smith and Mill still hold? After all, the scale of industry has vastly changed. Can we depend, in this complex and cosmopolitan age, on the luxury of allowing self- centered individuals to be the fundamental guiding mechanism for production?

In fact, there is evidence that we not only can but must. After all, even now, in order to make a profit, particularly over the long haul, producers must provide a good or service which consumers want. Somehow, if they are to survive, they must determine what it is that millions of Americans truly desire.

Indeed, as McKenzie points out, the invisible hand and free markets evoke the very essence of individualism. “If we were all alike in preferences and abilities—identical—there would be no basis for so many of the markets we observe in the real world.”[23] It is because, while some of us are gardeners or golfers, others are numismatists, philatelists, spelunkers, and scuba divers that the multitude of markets exists.

There is another element besides individual tastes to consider and that is individual talents. Since they also differ, we need a system of social organization which encourages all people to develop their own individual skills. This certainly entails selfishness of sorts, but it has some admirable social advantages. Two modern writers have expressed the matter as follows: “Concern for others implies concern for oneself in the following way: to be concerned for the well-being of another is to want to contribute to that well-being; but we can contribute nothing of worth to others unless we have taken the trouble to cultivate resources in ourselves, and this implies self-concern.”[4] As John Stuart Mill put it: “In proportion to the development of his individuality, each person becomes more valuable to himself, and is therefore capable of being more valuable to others.”[25] We cannot, in short, give to others unless we have something of our own to give.

The Virtue of Individualism

Individualism thus construed is not the epitome of selfishness or self-centeredness. It is not a social vice but rather a social virtue. It is in finding ourselves that we can best use our talents for the social good. In his work The Constitution of Liberty, Friedrich A. Hayek quotes a passage from H. B. Phillips which underlines this point: “In an advancing society, any restriction on liberty reduces the number of things tried and so reduces the rate of progress. In such a society freedom of action is granted to the individual, not because it gives him greater satisfaction but because if allowed to go his own way he will serve the rest of us better than under any orders we know how to give.”[26]

In studies of American and British industrial development over the last two centuries, much is often made not only of the sordid state of working conditions but also of the “Robber Barons” whose greed seemed bound to destroy both our natural and our human resources. Too little has been said of inventors and entrepreneurs whose new ideas and initiative unleashed a plethora of revolutionary innovations.

In Britain two centuries ago there was, for example, the remarkable coterie including James Watt, Matthew Boulton, Josiah Wedgwood, and others who comprised the Lunar Society of Birmingham.[27] In the U.S. during the late 1800s there was an even greater host of innovative individuals, most conspicuously Thomas Edison but including also many others such as Borden, Swift, Armour, Walgreen, Eastman, and Birdseye. Their stories have been marvelously retold by Daniel Boorstin in his book The Americans: The Democratic Experience.[28]

Nor have we any reason to believe that individual variety and initiative are any less lacking today than in the past. Examples run the gamut from such medical advances as CAT scanners and interferon, to cable TV and video games, even to a report in the Wall Street Journal that, despite all the furor over nuclear weapons and waste, residents of one town in Colorado are actively seeking establishment of a low-level nuclear-waste dump in their area for the jobs it would provide. (Their promotion of the project includes bumper stickers which read “Nuclear Power Plants are Built Better Than Jane Fonda!”)[29]

To solve all our energy, environmental, and economic problems, is it not essential that we allow all possible opportunities for the full development of individual talents and diversity? In his book, McKenzie rightly deprecates many Keynesian economists for prescribing government deficits which have unleashed an unwarranted (and often unwanted) expansion of government’s role. However, it should be noted that the famous British economist is not always well read by his own disciples. If they paid close attention to his famous work, The General Theory of Employment, Interest and Money, they would discover toward its end what may well be one of the most eloquent passages ever written about the advantages of individualism.

“Let us stop for a moment to remind ourselves what these advantages are,” Keynes wrote. “They are partly advantages of efficiency—the advantages of decentralization and of the play of self-interest. The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogenous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.”[30] In Keynes’ view, both the individual and society reap a great harvest from planting the seeds of free choice and initiative.

Thus it is that McKenzie and others advocate adoption of Constitutional constraints on government. Surely, some flexibility will be sacrificed. Moreover, it remains true that government has important roles to play, providing for “public” goods such as defense and dealing with “externalities” such as pollution. Some people would also reasonably require efforts to protect consumers from fraud.

A Dangerous Course

While it can be admitted that the distribution of income provided by a free market economy may not be ideal, it is still not clear that government intervention will improve on matters. In fact, the danger in our present course is that, without some effective constraints on both liberals’ and conservative businessmen’s redistributive schemes, both economic growth and the individual freedom that enable incomes to rise will be eroded to the point of extinction. That is a possibility no less awesome than a nuclear holocaust.

