[This article appeared in the Journal of Social, Political and Economic Studies, Winter 1998, pp. 433-463. It is based on a chapter in Murphey’s book A Shared Market Economy, which for a long time was unpublished but was published to this Web site in 2009.]
A Critique of the Central Concepts in Free-Trade Theory
Dwight D. Murphey
Wichita State University
The major concepts that underlie the "free trade" ideology which is so compelling in the world today are embraced by many proponents of the market economy as a closed philosophic system. When each concept is examined critically, however, it becomes apparent that it contains only an important part-truth. One of the central concepts is fallacious altogether. If a market economy is best to be adapted to future economic conditions, which are bound to involve much downsizing and economic displacement, the theory must be up-dated, and this can be done in part by looking back to the thinking of two thinkers, Henry George and Friedrich List, who have long been brushed aside.
Key Words: Free trade, economic concepts, the act of exchange, wages and productivity, optimum allocation of resources, property rights, consumer sovereignty, Henry George, Friedrich List, comparative advantage, purchasing power, protectionist theory, protectionism.
It is possible to be fundamentally friendly, as this author is, toward the classical liberal theory of an individualistic free society and yet to see that many of its thinkers make the philosophy intellectually insufficient when they formulate it as a closed ideological system. This insularity, which has long cut free-market concepts off from critical self-examination, is especially descriptive of the currently popular laissez-faire global free-trade position.
Several of classical liberalism's core ideas involve subtleties that classical liberals, long forced on the defensive by the world Left, have not explored. Those subtleties show that the ideas are neither as correct nor as definitive as the advocates of the closed system consider them to be. By the time we have completed our analysis, it will be apparent that the pure laissez-faire model of classical liberalism is sufficiently unsound that erstwhile supporters of "free trade" should not feel themselves untrue to their own philosophy if they choose not to adhere strictly to it under the economic conditions of the future. In a world where the globalization of trade and the rapid development of non-labor-intensive technology point toward a massive displacement of workers and polarization of incomes in the foreseeable future, economic theory must be free to pursue a sounder theory. Old shibboleths will no longer suffice. No one needs to realize this more than the supporters of a free market themselves.
This article won't undertake to describe the changes in technology and work that are coming; those are vast subjects in themselves. We will limit the present discussion to a review of several of the pivotal concepts about a market economy and in the "free trade" position to assess their soundness.
First, it is well to notice that there are major, long-standing criticisms of the market economy that are not valid. Later, when we see problems with much of the theory, we shouldn't be understood as endorsing those invalid criticisms. It will enhance conceptual clarity to include a discussion of those here, so that we can carefully delineate criticisms that are sound from those that are not.
The "exploitation theories." The ideas involved in the view that capitalism victimizes millions of people have been prominent among the invalid objections. A central part of the Left's outlook for two hundred years has been that many millions of people are systematically and oppressively taken advantage of under capitalism, so that the State or an ideological movement needs to take up their cause as a liberating mechanism against the exploiters. (This was the core insight held by the German socialist Ferdinand Lassalle, for example.) If this view is correct, classical liberalism is simply a sham, with "individual liberty" a cover for something insidious (which is precisely the view taken today by the various forms of class, racial and feminist "deconstructionist" theory). The criticism goes to the heart of a "bourgeois free society," seeing it as something far different than it purports to be.
This author analyzed the particular forms of exploitation theory in detail in an article in the Spring 1996 issue of this Journal, based on a chapter in his book Socialist Thought. Instead of just one theory, there were at least four distinguishable ideas: the socialist version of the Labor Theory of Value; class theory; bargaining power theory as it applies to wages; and bargaining power theory as it applies to other conditions of employment and to many transactions outside the labor market. My opinion was that there is merit only in the last of these (and I will talk about it here when discussing the theory of the act of exchange), but that it wasn't a criticism that was fatal to capitalism, since a more sophisticated approach to the legal and ethical framework of the market could remedy it.
Here are summaries of the critiques I made of the three exploitation theories I considered unsound:
The Labor Theory of Value, in its socialist form as propounded by Rodbertus and Marx, says it is unjust for any of the return from an enterprise not to go to the workers; the profit the owner makes from the difference between what the product sells for and what he pays the workers is a type of theft. Thus, the whole "wage relation," which is involved when one person hires another, is a form of oppression. The essential fallacy in this is that it is a moral judgment that presupposes the very thing it is trying to prove. It makes sense if one starts with a socialist liking for a non-market system of production and distribution in which trade and personal benefit play no part; it is absolute nonsense if one accepts private property and the centrality of the act of exchange. Anyone who sees value in the latter will find no merit in a moral judgment condemning profit as theft. Instead of being a reason for socialism, the socialist normative application of the Labor Theory of Value is valid only if someone already accepts socialism on other grounds. The theory commits the fallacy of using the conclusion to justify the premises.
Socialist class theory says there is no plurality for workers to deal with; all employers are monolithic as members of the same class, so that going to work for one employer is the same as going to work for any other. If we ask ourselves empirically whether this is really descriptive of things in a competitive market (presupposing, also, that we are talking about a classically liberal society, in which class structure will not have been permitted to harden), it is impossible to say that it is. There is far too much economic and social mobility for that.
"Bargaining power theory" as applied to wages says that an employer is in a position to dictate wages, telling workers "here it is, take it or leave it." But somebody working for wages will find this only temporarily true. As he talks with others or otherwise comes to know the alternative employments that exist, he can respond to better opportunities. Fundamentally, because of mobility, it is supply-and-demand, not employer fiat, that sets wages.
It seems that there can be validity to a "bargaining power" criticism about other matters. This will be discussed here in the critique of the "act of exchange," which will be part of the discussion of valid criticisms.
The Berle-and-Means Thesis. This is the view, commonly attributed to Adolf Berle and Gardiner Means in their 1932 book The Modern Corporation and Private Property, that corporate boards of directors aren't meaningfully accountable to the firm's stockholders where the stockholders are many in number and are diffuse and unorganized; most often, stockholders will simply return proxies to existing management, which can reelect itself time after time. Because management isn't effectively accountable to stockholders, it has no "accountability" to anybody. This "irresponsibility" means that corporations should be put under the wing of government.
The first part of this is descriptive, the latter part normative. The description is essentially true, but the normative conclusion doesn't follow for anyone who is not otherwise in favor of government direction of business. Free-market theorists point to the fact that the investing public seems little concerned about this purported "problem," and that in any case the managers of firms are under considerable competitive discipline to do well, because if they do not they will be vulnerable to hostile takeovers. As a matter of fact, a criticism is often made that runs the opposite direction from the Berle-Means Thesis: that management is too concerned about quarterly profits and the serving of stockholders, and should have longer-term goals and even "other 'stakeholders'" in mind.
