Letters

REYNOLDS' "PURGE" CONSIDERED

This is being written to comment on Alan Reynolds' "The Purge of Chicago Economists." (REASON, July 1971).

Reynolds says "…Rothbard feels that the notion of 'neighborhood effects' is invalid because it is subject to abuse (the unpaid benefit of watching mini-skirts). To reject neighborhood effects, however, is to say that there are no benefits or costs that escape market pricing—a patently untenable position and one which is inconsistent with Rothbard's own argument that polluters should be liable for damages."

Rothbard, as I understand him, does not claim that no benefits or costs escape market pricing; he claims that those benefits and costs which affect exchangeable goods depend either on market pricing or on physical interference with another's property (or the threat of such interference). The concept of a "neighborhood effect," in Rothbard's view, is invalid because it lumps together those benefits and costs which are based on coercion—e.g., polluting another's property, certainly a physical interference—with those which involve nothing except a change in some men's subjective valuations of opportunities, and proposes to "correct" both by the use of force—which in one case would involve using force against aggressors, in the other against peaceful men, thus blurring the distinction between aggression and proper liberty which Rothbard regards as essential to a peaceful society and thus to the market. If by "the market" one understands a society in which all aggression is excluded, then the idea of a "neighborhood effect" is simply of no relevance; because all "neighborhood effects" based on aggression—among which pollution can be included—would be stopped, and all those involving nonexchangeable goods such as the sight of a girl's legs would simply be outside the sphere of exchangeable goods. To propose to "correct" the first would be redundant, since they would already be corrected—see Demsetz' "Toward a Theory of Property Rights," reprinted in LIBERTARIAN CONNECTION 12, for an analysis of how property rights resolve externalities—and to propose to correct the second would be to suggest action on a principle which could justify prosecuting Roman Catholics for the mental discomfort they cause to Nietscheans such as myself, or vice versa, or both.

Finally, to call Rothbard's view "patently untenable" is not a proof or even an attempt at one. Too many views which deserve careful consideration are dismissed in this way. If Reynolds would care to identify the categories of events which he regards as showing that Rothbard's view is untenable, then perhaps he could make possible some coherent discussion, rather than philosophical name-calling.

William M. Stoddard
Sunnyside, Calif.

Alan Reynolds, in his article "The Purge of Chicago Economists" (REASON, July), brought out some good points, but in regard to his sneering attitude toward Murray N. Rothbard's "all-or-nothing games:" the lesser-of-two-evils approach championed by Mr. Reynolds leaves much to be desired, as well. "I see no objection to probable improvement by gradual steps," says Mr. Reynolds, but how "probable" are these "improvements," when considered in the context of the "real institutions and real people" he mentions?

Criticisms of Friedman often take the form of attacks on "some perversion of the original proposal," wails Mr. Reynolds. But isn't the fact that these "proposals" are subject to "perversions" a valid criticism in itself? Tuition vouchers and the negative income tax are two such Friedman proposals which are open to a myriad of perversions and are likely to lead to more, rather than less, government. One should think twice before calling them (or their proposer) "libertarian."

While no sensible person expects the State to vanish overnight, let us not, like Zeno, be caught up in a never-ending succession of half-way measures. When faced, for example, with someone who advocates the death penalty for publishing something in a newspaper, are we to hail as a "libertarian reformer" someone who offers a 99-year prison sentence?

Michael Hoy
Rose City, Michigan

D. FRIEDMAN ON BANKING

I enjoyed Mr. Reynolds' able defense of my father against Murray Rothbard. Most of it I agreed with; certainly my father holds very few of the views that Rothbard attributes to him.

But there are several points where I must disagree with Mr. Reynolds, all involved, directly or indirectly, with his attack on free (unregulated, nongovernmental) banking.

I am not an expert on the history of free banking in this country in the latter nineteenth century, but two points should be made. First, although there may have been financial crises, free banking, so far as I know, caused nothing quite comparable to the depressions of the 1830s and 1930s. As Mr. Reynolds himself points out, we must compare the various reasonable alternatives to each other, not to some ideal of perfection. Second, the difficulties Mr. Reynolds discusses with regard to private banking are mostly the results of poor communication and poor information handling. Those are areas in which there has been enormous progress over the last century. If free banking worked reasonably well in 1879, it would surely work far better in 1979.

As to counterfeiting, American Express seems to solve that problem with greater ingenuity than the U.S. Government. If you accidentally dump your travelers checks in the washing machine (or intentionally try to erase the signature at the top of the check) the checks come out marked INVALID along the top edge. It's easier to see than the difference between real Fed notes and free market ones.

Of course, the costs of preventing counterfeiting may constitute an economy of scale; if so, the market will respond by producing fewer varieties of money than would otherwise be optimal.

