Consumer Spending Doesn’t Drive the Economy, Investment Does

The Freeman
Foundation for Economic Education
May 17, 2010

“Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries.” –“Consumers Give Boost to Economy,”  New York Times, May 1

Every quarter, when the government releases its latest GDP figures, we hear the familiar refrain:

“What the consumer does is vital for economic growth.”

“If the consumer starts saving and stops spending, we’re in big trouble.”

“Consumer spending accounts for 70 percent of the economy.”

The latter “fact” is repeated regularly in the news reports from the Associated Press, the Wall Street Journal, and the New York Times.

The truth is that consumer spending does not account for 70 percent of economic activity and is not the mainstay of the U. S. economy.   Investment is!   Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the  economy and a higher standard of living.  In the business cycle, production and investment lead the economy into and out of a recession; retail demand is the most stable component of economic activity.

Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output.  It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages — to avoid double counting.  I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS).  By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.

Thus the truth is just the opposite:  Consumer spending is the effect, not the cause, of a productive healthy economy.

The Importance of Say’s Law

This truth prevails in the marketplace:  It’s supply — not demand — that drives the economy.  Savings, productivity, and technological advances are the keys to economic growth.  This principle was discovered and developed by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and is known as Say’s law.  In fact, he invented the word “entrepreneur” to describe the primary catalyst of economic performance.

Is retail sales a leading economic indicator?  Each month the Conference Board releases its Leading Economic Indicators for the United States and nine other countries.  The ten U.S. leading indicators are:

  • manufacturers’ new orders
  • building permits
  • unemployment claims
  • average weekly manufacturing hours
  • real money supply
  • stock prices
  • the yield curve
  • new orders for nondefense capital goods
  • vender performance
  • index of consumer expectations

As you can see, almost all of the indicators are linked to the early stages of production and business activity.

Misleading Consumer Confidence Index

What about the Consumer Confidence Index that the media highlights every month?  It turns out that the title is misleading.  The questions asked consumers are more about business conditions than spending attitudes.  Here are the questions consumers are asked to determine their “expectations”:

  1. Are current business conditions good, bad, or normal?
  2. Do you expect business conditions to be good, bad, or normal over the next six months?
  3. Are jobs currently plentiful, not so plentiful, or hard to get?
  4. Do you expect jobs to be more plentiful, not so plentiful, or hard to get over the next six months?
  5. Do you plan to buy a new/used automobile/home/major appliance [note: these are all durable consumer goods, not unlike durable capital goods] within the next six months?
  6. Are you planning a U.S. or foreign vacation within the next six months?

In other words, the much-touted “consumer” confidence index is more a forecast by consumers for business, employment, and durable goods than “retail sales” and consumer spending.  It does not ask any questions about food, clothing, entertainment, and other short-term buying, because these expenditures seldom change from month to month.

The reality is that business and investment spending are the true leading indicators of the economy and the stock market.  If you want to know where the stock market is headed, forget about consumer spending and retail sales figures.  Look to manufacturing, capital expenditures, corporate profits, and productivity gains.

Beware of Keynes’s Law

The reason we hear so much about the consumer is because the media and political pundits still live under the spell of Keynesian economics, which teaches that demand creates supply.  Keynes’s law is just the opposite of Say’s law (supply creates demand).  According to Keynesians, consumer spending drives the economy and saving is bad when the economy is in a short-term contraction.

In reality, increased savings can actually stimulate the economy, even if consumer spending is anemic.  A recent study by the St. Louis Fed concluded that in the short run, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Daniel L. Thornton, “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17, 2009).

How is this possible?  When people save more, interest rates fall and business can afford to replace their old equipment with new tools, spend more on research and development, or develop new production processes.  So while consumer spending may stay low, business spending can pick up the slack.  Remember, in a dynamic economy the decision by businesses to spend more investment funds and hire more workers is a function of both current consumer demand and future consumer demand.  And don’t forget, during a recession corporate profits often recover first, without an increase in customer demand, because companies can boost profits by cutting costs and downsizing.

In the long run new business strategies and spending patterns increase productivity and lower prices to consumers, which in turns means the consumers’ purchasing power increases.  As the St. Louis Fed concludes, “A higher saving rate does mean less consumption [in the short run], but it could also result in more capital investment and, ultimately, a higher rate of economic growth….  [T]he growth rate of real GDP has been higher on average when the personal saving rate is rising than when it is falling.”

Granted, the ultimate function of business activity and entrepreneurship is to fulfill the needs of consumers, and the most successful firms are those that satisfy their customers.  But more important, who discovers the new, improved products that consumers desire?  Who is the catalyst that determines the quantity, quality, and variety of goods and services?  Did the consumer come up with the idea of personal computers, SUVs, fax machines, cell phones, the Internet, and the iPhone?  No, these technological breakthroughs came from the genius of creative entrepreneurs and the savers/capitalists who funded their inventions.

My Friendly Fights with Dr. Friedman

The Rational, The Relentless – Liberty Magazine – September 2007

by Mark Skousen

“To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel.”— Paul A. Samuelson

Milton Friedman, the intellectual architect of the free-market reforms of the post-World War II era, was a dear but prickly friend. We constantly argued over a variety of issues, but remained friends throughout. I was probably the last person to go out to lunch with him before he died of a heart attack on Nov. 16, 2006.

It was a privilege to know him, despite our policy differences. The triumph of free-market reforms introduced by Thatcher, Reagan, and other leaders in the post-Berlin Wall era (reforms such as lower taxes, deregulation, and privatization that showed the collapse of the Keynesian and Marxist paradigm) can be laid at the feet of a single giant figure: Milton Friedman. Other free-market economists made their mark, but Friedman was the most influential.

Founder of the modern-day Chicago school of economics, Milton Friedman was the force behind many new and excit­ing ideas: policies such as monetarism, privatization of Social Security, school choice, and futures markets in currencies, and also scholarly pursuits that transformed the economics profession from the “dismal science” to the “imperial sci­ence” of today. He was the first economist to counter effec­tively the Keynesian monolith and its myths: that capitalism is inherently unstable, that money does not matter, that there is a trade-off between inflation and unemployment. Friedman debunked them all. He demonstrated that money mat­tered a lot: “Inflation is always and everywhere a monetary phenomenon.”

His most important work is his 1963 magnum opus, A Monetary History of the United States, 1867–1960, with co-author Anna J. Schwartz. This book carefully demonstrates a close correlation between monetary policy and economic activity. Friedman and Schwartz demonstrated beyond doubt that ineptitude by a government body, not free-enterprise cap­italism, caused the Great Depression, when the Fed allowed the money supply to contract by over a third. This book marked the beginning of a counterrevolution, away from the Keynesian view that big government and the welfare state were beneficial. Now government was seen as the cause of our problems, not the cure, as Reagan used to say. Textbooks replaced market failure with government failure. And Friedman made it happen.

He was able to succeed where other free-market econo­mists failed because he had impeccable credentials within the economics profession — earning his Ph.D. from Columbia University, becoming president of the American Economic Association, being published by Princeton University Press, teaching at the University of Chicago, and winning the Nobel Prize in Economics (in 1976, appropriately on the 200th anni­versary of America’s Declaration of Independence).

After establishing himself as a top-ranked economist, he wrote for the general public, especially in Capitalism and Freedom (1962) and Free to Choose (1980), co-authored by his wife and fellow economist, Rose Friedman. (Rose was his beloved companion in life — they traveled and worked together, reared two children, and wrote the memoir “Two Lucky People.”) Milton told me that he always regarded Capitalism and Freedom as his best book for the intelligent layman. I recommend it as an ideal libertarian document.

On a personal level, Milton was unique. He had an “open door” policy toward people of all walks of life. Always intelligent and demanding of evidence, he kept his secretary busy with a huge correspondence with friends and strangers. When I met him in the early 1980s, he didn’t know me from Adam, but he was willing to talk with me and answered my questions seriously. I kept up our friendship by letters, emails, telephone calls, dinners, and lunches over the past dozen years. In 1988, he invited me to my first meeting of the Mont Pelerin Society, and through his influence, I became a member in 2002. He generously wrote blurbs for my recent books and was a big fan of FreedomFest, my annual gathering of freedom lovers. When I had the opportunity to teach at Columbia Business School, he wrote a favorable letter to the dean, which helped me win the position.

Friedman loved to debate, and took on all comers. Unlike many erudite libertarians, he suffered fools gladly and, to my knowledge, never excommunicated anyone over intellectual disagreements. He disagreed sharply with Keynesian economists such as Paul Samuelson and John Kenneth Galbraith, yet he remained friends with both. At times, my own disputes with him were so intense that I thought our relationship was threatened, but my friendship with this happy warrior continued to the end.

