All Commentary
Friday, April 1, 1977

Interventions and Their Consequences

Mr. Husbands of San Francisco is a member of a national investment banking firm. He is a Trustee and past Chairman of the Board of The Foundation for Economic Education. This article is from his ad­dress at the Fall Meeting of the Board and guests at the Foundation, December 5, 1976.


It is no longer unusual to read and hear expressions of discontent about the role of government in our lives. The proliferation of interven­tions and the resultant economic dislocations have made almost everyone aware that something is amiss with the notion that govern­ment can solve problems in man’s creative affairs.

I propose to offer here some ran­domly picked examples of how government interventions almost invariably cause results directly op­posite to what their proponents en­visaged. Though I am primarily stressing economic consequences, what may be more important than the economic cost is the creation of conditions which reward behavior that would be considered not only unnecessary but often reprehensi­ble in a limited government society. This corruption of moral sensibility can affect both the perpetrators of interventions and those in or out of government who might be charac­terized as innocents or merely naive.


For morality to be demonstrated, a prerequisite is an element of choice. Interventions reduce choice and by their nature are discre­tionary, arbitrary and discrimina­tory. At a minimum, they cannot meet the universality test of a moral action. As police power is used to favor one side of an otherwise freely chosen transaction, it is my contention that there is a dim­inution of such virtues as integrity, consistency, humility and serenity, with the opposite characteristics of deceit, contradiction, arrogance and envy filling the void. Both those who cry out for favor and those who pander to their appeals are con­tributors to the malaise.


Of course, all men are capable of expressing those qualities, both good and bad, and therefore they are present in abundance in both the socialist and relatively free societies.


As an aside, it is the institutional­izing of evil in the totalitarian systems—systems which, paradox­ically, purport to change man’s nature for the better—which has brought about horrors inconceiv­able even to medieval torturers. The worst of those horrors, however, may not be the mass elimination of mankind through deliberate exter­mination and war, but the turning on its head the meaning of truth and integrity—in other words, the destruction of conscience.


The Market as Regulator


In a free society any tendency for man to cheat, lie and arrogantly abuse his neighbor is continually checked by the necessity for people to live in free association. Each is dependent on the good will of his customers, benefactors, stockhold­ers or employees, any of which can “stop drinking tea” with one who would abrogate that relationship.


In posing a number of disparate examples of the results of interven­tions, I should first like to touch on the law itself, and see how the emergence of politicized decisions has affected that most fundamental element in a free society.


I approach the law in a spirit of humility, and trust that my very naïveté and lack of formal training in the law may lend an uncluttered aspect to my observations. For those of us who are convinced of the verities of limited government, the law based on a concept of the natural rights of man is the founda­tion of our faith for it essentially defines the role of government and sanctifies the individuality of the citizen. On the other hand, the growth of sociological jurispru­dence has found a partnership in the arbitrary, fiat actions that necessarily flow out of the collec­tivist state.


Roscoe Pound’s championship of the sociological school, along with the pragmatism of John Dewey, are apparently modern-day manifesta­tions of those Machiavellian prescriptions to his Renaissance prince. As has been noted, “the om­nipotence, unrestrained by law or morality”—that Machiavelli both ascribes and prescribes to the prince—is a product not so much of his scientific detachment as of his tendency to view political power as a value, as an end in itself.


Laws to Reform Us


As the power of government grows, not only will the man of in­tegrity, consistency and humility be shut out of any government func­tion both by his own will and that of others, but the law must necessarily lose its predictability, its fairness, its restraint. It will become instead the thrusting instrument of socio­logical trends and fads, a threat to civil liberties while exclaiming the opposite, a penalizer of productivity and a cannibal of the natural law itself. Frederic Bastiat’s ideal of the law, as I see it, has a great deal of inherent resiliency if nurtured and not abused. But if politicized, it quickly turns and must inevit­ably—and no matter the sincere motives of its advocates—become anti-law, a program to defile any rational meaning to the law.


I fully respect those who teach the law, and hope their students will help return us to the law’s more limited construction. But I cannot help wondering if the very number of practicing attorneys per capita may be an indication of something amiss.


The United States presently has licensed in excess of 400,000 at­torneys, the ratio being on the order of one attorney for each 530 people.