But Mr. Reynolds makes, I think, a much more serious error, one he shares with both Rothbard and Mises. He implicitly assumes a fixed price of zero, paid by the bank to those who hold its money (and thus give it an interest free loan). It the price for producing money is fixed at zero (above its negative market level), of course banks will "want" to produce too much. Under competition, would banks not have to provide "interest bearing money," in the form of either interest bearing checking accounts or money whose redemption value was guaranteed to rise, year by year?

If so, the old incentive for inflation disappears. Banks will "produce" money until marginal cost equals marginal income, just like anyone else produces anything else.

Under such a system (assuming currency rather than checks), there would be a steady slow price deflation, one just sufficient to keep the money interest rate at about zero (neglecting the overhead costs of the banks producing the money). Deriving this result I leave as an exercise for the reader. It corresponds to exactly the behavior of the money supply which my father argues is "optimum" in THE OPTIMUM QUANTITY OF MONEY AND OTHER ESSAYS.

The title essay, incidentally, refutes both Rothbard's contention that my father is an "inflationist" and Reynolds' belief that no ill effects follow from an increase in the supply of money just sufficient to maintain a stable price level.

David Friedman
Chicago, Illinois

AUTHOR REYNOLDS REPLIES

Mr. Stoddard's observation that some costs and benefits "simply" aren't exchangeable describes the essence of neighborhood effects: namely, the prohibitive cost of noncoercively collecting for very real benefits (mosquito control) or for even unforced injuries (noise). Chicago economists, such as Demsetz, Coase, and Tullock, were first to explore ways of bringing such activities into the market (often through clarified property rights), while emphasizing the negative externalities inherent in coercive political solutions.

To say that polluters should be liable for damages is to say that polluters impose costs which cannot be compensated for by market pricing: i.e., there is a neighborhood effect! Rothbard then proposes to "correct" for such nonpayment "by the use of force." If I call the agency which arrests and punishes such polluters a "protection agency" and don't mind a bunch of such agencies competing in the sale of force, I will be hailed an "Anarchist." If I prefer one agency—with the same duties—and call it a "state," apparently I'm a "Statist." It's a touchy teeter-totter.

Mr. Hoy apparently concedes that Dr. Friedman's proposals may be the "lesser-of-two-evils" available. Why then should we not support these proposals and continue such choices between available alternatives until we reach the "least evil"; Is it not accurate to characterize the opposite approach as "all or nothing"? And won't it, in fact, be nothing?

Rothbard's proposals (competing police, uncontrolled coinage, tort-liability for polluters, etc.) are surely subject to perversions too, though I wouldn't consider this a fair, direct criticism of his ideas. Incidentally, Friedman never asked to be hailed a "libertarian reformer," but neither has he deserved to be called a "statist."

I don't believe David Friedman's father shares his son's desire to abolish central bank monopolization of currency issued—probably because free banking did not work "reasonably well" in the last century (compare 1884-1907 with 1948-1971).

When interest was legally paid on demand deposits, it wasn't always offered. Checks didn't just disappear, as David Friedman's theory would predict, because there are many reasons, other than yield, for holding liquid assets. When few people are borrowing and many are saving, even freely competing banks may well charge a service charge for the use of their check-money. Thus, there is no reliable automatic force keeping currency and demand deposits within the 1-2% optimum growth. 100% gold reserves for bank notes and checking accounts might prevent massive fluctuations, but converting to such a system (with our $11 billion gold stock) would require a sudden and catastrophic price deflation.

My remark about "no ill effects" arising from price-level stabilization referred only to Misesian objections to such so-called "inflation" when it is obviously price increases that they're talking about (e.g., only price-inflation taxes fixed incomes and monetary creditors, and generates monetary collapse). There may be ill effects (or good effects) arising from artificially depressed interest rates, although prices remain stable. Much depends on whether the effects are anticipated, as I show in my forthcoming article "Case Against Wage and Price Controls," in NATIONAL REVIEW.

To favor eliminating, rather than restraining, central bank power requires more of a leap of faith than I am prepared to take without seeing the details worked out. At the very least, some sort of rule (say, zero to two percent) for monetary growth would surely be an improvement over existing discretion and would deserve the provisional support of even the most ardent free banking advocate.

Alan Reynolds
Sacramento, Calif.

COUNTERINTUITION?

I have with great interest read Dr. Jay W. Forrester's two-part paper on "Counterintuitive Behavior of Social Systems" (REASON, July and August 1971). Personally I have never studied this field, but I have run wargames on computers and know the field fairly well. The first thing which strikes one from the published curves are the violent fluctuations which appear, especially in pollution. Whenever this appears, one looks for the reason of the instability: there must be a strong positive feedback somewhere. The object of control must not be in selecting suitable initial conditions, as the author has tried, but in breaking the feedback loop. (It may also be thought that such a strong positive feedback is improbable and that there is a serious error in the model, perhaps some none-linear terms are missing.)