The attribution of these ideas to Berle and Means has long been an act of ideological fraud - an instance of the long-continuing dissimulation by which American "liberal" thought has obscured its connection with socialist ideas. Attributing it to these two men has made it seem that the idea came from two American "liberals." In fact, by 1932 the point had long been prominent in socialist literature. British socialist G. D. H. Cole stated it, and so did Thomas Kirkup in his History of Socialism as far back as 1909. (1) Berle himself argued it in The New Republic in the 1920s.
Underconsumption-overproduction theory. According to socialist author Maurice Cornforth, Marxist theory says the trade cycle that periodically disrupts capitalism is due to the employers' keeping workers' pay as low as possible, which causes the workers not to have the means "to consume the products of the ever-increasing industrial machine." Because of this gap, production outstrips purchasing power, precipitating a crisis. (2)
Ironically, this is precisely the problem that is now looming, for the years ahead, from the increasing adoption of non-labor-intensive technology, led by computers and biotechnology. There is going to be a vast "purchasing power problem," as well as revolutionary turmoil and a general refusal to countenance a market economy unless a way is found to include everyone in the productivity of the new technology as it develops through the market system.
Why, then, is the Marxist theory one of the major erroneous criticisms of capitalism? Because it has been false during all of the time prior to the present, and even into the future until the displacement of work becomes pronounced. People went from agriculture into industry, and from industry into services, with their standard of living going ever-upward based on increasing real wages and success in the marketplace. The market economy has worked well, and the trade cycle has indeed, contrary to socialist analysis, had other explanations rooted in monetary fluctuations. The fact that there will be a distribution problem in the future does not validate two centuries of misplaced carping against an institution that has served humanity so well.
Major problem areas in free-market thinking
Even though the criticisms just reviewed have not been valid, there is much that properly can be objected to about certain of the pivotal concepts in free-market theory. A strengthening of the theory requires an understanding of these problems.
Insufficiency of the analysis of the "act of exchange."
The "act of exchange" (also called "the transaction") is a key building-block in market theory, something from which all else grows when voluntary exchanges occur by the millions. Voluntary transactions are entered into because all parties are motivated by the prospect, as they see it, of bettering their situations. All parties win. An economic system based on vast networks of such transactions will constitute, in effect, a "positive sum game" from which people in general benefit immensely.
My criticism of the act of exchange won't be intended to diminish our understanding of its vital role in a free society, where voluntary relationships prevail in contrast to a command system. What we will be noting is that the analysis of it hasn't been adequate and that the simple "each person benefits" insight doesn't tell the whole story. A sophisticated analysis is much more complex. Since the ideal of "the transaction" feeds into the "optimum allocation of resources" concept to form an impenetrable closed system that bars other considerations, it is valuable to pierce the over-simplified view of it that allows it to be so easily used in that way.
What about the truism that "all parties benefit?" No doubt in terms of "net effect" they do (at least as the parties see it at the time of the transaction; it is relevant, however, that somebody can easily look back later and say "I was really taken on that one.") But let us consider the situation in which there is "unequal bargaining power." I mean the situation, so common in today's market (and not nearly so common in Adam Smith's day when individuals largely dealt with other individuals), where one of the parties is able to spell out all of the subsidiary terms of the contract on a "take it or leave it" basis. Often, the other party doesn't even read the terms, much less bargain over them. Let us suppose you find a farm tractor, a computer, a car, or a dishwasher you like, and decide to buy it. Will you work out with the seller the terms of the warranty? By no means. As a lawyer I can tell you that the warranty will have been written entirely by the seller's legal and marketing departments, often with one eye out for actually limiting, not increasing, the seller's liability and the other for having something that sounds good when it can be said "this carries a warranty."
It is too easy to set up a mental image of "the transaction" as necessarily being an "amply-negotiated" one. In an important transaction between two well-organized parties, every detail of the contract is worked out, negotiated and renegotiated, until each side is satisfied its needs are met in all particulars, at least to the extent that the compromises inherent in negotiation allow. But such full consideration, amply advised by counsel, which is really necessary for a contract to attract our admiration, isn't the model for the typical transaction. And since it isn't, the result in terms of "mutual satisfaction" is often far less than the simple view of "the act of exchange" suggests.
When I graduated from law school, I rented an apartment in Denver. After I moved in, the property manager brought up a lease for me to sign, which hadn't been mentioned before. I read it and was horrified. In among the small print was a provision that the property manager and owner would have no responsibility for harm to me from any negligence of theirs, including from such things as faulty wiring, exploding boilers, and the like. I took the lease to the attorney for the property management company, who told me "we don't change the terms of our lease form for individual tenants; if you don't like it, move" - which is what I did at the first opportunity. Modern landlord-tenant law has since outlawed a disclaimer-of-liability ("exculpatory") clause such as this one on the ground that it is "unconscionable" (so grossly unfair that it violates conscience). But that is a legal development that flies in the face of the simple view of the transaction, which is that it is purely voluntary, everybody benefits, and there's no basis for "paternalism" in "a court's remaking the contract for the parties."
This has vastly important application in the employment relationship. Everybody knows before taking a job what wage is being offered, but much of the subordinate features of the relationship will just be put in by the employer and certainly not negotiated with the employee. A person signs on for employment, knowing the wage or salary; but, especially as the months and years go by, the organization sets the "conditions of employment." The employee will choose to stay with the job as long as the net effect is better than any alternative he sees, but there are many things about the relationship that lack mutuality (in the sense of looking after the interests of both parties). Will there be a "fair procedure" for such things as promotion, demotion, transfer, discipline or discharge? Is the employment set up in a way that allows dependable planning for retirement? Is there any way to maintain income in case of disability? What about health insurance? The idea that "both parties benefit" just doesn't look far enough to tell all there is to tell. Most of the time the employment relationship is far from analogous to the amply-negotiated type of contract. These are things that are enormously important to people "where they live" - i.e., in relation to their most basic needs. Classical liberal thought hasn't been sensitive to them, and this has allowed a vast opening for its critics and has also caused the public during the twentieth century, in pursuit of its native commonsense, to see that body of thought as irrelevant to much that counts.
Another weakness in the simple view of the transaction is that it has for the most part been oblivious to the legal, institutional and cultural prerequisites of satisfactory transactions. Most people don't know it, but the wonderful storyteller Jack London was a revolutionary socialist. In his socialist novel The Iron Heel a century ago, he made a devastating anti-capitalist point by telling about a man who, though described as a fine worker, lost his arm in an industrial accident because of a momentary lapse of care. Unable to perform the work, he lost his job. There was no insurance, and when the man sued the company to try to recover something, he ran into highly capable corporate attorneys who were able to invoke successfully all of the defenses available under common law negligence theory (the absence of the employer's negligence, the worker's assumption of risk, and contributory negligence).