At the beginning of the century the number was one to 1,100 Ameri­cans. Japan has a ratio of one to 10,300. While we can recognize the great cultural differences between Japan and the United States, these figures nevertheless are an indica­tion that the law may be being abused, that there is among us a no­tion that every conflict, every slight, real or imagined, must be subjected to the full panoply of legal adjudication.


Shortly after I received these figures from the American Bar Association, I noticed an article in the October 1976 Harper’s by Jerold Auerbach, who teaches law at Wellesley , titled “A Plague of Lawyers.” To me the most interest­ing thing in his article is his at­tributing the proliferation of lawsuits and resort to the Courts to the assertion of individuality. He says, “A society in which individual rights are paramount requires an abundance of lawyers to defend and process them. In a society where lawyers abound, contentious in­dividualism flourishes.”


Laws Bring Lawsuits


I would propose that individual­ism as brought about within the restraints of our Judeo-Christian heritage cannot account for our litigious society. On the contrary, it seems much more plausible that it is the substitution of socialist nostrums on what used to be an in­dividualist and responsible ethic which has been responsible for this lawsuit phenomenon. What could be a finer inducement to sue your better-off neighbor than for govern­ment to declare openly and imply covertly that it is one of its func­tions to make men equal, not only before the law, but also in material possessions. Interestingly, as it strives for redistribution it gradual­ly but inexorably reduces equality before the law.


Recently an Alaskan jury allowed that a man using a pistol with a design basically unchanged for 100 years should be awarded $3,500,000 for shooting himself in the foot and from which shooting he suffered no permanent damage. Should the judgment be sustained in the Alaskan Supreme Court, the manu­facturer of the weapon would presumably be put in the position of not being able to buy insurance for his product, and with the size of those judgments, being of course unable to self-insure.


The engendering of envy often brought about through the law itself is the essence of adversary economics. Adversary economics in turn is the very fuel the Marxist would use to gain absolute political power. Paradoxically, at that point the need for lawyers drops to zero for judicial decisions are now political decisions. To weigh the evidence is then absurd and merely play-acting. I might add, the need for marksmen for firing squads seems to rise proportionately.


Robert Payne in his biography of Lenin noted that early in the Revolution, by 1918, Lenin had ac­quired the ominous habit, when asked what to do with dissidents, of writing back, “Shoot them,” so that in the end it became almost meaningless; it was like brushing off flies.


It is a long step from Lenin’s ex­ecutions to modern America . There are simply no comparisons. I would, however, contend that to the extent that envy and redistributionist theory motivate a jury, a regula­tory authority, or even companies hoping for a windfall, so will predic­table and even-handed justice be aborted. The decisions rendered will more clearly resemble those spring­ing naturally from the wholly politicized state.


The Vagaries of Antitrust


Professor Benjamin Rogge and D.T. Armentano among others, have made the persuasive case that antitrust law is inherently subjec­tive. Assuming their conclusions are correct, one trouble with an­titrust law is that it takes a still photo of a situation that is dynamic and bases its case on that snapshot or time slice. By the time the in­evitable decrees are laid down, the conditions have completely changed and the prescription which was never appropriate is even less so by the time it is enacted.


As Armentano says, the sacred cow of antitrust law takes for granted that firms indicted under the law actually raised prices, reduced outputs, produced shoddy goods, colluded with competitors, drove rivals from the market through predatory practices and abused their presumed monopoly power. As one reads his book, The Myths of Antitrust, it is readily ap­parent that the judges on the main decisions of the last 70 years or so had to make what were essentially subjective decisions. A fair man could have just as easily decided the case in the reverse. Consistency? Hardly!


As Business Week recently noted, “Enforcing antimonopoly law has become like the cold war. Almost any action of a company that dominates its industry can be considered hostile, and no one seems to know how to arrange a lasting truce in this area between Government and large companies.


“The law requires that an anti­trust decision be turned over to a single judge, who must reach his conclusion by shifting evidence through the intricacies of the legal process.


“In the IBM case the Govern­ment for its part was faced withsorting through 27 million documents, an index to which had been destroyed as the result of a settlement in the private suit that Control Data had brought against IBM.”


The Federal Trade Commission challenges the ARCO-Anaconda merger partly on the basis that a merger would lessen competition in copper mining. Now that doesn’t mean that ARCO is in the copper-mining business. The FTC has used what is known as the “protected en­try” argument, i.e., ARCO might have gotten into the copper mining business anyway, had they hot been enjoined from buying Anaconda, therefore the country might have had another competitor.