Another matter which I must mention is that one should never believe the absolute values predicted by a simulation: there are too many erroneous assumptions in even the best model. One can, however, trust the direction of changes predicted when conditions are changed, assuming the model is reasonably realistic.

Dr. Forrester's predictions are fascinating and his prediction that his field soon will be researched thoroughly will certainly come true, but without independent confirmation I do not believe in a catastrophe of such rapidity.

Dr. Jan V. Garwick
Manhattan Beach, Calif.

ATLAS ARTICLE SCORES

As one who has had his subscription to Ayn Rand's THE OBJECTIVIST cancelled in response to a critical letter, I was very interested in Dennis J. Chase's article "Atlas Shrugged at Me" (REASON, July 1971). My letter criticized Miss Rand's dismissal of ecology as a valid contemporary issue. (See "The Left: Old and New," by Ayn Rand, THE OBJECTIVIST, February 1970). Miss Rand assures us that environmentalists are actually Leftists intent on the destruction of American technology. "The real motive behind the anti-pollution campaign is stated all but explicitly: 'As the decade advances, it will become clear that if the ecological effort is to succeed, much of today's existing technology will have to be scrapped and something new developed in its place.'…" Miss Rand goes on to describe the horrors of primitive existence, insisting that the environmentalists would lead us to a non-technological society. "It is not possible that the anti-pollution—i.e., anti-technology—crusaders are ignorant of man's condition in the midst of an unconquered nature. It does not seem possible that, knowing it, they would advocate its return. But there it is, out of their own mouth."

It is difficult to see how any person, informed on the realities of contemporary life, could draw such a hard and fast association between environmentalism and "anti-technology." I doubt if many people take this position seriously, except for a small minority faction of the DAR. The simplistic attitude of Ayn Rand is revealed in her use of such terms as "dirt" and "grime" to characterize pollution. In her attempt to avoid criticism of industrialists, she defends a status quo technology and overlooks the more relevant concepts of "lethal" and "poisonous." In today's context, for a supposedly reality-orientated intellectual to declare that we should give thanks "to the nearest, grimiest, sootiest smokestack" we can find is, to use some Randist rhetoric, a monstrous absurdity and a moral obscenity.

There is a passage in THE FOUNTAINHEAD which portrays a young man on a bicycle. He is riding through a wooded area and experiences a sense of ecstasy when confronted with the world's beauty. He desires to feel the same thing in relation to man's work and finds it in the achievement of Howard Roark. That the author of that passage now thrusts a sooty smokestack in our faces as her vision of human achievement is a monumental contradiction and a sickening tragedy.

Richard Terrell
Crete, Nebraska

EDUCATION VOUCHERS QUESTIONED

After reading Robert Roole's article "The Case for Education Vouchers" (REASON, April/May 1971), and especially after reading his and Mr. Eenigenburg's comments in the August 1971 issue, I believe it necessary to make a few comments.

Mr. Poole has stubbornly chosen to ignore the fact that the voucher proposal first suggested by Milton Friedman is emphatically not the one scheduled for operation by the Office for Economic Opportunity (OEO). I suggest that Mr. Poole examine the reality of the situation and then consider whether he thinks it is a step in the right direction. In fact, he might profit from reading my own article on the subject: "Ticket to Ignorance: Education Vouchers," which appeared in the June issue of SOL III MAGAZINE.

Mr. Poole is not stamping his foot, no—but he is turning his head away from the obvious.

Peggy Farrell
Santa Monica, Calif.

MR. POOLE REPLIES:

Miss Farrell is correct in pointing out a substantial difference between the Friedman and Jencks versions of education vouchers. The Jencks plan soon to be tested by OEO contains a great many restrictions which considerably reduce the free-market characteristics intended by Friedman. Nevertheless, one need only observe the hysterical fear that the OEO program generates in most public school bureaucrats and teachers' union officials to realize that it delivers a major blow against "public education." For the first time in over a century, a significant amount of control over education will be in the hands of its consumers, rather than being the exclusive province of School Boards and unions.

Furthermore, the OEO demonstration program is just that—a demonstration. In its small, half-hearted way, it's a foot in the door. Once the demonstration has been completed, it will be up to local communities to decide whether to adopt any sort of voucher program—either more or less free-market-oriented. Hopefully, the resulting diversity of plans will demonstrate the greater success of the least-regulated voucher systems. Libertarians should begin planning now to exert a major influence several years hence in shaping post-demonstration voucher systems in a laissez-faire direction.