Friedman and I were friend and foe on many issues, to the point where I was criticized for being both too sympathetic and too critical. In 2001, at my first board meeting as president of the Foundation for Economic Education, I was approached privately by Bettina Greaves, a long-time FEE employee and devotee of Misesian (“Austrian”) economics. She said, “Mark, I support you in every way as the new president of FEE, but please be more critical of Milton Friedman.” I thanked her for the suggestion. Then, half an hour later, another board member, Muso Ayau, past president of the Mont Pelerin Society and founder of the Universidad Francisco Marroquin in Guatemala, pulled me aside to give me some advice. He whispered, “I support you in every way, but could you do me a favor? Please stop being so critical of Milton Friedman!” When I told Milton this story, he had a belly laugh.

I first met Milton Friedman at the San Francisco Money Show. I approached him with a question about Murray Rothbard’s book, America’s Great Depression, and he willingly engaged me. At the time, I was quite enamored with Rothbard’s Austrian-school explanation of the depression — his argument that it was caused by an inflationary boom in the 1920s that had to collapse, and that the 1930s was actually a good cleaning for a defective financial system. Friedman quickly disparaged Rothbard’s scholarly work, saying that the Fed’s policies during the 1920s were not the problem and that Rothbard had artificially inflated the money supply figures to justify his Austrian position. “The Great Depression was caused by inept Fed policy in the 1930s, not the 1920s,” he told me.

Afterwards, we continued our correspondence by mail, arguing largely about Austrian vs. Chicago economics. This correspondence eventually culminated in my book, Vienna and Chicago, Friends or Foes? (2005). When I asked Milton about the title of this book, he answered, “We’re both friends and foes!” Once I made the mistake of referring to Anna Schwartz, co-author of Monetary History, as his “researcher,” and he blew up. He accused me of being “narrow-minded” and “intolerant” in a way he termed “typical of Austrian economists.” He urged me to look at the back­ground papers and letters dealing with Monetary History at the Hoover Institution, where I would quickly realize that Schwartz was clearly a bona fide “co-author” and not just a “researcher.” This letter is still burning in my files. Funnily enough, a month later, I saw a picture of Anna Schwartz in the American Economic Review, and the short summary of her professional career listed the terms “researcher” and “research” seven times! But I dared not write him back with this comment for fear of retaliation.

A few years after the Money Show I was back in California for a meeting of political conservatives where Friedman was a speaker. I called his hotel room and invited him to lunch, just the two of us. He agreed, and we had a delightful two-hour luncheon overlooking the California coastline. I showed him a chart of M1, the narrowly defined money supply, noting that it had declined sharply in the mid-1980s. I interpreted this to mean that another economic collapse was imminent. He disputed my interpretation. “You can’t rely on M1 anymore — it’s out of date due to the deregulation of the bank­ing system. If you look at M2, which includes money market funds, the money supply is growing. There isn’t going to be any collapse.” He was right. The Reagan era was booming.

When the lunch was over, the bill came and I insisted on paying. As I was signing the credit card bill, I turned to him and said, “Dr. Friedman, one of your favorite sayings is ‘There’s no such thing as a free lunch.’ Well, I’m here to disprove it today because I’m paying for yours.” Quick as a flash, he retorted, “Oh, no, no, Mark, that wasn’t a free lunch. I had to listen to you for two hours!”

When my book Economics on Trial (1991) was pub­lished, I prepared an advertisement with the headline: “Japan and Germany Win World War III,” followed by these words: “Their formula multiplies wealth so rapidly that they will achieve their goal of world domination by the year 2000.” In the ad, I referenced the sound economic model that had transformed war-torn Germany and Japan into economic powerhouses and strengthened their stock markets in one generation. The principles were high savings rates, low taxes on capital and investment, low inflation, balanced budgets, and free markets.

I sent a copy of my ad to Friedman, and he took no time debunking it. “This prediction is a bunch of nonsense,” he scribbled over the ad copy. “I will not live long enough to see it falsified, but you will. In the year 2000, the U.S. standard of living will be higher than the Japanese.” He was, of course, proven right.

Friedman’s anger flared again in the late 1990s, when we gathered in Vancouver for a Mont Pelerin Society meet­ing. Milton and Rose Friedman were in charge of the conference program. Its title was “Can Creeping Socialism Be Stopped?” In one of the breakout sessions I asked Friedman about his easy-money solution to Japan’s economic problems. I held up an article he published in The Wall Street Journal, “Rx for Japan,” in which he advocated a massive printing of yen to jumpstart the Japanese economy, while ignoring such free-market solutions as cutting taxes, deregulating, or open­ing up the Japanese economy. “Isn’t printing more money another example of creeping socialism?” I asked. He was not amused, and noted that, historically, increasing the money supply has stimulated economic recovery, and that fast monetary growth was necessary, given Japan’s fragile condition. I countered, “Ah, so there is a free lunch, after all, Dr. Friedman?” “A free disaster!” he interjected with high emotion. Afterward, Professor Jim Gwartney came up to me and said, “You attacked God today!” Indeed. Yet even free-market icons can make mistakes.

A year later, Milton and Rose were invited to speak at the New Orleans Gold Conference, an annual gathering of hard-money investors. After Milton spoke, he took questions from the audience. I tempted him with the question, “Who’s the better economist, Ludwig von Mises or John Maynard Keynes?” I knew Milton would answer straight; he didn’t care what gold bugs thought. “Keynes,” he proclaimed to a shocked audience. When asked who was the greatest economist ever, he didn’t say Adam Smith, but settled on Alfred Marshall, the British economist who invented supply and demand curves.

Rose dissented. I had never seen her disagree with her husband in public, but she stood up and said that Marshall was infamous for treating his wife poorly and refusing to support her professional career as an economist. In all my private meetings with the Friedmans, Rose was always graciously reserved and seldom if ever argued with her husband. I had heard a rumor that she differed with Milton on Austrian capital theory, and one time I asked her if this was true. She simply smiled and winked.

My most embarrassing moment with the Friedmans came later that evening when I invited them to dinner at the best restaurant in New Orleans, Commander’s Palace, along with two friends, Gary North and Van Simmons. After we ordered and exchanged greetings, Milton turned to me and asked in a serious tone, “Mark, why are gold bugs so passionate about gold?” It was a perfect opportunity to talk about the importance of “honest money,” a theme that Ludwig von Mises, Henry Hazlitt, and other Austrian economists have taught for years. I pulled out of my jacket pocket a large oversized $20 banknote, a “gold certificate” issued in the 1920s. Together we read the words spelled out on it: “This certifies that there has been deposited in the Treasury of the United States of America TWENTY DOLLARS IN GOLD COIN payable to the bearer on demand.” I then explained, “Milton, we’re passionate about gold because under the gold standard, there’s a contract between the government and its citizens. For every gold certificate issued, the government had to back it up with a $20 gold coin. Under a genuine gold standard, the Treasury can’t just print up money to pay their bills. It’s honest money.”

All along, I felt that Friedman was simply playing along, since after all, he was the world’s foremost monetary historian. I went on, “So, what kind of contract exists today between the government and its citizens? Milton, do you have a $20 bill?” He reached into his pocket and handed over a $20 bill. “See, the contract has completely disappeared. Now it only says ‘Federal Reserve Note.’ And the Fed doesn’t even pay interest!” I paused and said, “Milton, this $20 bill isn’t worth the paper it’s printed on.” And I tore it up! I ripped Milton Friedman’s $20 Federal Reserve Note into a half-dozen pieces.

Suddenly, the atmosphere changed. He turned to me and said angrily, “Mark, you had no right to destroy my property!” Rose chimed in, “Yes, Mark, you shouldn’t have done that. That was Milton’s private property.” Gary North and Van Simmons stared in horror and didn’t say a word. Milton’s voice rose, and other dinner guests looked over at us and could see emotions rising. At this point, I was worried. My relationship with the Friedmans seemed to be ending that very night. Finally, I said, “Well, I suppose you want your money back?”

They assented heartily. So I reached into my pocket and pulled out a $20 St. Gaudens Double Eagle gold coin, handed it to Milton, and said, “Okay, here’s your $20!”

He looked startled and stared at the coin. I thought he would be pleased, but I was wrong. Suddenly, he handed it back to me. “I don’t want it!”

I gulped, struggling for words. “But Milton, it’s a gift. Here, take it. It’s a $20 gold coin, worth a lot more than a $20 Federal Reserve Note.”

“No,” he repeated emphatically. “I don’t want it.”

After an agonizingly pregnant pause, I finally figured out a solution. Setting the coin aside, I reached into my pocket, pulled out a fresh new $20 paper note, and handed it to him. “There, okay, will this help?”