Open to Corruption


In what I view as such misuse of the law, the temptation to bribe and otherwise compromise integrity is obvious. I have on my desk a remarkable machine made by the Bunker-Ramo Corporation. On its display tube we can retrieve all the news on any publicly held company for the previous six months. For the masochist, one may also retrieve all the decrees and fiat actions taken by all the U.S. regulatory authorities for the same period. For in­stance, I currently have 19 pages of 9-line items on FTC decisions, each of which has a varying degree of im­pact on any individual company and the general economy, but few of which would likely have come out of a court of law a few years back. Yes, I know there is the right of appeal, but hundreds of staff members working frantically to justify their salaries can soon attenuate the will of a company to challenge each arbi­trary decision.


Though all defenders of free market philosophy would view the Federal regulatory authorities as arbitrary, one often hears reserva­tions about eliminating one or the other, on the basis that though fiat lawmaking in general may be bad, in this one particular instance, parts of a commission should be kept because there would be nothing to fill the vacuum were it eliminated.


The analogy may not be exact but, to my mind, leaving a part of a regulatory authority in existence may be akin to a surgeon in a cancer operation leaving a malignant cell on purpose.


Can regulatory decisions in the final analysis be anything but ar­bitrary? How, considering human nature, can such actions not result in and stem from duplicity, inconsistency and a certain amount of arrogance? The free market is a remarkably civilizing force, but even threaten the use of police power to intervene on one side of the market equation in an otherwise peaceful transaction, and in my opi­nion you release the baser elements in man.


The Food and Drug Administra­tion and its cousin agencies are often defended on the basis that though recognizing the danger to freedom of fiat law, if society has to contend with predation after the fact, i.e., in a court of law, after harm has been rendered to one par­ty, people will be hurt who would not have been had the regulatory authorities been doing their job.


But let us see in the case of the FDA whether in fact this works in the real world. The case of thalido­mide provides defenders of such agencies as the FDA what they think to be the ultimate argument for its institution. As you recall, the resistance of one lady FDA staffer to allowing thalidomide to be distributed in the United States prevented many American children from being disfigured and crippled. What possible objection could we have to any institution which, by accident or otherwise, saved perhaps thousands of families from the calamity experienced by Euro­peans not under FDA protection?


Life Involves Risk


Life is always a chancy thing. The frailty of life comes home to us many times a year, as friends, relatives and those only known to us through the media, depart this existence.


It is quite possible modern science might be able to sustain a man’s life to 150 years, were an in­dividual willing to deliver himself as a human guinea pig, giving up all of his freedom. But this is not man’s nature. From the extremes repre­sented by those who volunteer as test pilots, or take up hang gliding or deep sea diving, to what we con­sider everyday risks such as driving to work, walking under ladders, or three martinis at lunch, it is ob­vious that most people are willing to take chances. We would in fact find life excruciatingly dull were it not for the freedom to weigh in one’s own mind risk versus reward and proceed according to our own individual temperaments.


But if a regulatory authority could eliminate an unnecessary and unknown danger and thereby save lives, can one really make an argu­ment against it? Were it humanly possible to identify with alacrity and accuracy just those drugs which unbeknownst to the user could cause death or disablement, and make that identification within the framework of a governmental agency, can we really object?


Politically Motivated


The nature of any political in­stitution is that different and, for free men, not necessarily salutary inputs motivate the actions of government employees. Take the case of the lady who stopped the marketing of thalidomide. How would we be motivated were we she? If penicillin were introduced today, and it was evident that cer­tain people are allergic and can die from the consequences of the allergy, would we risk allowing the drug to be sold and have to defend our job before a Congressional Com­mittee? Or, would it be easier to delay approval, in spite of millions dying from infection, until public pressure demanded release and in effect removed the burden of responsibility?


Lest you think I am branding all government employees as ignoble, I will stress that though some who have a propensity to arrogance may find the use of police power attrac­tive, the run of the mill government employee is likely to be inherently no better or worse a person than his privately employed neighbor. It is the pressures of government which are different and almost opposite to those facing private companies and individuals, and these are the pressures which debase their ac­tions.

In my opinion, it is the private drug company, with its desire to maximize long term profits while protecting its good name, which has the best balance of restraint, and urgency, in introducing new pro­ducts.


So, left without an FDA, what would be the restraining influences on a drug company to prevent its releasing drugs insufficiently tested or fraudulently conceived?