Right now, many people, out of deep concern for both ourselves and our posterity, seek to avoid that awful destiny by advocating a nuclear weapons freeze. Isn’t it equally essential to lend our efforts to developing policies to assure that markets and individuals are free? []

1.   Ayn Rand, Atlas Shrugged (New York: Signet, New American Library, 1957), p. 1083.

2.   Richard B. McKenzie, Bound to Be Free (Stanford, Calif.: Hoover Institution Press, 1982).

3.   "The Recession Sours Voters on Business,” Business Week, May 31, 1982, p. 13.

4.   “. . . the death rate, calculated per registered vehicle, for subcompacts from 1978 to 1980 was more than twice that for full-size cars.” Dale D. Buss, “Small Cars May Save Fuel but Cost Lives, Safety Experts Think,” Wall Street Journal, April 27, 1982, p. 1.

5.   John B. Schnapp, “GM Shakes Up the Auto Industry,” Wall Street Journal, May 26, 1982, p. 30.

6.   Thomas M. Lenard, “Wasting Our National Forests,” Regulation, July/August 1981, pp. 29 36.

7.   "Dispatch from the Nut Wars,” Regulation, January/February 1982, pp. 8-10.

8.   Jane Seaberry, “Dumping Cases: Ice Cream, Steel, Carts and Pears,” Washington Post, May 4, 1980, p. GI.

9.   McKenzie, pp. 120-22.

10.   "Sugar Imports to Be Limited, Reagan Decides,” Wall Street Journal, May 5, 1982, p. 4; “Sugar Refiners’ Group Files Lawsuit to Halt Quotas on Imports,” Wall Street Journal, May 12, 1982, p. 47. Indeed, the Reagan Administration’s stance on “free trade” has been the subject of some sharp attacks; see Sheldon L. Richman, “Examining Reagan’s Record on Free Trade,” Wall Street Journal, May 10, 1982, p. 30, and Clifton B. Luttrell, “Reagan’s Farm Economics,” Competition, III (May 1982), pp. 8-9.

11.   See especially Chapter 3.

12.   McKenzie, p. 55.

13.   Roger J. Williams, Free and Unequal: The Biological Basis of Individual Liberty (Indianapolis: Liberty Press, 1979), Chapter 4.

14.   Ibid, p. 63.

15.   Ibid., p. 70.

16.   Carl Sagan, The Dragons of Eden: Speculations on the Evolution of Human Intelligence (New York: Random House, 1977), p. 42.

17.   Friedrich A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), p. 24.

18.   Ibid, p. 25.

19.   George Getschow, “More or Less Oil Will Go Up or Down or Maybe It Won’t,” Wall Street Journal, May 5, 1982, p. 1.

20.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1937), p. 423.

21.   John Stuart Mill, On Liberty, in Edwin A. Burtt (ed.), The English Philosophers from Bacon to Mill (New York: Modern Library, 1939), p. 1024.

22.   Paul A. Samuelson, “Economists and the History of Ideas,” American Economic Review, LII (March 1962), p. 11.

23.   McKenzie, p. 63.

24.   David L. Norton and Mary Kille Norton, review of Sex Without Love by Russell Vannoy, in Reason, May 1982, p. 57.

25.   Mi[11], p. 998.

26.   Hayek, p. 9; quotation is from H. B. Phillips, “On the Nature of Progress,” American Scientist, XXXIII (1945), p. 255.

27.   Lord Ritchie-Calder, “The Lunar Society of Birmingham,” Scientific American, June 1982, pp. 136-45.

28.   Daniel J. Boorstin, The Americans: The Democratic Experience (New York: Vintage Books, Random House, 1974).

29.   Eric Morganthaler, “To Keep Their Town Alive the Residents of Naturita, Colo., Want a Nuclear Dump,” Wall Street Journal, July 1, 1982, p. 21.

30.   John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace and World, 1964), p. 380.

The Authoritarian Society

The authoritarian society is the natural and stable form of society because it is in solid conformity with the survival characteristics of the human being. It is dominant in history. Once established it tends to perpetuate itself because those wielding power seldom give it up short of bloodshed. If an authoritative state is overthrown through organization and exercise of still greater physical power, then the wielders thereof won’t let their power go after they have won. They just become the new set of rulers. Hence, much of human history is the story of a squirrel- cage succession of one authoritative regime after another from which the people almost never break out, as you may see in many countries of the world. George Washington was the exception. He refused to become our king; he gave up his wartime powers and insisted upon establishment of a representative republic of limited power. He uniquely opened the door to the squirrel cage. We can, of course, crawl back into the cage, well-baited with promised security; and the door will then snap shut.

—Bradford B. Smith, “Our Unique Economic System”

Further Reading