The point is that the employment relationship was voluntary and an act of exchange in which both parties benefitted - but that it was nevertheless profoundly insufficient to see to the most fundamental needs of one of the parties. The world cried out for greater affluence and more sophisticated market development so that insurance could become an auxiliary to the employment relation to cover industrial accident. The "transaction" needed plug-in institutions, something that the theorists of the "act of exchange" rarely see the need to talk about.
This is an important criticism of the theory, which I cite in order to encourage an expansion of the thinking. But it is valuable at the same time to keep these issues in perspective. Otto von Bismarck introduced "workman's compensation" (now called "workers' compensation") into late-nineteenth century Germany as an insurance system which was then copied by other countries. It was part of his social legislation that formed the nucleus for the "welfare state." This would not have been possible, however, if the productivity of the Industrial Revolution and of the marketplace had not already brought about enough affluence so that people could afford it, and if the modern insurance industry had not begun to come into being so that it could serve as an auxiliary institution. Capitalism deserves immense credit in this context. Its theory, though, lagged far behind, having virtually nothing to say about such things as it clung to the over-simplified view of the transaction.
A final criticism of the theory of the transaction is that it doesn't look beyond the parties themselves to account for the entire setting. It sees a broader picture to the extent that it envisions peoples' linking transactions together to form a dynamic economy, but it has no willingness to see detrimental effects that the particular circumstances of trade may bring to a country's well-being. To avoid acknowledging such effects, it prefers to see the act of exchange atomistically as exclusively a matter between the parties. This dropping of context has been especially important in the long-standing "Free Trade vs. Protection" debate. I will talk about this in detail later when we examine the laissez-faire view that "free trade [like any act of exchange] is always beneficial."
The insistence that wages are tied to productivity
It is a truism that if there is no output to be sold, there is nothing from which to pay wages. If productivity goes down, the sum of wages paid out will have to go down, too, unless investors or creditors pump in money to sustain a firm on what would have to be a temporary basis, contingent upon things improving.
It is also true under theoretical model-related conditions in a free market that if productivity goes up and yet wages stay the same, profits to the business will rise; that this will attract a flow of other capital, always on the lookout for profit opportunities, into the industry to compete for the profit; and that that will create more demand for the pool of workers, bidding wages up (if the size of the worker-pool remains roughly the same). This is all standard economic theory, which postulates a constant tendency toward re-adjustment within a marketplace in response to opportunities. You will notice that wages do go up in response to the increase in productivity.
The truisms of the preceding two paragraphs are what give rise to the economic maxim that wages are tied to productivity. It is repeated frequently in economic literature. Mark Skousen in The Freeman says that "productivity is the key to rising or falling wages. Many years ago, F. A. Harper...wrote a grand little book entitled Why Wages Rise...He demonstrated that...'Higher wages come from increased output per hour of work.' Ludwig von Mises adds, 'if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise.'" (3) Hans Sennholz writes that "working conditions and wage rates depend on labor productivity, which is a direct function of the stock of capital invested per worker." (4) Paul Krugman says in the Harvard Business Review that "one last assertion that may bother some readers is that wages automatically rise with productivity. Is this realistic? Yes. Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages." (5)
So here we have it. The theory is presented as "realistic," meaning that it describes the actual situation "on the ground." But you'll notice that the theory contains certain factual predicates, assumptions that must be met for the theory to apply. One of these is that capital will flow to the increased profit opportunity, expanding the amount of capital invested per worker and bidding up wages. Another is that the number of people in the pool of potential workers remains approximately the same as it was before (i.e., that the supply of labor wasn't changing as the demand for it increased). Economic theory has to make such assumptions for its analysis. One of its key concepts is ceteris paribus, the expressed assumption that "everything else [other than the variable that is being changed] remains the same."
How do these factual predicates fare in today's world? We certainly have the first one - the ready mobility of capital to move toward any profit opportunity. That is one of the more salient features of the global economy, with its worldwide finance (if we ignore, which seems justified in the context of the general point, the many obstructions to total mobility that exist in many countries).
We just as certainly don't have the second one. The more improvements in communications and transportation make labor markets global, not local, the more there will be a vast expansion in the labor pool in both skilled and unskilled areas. The world is "just at the beginning" of this, and so far has barely seen the effects. The day is rapidly approaching, however, when an accountant in Goodland, Kansas, is in direct competition with accountants in New York City, the Philippines and India, because of computers - even if the accountants all stay where they are and don't migrate. Computers and instantaneous communication will place them in "virtual" proximity to each other. To some degree, such labor competition already exists; but it is nothing compared to what it will be. And what happens to the conclusion that "wages will rise" if the labor pool is expanded by a factor of a hundred or a thousand, bringing in billions of people who have hardly been receiving any wage at all compared to what workers in the advanced economies have been getting? The theory will simply say that ceteris paribus didn't hold, and that the flow of capital will enhance wages under the new conditions of a vastly increased supply of labor; but that, of course, those enhanced wages will be much lower than they were before for those who had been part of the earlier, much smaller labor pool. In other words, given a worldwide extension of the labor pool and given a sizeable immigration from the Third World, higher productivity will be concomitant with drastically falling wages for many, many workers in such places as the United States and Europe. The theory can account for this, but the standard expression that "higher wages are a realistic prediction" certainly does not. It is a case of economists not reexamining the minor premises of their theorems; i.e., not checking how much the facts match what the major premises of the theory call for.
Moreover, we face a new phenomenon. As capital flows in, the theory says, it will create more demand for labor, so that wages will be bid up. Does this take into account that so much of the emerging technology is precisely non-labor-intensive, actually decreasing by leaps and bounds the demand for labor? Obviously not. Again, it is one of those ceteris paribus things. The conclusions don't follow if givens don't stay givens. There is nothing wrong with the theory, which says "here's what will happen if certain conditions are present"; it is the application of it, which blithely assumes the existence of those conditions, that is deficient.
The fallacy of the "optimum allocation of resources" linchpin
Now we come to perhaps the most important concept, the one that is the linchpin of the entire closed system since it provides the sweeping value judgment that validates the outcomes that arise from the laissez-faire market. This is the claim that the millions of acts of exchange that constitute the marketplace make an "optimum allocation of resources." An examination of the writings of prominent market theorists shows that what is meant is not just a technical meaning of "optimum," but a claim that the allocation of resources (and of everything that follows by way of incomes, wages, social position, etc.) in a market economy is the "best" allocation. Unfortunately, this conclusion results from a logical fallacy.
The claim that a market economy automatically makes an optimum allocation of resources is a value judgment that is thought to follow from the idea of "consumer sovereignty" - the point that "consumers are sovereign, since it is their demand that entrepreneurs have to respond to if they are to make a profit." Ludwig von Mises said that "to assign to everybody his proper place in society is the task of the consumers."