•1. The most controlling influence is no doubt the desire of a firm and its management to maintain the in­tegrity of the firm—to jealously guard its good name,—for this is the source of customer goodwill and the base on which all other cor­porate activities rest. Abuse it, and the demise of the company can be counted in years if not months.

•2. There are always present and in the absence of an FDA there would undoubtedly be a proliferation of non-profit consumer groups who act as self-appointed guardians of the public welfare—to be believed or not as their credibility is tested, just as everyone else’s, in the free market. It is their quasi-govern­ment status which has given them disproportionate power in recent years.

•3.    The insurers of the drug pro­ducer, of the doctor prescribing, and of the druggist selling, would necessarily influence their insured’s behavior, even more than they do currently. The very fact that government has assumed the re­sponsibility to determine not just the dangers of drugs, but also their efficacy, has relieved those who manufacture and dispense drugs

from having to assume full respon­sibility for their products.

•4. Without government agencies holding the consumer’s hand and leading him to only those products deemed unharmful by mandate, caveat emptor must necessarily become a more vigorous notion among consumers.


The High Tax Load


Government now takes an average of more than 40 per cent of everyone’s earned income. The high tax take, and the government’s debasement of the money to avoid increasing direct taxation, has perhaps had the most debilitating effect on the economy of any action by government.


As taxes take an ever larger share of the national income, a major por­tion of creative activity is directed toward legally avoiding the tax burden, and from this activity are born the so-called tax shelters of various brands. The real estate in­vestment trusts, set up with a tax-free flow-through of earnings to dividends, attracted some $30 billion in investment funds, which essentially pursued the same pieces of real estate with disastrous results.


It is not coincidental that the tax-shelter business is the one most commonly associated with fraud. When one in a high bracket seeks a tax write-off in an investment where one may sustain no loss after taxes even if the investment is a bust, one’s business judgment tends to become less discerning and discriminating. This indirect and in­evitably wasteful allocation of in­vestment resources is a direct result of government’s high taxation and the resultant starvation of various private activities. These activities are then given a shot in the arm by the all-benevolent government, allowing a diversion of investment funds to the depressed area through a tax break of some kind. The major beneficiary is the bureaucracy, nourished and encouraged by the very people who are becoming its slaves.


I hope those who seem to have as their goal the demise of the free market will have the graciousness of the cannibal chieftain who said, “My wife made a great soup, but I shall miss her just the same.”


The evidence that American bus­inessmen will play an important part in any further socialization of society is confirmed when one hears the chairman of one of the largest oil companies in the country, to the applause of his audience of businessmen, propose an increase in the taxes on petroleum, to “achieve effective energy conservation in the United States.”


Here are a couple of items involv­ing government intervention, one in the indirect allocation of credit, the other in price controls. See if you can detect any potential areas for abuse.


The Allocation of Credit


Most of you have heard of the Small Business Investment Act and the government corporation it empowered. Under certain cir­cumstances, one can borrow from the Small Business Administration funds the private sector is not will­ing to lend. Now we have as a fur­ther extension the so-called Minori­ty Small Business Investment Company. If one has, as defined, a minority member of management and with a minimum of $500,000 in equity, the SBA will buy an equal amount of preferred stock from the company, and then lend in addition an amount equal to three times the company’s private capital stock. The leverage is 6 times over. In­terest rates a bit high for you? Don’t worry, the loan is at 3 per cent below the cost of money to the U.S. Treasury. You may be the guarantor of other loans, for which you will presumably receive equity in the other company, apparently without limit. Tomorrow the world!


In another area entirely, we now have the Federal Energy Adminis­tration with its price controls, caus­ing this interesting phenomenon. “Old oil” has a price ceiling of about $5.80 a barrel, but if your well produces less than 10 barrels a day, you are allowed to receive the free market price, about $14.30 for 40 gravity crude. The numbers of the so-called stripper wells (under 10 barrels a day) have soared since the imposition of these controls, for ob­vious reasons. Will anyone produce 30 barrels a day at $5.80 a barrel when he can receive almost as much for 91/2 barrels a day at $14.30 a barrel and conserve his crude? Is it any wonder, when low production wells make up the largest percen­tage of total crude production in this country, that we are now im­porting over half of our liquid fossil fuel?