He calmed down and took the $20 bill. Gathering up some courage, I brought out the gold coin again. “Look,” I said, as I handed it over to him, “look at the date.” He examined the coin again. “Oh, 1912 — my birth year!” He laughed haltingly. Rose looked on and smiled.

I explained that the entire evening was a set-up, an opportunity for me to give him a St. Gaudens Double Eagle gold coin minted in the year he was born. The coin was in a PCGS certificated plastic container with the words, “To the Golden Milton Friedman.” I told Milton and Rose that my friend across the table, Van Simmons, was a coin dealer and had gone to great lengths to find a 1912 Double Eagle, which was rare. Van added that it had been shipped overnight from Switzerland and had arrived only an hour before dinner. I think that only then did the Friedmans recognize what was going on. The next morning they came up and thanked me for the coin and my gesture of appreciation.

Throughout the evening Gary North — a well-known economic historian and gold bug — said nothing. But in the morning, he came up to me at the conference and said something profound. “Mark, I’ve thought all night about what happened at dinner at Commander’s Palace. You and I have an ideology of gold. And Milton has an ideology of paper money. Mark, last night you attacked his ideology!”

Milton and I never discussed the coin incident again. (I keep his torn-up $20 bill in my wallet as a keepsake.) We met on many other occasions, but I shall never forget our last lunch together in San Francisco. There for the Money Show, I took the opportunity to call him. We met at his favorite Italian restaurant, the North Beach. For the past few years he had walked with a cane and traveled only on cruises or in private jets. At age 94, he had weak legs, a serious heart condition (after two open heart surgeries in the 1980s), and was losing his eyesight. Yet his mind was still sharp.

We discussed the latest Nobel laureates in economics. “We’re running out of good names,” he said. I showed him a Photoshopped picture I had created of him standing next to the 6 foot 10 inch John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century. Galbraith towered over the diminutive Friedman. Beneath the picture* was a funny line from economist George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends.

As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!” But he was almost always upbeat about life, even to the end. He was not a religious man, but he expressed interest in religious topics near the end of his life. His favorite poem was Keats’ “Ode on a Grecian Urn” which ends, “ ‘Beauty is truth, truth beauty’ — that is all / Ye know on earth, and all ye need to know.” He discovered both in a full and complete life. I consider it a privilege and honor that I knew him.

Friedman’s Less Familiar Quotations

Milton Friedman was not only a great economist, but a memorable quotesmith. Besides the standard-bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch” (which he popularized), here are some others less well known:

“If a tax cut increases government revenues, you haven’t cut taxes enough.”

“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”

“A society that puts equality ahead of freedom will end up with neither equality nor freedom.”

“Competition is a tough weed” (George Stigler). “Freedom is a rare and delicate flower” (Milton Friedman).

“Nothing is so permanent as a temporary government program.”

“Inflation is taxation without legislation.”

“The economy and the stock market are two different things.”

“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”

“The great advances of civilization, whether in archi­tecture or painting, in science or in literature, in indus­try or agriculture, have never come from centralized government.”

“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”

“Nobody spends somebody else’s money as carefully as he spends his own.”

“The government solution to a problem is usually as bad as the problem.”

The Art of Letting Go

Tranquility
Liberty Magazine
March 2007

by Mark Skousen

“How many a man has dated a new era in his life from the reading of a book.”— Henry David Thoreau, Walden

Would you do me a favor? Find an easy chair, or better yet, go outside to a secluded spot and read this essay at your leisure.

Ever since my family and I lived in the Bahamas for two years,1 I’ve had an interest in leisure, the lure of breaking away from business and just relaxing, wandering, and letting my mind go. It seems like a very libertarian thing to do. Along with a photo of my family in the Bahamas, I have on my bookshelf a whole list of titles to remind me to walk away from work: The Idle Thoughts of an Idle Fellow; Leisure: The Basis of Culture; and Bertrand Russell’s In Praise of Idleness.

But before I go on, would you mind indulging me? As I write this, it’s a beautiful sunny day here in New York, and my wife has just beckoned me to join her at the swimming pool along the Hudson River. I’ll be back in a not-so New York minute . . . (While you wait, go ahead and read the rest of this issue of Liberty, or just listen to the birds sing.) There’s nothing like an opportunity to think, meditate, and relax with friends on a balmy summer day.

In my travels, I make a point of wandering aimlessly around the city or neighborhood I’m visiting, and usually end up at some used-book store. In the mid-’80s, I happened to be in Durango, Colo., a small college town, and came across a first edition of a book called The Importance of Living by Lin Yutang. I’d tried to read Chinese philosophers before, but never found them appealing until this book came along. What makes Lin Yutang so different from Confucius, Mencius, and Lao Tzu? He lived in both the East and the West, and consequently does an extraordinary job of contrasting the cultures. His book was so refreshing and shocking, so charming and witty, that I found myself underlining something on practically every page. And though Lin wrote in 1937, he sounds very modern.

Lin was a 20th-century Taoist known for his philosophy of leisure and “letting go.” He was also a libertarian who despised all forms of government control, especially Marxism-Leninism and Maoism in Red China. Born in southeastern China in 1895 to Christian missionaries, he learned English at St. John’s University in Shanghai and pursued a doctoral degree at Harvard University. He left Harvard early and went to France and then Germany, where he earned a Ph.D. at the University of Leipzig. After 1928, he lived most of his life in New York, where he translated Chinese texts and wrote prolifically. His objective was to bridge the gap between East and West, teaching Westerners about the old Chinese culture in such bestsellers as My Country and My People (1935) and The Importance of Living (1937). Refused permission to return to China by the Communists, Lin moved to Taipei, Taiwan, where he died in 1976.

The Age of Busy-ness

To understand Lin’s Chinese philosophy, I begin by quoting his most famous line, a line that mystifies workaholic Americans: “Those who are wise won’t be busy, and those who are too busy can’t be wise.”

I made the mistake of writing this statement on the blackboard on my first day of class as a professor at Columbia Business School. A third of the students immediately left, and dropped the class. (Fortunately, the majority had an open mind about pursuing interests other than a 24/7 lifestyle, and later rated my class highly.)

Yet there is wisdom in Lin’s statement. If you are too busy in your work, you don’t have time to learn new ideas, to discover new truths, to enjoy life’s little pleasures, or perhaps to pick a winning stock! Beating the market requires you to look down untrodden paths, and you need the free time to do it.

Lin Yutang criticizes most Americans for being too busy, and therefore slaves to the business culture and the old ways. They worry themselves to death. In another startling statement, Lin writes, “The three American vices seem to be efficiency, punctuality and the desire for achievement and success. They are the things that make the Americans so unhappy and so nervous.”2 Gee, I thought they were American virtues!

Life in the West, according to Lin, is “too complex, too serious, too somber, and too involved.” He would agree with Henry David Thoreau: “Our life is frittered away by detail. Simplify, simplify.” Following Taoist philosophy, Lin warned against “over doing, over achieving, over action . . . of being too prominent, too useful, and too serviceable.” The “perfectly square” house, the “perfectly clean” room, and the “perfectly straight” road rankle in him. He goes on to say, “O wise humanity, terribly wise humanity! How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play!”

The Art of Loafing

Lin says not to worry: “The Chinese philosoph[er] . . . is seldom disillusioned because he has no illusions, and seldom disappointed because he never had extravagant hopes. In this way his spirit is emancipated.”

Culture, says Lin, is essentially a product of leisure. “The art of culture is therefore essentially the art of loafing. From the Chinese point of view, the man who is wisely idle is the most cultured man.” He likes a messy room, a crooked road, and a leaky faucet!

Lin offers the secret to success for the businessman (busy man?) in this statement: “Actually, many business men who pride themselves on rushing about in the morning and afternoon and keeping three desk telephones busy all the time on their desk, never realize that they could make twice the amount of money, if they would give themselves one hour’s solitude awake in bed, at one o’clock in the morning or even at seven. There, comfortably free, the real business head can think, he can ponder over his achievements and his mistakes of yesterday and single out the important from the trivial in the day’s program ahead of him.”

But the West won the cultural war. Today, 70 years after Lin’s critique of the three American vices, it is the Japanese, the Chinese, the Koreans, and the Indians who dress in Western business suits and spout the Western philosophy of efficiency, punctuality, and goal-setting, and who work 14-hour days and forget to play. In the new China, the roads are straight, the houses are perfect, and everything works. I suspect Lin Yutang would not like the new Asia, especially the regimented Singapore. It’s a paradise lost.