To avoid misunderstanding, I should point out that I, too, have favored an allocation of resources and of social position on the basis of consumer choices. I haven't based this conclusion on the ground that that allocation is necessarily best as an allocation. Whether it is best or not, I as a classical liberal have supported it because it is the allocation that arises out of freedom. I don't favor individual liberty and the act of voluntary exchange because it produces the best allocation of resources; rather, I favor the allocation of resources because it is the one produced by a free process.
When a market theorist says the sovereignty of the consumers makes the optimum allocation of resources, he is making what is called "a holistic argument." Ludwig von Mises himself is the one who argued most persuasively against "holistic" concepts. Chapter VIII of his monumental treatise Human Action contains a section of several pages with the heading "A Critique of the Holistic and Metaphysical View of Society." In the following passage Mises is talking about the imputation of distinct existence to "society" as a collective whole separate from the individuals who make it up:
The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors. (6)
Such a concept as "society" is useful in many ways, but it contains what we might call "the fallacy of wrongly-imputed consciousness" if it is used in a way that attributes consciousness and decision-making to the abstraction as an aggregate. It is true that a society can make decisions through individuals who are its selected representatives. But the aggregate itself isn't a conscious thing. To talk as though it is is to treat it "holistically," asserting that the sum is different from the particles that make it up. (Interestingly, a human being is a validly holistic creature, since a person does have consciousness and is in that way more than simply the cells that make him up. But it is a metaphor to speak of society as having its own consciousness.)
The concept of "the consumer" is the same. Consumers taken as an aggregate don't have a consciousness; only consumers as individuals do. It is odd that Mises didn't see this, since he saw it so powerfully in other connections.
Now, let us ask: from whence can value judgments come? The answer is: only from a conscious being. Inanimate objects such as rocks, water, clouds and sky don't make value judgments. Nothing is good or bad, desirable or undesirable, to a rock. A God, in most conceptions of God, is a consciousness, and so can decide what is good and bad, what is to be preferred and what is not. But note this: between the consciousness of a God and of individual people, there are no consciousnesses. Many thinkers who don't want to base their value judgments on a God feel very uncomfortable about attributing them to no stronger a reed than individual minds and the preferences to which they give rise, and so search for some source of values below God but above individuals. All efforts of this kind demand attributing consciousness to some metaphorical entity that doesn't really possess consciousness. I wrote an article years ago pointing this out about the philosophies of Victor Frankl, Abraham Maslow and Nathaniel Branden, who otherwise are three very distinct thinkers. (7)
Can "consumers," taken holistically, make a value judgment? Are they collectively a consciousness that can decide what is "best"? Of course not. The aggregate does not have a mind in itself, but is the sum of countless individual consumers, each making decisions about what is best in his own case.
Then let us notice that from the perspective of each one of these individuals as a consumer the person predictably will not think the allocation of resources flowing from the total economy is the best possible. Almost certainly he would prefer an allocation that would bestow more resources on him and the things he cares about. Actually, in spending his own money, he has not given the slightest thought to the economy's total allocation; he has only paid attention to his own little corner of the world.
Next, let us think of each individual as a philosopher or social observer. Will he then think, as he looks out upon the sum total of what is resulting from market transactions, that what he sees is entirely to his liking in light of his philosophy? Probably no one, including Mises himself, would be completely satisfied from that perspective. There are many things consumed, such as excessive alcohol, dope, pornography, or what-have-you, that hardly square with anyone's idea of what is "best," even from the point of view of those who engage in the consumption (if asked in their sober moments). Indeed, people from competing philosophies and cultures bring very different preferences to bear on what they would like to see happen. It is for them more than just a matter of individual preference or not liking certain features such as drug consumption.
If "consumers" as a metaphor can't judge, and individuals as consumers aren't judging, and individuals as philosophers find aspects to take issue with, and we aren't premising the whole "optimum allocation" claim on a judgment made by God, what is there to the claim that a market economy makes the best possible allocation of resources? Nothing. The most we can justifiably say is, as was said above, that "I will accept the allocation, with a few exceptions as provided by law, since it is what results from a free process." The seeming deficiency in this, and the reason the closed system of market theory has so eagerly accepted the "optimum allocation" argument in its place, is that it has no metaphysical pretensions, and hence much less polemical power.
Socialists, of course, have never accepted that the allocation of resources effected by a market economy is ideal. They consistently urge a different set of priorities. Given that difference, you would think they would have raised the criticism made here, pointing to the conceptual flaw. If any of them has, I am not aware of it. In so competitive a world ideologically, it is amazing that even ones opponents' concepts often go unexamined. Maybe it is because people don't pay all that much attention to what others who differ with them are saying.
Later we will examine Friedrich List's early-nineteenth century criticism of Free Trade theory. It is worth noting that he didn't see the sense of the argument that when people strive to further their own interests, they "always further the interests of the community." He cited several counter-examples where it just wasn't true. (8)
The need to qualify property rights theory
"Private property" is a major element in the classical liberal philosophy, which contains varied theories about its origin and justification. It is a feature that has great utility to a philosophy that wants some sort of individual autonomy and significant limits on the power of the State. A widely diffuse holding of property provides the stuff with which individuals can act, and the diffusion itself means that the State doesn't have a centralized grip on one of the main things that is pivotal to peoples' ability to exist.
Thus, it is sound to be reminded of the importance of private property. Nevertheless, there is one very important question about it:
whether the claim to it by the owner is properly (i.e., in the context of the philosophy of a free society as best formulated) to be considered as absolute; or whether, on the other hand, the ownership shouldn't be seen as often subject to a rightful claim, for at least part of its value, on behalf of the community.
Even to ask such a question is heretical within classical liberal thought. For a century and a half, any admission that private property is subject to qualifications has been thought to create a disastrous loophole through which the Left could attack the entire system of private ownership. During that time, this defensive posture has almost certainly been necessary for precisely that reason (although later here we will see why this may simultaneously have been very damaging to classical liberalism). It has seemed better from a classical liberal point of view to defend the institution entirely, not giving an inch. Henry George and his followers disagreed, but they have remained a minority within free-market thinking.
The problem, as the Georgists point out, is that this total defense hasn't been fully sound. And what is more important now, it will become far less so under the onrushing world conditions. If conservatives, libertarians, and classical liberals are to adapt in a way that will allow their point of view to survive and that will preserve their primary values in a world of vast economic displacement, they are going to have to revise their view of property (including earnings), doing so in a way that is intellectually defensible.
Let us begin with George's insights a century ago, since they voice much of what I have in mind and will get us underway. The first thing to notice is that George was a devout free trader and classical liberal. Most of his writing gave powerful reiteration to the various points of market theory. He was a crusader for Free Trade and against Protectionism (which was the main issue of political economy in the nineteenth century, just as it is becoming again). His intellectual method was that of a moral purist, even though he mixed into this many arguments that were made on purely empirical, utilitarian grounds. Any free market theorist who hasn't already done so will enjoy going back and reading his books. They provide a vigorous defense of the entire complex of ideas that make up classical liberalism as we know it.