Well, what is there to do about it? After 20 years of searching for an answer to methodology, I can find no prescription better than that of Leonard Read: It’s a full-time job bettering yourself and bettering your understanding of the freedom philosophy.


Perhaps we might take a lesson from the story of the American tenor making his debut at La Scala. After his first aria in Pagliacci, the crowd roared, “Encore! Encore!” A reprise and once more they ex­claimed, “Encore! Encore!” After several more attempts to satisfy the audience the singer stepped to the front of the stage, raised his hand and said, “Ladies and gentlemen, I am indeed honored and flattered at your response, butif we are to finish this opera before midnight you must allow me to pro­ceed.” Whereupon, a huge Italian near the front arose and, apparently speaking for the audience, said, “No! You will sing it again and again until you get it right!”


Sustained through Principle


What I have tried to stress here is that freedom is an outgrowth of vir­tuous concepts and can only be sus­tained through principle. As government crowds out more and more of private activity, we can be sure that those who vie for political office—holding to no principle, and striving for power alone—will more closely resemble those congrega­tions of thugs heading the gro­tesque totalitarian states of this century.


But it would be to fall into the Marxist environmental trap if we were to contend that man is per­manently and irretrievably cor­rupted by Statism. The paradoxes are obvious. Out of one of the most tyrannical and terrifying en­vironments the world has known has emerged that towering figure of Alexander Solzhenytsyn, an unknown Red Army officer just 30 years ago.


Think how remarkable are these words coming from Svetlana, Stalin’s daughter. Born into that environment of mass murder, cynicism and rejection of the spirit, emptiness and hopelessness, it came to her in an almost intuitive realization that the world of her youth was the antithesis of what she truly was and wanted to be. She writes: “The bad and the good, as taught me in my childhood, changed places. The heroics of war and revolution lost all meaning, and men I had been taught to consider as great crumbled in my eyes. The authority of brute force ceased to exist, even if it cloaked itself in the highest ideals. The best people now were the quiet, kind, sincere and truthful, the unnoticed and unknown, instead of the rock-hewn heroes of suppressions and vic­tories. The lies and bigotry of political and party life became unbearable. Any secret, any underground activity and thoughts that had to be kept under lock and key were repulsive, any violence against human beings, animals, or life in any form, inadmissible.


“People filled with ambitions and envy, self-enamored posturers, cold cynics and snobs become far more terrifying than crude physical dangers, which for me had ceased to exist. I was no longer afraid of death, darkness, physical violence; but a man who lies, even with the best intentions and for the highest cause, frightens me so that I feel like taking to my heels.”


Well, the freedom philosophy is in a phase of spectacular if not ex­plosive growth, with such a pro­liferation of activities as the world has never seen before, with the goal of limiting government and the free­ing of man’s choice. I think I can safely say that never before in history when relative freedom has been threatened by totalitarian forces has there been such a massive philosophical response in defense of freedom.


And this phenomenon is the one reassuring aspect to this battle of ideas, for it gives us hope and reassurance that Adam Smith’s in­fluence in the 18th and particularly the 19th century can be duplicated in a much more profound way in the latter part of the 20th century.


Three Important Aspects of Ideas and Idealism


Arthur Shenfield, at a Mont Pelerin Society meeting in St. An­drews , noted three phenomena characteristic of ideas and idealism.


·   First, there is a time lag involved—when an idea reaches its apogee it is at its weakest but most observable point, and it is not until it is at its apogee that it can be overtaken by a contrary idea.


·   Second, the shell of an idea can continue after the kernel has died. I might add, how can anyone—even those who have not rejected Statism in principle—continue to ignore the empirical evidence of Socialism’s destruction of moral values, its promotion of war and genocide, its destruction of material goods and economies from the Soviet Union to the South Bronx ?


• Third, he pointed out the inex­haustible capacity of man to hold inconsistent ideas. Again, it is im­perative that those who look favorably on freedom be consistent and hold to principles, for this is the sharpest weapon to use against those who would harbor collectivist notions.


There is the story of the deaf old Duke of Cambridge, Queen Mary’s grandfather. Every Sunday morn­ing he sat in the first pew in Kew Church , and commented all too audibly throughout the service. One day when the curate prayed for rain, the Duke was heard by the whole congregation to observe, “Amen—but you won’t get any rain till the wind changes.”


Well, the wind is changing, and freedom is on its way. But it will take men of principle to keep, it com­ing.