The Individual and the State

Lin Yutang is a champion of the individual and “its unreasonableness, its inveterate prejudices, and its waywardness and unpredictability.” But in today’s society, warns Lin, the individual free thinker is being replaced by the soldier as the ideal. “Instead of wayward, incalculable, unpredictable free individuals, we are going to have rationalized, disciplined, regimented and uniformed, patriotic coolies, so efficiently controlled and organized that a nation of fifty or sixty millions can believe in the same creed, think the same thoughts, and like the same food.” Lin goes on to warn, “Clearly two opposite views of human dignity are possible: the one believing that a person who retains his freedom and individuality is the noblest type, and the other believing that a person who has completely lost independent judgment and surrendered all rights to private beliefs and opinions to the ruler or the state is the best and noblest being.”

I daresay which of the two applies to Liberty readers! Lin dislikes the popular trend of sorting people into groups and classes. “We no longer think of a man as a man, but as a cog in a wheel, a member of a union or a class, a ‘capitalist’ to be denounced, or a ‘worker’ to be regarded as a comrade. . . . We are no longer individuals, no longer men, but only classes.”

Lin Yutang experienced the brutality of Chinese communism and the heavy-handed bureaucracy of Washington durng the New Deal era. Needless to say, he had a low opinion of government: “I hate censors and all agencies and forms of government that try to control our thoughts.”

Favoring persuasion over force, Lin distrusts laws and law enforcement. Quoting Lao Tzu, Lin says government regulation “represents a symptom of weakness.” Lin adds, “the great art of government is to leave the people alone.” Quoting Confucius, Lin suggests that if you regulate people by law, “people will try to keep out of jail, but will have no sense of honor.” But if you regulate the people by moral teaching, “the people will have a sense of honor and will reach out toward the good.” War is never ideal, even when your side is right. Again Lin quotes Lao Tzu: “Where armies are, thorns and brambles grow.”

Lin opposed Mao and the Communists because they placed society above the individual. The Soviet model was “disastrous” and Maoism “the worst and most terroristic regime.” Lin favored a “silent revolution, of social reform based on individual reform and on education, of self-cultivation.”3

He also questioned the establishment economist and forecaster:

“Perhaps I don’t understand economics, but economics does not understand me, either. The sad thing about economics is that it is no science if it stops at commodities and does not go beyond human motives . . . It remains true that the stock exchange cannot, with the best assemblage of world economic data, scientifically predict the rise and fall of gold or silver or commodities, as the weather bureau can forecast the weather. The reason clearly lies in the fact that there is a human element in it, and when too many people are selling out, some will start buying in. . . . This is merely an illustration of the incalculableness and waywardness of human behavior, which is true not only in the hard and matter-of-fact dealings of business, but also in the shape of the course of history.”

He was probably unfamiliar with the one school of economics that does take into account human behavior: the Austrian school of Ludwig von Mises and Friedrich Hayek. Undoubtedly Lin would like the title of Mises’ magnum opus Human Action.

Lin Yutang has many more things to say about our culture and how to live a happy and fulfilling life: about growing old gracefully (“The East and West take exactly opposite points of view. In China, the first question they ask is, ‘What is your glorious age?’ ”); the need for women at dinner (“the soul of conversation”); the evils of Western wear (“inhuman”); the only way to travel (“buy a one-way ticket”); and his controversial views on smoking (“one of the greatest pleasures of mankind”). I’ve only scratched the surface of this brilliant Chinese philosopher.

On Buddhism and Christianity

For Lin, Buddhism’s outlook (“life is suffering”) was too pessimistic and its path to happiness (“suppress one’s desires”) too austere. In a chapter called “Why I am a Pagan” in “The Importance of Living,” Lin renounced his parents’ Christianity, which in his age forbade enjoying sex, dancing, food, smoking, drinking, and the good life, in favor of an ascetic lifestyle that suppressed all sinful pleasures to obtain salvation.

Although Lin approved of the Christian emphasis on technology and education, and its banishment of foot binding and drug use in China, he rejected the austerity and social isolationism. “Chinese Christians virtually excommunicated themselves from the Chinese community,” he wrote. While at college, Lin discovered “the vast world of pagan wisdom.” His personal philosophy: “If I had to make a choice between contemplating sin exclusively in some dark, cavernous cor­ner of my soul, and eating bananas with a half-naked girl in Tahiti, entirely unconscious of sin, I would choose the latter.”

Yet in the 1950s, he returned to his Christian roots, although it was a liberal, tolerant, forgiving Christianity. What reconverted him? Not the catechism, but Christian charity, the showing of love, kindness, and good works toward his fellow man as Jesus proclaimed in the Sermon on the Mount. “Once this original emphasis is restored and Christians ‘bear fruit’ in their lives, nothing can withstand the power of Christianity.”4

But for now, it is Lin Yutang and his works that are bearing fruit. There is a growing hunger for leisure in a speedy world and for individualism in a conformist globalization. As if speaking today, Lin states, “I am quite sure that amidst the hustle and bustle of American life, there is a great deal of wistfulness, of the divine desire to lie in a plot of grass under tall beautiful trees of an idle afternoon and just do nothing.”

While enjoying that idle afternoon, may I suggest you take along a copy of Lin Yutang’s “The Importance of Living”? In the United States, a Little, Brown edition came out in 2003, although I’m disappointed that it is without Chinese art on the cover or running heads inside the book. Lin would not approve of such an austere edition! A Singapore edition by Cultured Lotus recaptures the beauty of the original and is far superior. Yet I personally prefer the 1937 edition by John Day Company, available by wandering through any dusty, dank, disorganized bookstore.

Notes
1. See “Easy Living: My Two Years in the Bahamas” (Liberty, December 1987).
2. Lin Yutang, “The Importance of Living” (John Day and Company, 1937), p. 150.
3. Lin Yutang, “From Pagan to Christian” (World Publishing, 1959), p. 78.
4. “From Pagan to Christian,” p. 236.

A Year at FEE

Liberty
February 2003

by Mark Skousen

Is the sun setting on the world’s oldest freedom organization?

The Foundation for Economic Education (FEE) is often called “America’s oldest freedom organization.” It predates the Institute for Humane Studies, the Cato Institute, and the Libertarian Party; its monthly magazine The Freeman (now Ideas on Liberty), was published for years before Reason or Liberty began publication. FEE was founded in 1946 by Leonard Read, a libertarian businessman and prolific writer most famous for his book Anything That’s Peaceful and his essay “I, Pencil.” For almost 60 years, the Foundation has been located in a 35-room mansion on a five-acre estate in Irvington-on-Hudson, just 20 miles north of Manhattan. Through its books, student seminars, and The Freeman, FEE has been associated with some of the biggest names in the freedom movement: Ayn Rand, Ludwig von Mises, Henry Hazlitt, and Milton Friedman, among others. Even Ronald Reagan, John Wayne, and Lawrence Welk wrote letters of support to Read. (Go to www.FEE.org for a delightful color photograph of Ronald Reagan reading The Freeman, while his wife, Nancy, rests on his shoulder.)

Yet since the passing of its founder in 1983, FEE has fallen into obscurity while the Cato Institute, the Heritage Foundation, and Hillsdale College have become household names. It has struggled to survive financially and The Freeman has dropped to only 5,000 paid subscribers. A series of presidents, including Hans Sennholz and Donald Boudreaux (now chairman of the economics department at George Mason University), worked hard to resurrect the glory years of FEE. Their efforts were valiant. But despite these valiant efforts, when I became president of FEE in August, 2001, many of my friends in politics and finance had never heard of it.

So now it was my turn to take on the challenge of resurrecting FEE. I thought my background had prepared me well. I hold a Ph.D. in economics from George Washington University. I’ve been a professor of economics and finance at Rollins College for 16 years. I’ve edited a very successful investment newsletter and spoken on economics and liberty to a wide variety of audiences. Having written over a dozen books, including three textbooks, The Structure of Production, Economic Logic, and The Making of Modern Economics, I felt it was time to focus my efforts on spreading the word.

And I had a long experience with FEE. I have been an avid reader of The Freeman since the 60s, a columnist since 1994, and a financial supporter of FEE. I knew Leonard Read and have lectured at the FEE mansion many times over the past two decades. FEE published my Ph.D. dissertation, Economics of a Pure Gold Standard, in 1988 and a pamphlet, What Every Investor Should Know About Austrian Economics and the Hard Money Movement, in 1995. For many years, I have recommended FEE in my investment newsletter, Forecasts & Strategies as the one organization worthy of a tax-deductible contribution. Most importantly, economic education has always been as much my passion as the world of investing.

So when Gary North, a longtime FEE supporter, urged me to apply for the job as president in early 2001, I jumped at the opportunity. When the FEE board approved my name, our family suddenly dropped our easygoing lifestyle in Florida and moved to New York, with less than a month’s notice.