They do, that is, with one exception. This has to do with his perception that certain types of property come to their owners unearned, as windfalls merely dropping into some peoples' laps from the fact that they live among other people. Land is the principal form of property of this type. No human being has made the land, although improvements to the land are another matter. The land per se comes to have value because of the growth of human population, not because of a creative act by anybody. Since this is so, George saw no reason why land should not be a resource of the whole population, rented out to individuals who want to use and improve it. This rent would then create a fund of money that could be used for a variety of projects that would benefit everybody, as well as for placing a floor under all members of the community to keep them from poverty. In the private property system as it has been known, the owners of property enjoyed an enormous privilege, especially in a predominantly agricultural society such as existed until a few years ago, while those who owned none of it had to toil for everything they got. Such a thing places a serious stain on the property-market philosophy, since it isn't fundamentally just.
George quoted Herbert Spencer, whose credentials as an individualist philosopher are solid, as agreeing with him; and he said he was merely picking up from the French thinkers Quesnay and Turgot, whose ideas fed into Adam Smith's. Rather than include a number of direct quotes from George here, I am including them in the endnote. (9)
It is significant that he thought the same applied to minerals: "...the ground values of great cities and mineral deposits are due to the general growth of the population" [emphasis added]. (10) Natural resources are not created by anyone's effort. They take on value by virtue of the presence of people who will find them useful, and the value increases as population grows and as an industrial system and way of life come to be centered upon them. George would have the community charge a rent equivalent to this value. In addition, of course, a major portion of resources' value is attributable to other things traceable to specific effort -- i.e., the invention that discovers their usefulness, and the capital and labor that go into extracting and applying them. These, pursuant to George's logic, would not be charged a rent, since they are not a windfall but the product of someone's thought or effort.
These were the insights held by George and several other major classical liberals. It may be an eye-opener to some that it has not exclusively been socialists who have believed that these types of property should belong to the community as a whole. George felt that the system of private property would actually be stronger, and certainly much more morally justified (and hence defensible), if it did not include a privileged position for some.
As mentioned earlier, most classical liberals have resisted this, preferring an across-the-board system of private property, without any exceptions that could be expanded to destroy the system as a whole. That resistance, though I have thought it was best, has had its costs, probably the major one of which is that the market has been left to seem "heartless" to those who haven't fared well in it. Labor has had a certain affinity to capitalism because workers in general aspire to be among the middle class, but the chance for a bond of alliance and sympathy between those who have done the drudgery and others has been surrendered. By not following George, classical liberalism set itself up to allow socialism to "occupy the moral high ground" throughout the twentieth century. As I ponder this, I am by no means certain it has been wise to follow the majority classical liberal position.
Whatever was wisest in the past, it is rapidly becoming clear that classical liberalism must immediately move to George's position - and indeed to an expanded view of it. When work is displaced and either vast unemployment or marginalized work results, people are going to be crying for a place at the table; and they will have been knocked away not because of any flaw in their character or lack of effort on their part, but because of omnipresent forces over which they have no control. Their need is, however, only half of it: the second half is that under the new technology there will be some people reaping immense wealth, only a certain fraction of which they will have created through their own contributions. This is the stuff of which revolutions are made. Notice, too, that it would be a rotten version of classical liberalism that would defend it. This would be a version that by clinging to the closed system under radically changed circumstances will have forfeited its tie to the main classical liberal values. If the "act of exchange" and the resulting allocation of resources remain classical liberalism's central criteria under the new circumstances, it will be totally inappropriate. The act of exchange ought to remain central to the productive economy, but the distribution of the product needs to be qualified by the insight into what has been earned and what has not.
Why is it true that those who reap immense compensation from the new technology will not have earned all of that return? (In the closed system, they will be said to have, on the simple ground that it is coming to them through contract, reflecting acts of exchange. But it is that way of looking at it that has to be seriously qualified.) The answer is: because each person makes, at best, only a relatively small, incremental addition to a technology that has been built up, like a coral reef, through the efforts and intellectual contributions of countless predecessors. Imagine a young person in the year 2030 who works as a technical specialist in some advanced technology, being so good at it that the rewards are extremely high. Everything he does will be standing on the shoulders of people developing computers, biotechnology, robotics, genetics, etc., today, before he is even born. What he brings to it will be valuable, no doubt, but it will be creating only part of the value. Humanity itself will have created by far the largest part. To some considerable extent, this has always been true. It could be overlooked for the sake of individual autonomy so long as "the system worked" to provide opportunity for everybody. It must not be overlooked at such time as the system comes no longer to function acceptably in that sense.
This author is one who has always worked for such attainments as have come his way. I have seen others who haven't applied themselves so diligently who haven't done as well. So I have a strong moral conviction that what people get, they earn. This change in perspective, acknowledging that a significant part of someone's success is derived from what other people have done or from the whole context of developed community, isn't one that I would naturally find congenial. But isn't it true? And isn't it essential? Especially as the displacement creeps in upon us?
The implications of this insight are extensive. It means that there will be no moral crime, no violation of private property or of contractually-earned income, if a community treats a significant amount of the economic product of the new technology as a common resource to be used or distributed for the good of all. It means, too, that there can be, as George wanted, a full return to people for their own labor, intelligence, or capital. If we wish to maintain a thriving competitive market economy, the reward to those contributions will be necessary and rightful. That reward simply won't be the entire return, but something more commensurate to the person's own input. In A Restatement of Economic Liberalism (1988), Samuel Brittan, who centers his thinking on Friedrich Hayek's, has already thought along these lines, although without seeing the coming displacement of labor as the reason for its necessity. (11)
There is no way the exact proportion between what humanity has contributed and the individual has contributed will be determinable. This fact shouldn't be too great an objection; the division can be made in keeping with the criteria of the "rule of law" - i.e., according to established rules known in advance and applicable to everybody. Recent data shows that in 1980 executive compensation was between 30 to 40 times that of the firms' average workers, whereas by 1990 this had grown to a difference of 130-140 to 1. Let us say that tax law in the United States were to provide that the highest management person in a firm should be entitled to thirty or even fifty times the average earnings (or some multiple of the earnings of the lowest-paid employee), but no more; and that the rest should be taxed away. Would that be unjust? Would it be something that "no market economy can live with?" Hardly. Enormous incentive would still be there for executive leadership. Whether that leadership would abandon the United States for some other place where a higher ratio is permitted would depend on a number of factors, not the least of which might be an international tax convention setting the same ratio for all countries or at least for all advanced economies.