Attract Attention!

FEE has fallen into obscurity while the Cato Institute, the Heritage Foundation, and Hillsdale College have become household names.

I immediately went to work to restore the glory days of FEE, telling the board that my plan was to think big and make FEE a household name. I read everything I could about FEE, including Leonard Read’s private diaries and essays. My wife, Jo Ann, and I worked twelve-hour days, including weekends, to turn a candlestick (Leonard Read’s favorite symbol of liberty) into a lighthouse. I paid my respects to Andrew Carnegie, the legendary financier buried a few miles away in Sleepy Hollow Cemetery, by following his advice to “attract attention.” The first thing I did upon arriving was to replace the 50-year-old sign at the Broadway entrance with an impressive new sign. Here are some of the other FEE accomplishments in my first year:

• We acquired Laissez Faire Books, the largest distributor of books on liberty in the world.

• We created the annual Leonard E. Read Book Award for Excellence in Economic Education.

• We publicized FEE by obtaining complimentary exhibit booths at the Money Shows and other major investment conferences around the country.

• We created the James U. Blanchard III Memorial Scholarship Fund to finance scholarships for needy international students to attend FEE seminars. We raised over $60,000 in our first year and eight international students were recipients of the Blanchard scholarships this summer.

• We updated our primary website, www.FEE.org, and created a daily news service, www.FEEnews.org, with Ron Holland as editor. He did a terrific job and FEE won an award for this new daily news service. This past summer, FEE.org was averaging 30,000 new visitors each month — not “hits,” visitors.

• We dramatically expanded our high school and college outreach program, with Dinesh D’Souza serving as our spokesman on college campuses, and Greg Rehmke expanding his debate program into the homeschool arena.

• We invited Nobel Prize economist Milton Friedman to write an article for Ideas on Liberty (a first).

The FEE National Convention: First Time on Nationwide TV

Perhaps our greatest achievement was the FEE National Convention (“FEE Fest”) at Las Vegas in early May. It put FEE on the map and people are still talking about it. We attracted nearly 900 paid attendees, 100 exhibitors, and 80 speakers (including Ben Stein, Charles Murray, Ron Paul, Nathaniel Branden, and Dinesh D’Souza). FEE Fest was co-sponsored by Reason Foundation, Heritage Foundation, Young America’s Foundation, Institute for Humane Studies, Leadership Institute, Goldwater Institute, Liberty magazine, and dozens of other freedom organizations. Our seminar director, Tami Holland, put together this program in only four months and Kim Githler, president of the Money Show, was able to negotiate a contract with Bally’s/Paris Resort Hotels without requiring a minimum deposit (thus minimizing our risk). We made some money — $14,000 — on the convention, but more importantly, we made FEE visible for the first time in decades, and introduced hundreds of people to free-market economics in the course of three wonderful days. “I feel an electricity that I have not felt in many years among libertarian gatherings,” commented Nathaniel Branden. We received extremely favorable comments from attendees, and even today people write us to ask when the next FEE convention will be.

As a result of the convention, FEE appeared on nationwide television for the first time when C-SPAN Book TV taped speeches by Dinesh D’Souza, Harry Browne, Michael Ledeen, Charles Murray, Tom DiLorenzo, and me. C-SPAN Book TV broadcast these speeches from the FEE convention repeatedly from May until November. C-SPAN was so impressed with the FEE convention that they wanted to bring two crews to the next one.

As an added benefit of the convention, FEE acquired two new prestigious toll-free numbers, 1-800-USA-1776 and 1-888-USA-1776. These numbers — previously owned by the U.S. Bicentennial Commission — were valued by an independent media consultant conservatively at $400,000. The toll-free numbers were donated by Terry Easton, a telecommunications expert who attended the FEE convention and was so impressed with the “new” FEE that he offered to help FEE financially in many other ways.

FEE Summer Seminars: “You Changed My Life”

The FEE convention also led to the doubling of student/teacher seminars. We sold out all of our student seminars this past summer and even had to add an additional seminar because of higher demand. Over 175 students attended. One major supporter who attended the FEE convention was so pleased that he more than doubled the number of scholarships he awarded to FEE summer seminars.

In addition, we made money on all our seminars this summer (a first). We cut costs by using staffers and trustees to teach. My wife, Jo Ann, and the staff prepared 3,200 meals in the FEE kitchen, thus saving thousands of dollars. But the best part was the response of the students. (One student wrote me, “I will be forever grateful to FEE for making this life-changing event possible. It was one of the most enjoyable and productive weeks in my life.”) Of all the things we did in 2002, the student seminars were the most rewarding.

My Most Controversial Decision: Inviting Rudy Giuliani to Speak

Every year FEE plans a fall dinner in October for trustees and supporters. My goal was to put FEE on a national pedestal, so I invited the #1 speaker in America, former mayor Rudy Giuliani, to be the keynote speaker. I didn’t think this choice would be out of character, since past speakers have included Lady Margaret Thatcher, Bill O’Reilly, and Paul Gigot (new editorial page editor of The Wall Street Journal). Although not a libertarian, Giuliani had almost singlehandedly transformed the world’s most powerful city from a stifling, dirty, dangerous metropolis into a thriving, safe, and clean city. Giuliani proudly points to the recommendations of the Manhattan Institute, a free-market think tank, as having influenced his decision to cut taxes, privatize, and deregulate the city’s economy. And few questioned his leadership during the terrible days after the terrorist attacks in September, 2001. I probably would not have moved to New York if Giuliani hadn’t been mayor, because the New York of ten years ago simply wasn’t safe or inviting.

In my mind, the biggest risk was financial — Giuliani gets a high honorarium and we had reserved the big ballroom at the New York Hilton. My goal was to attract the largest gathering of freedom lovers in New York history and to let them know that FEE was the place to learn more. Kim Githler again came to our aid by co-sponsoring the event and negotiating excellent terms with the Hilton. The chances of getting Giuliani were slim, however, since he turns down nine out of every ten requests. But everything fell into place when Giuliani accepted my invitation. And John Stossel of ABC News graciously agreed to be Master of Ceremonies for the event. Talk about a one-two punch! I quickly arranged pledges from supporters to buy patron tables to cover the cost of Giuliani’s honorarium, and Tami Holland went to work selling tickets. Everything was set for a spectacular extravaganza that would elevate FEE to national prominence.

However, I failed to take into account one thing — the extreme reaction of some libertarians around the country to my choice of Rudy Giuliani as a speaker at a FEE event. Many were outraged that I would select a “fascist” and a “thug” who “represents everything inimical to what FEE stands for,” to quote some of the more colorful lines from libertarians on the Internet. I was attracting attention, all right, but not the kind I was expecting. I countered by explaining that the Liberty Banquet was not an endorsement of Giuliani’s political record, but an outreach program. We wanted the general public to become familiar with FEE as the best source of sound economics, and what better way to attract the public than to invite America’s hero after Sept.11? Thousands of investors and business people didn’t know FEE from Adam, but they knew Giuliani, and by coming to a banquet with America’s mayor as speaker, they would be introduced to a powerful new organization that could change their lives forever.

The only way we are going to make a difference in this world is if we reach out to people who don’t yet agree with us. Sound economics is too important to leave only to libertarians! Henry Grady Weaver wrote in a FEE pamphlet: “I [already] believe in free enterprise. Explain it to those who don’t, not to me.” Amen!

I didn’t think choosing Rudy Giuliani to speak would be out of character, since past speakers have included Lady Margaret Thatcher, Bill O’Reilly, and Paul Gigot.

It didn’t seem to matter that John Stossel, a true libertarian hero, was willing to appear on stage with Giuliani, or that Giuliani had done wonders to restore the value of life, liberty, and property (the libertarian trinity) in the city of New York. I was amazed how closed-minded my libertarian friends were to Giuliani’s positive contributions. “It’s like inviting the devil to church,” accused John Pugsley. My response: “I already did that when I invited Doug Casey to speak at the FEE National Convention on Sunday, May 5.” Many Christian libertarians, including me, were offended by Doug’s attack on Christianity, but I was willing to listen to his opinions. I wish libertarians could be more tolerant and open-minded, more willing to have a dialogue with those whose views differ from their own. As Ben Stein, our keynote speaker at the FEE convention, said, “It’s funny how libertarians are so controlling.” (I was criticized for inviting Ben Stein, too, because he wasn’t a pure libertarian.)

Ironically, another organization, Washington Policy Center, dedicated to “advancing limited government and free markets,” promoted their own banquet in Seattle two weeks before ours. The keynote speaker? Rudy Giuliani. They had over 850 attendees in a very successful outreach program.

Mission Aborted!

It was during this ongoing debate over Giuliani that I received a startling telephone call from the chairman of the FEE board. He said the executive committee had met and decided to ask for my resignation. He did not go into details, aside from saying the board did not share my grand vision for FEE. He cancelled the Liberty Banquet and all future FEE national conventions.

I must admit that this move was the most shocking and disappointing event I’ve ever experienced in the freedom movement, and it came at a time when FEE was on the verge of once again making a real impact. Over the past ten years my wife and I had put our hearts and souls, as well as a good deal of money and reputation, into FEE and then it ended like this! It seemed unfair to us and destructive to FEE’s future. I have no doubt that the board members are good people and well-intentioned supporters of liberty. They volunteer their time, donate funds, and attend board meetings without compensation. Several board members were quite supportive of my presidency and wrote letters on my behalf. But I did not want to cause further controversy by fighting a divided board, so I agreed to resign. I still feel a great sadness about this.

Looking back, I made lots of mistakes as president, things I would do differently if I had the benefit of hind-sight. I would have worked more closely with the board and spent more time raising money. I probably tried to do too much too soon. But I think we did some things right and, in large measure, fulfilled the mandate I was given.

When I became FEE’s president, the organization was coming off a difficult year financially and charitable giving was plummeting across the country. I am pleased that in the six months before I was asked to resign, FEE’s revenues were up 30% and contributions were up 20%. And I am proud of the FEE convention and the student seminars.

When I was asked for my resignation, it was the most shocking and disappointing event I’ve ever experienced in the freedom movement, and it came at a time when FEE was on the verge of once again making a real impact.

After the executive committee cancelled the fall dinner, I was worried about the financial burden the cancellation of the Liberty Banquet would put on FEE, since it would still have the expense of honoring Giuliani’s contract while returning the patron table donations. So with the help of my publisher, Tom Phillips, and Kim Githler of the Money Show, we resurrected the Liberty Banquet and it went off on schedule Oct. 25 at the New York Hilton. It had lost momentum after the initial cancellation and a three-week delay in sending out the major promotions, but we still managed to attract 250 paid attendees. Rudy Giuliani was the perfect gentleman and quite a few libertarians gave him a standing ovation.

Jo Ann and I have appreciated the many letters and emails of support we have received during this difficult period. I continue to teach on college campuses, write my investment letter, speak at conferences, and author books. Instead of writing a column for Ideas on Liberty, I am now a contributor to Liberty magazine. I have my free time back but, to paraphrase John Maynard Keynes, I’d rather be the slave of some great cause.

Whither FEE?

Jo Ann and I will persevere, but what about America’s oldest freedom organization? An aggressive new FEE is unlikely under the current board. The new toll-free numbers have been returned to Terry Easton (upon his request), the daily news service is dormant, and the Blanchard Scholarship Fund is looking for a new home. There’s talk among a few board members of selling the FEE mansion and distributing the assets of FEE to other freedom organizations. Such an action would be most unfortunate. As one FEE supporter wrote, “it would be a crime to discontinue FEE since it was the first free-market foundation preaching in the wilderness to the business community which was then plagued with Keynes’ dogmas.”

FEE deserves to survive and prosper. Many organizations do a fine job of lobbying in Washington, researching public policies, supporting important libertarian scholarship, and fighting the enemies of freedom. But only one organization is dedicated solely to educating students, teachers, businesspeople, and citizens on the principles of free markets and sound money. And, if there’s anything the world needs desperately, it’s a strong dose of sound economics and an enthusiastic FEE. Jo Ann and I sincerely hope FEE can regain its influence.

When the Founding Fathers signed the Constitution of the United States in 1787, Benjamin Franklin, looking toward the half-sun carved on the back of the president’s chair, observed, “I have often in the course of the session, looked at that [chair] behind the president without being able to tell whether it was rising or setting. But now at length I have the happiness to know that it is a rising and not a setting sun.”

In a similar vein, as I was leaving FEE at the end of my presidency, I stood before the large portrait of Leonard E. Read located above the mantel in the living room of the FEE mansion and wondered whether Len was smiling or sad. I think that, for a year at least, he was smiling.

A Year of Miracles — 1776

Personal Snapshots
Forecasts & Strategies
August 2002

“The cause of America is in great measure the cause of all mankind.”

— Tom Paine, Common Sense (1776)

A Year of Miracles

Like most Americans, I’ve always been fascinated by the events of 1776. It was a year of earth-shattering events that transformed forever the Western world.

It is, of course, the year the American colonies broke off relations with the Mother Country, declared political independence from monarchy, and established the words of Thomas Jefferson that “all men are born equal” and endowed with certain “inalienable rights.”

It is the year that Adam Smith’s monumental Wealth of Nations was published, a powerful declaration of economic independence. Smith proclaimed the establishment of a “system of natural liberty” and the “invisible hand” doctrine that private enterprise would benefit the public wealth.

It is the year the eminent British historian Edward Gibbon published the first volume of his classic history, The Decline and Fall of the Roman Empire. It was considered a scandalous book because it blamed the decline and fall of Rome after it adopted Christianity as its state religion. Through his review of the Roman world, Gibbon emphasized the principles of “liberty, virtue and courage.”

Last but not least, 1776 is the year Thomas Paine’s Common Sense was printed, and Paine, more than any other revolutionary figure, symbolized the Age of Enlightenment. Paine’s philosophy encompassed the entire compass of liberty. He was a radical who advanced democratic emancipation, individual rights, religious tolerance and competitive capitalism.

Just as Adam Smith, Thomas Jefferson, Edward Gibbon and Tom Paine were radicals of their day, so the Foundation for Economic Education and its supporters are the radicals of our day, supporting maximum political, economic and religious freedom.

 

The Origin of the 21-Gun Salute

Personal Snapshots
Forecasts & Strategies
July 2002

“Is anybody there? Does anybody care? Does anyone see what I see?”

— George Washington, 1776

The 21-gun salute is considered the highest expression of honor and respect, given to recognize the presence or the passing of a great military hero or political leader. What is the origin of the 21-gun salute? In ancient times, warships fired seven-gun salutes based on the lucky number seven. Seven is also an important biblical number — e.g., God rested on the seventh day.

In 1810, the War Department of the United States defined the “national salute” as equal to the number of states in the Union, at the time 17. This salute was fired by all U.S. military installations at 1 p.m. (later at noon) on Independence Day. Today 50 guns are fired when the president visits a military installation, or when a president or ex-president dies.

In 1842, the presidential salute was formally established at 21 guns. Why 21? Some say it is a multiple of three based on another significant biblical number. At Independence Hall in Philadelphia, tour guides report that the 21-gun salute reflects the founding of our country. Independence was declared on July 4, 1776. If you add up the numbers 1 + 7 + 7 + 6, what do you get? 21! In Las Vegas, “21” is a lucky number. Not only does it represent winning at Blackjack, but if you add the 1 and the 6 in 1776, you get 777, the lucky winning combination in slot machines. And my friend Bert Dohmen, a financial technical analyst, noted that “21” is a Fibonacci number, a number that is found often in nature (the numbers in a Fibonacci sequence are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, … where you add the previous number to get the next Fibonacci number). Fibonacci numbers are used frequently by mathematicians and technical analysts on Wall Street.

What Is the 1776 Club?

To honor our Founding Fathers and the Spirit of 1776, I’ve created the new 1776 Club. The purpose of the 1776 Club is to help deserving students learn the principles of free-market economics and the freedom philosophy in several ways: by attending seminars at FEE headquarters and other centers of liberty around the world; by attending on-campus lectures, regional seminars and international conferences; and taking accredited Internet classes in sound economics. (I’m working right now with Grantham University — www.grantham.org — to create courses in investments, economics and finance, to be announced soon.)

We chose the 1776 Club as the name of this Foundation for Economic Education (FEE) program in honor of our Founding Fathers who declared economic, political and religious independence, and thus created the freest, most prosperous nation in the world.

At the FEE Fest 2002 in Las Vegas in May, we encouraged attendees to donate any amount of money using the numbers “76” or “1776” in them, from 76 cents to $1,776. So far we have raised nearly $15,000 in the 1776 Club. Please feel free to donate any amount, such as $76, $760 or $1,776, to this good cause. If you donate $1,776 or more, you become a Founding Member of the 1776 Club. Some of the first to become Founding Members are: Andrew Westhem, president of Westhem Grant Group of La Jolla, California; Mel Adams, president of Adams Bank in Nebraska; Bert Dohmen of Dohmen Capital Management of Hawaii; Conrad Denke, president of American Production Services of Hollywood, California; and our new FEE chairman, Ed Barr.