The same can be said for everyone who makes a vast fortune in today's (and especially tomorrow's) mass market. If a professional football player, or a movie actress, or a rock star, makes $20 million dollars in a year, how much of that is due to the person's own ability and contribution, and how much of it is because technology has evolved to the point at which communication makes available a worldwide audience? Did the ballplayer, actress or rock star create that system of worldwide communication, with its fiber optics and satellites? No. We are tempted to say, only half tongue-in-cheek, that Bill Gates did; but even that would be an immense simplification, because Gates is himself standing on the shoulders of countless ingenious people like himself.
If we may add still another shocking heresy (and a heresy to no one more than to myself), it is to say that this fully justifies a system of strongly progressive taxation. Once the non-labor-intensive technology has more fully come in, if some people become enormously wealthy and others have no or only very meager earnings, there should be no objection from a classical liberal point of view to taxing away a good portion of the high earnings to make provision for everyone in the society. To the objection that "that would run afoul of, maybe even totally destroy, the sanctity of earned income and private property," it must be answered that it does no such thing - and that there is no alternative. A market economy going forward to new innovative heights, with free individuals employed within it through contract, all within a setting in which everyone in the society shares in the prosperity and has purchasing power with which to buy the products - all this is much more compatible with classical liberal aspirations than for the market and individual liberty to drown in a sea of opprobrium and revolution.
Many market theorists will doubt whether the displacement and polarization will actually come about. They may be strongly inclined to think I am overstating what is going to happen. (They will want to be alert to, and to avoid, a psychological possibility that may explain, as time goes on, their expectation of continued normalcy: a willingness to accept a growing impoverishment for the less intelligent half, or some other fraction, of mankind as being a "natural condition." Such an insensitivity is altogether possible, since it has been thought normal and appropriate in countless societies already. I shouldn't think that any true classical liberal would build his feeling of normalcy on a lack of empathy. There is reason to fear, though, that some of those who are entranced by the closed system of market thinking may easily talk themselves into doing precisely that, since they are in a mental box that is hard to escape. It is a part of all classical liberal thinking, of course, to accept the inequalities that flow from the normal working of the market. Their ideology may keep them from seeing the distinction between this and the roots of inequality in a world beset by economic displacement.)
Let us assume, moreover, for sake of argument, that the new technology does not radically alter the shape of things, that most people stay employed without seeming to become severely marginalized. What then? Will not much of what I have just said, building upon Henry George, still be true? Doesn't it provide a rationale for making the market society "more just"? Do we have to be socialists to think so? The questions pretty much answer themselves.
The scope of this article does not permit a discussion of the ways to shift to a "shared market economy" in which much of the stock in business is owned by the entire spectrum of people in the society, while a competitive world market continues to go forward with the participants in it making a fortune (albeit limited as I have just indicated). There are ways that this can be done that will least disturb the current system of income and property. Progressive taxation to accomplish that spread of ownership will be justifiable, but may not be all that necessary.
Before we conclude, a question remains about how the "unearned value" of something like land or minerals can be taxed away in today's society without in effect expropriating the present owners. Those owners have paid for the property when they have acquired it, so the unearned value has gone to the sellers (and actually to their predecessors in a long chain of title). In applying George's point, it would be enough just to tax the unearned increment that arises in the future. Assume, for example, that someone buys land for $100,000 and it increases in value to $200,000 as the city grows up around it, and that none of that increase is due to improvements made on the land. This increase, as adjusted for the inflation that will have occurred during the period the increase in value has occurred, could (and should) be considered as accruing to the community as a whole. It wouldn't be just or feasible to take for public purposes the portion of the value of the land represented by the purchase price.
The insistence that international Free Trade is always beneficial
One of the more beneficial features of a market economy, according to economic theory, is that the act of exchange and search for profit lead to an elaborate division of labor. The continuing tendency is toward everyone's doing what he can do at lowest cost, while others gravitate toward what they can do most cheaply. If firms in one country are able to make shirts most efficiently, and farmers in another country are best at growing papayas, both will do the thing for which they are best suited. And, as David Ricardo argued with his "law of comparative cost," this will occur even if one set of producers is better at everything than the others; it will profit the former more to leave the things they do less efficiently to the latter, even though they are better even at them than the latter. Everybody will have something to do, and by the division of labor efficiency will result compared to a situation in which everyone tries to be a "Jack of all trades" and do everything.
Adam Smith expressed this in a famous passage:
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them from the shoemaker. The shoemaker does not attempt to make his own cloaths, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers...
What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our industry, employed in a way in which we have some advantage. (12)
When the efficiencies of the division of labor are added to the notion of the "optimum allocation of resources," an abiding conviction seems justified that any governmental intervention into the process detracts from human well-being rather than adding to it. This amounts to a powerful argument for laissez-faire. When applied in the international arena, it is a compelling argument for Free Trade. Any attempt by governments to impede the flow of goods and services will be retrogressive. Likewise, any effort to develop trades or crafts within a given nation that is not in line with "buying most cheaply" seems transparently wasteful.
This view sees important parts of the truth. The division of labor is highly beneficial, just as described. But, as with much else in the laissez-faire ideology, it is not the whole truth. There are at least three reasons we shouldn't accept the view as part of a closed system that allows of no (or only minor) departures:
That Free Trade looks at the process as a whole, but overlooks the aspirations of various of the parts, which if developed might eventually benefit the whole more than if they are not developed. According to Adam Smith's principle, it is best to acquire something from the cheapest source, and that will often be from someone other than yourself. Today, if the Taiwanese produce VCRs most cheaply, by all means buy from them; ones own industry can do something more profitable even if this means losing all knowledge or other capacity needed for making VCRs.
I have been amazed to find that the early nineteenth-century German economist Friedrich List, who is almost always put down dismissively in market theory as the principal apologist for "Protectionism," actually had a much more sophisticated understanding of international trade than did Smith or Ricardo. List was no apologist for statism, but was actually quite a thoughtful classical liberal. Before we proceed, it will be worthwhile to become more acquainted with his thinking. As we did with Henry George's views, we will provide a summary in the text and leave extensive quotation to the endnotes.
List's classical liberalism shone through all his work, except that it was a liberalism that saw the individual, and trade itself, as part of a free community. Far from being a statist, he said that protection (such as tariffs) is only good if it is in combination with progressive civilization and free institutions. By no means did he fully reject the Free Trade idea, although he concerned himself with how each nation fared in the course of it. He was strongly favorable to individual liberty, but again qualified one value by keeping others in mind: individual liberty flowers as part of a well-ordered free society. List strongly opposed socialism, such as was then presented in the writings of Saint-Simon and Fourier, as the annihilation of individual liberty. (13)
A certain J. S. Nicholson wrote the introduction to the 1904 edition of List's work. Nicholson sums up one of List's central observations about trade: "To buy at the time in the cheapest market and to sell in the dearest may not always be the wisest national policy. The distinction between present and future advantage from the national standpoint is fundamental throughout the whole work." (14) A key problem with Smith and Ricardo is that they looked only to what is advantageous at present, which is a remarkably over-simplified perspective. People who read them naturally assume that an infinite series of moments in which a person achieves present advantage must add up to long-term advantage. But that isn't necessarily so.