What are the benefits of being a Founding Member of the 1776 Club? First, you receive a lifetime subscription to our monthly publication, Ideas on Liberty. Second, you receive a complimentary copy of Leonard E. Read’s classic work, Government — An Ideal Concept. And third, you receive special discounts for our annual FEE Fest and other FEE seminars throughout the year. Most importantly, you share in the joy of helping young people learn the principles of sound economics.

Throughout the month of July, we are planning to ring FEE’s Liberty Bell in honor of all those who send in donations to the 1776 Club. If you send in a donation, we will ring the bell once. If you donate $1,776 or more, we will ring the Liberty Bell 21 times in your name as a way of showing our appreciation for your patriotism and support. Send your donation to the Foundation for Economic Education, 30 South Broadway, Irvington, New York 10533, call 800/960-4FEE, ext. 209, or go to www.FEE.org.

From Poverty to Riches: Is There a Magic Elixir?

From The President’s Desk
Published in Ideas on Liberty
July 2002

by Mark Skousen

“The problem of making poor countries rich was much more difficult than we thought.”

—William Easterly, World Bank1

“If there is one formula for our success, it was that we were constantly studying how to make things work, or how to make them work better.”

—Lee Kuan Yew, former Prime Minister, Singapore2

William Easterly has spent his entire adult life working for the World Bank, living in the Third World, and helping poor countries develop into rich countries. You would think he would severely lecture the World Bank and his fellow economists about the dumb policies governments have pursued.

Instead, Easterly throws his hands in the air and offers no clues to the “elusive” quest for growth. He confirms a few economic truths, such as “incentives matter” and “government can kill growth,” but ultimately he thinks luck has as much to do with it as anything. “There are no magic elixirs,” he sighs. The almighty empirical evidence solemnly declares it. Foreign aid doesn’t work. Foreign investment doesn’t work. High savings don’t work. Investment in machinery doesn’t work. Education doesn’t work. Technology doesn’t work. Tax cuts don’t work. All have failed to live up to expectations. It’s time for the economist to be humbled: “It’s very, very hard to predict success in sports, music, and politics—as well as in economics.”3

Over the years I have witnessed a split in the economics profession. Some adhere to the view that we live in an Age of Ignorance; that we know very little about how the world economy really operates and what government policies should be pursued. They are in large measure armchair critics and doubting Thomases.4 Others believe we live in an Age of Enlightenment; that despite maddening uncertainties about the marketplace, we do know with some assurance how a freely competitive market economy works and we have learned a great deal about what governments should and should not do. It is sad commentary to see that despite his honesty, Easterly, a seasoned veteran in the war on world poverty, tends to fall into the former category. He certainly lost an opportunity to clear the air and reveal the root causes and cures of poverty.

Singapore’s Economic Miracle

Perhaps one reason Easterly’s story ends in tragedy is that he apparently spent too much time in failed economies and not enough time in successful ones. I notice that his book says almost nothing about Chile, the economic model of Latin America, or the Four Tigers—Hong Kong, Korea, Taiwan, and Singapore.

Contrast Easterly’s confused story with Lee Kuan Yew’s autobiographical account of Singapore. Lee became president of the tiny, poverty-stricken British colony after it was granted independence in 1965. In one generation, he oversaw its transformation into an Asian giant with the world’s number-one airline, best airport, busiest port of trade, and the world’s fourth-largest per capita real income.

How did this economic miracle happen?

First, Lee offered real leadership. He was a seminal figure in Asia who accomplished extraordinary things. He built an army from scratch, won over the unions, and destroyed the communists after the British left a vacuum. Despite strong opposition, he insisted on making English one of four official spoken languages, knowing it was fast becoming the language of international business. Singapore, like other Southeast Asian countries, was known for its nepotism, favoritism, and covert corruption; Lee cleaned up the courts, police, and immigration and customs offices. Today Singapore is ranked as the least corrupt country in Asia. Singapore was also dirty, so Lee began a “clean and green” campaign. Rivers, canals, and drains were cleaned up and millions of trees, palms, and shrubs were planted.

The Lee government tore down dilapidated shacks and replaced them with high-rise apartments. He imposed law and order by demanding severe sentences for murder and other crimes. Today Singapore ranks no. 1 in the world for security. To reduce traffic congestion, a huge problem in Asian cities, Singapore built an underground subway system, and imposed an electronic road-pricing program. Every vehicle has a “smart card” on its windshield, and the toll amount varies with the road used and the time of day. During rush hour, the price goes up. “Since the amount people pay now depends upon how much they use the roads, the optimum number of cars can be owned with the minimum of congestion.”5 A sound economic principle!

Lee rejected Soviet-style central planning and domestic heavy industry, although he did target certain industries for development. He focused on a two-pronged plan to advance Singapore: First, his government encouraged domestic industry to leap over their neighbors and link up with the developed world of America, Europe, and Japan, and tried to attract their manufacturers to produce in Singapore. Second, Lee wished to create a First World oasis in the Third World by establishing top standards in security, health, education, communications, and transportation, and a government offering a stable currency, low taxes, and free trade. Singapore would become a “base camp” for multinational corporations from around the world. And, after years of effort, it worked.

Under Lee’s brilliant leadership, Singapore has advanced far beyond anyone’s dreams. Yet we cannot ignore his mistakes—his paternalistic strong-arm tactics, his interventionist targeting of industries, his forced saving programs, his denial of a free press, and his excessive punishments for certain crimes. It will be interesting to see how Singapore performs, both as a people and economy, after Lee Kuan Yew is gone. We can only hope that economic freedom will lead to political liberty.

1. William Easterly, The Elusive Quest for Growth (Cambridge, Mass.: MIT Press, 2001), p. 291.
2. Lee Kuan Yew, From Third World to First: The Singapore Story, 1965–2000 (New York: Harper Collins, 2000), p. 687.
3. Easterly, p. 208. Despite Easterly’s failure to come to any clear conclusions, his book offers an honest and often entertaining appraisal of development literature.
4. See my columns, “Is This the Age of Ignorance—or Enlightenment?,” June 1994; “European Unemployment: The Age of Ignorance, Part II,” January 1995; and “The Age of Confusion,” August 1995.
5. Lee, p. 206.

Mark Skousen is president of FEE.

A Painless Way to Triple Your Savings

From The President’s Desk
Published in Ideas on Liberty
June 2002

by Mark Skousen

“The human mind is charming in its unreasonableness, its inveterate prejudices, and its waywardness and unpredictability.”

—LIN YUTANG1

“Behavioral” finance is the hot new field in the rapidly growing “imperial” science of economics. Consider the titles of recent books on the subject: Irrational Exuberance by Robert Shiller of Yale University, who correctly warned investors that the bull market on Wall Street in 2000 was not sustainable, and Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich.

Essentially, these writers take issue with a fundamental principle of economics—the concept of “rational” predictable behavior. They argue that investors, consumers, and business people don’t always act according to the “rational economic man” standard, but instead suffer from overconfidence, overreaction, fear, greed, herding instincts, and other “animal spirits,” to use John Maynard Keynes’s term.2

Their basic thesis is that people make mistakes all the time. Too many individuals overspend and get into trouble with credit; they don’t save enough for retirement; they buy stocks at the top and sell at the bottom; they fail to prepare a will. Economic failure, stupidity, and incompetence are common to human nature. As Ludwig von Mises notes, “To make mistakes in pursuing one’s ends is a widespread human weakness.”3

Fortunately, the market has a built-in mechanism to minimize mistakes and entrepreneurial error. The market penalizes mistakes and rewards correct behavior (witness how well business responded to the Y2K threat in the late 1990s). As Israel Kirzner states, “Pure profit opportunities exist whenever error occurs.”4

But the new behavioral economists go beyond the standard market approach. They argue that new institutional measures can be introduced to minimize error and misjudgments, without involving the government.

At the American Economic Association meetings in Atlanta in January 2002, Richard Thaler of the University of Chicago presented a paper on his “SMART” savings plan, which is being tested by five corporations in the Chicago area. Thaler, author of The Winner’s Curse and a pioneer in behavioral economics, has developed a new institutional method to increase workers’ savings rates. Thaler noted that the average workers’ savings rates are painfully low. I blame the low rate on high withholding taxes, but Thaler suggested that part of the problem is the way retirement programs are administered. He convinced these corporations to adopt his plan to have their employees enroll in an “automatic” investment 401(k) plan. Most corporations treat 401(k) plans as a voluntary program and, as a result, only half choose to sign up. In Thaler’s plan, employees are automatically invested in 401(k) plans unless they choose to opt out.

Result? Instead of 49 percent signing up (as they do in a typical corporate investment plan), 86 percent participate.

Raises Invested

In addition, Thaler has participating employees automatically invest most of any pay increase in higher contributions to their 401(k) plans, so they never see their paychecks decline, even though their 401(k) plans are increasing. Consequently, employees under this SMART plan have seen their average savings rate increase from 3 to 11 percent.

Robert Shiller was a discussant at the session and rightly called Thaler’s plan “brilliant.” I agree. Having authored several investment books advocating “automatic investing” and dollar-cost-averaging plans,5 I applaud Professor Thaler for taking the concept of automatic investing to a new level. If companies everywhere adopt his plan, it could indeed revolutionize the world and lead not only to a much more secure retirement for workers but to a higher saving and investment rate. The result could be a higher economic growth and standard of living throughout the world.

Most important, Thaler’s plan is a private-sector initiative and does not require government intervention. In short, through innovative management techniques and education, individuals can solve their own financial and business problems without the help of the state.

1. Lin Yutang, The Importance of Living (New York: John Day Company, 1937), p. 57.
2. References to “animal spirits” and “waves of irrational psychology” can be found in John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Macmillan, 1973 [1936]), pp. 161–62.
3. Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957), p. 268. However, Mises refuses to call bad decisions “irrational.” He states, “Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses it, he is not ‘irrational’ he is a poor marksman.”
4. Israel M. Kirzner, “Economics and Error” in Perception, Opportunity, and Profit (Chicago: University of Chicago Press, 1979), p. 135.
5. Mark and Jo Ann Skousen, High Finance on a Low Budget (Chicago: Dearborn, 1993) and Mark Skousen’s 30-Day Plan for Financial Independence (Washington, D.C.: Regnery, 1995).

Mark Skousen is president of FEE.

Can Money Buy Happiness?

Personal Snapshots
Forecasts & Strategies
April 2002

“I’m tired of Love: I’m still more tired of Rhyme. But Money gives me pleasure all the time.” —Hilaire Belloc

I came across a very interesting book the other day called Happiness and Economics: How the Economy and Institutions Affect Human Well-Being (Princeton University Press, 2002), by Bruno S. Frey and Alois Stutzer. It’s a very academic book, with lots of graphs and mathematical regressions, but the conclusions are pretty clear: “The general result seems to be that happiness and income are indeed positively related.” In other words, money can provide many benefits—more opportunities, higher status in society, the ability to travel, enjoy better food, housing, health care and entertainment, etc.

I remember the day I discovered that I would be financially independent. It was a summer day in the 1970s when I came home and presented my wife with more than a dozen checks from a mail-order business I had started. Within a year, we had bought our first home, with 20% down, and by 1984, we had become successful enough that we could move our entire family (with four children) to the Bahamas to “retire.” The experience of becoming financially secure gave Jo Ann and me an incredible feeling of satisfaction.

The graph shows the relationship between income and happiness across nations. In general, people in poor countries are less satisfied than people in rich countries. One reason is that poor nations are often more subject to violence and uncertainty. “Countries with higher per capita incomes tend to have more stable democracies than poor countries have…. The higher the income, then the more secure human rights are, the better average health is, and the more equal the distribution of income is. Thus, human rights, health and distributional equality may seemingly make happiness rise with income.”

But the graph also indicates that more money provides diminishing returns in happiness. Subjective well-being rises with income, but once beyond a certain threshold, income has little or no effect on happiness. That’s why many wealthy people are not any happier than middle-class people. In fact, some wealthy people are downright unhappy.

Four Elements of Happiness

I once read a sermon by a church leader on the “Four Sources of Happiness.” He spoke of work, recreation, love and worship. I think he’s right. You have to find rewarding and honest employment to be happy. Unemployed people, not contributing to society or themselves, are generally unhappy. At the same time, people who spend too much time at the office and can’t relax with their family or friends at home need to learn the joy of recreation with a hobby, sports, travel or other avocation. Some of my most memorable times have been at a county softball game or a pick-up game of basketball with my kids or friends.

Love and friendship are also key elements of happiness. Everyone needs someone to confide in, to spend time with, to learn from, to reminisce with, to love and be loved. For most people, love and friendship take time and effort. You have to work at developing friendships, but the rewards are never-ending.

Finally, worship. Developing one’s spiritual side is essential to happiness. Some of my friends say they don’t need religion, but they are missing out on one of the joys of life—listening to a great sermon, singing hymns, meditating on the word of God and praying for God’s help.

In short, there’s more to life than doubling your money on a hot stock (although that, too, gives a lot of pleasure).

What’s the Big Idea, Mr. Skousen?

Personal Snapshots
Forecasts & Strategies
March 2002

“We live in a ‘knowledge economy’—either you gain new knowledge, or your business and your investments die!” — Peter Drucker, World’s #1 management guru

Peter Drucker is right. Either you grow in knowledge and opportunity, or you and your business die. Either you correctly foresee the future, or your old investment strategy fails. You must always be on the lookout for change, and how it will affect your business, your portfolio and your personal life. My, have we learned this lesson in the past year as stocks have floundered and gold has flourished.

Last month I started putting together the best minds I could think of and asked them to join me for an unprecedented “pow wow,” a three-day intensive program of ideas and strategies on economics, finance, public policy and personal philosophy for the future. Since Sept. 11, 2001, we have all recognized that we live in a much more dangerous world than we could imagine—the growing threats of terrorism, mismanagement, depression, bear markets and trade wars. What will the future bring?

Here are just a few of the experts coming to this historic event, the FEE National Convention & 30th Anniversary Celebration of Laissez Faire Books, scheduled for May 3–5 in Las Vegas:

  • Charles Murray, #1 expert on government policy and controversial author of Losing Ground and The Bell Curve, on “The Growing Power of the State in the War on Terrorism, Drugs and Illegal Aliens.”
  • Robert Poole Jr., founder of Reason magazine, on “Is Air Travel Really Safe?”
  • Gerald P. O’Driscoll Jr., senior fellow at Heritage Foundation, on “The World Map of Economic Freedom—a Startling Revelation.” (You must see this unusual world map in person to appreciate its significance.)
  • Larry Abraham, author and editor of Insider Report, on “What Every Investor Must Know about the Middle East.”
  • Gary Hoover, author of Hoover’s Vision and entrepreneur extraordinaire (creator of Bookstop and Hoovers, Inc.), “The Right Stuff: What it Takes to Succeed in the 21st Century.” Gary will lead a special panel on newly developed management techniques.
  • Ben Stein, actor and social conservative, on “Why Bashing Big Business is Big Business in Hollywood.” He will give us an inside look into the dangers and opportunities in the entertainment world.
  • Congressman Ron Paul on “Danger Ahead: The Way Congress Really Works.”
  • Mike Ketcher, editor of The Financial Privacy Report, will lead a special panel on “How to Protect Your Assets and Privacy in this New Age of Big Government.”
  • Dinesh D’Souza, author of The Virtue of Prosperity and a Hoover Senior Fellow (and FEE spokesman on campus), on “Why They Hate Us.” This is a speech you won’t want to miss.
  • Madsen Pirie, president of the Adam Smith Institute and a privatization consultant to numerous governments around the world, on “The Outlook for Global Capitalism in a Terrorist World.”
  • Louis James, editor of Free-Market.net, on “How to Spread Your Cause on the Internet.”
  • My brother, Joel Skousen, expert on geo-politics, bio-terrorism and survival techniques, “A Principled Approach to Liberty,” and “How to Survive the New World of Terrorism.”
  • Other speakers include: Richard Ebeling from Hillsdale College in Michigan, Parth Shah from India, Doug Casey from New Zealand and Manuel Ayau from Guatemala.

“Big Idea” to be Announced

Finally, I plan to take this opportunity to announce a blockbuster idea that will revolutionize the freedom movement, and maybe even stop the growth of government in its tracks. Don’t miss this opportunity to hear this “big idea” and how it will be implemented—with your help!

Last Chance for “Early Bird Special”

This the last month to take advantage of the “early bird special” at only $175 per person, $99 per student. After March 31, the price goes up to $225. This price includes everything: the Friday pre-conference FEE Course on Sound Money and Free Markets, the cocktail reception and speech by Ben Stein, all the sessions on Saturday and Sunday, entrance into the exhibit hall, and the Saturday night banquet & 30th anniversary celebration of Laissez Faire Books.

How You Can Change the Lives of Hundreds of Students

This is a conference for adults as well as students. If you would like to provide financial assistance to students, please buy a patron table at either the silver, gold or platinum level (call Tami Holland for specific benefits at each level; or go to the website). The FEE National Convention is sponsored by Reason Foundation, Young America’s Foundation, Hillsdale College, Heritage Foundation, Leadership Institute, and dozens of other top-ranked think tanks and colleges. See you in Las Vegas!