Let us go back to Adam Smith's example of the tailor and the shoemaker. The tailor, he says, should not himself make shoes, but buy them from the shoemaker, who can make them for less than he can. But what if the tailor thinks he could become a better shoemaker than the shoemaker now is, which if true means they should trade places? To accomplish this development of his newly-aspired-to skill, he has to set out to make some shoes, even if at first they aren't as cheap as he could buy from the present shoemaker. Applying this to an entire country, the given situation of "who's best at something" will remain static, as though it were set in cement, unless some people break out of the mold to develop new skills at which they previously haven't been the most capable.
This is the basis for the "infant industry" exception to the Free Trade principle. It should, however, be understood as going far beyond its traditional meaning. Those who are second-best had better continue and work on their capability rather than drop out of a market altogether if they hope ever to become the best. To turn markets permanently over to those who are now the best is to insulate them from competition and to atrophy the abilities of the others. The retention and development of capability will also depend upon the societal and cultural context in which the attempt is made, and is not entirely a matter of individual effort. The many conditions bearing on "who can produce something most cheaply" can change over time, making one source the cheapest now, another the cheapest later. This is especially true in today's world of hyperspeed-changing technology and world markets. Many competitors need to stay well-prepared right on the fringe, rather than to surrender their skills and their productive plant. They even have the potential of contributing to technological innovation as they strive to leap over the existing leaders. Seen in light of these things, the "infant industry" phenomenon takes on a permanent and widespread significance over time, and is not just a "one shot" development of a nation's industry.
There has been a growing recognition in economic theory that this is so. (15) Stephen S. Cohen and John Zysman ask "why can't the United States simply buy semiconductors and embed cheap semiconductors into expensive computers?," but then answer it with another question: "Will U.S. producers of computers be able to stay ahead of Hitachi if they depend on Hitachi for semiconductors? ... If the technology is changing rapidly, the question becomes vital ... Dependence on foreign sources for a technological innovation could affect the entire range of user industries...." (16) List's insights about these things are set out in the endnote. (17)
The dynamic view of comparative advantage - that competitive standing changes over time if some of those who are not the cheapest producer retain their capacity to compete - is a much more sophisticated view of the market than the static view. That the thinking should have stayed at that unsophisticated level is typical of the closed-system market rationale. The static concept actually works in favor of less innovation, less competition, less ultimate consumer satisfaction. And it arrives at that because it looks no further than to a simplistic "truism": that "what is beneficial to the parties in one transaction, or even a string of transactions, must be best for long-term benefit."
This realization is not just important for economics and efficient productivity. It leads on to an understanding that given peoples and nations are not necessarily well-advised to settle for being an increasingly remote second-best in things that they consider important to themselves. This is important to culture and nationality (things that are played down in classical theory in part because they are thought to run counter to a developed division of labor). If the iron logic of static comparative advantage loses its grip, people will find themselves able to think in terms of their own preferences about their development as a people or a nation. Cultural preferences can come in without being tagged as economically harmful.
List was primarily concerned with how his own people, the Germans, could amount to anything as a productive, talented people if "buying cheapest" from the British, who already had a magnificently developed industrial and commercial economy, was, at every point along the way, the sole criterion.
Many nineteenth-century Americans felt the same concern. Again, if "buying cheapest" from Britain controlled, the United States would remain an agricultural country and wouldn't develop its own industrial, commercial capacities. The "comparative advantage" of the time would be taken as a given. Because so many Americans realized this, average U.S. tariffs were set at over 30 percent during the period between 1865 and 1900; James Fallows explains how national circumstance molded the national outlook: "While American industry was developing, the country had no time for laissez-faire. After it had grown strong, the United States began preaching laissez-faire to the rest of the world." (18) Economist Ravi Batra of Southern Methodist University says that during the nineteenth century the United States "became the preeminent economic power in the world. Would free trade have done that? Absolutely not. If it were up to free traders, America would still be a prominent agrarian economy." He adds: "The U.S. success occurred because the nation was able to generate the ingredients for growth - large consumer markets and vigorous competition - even in the absence of foreign trade." A key to this was fierce domestic competition. (19)
That in the new age of unemployment or of marginalized work, it will be essential that the closed system be departed from enough to allow a solution to the dual problems of distribution and purchasing power.
I haven't been eager to become involved in the Free Trade vs. Protection argument, which has raged for hundreds of years. I raise it now because it was an eye-opening experience, in terms of my own classical liberalism, for me to read List; and because his insights add so much to an intelligent critique of the closed system of market thought. That critique is imperative now that world changes are bearing down on us in ways that will make a lock-step adherence to that system disastrous.
The idea of a "shared market economy" - in which all members of a society receive shares in index mutual funds that represent market-wide investment in the competitive economy - will scandalize the closed-system ideology. To it, such a thing will be "government intervention" and "giving people something for nothing." Moreover, the effort by individual nations to deal with this need, necessarily through political action to create the broad sharing of ownership, will seem "impermissible economic nationalism," especially since no one people can conceivably share ownership with everyone in the world and will have to limit the sharing to its own members. Accordingly, stringent ideological barriers stand in the way of solving the coming "crisis of the [relatively workerless] market." Those barriers have to be removed if the solution is to be accomplished. And the best way to remove them is to see that they really don't make sense anyway - certainly not to a conclusive extent.
That in the coming age of reduced scarcity, in which technology is so incredibly productive, the fine-honing of degrees of economic efficiency won't be nearly so important, anyway, as it has been in the past or as economic theory has described it. This makes it increasingly justifiable for local peoples to develop preferences as to the direction of their own activity.
Cultural conservatives of all persuasions, Left or Right, have thought all along that market ideology puts too much stress on economic performance and not enough on "the small platoons to which people belong" - family, community, a person's own country. It is not just the ideology that leads to this deracination: the mobility that a market economy demands is a force that breaks these local bonds, such as when adult children, say, move half-a-continent away to pursue jobs.
The incoming technology can, if people choose, shift the balance in the other direction. Comparative productivity may become far less important, relative to other values, in a world in which there is abundant productivity. We can think of this in economic terms as a matter of "marginal utility": the utility of additional increments of productivity becomes far less when the increments are on top of an already-vast productivity; and the relative utility of other things becomes higher. However, to give expression to this heightened interest in non-economic values, people will have to depart from the market view that productivity trumps everything else.
Departures from laissez-faire ideology do not demand that a competitive global market be abandoned. They simply mean that other needs can be satisfied, especially as those needs become vitally important. Nor does a broad-based sharing of the ownership in the economy mean that those who are active in the economy cannot make additional money or hold additional ownership. Indeed, shared ownership only has value if the economy itself remains innovative and highly productive. A consensus has properly come into being in recent years that this requires a competitive market system.
1. See G. D. H. Cole, Labour in the Commonwealth (London: Headley Bros. Publishers, Ltd., no date given), p. 107; and Thomas Kirkup, History of Socialism (New York: The Macmillan Company, 1909), p. 356. My own discussion of it appears in Dwight D. Murphey, Liberalism in Contemporary America (McLean, VA: Council for Social and Economic Studies, 1992), Chapter 10 and particularly pp. 168-174. That chapter was republished in the Journal of Social, Political, and Economic Studies, Summer 1992, pp. 183-202.
2. Maurice Cornforth, The Open Philosophy and the Open Society (New York: International Publishers, 1968), pp. 210, 212. This "underconsumption" theory is still relied upon today by so prominent an author as Ravi Batra, an economics professor at Southern Methodist University. See his book Stock Market Crashes of 1098 and 1999: The Asian Crisis and Your Future (Richardson, Texas: Liberty Press, 1997), in which he speaks frequently of the "supply-demand gap."
3. Mark Skousen, "Overworked and Underpaid?," The Freeman, 1996, pp. 734-735.
4. Hans Sennholz, "Notes from FEE," The Freeman, November 1996, unpaginated center feature.
5. Paul Krugman, "Does Third World Growth Hurt First World Prosperity?," Harvard Business Review, July-August 1994, p. 116.
6. Mises, Human Action, p. 143.
7. See my "Three Contemporary Psychologists and the Meaning of Life" in The Occasional Review, February 1974. It is entirely a postscript to my present discussion to bring it up, but the treatment given to this article provides a hilarious case-in-point about the travails an independent thinker goes through. The editor liked my analysis of Frankl, Maslow and Branden, but when he got to the end and found that I wasn't basing my critique on a belief in God, but rather on the fact that individual people are the source of value judgments, he cut out the final three pages. I had to complain to the journal's publisher, who then insisted that the editor include the conclusion of my article as a "Postscript" in the next issue. So to read the entire essay you have to pick up the ending from the Fall 1974 issue.
8. Friedrich List, The National System of Political Economy (Fairfield, NJ: Augustus M. Kelley, Publishers, 1991 reprinting), p. 166.
9. Here are passages from Henry George's Protection or Free Trade that illustrate the summary I have made in the text:
P. 273: "Land is not the produce of labor; it existed before man was...[T]he value of land is a value of appropriation, based upon the amount that can be appropriated, and therefore tends to increase as the progress of society increases production."
P. 272: "If infants ceased to be born and men to grow up in America, his land would be valueless. The profits on such I nvestment do not arise from the growth of land or increase of its capabilities, but from the growth of population."
P. 280-1: "All we have to do is to treat the land as the joint property of the whole people...In other words, we can leave land now being used in the secure possession of those using it, and leave land now unused to be taken possession of by those who wish to make use of it, on condition that those who thus hold land shall pay to the community a fair rent for the exclusive privilege they enjoy--that is to say, a rent based on the value of the privilege the individual receives from the community in being accorded the exclusive use of this much of the common property, and which should have no reference to any improvement he had made in or on it, or to any profit due to the use of his labor or capital."
P. 281: "As Herbert Spencer has said of it: 'The change required would be simply a change of landlords. Separate ownership would merge into the joint-stock ownership of the public.'"
P. 284: "A large and constantly increasing fund would be provided for common uses, without any tax on the earnings of labor or on the returns of capital."
P. 311-2: "Among the purposes which will suggest themselves to the reader by which the surplus income of the community could be used to increase the sum of human knowledge, the diffusion of elevating tastes, and the gratification of healthy desires, there is none more worthy than that of making honorable provision for those deprived of their natural protectors, or through no fault of their own incapacitated for the struggle of life... Citizenship in a civilized community ought of itself to be insurance against such a fate." One possibility: "No taxes at all, and a pension to everybody" [quoting an English member of parliament].
10. George, Protection or Free Trade, p. 322.
11. Samuel Brittan, A Restatement of Economic Liberalism (Atlantic Highlands, NJ: Humanities Press International, Inc., 1988), p. 300.
12. Quoted by Irwin M. Stelzer in National Review, March 16, 1992.
13. Friedrich List, The National System of Political Economy (Fairfield, NJ: Augustus M. Kelley, Publishers, reprinted in 1991). See the following passages:
P. 112: "A restrictive commercial policy can be operative for good only so far as it is supported by the progressive civilisation and free institutions of a nation...."
P. 175: "A nation in its normal state...must afford to those who belong to it a high degree of security and liberty, and must promote religion, morality, and prosperity; in a word, must have the well-being of its citizens as [its] object."
P. 335: "A high degree of economical development has only been attained in those nations whose form of government has been such as to secure to them a high degree of freedom and power, of steadiness of laws and of policy, and efficient institutions."
P. 360: "The Saint-Simonians and Fourrierists (sic) ...Their annihilation of individual freedom and independence is their weak side; with them the individual is entirely absorbed in the community...."
14. J. S. Nicholson in his introduction to List, The National System, no pagination for the Introduction.
15. See Michael E. Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), pp. 12 and 13: "The standard theory assumes that there are no economies of scale, that technologies everywhere are identical, that products are undifferentiated, and that the pool of national factors is fixed. The theory also assumes that factors, such as skilled labor and capital, do not move among nations. All these assumptions bear little relation, in most industries, to actual competition... More and more industries do not resemble those that the theory of comparative advantage was built on."
16. Stephen S. Cohen and John Zysman, Manufacturing Matters: The Myth of the Post-Industrial Economy (New York: Basic Books, Inc., Publishers, 1987), pp. 238-9.
17. List, The National System:
P. 80: "How pitiable and unpractical seems that theory of political economy which would have us refer the material welfare of nations solely to the production of individuals, wholly losing sight of the fact that the producing power of all individuals is to a great extent determined by the social and political circumstances of the nation."
P. 138: "It is (says J. B. Say) that science which teaches how riches, or exchangeable values, are produced, distributed, and consumed. This is undoubtedly not the science which teaches how the productive powers are awakened and developed, and how they become repressed and destroyed" [List's emphasis].
P. 295: "As in all human institutions so also in industry, a law of nature lies at the root of important achievements which has much in common with the natural law of the division of labor...[this is] the confederation of the productive forces, whose principle, namely, consists in the circumstance that several generations following one another have equally united their forces towards the attainment of one and the same object...."
18. Patrick Low, Trading Free: The GATT and US Trade Policy (New York: The Twentieth Century Fund Press, 1993), p. 53; James Fallows, "How the World Works," The Atlantic Monthly, December 1993, p. 80.
19. Ravi Batra, The Myth of Free Trade (New York: Touchstone Books, 1993), p. 137.