Time for a pop quiz.

What does Alvaro Vargas Llosa think about efforts to block the so-called Ground Zero mosque? What does Ivan Eland think U.S. foreign-policy leaders can learn from the military’s counterinsurgency operations? What does Dominick Armentano think about the prospects of the state lawsuits against Obamacare? What does S. Fred Singer think about the proposed Renewable Electricity Standard?

To learn the answers, check out the contents of this week’s edition of The Lighthouse, the Independent Institute newsletter. Here are links to the individual items in the latest edition:

1. Obamacare and the Constitution
2. Consumers Would Suffer under the Renewable Electricity Standard
3. Vargas Llosa on the “Ground Zero Mosque”
4. What the U.S. Military Can Teach Its Foreign-Policy Leaders

To keep abreast of Independent Institute publications, events, and student programs, subscribe to The Lighthouse by signing up here.

This book also highlights two enduring alternative paradigms about the fundamental nature of economic systems. The early Puritans had viewed the market essentially as a human activity, and, as such, less than perfect. That being assumed, economic behavior needed boundaries defined by human institutions (churches and governments). The impact of commerce on the local community was a matter for regulation. By the time essentially secular Enlightenment ideas had been hallowed by eighteenth-century clergy, the market had ceased being a human invention and been transmuted into an expression of natural law and a divine construct (p. 249). As such, of course, the economy became sacred and untouchable — perhaps to be worshipped, but never to be reformed by mere mortals. The way was set toward nineteenth-century laissez-faire. The distinction between the economy as an imperfect human invention, always the proper object of reform, and the economy as an expression of some kind of perfection (perhaps general equilibrium), it seems to me, plays out to this day in contemporary politics and economics. As this book shows, these alternative paradigms are largely matters of faith. Recognition of this might greatly improve contemporary political discourse.

That’s Donald Frey, reviewing Mark Valeri’s Heavenly Merchandize: How Religion Shaped Commerce in Puritan America (Princeton, 2010) for EH.Net. It’s an insightful point, contrasting what Hayek called “constructivism” — the view that all social institutions are the result of human design, and hence subject to redesign — with the idea of markets and other institutions as emergent processes not easily reconstructed. (Menger called them “pragmatic” and “organic” institutions, respectively.) Hayek would argue, however, that Frey sets up a false dichotomy by characterizing emergent processes as “divine,” suitable for worship and sacrament; they are man made, simply not designed. Nor would Hayek, or contemporary Hayekians, accept that choice between constructivism and sensitivity to emergent order is itself a matter of faith! (Here’s a whole journal devoted to it.)

The Wall Street Journal has been polling economists throughout the recession on their forecasts, including for unemployment—which have not been very accurate—as well as advice on government policy. Their most recent response: “Economists Want Policy Makers to Back Off Now.”

Despite the continuing challenging conditions, 30 out of 48 economists … said the economy didn’t need any more fiscal or monetary stimulus.

Had they heeded Robert Higgs’s advice 18 months ago, “Instead of Stimulus, Do Nothing—Seriously,” the $787 billion wasted by the American Recovery and Reinvestment Act of 2009 could have remained in the private sector, with vastly different outcomes than the negative multiplier of government spending. Instead, we have ongoing regime uncertainty, as markets, consumers, and investors remain wary of the Obama administration’s pursuit of one “top priority” after another.

I pose this question seriously, not as a physiologist, but as an economic historian. I am provoked to raise the question by an advertisement that Amazon sent me recently, calling my attention a book titled Can Capitalism Survive? Creative Destruction and the Future of the Global Economy. Seeing this sales pitch, my immediate reaction was my usual sadly amused reply to such a question: Can capitalism survive? What an odd question! Assuming that capitalism ever existed at all, it has been dead for at least a century.

At first glance, I did not recognize that the book being advertised is one for which, in a sense, I am responsible. It turns out that the “new” book is only an old (portion of a) book, now adorned by a new subtitle and two new introductory paragraphs by the Newsweek columnist Robert J. Samuelson. If I reveal that the book’s author is Joseph A. Schumpeter, many readers will recognize it immediately as Part II of that famous economist’s best-known work Capitalism, Socialism and Democracy, first published in 1942, with subsequent editions in 1947 and 1950.

The new book’s front cover has a blurb from Fortune that declares Schumpeter to have been “the most influential economist of the twentieth century . . . a major prophet.” The back cover has an embarrassingly superficial blurb by publisher Steve Forbes that, among other things, describes Schumpeter as “the twentieth century’s foremost economist.”

I do not consider Schumpeter entitled to be called the most influential economist of the past century―that distinction unfortunately belongs to John Maynard Keynes, and Milton Friedman surely deserves the second place. As for Schumpeter’s rank as a prophet or as the intellectually foremost economist, I would place him below Ludwig von Mises and F. A. Hayek.

Nevertheless, Schumpeter was unquestionably one of the most important economists of his day, and his work has continued for good reason to attract readers ever since his death in 1950. His analysis of the historical dynamics of classic capitalism, which makes up Part II of Capitalism, Socialism, and Democracy, though contestable on various grounds, may be, all in all, the best ever written, and it certainly remains among the most thought-provoking. (My own thoughts on Schumpeter’s analysis appear briefly in my book Crisis and Leviathan, pp. 239-44.)

In the mid-1970s, having read Capitalism, Socialism and Democracy repeatedly and having used it to good effect in my teaching, I sent a proposal to Harper & Row, the publisher. I proposed that Part II of the book be published as a separate work with an introduction by me. I asked for a reasonable royalty on sales of this proposed book. Harper & Row declined my offer. The publisher liked the idea of a stand-alone publication of Part II, with my introduction, but did not want to pay me a royalty. Not long afterward, in 1978, I was surprised to find in the bookstores the very volume I had proposed, with an introduction by Robert Lekachman, who evidently had been willing to work for less than I when he was approached by the publisher. Somewhat pushed out of shape by this pilfering of my idea, I wrote a letter to Harper & Row to let their managers know how unprofessional, at best, I considered their action to be. As I recall―although my memory is foggy in this regard―Harper then sent me a nominal “finder’s fee.”

(This episode, by the way, was but one of many that led me to propound Higgs’s Law of Publishing, which states: All publishers strive to maximize losses, but by virtue of sheer stupidity, some of them screw up so royally that they earn enough income to remain in business.)

Returning from the foregoing personal digression, what are we to make of the idea that capitalism might survive, indeed, of the idea that it has survived to date, when in fact it has scarcely ever existed and, even when prevailing economic conditions and institutions verged most closely on the capitalist model, sometime between the 1830s and World War I in the United States, they suffered a variety of government interventions and distortions that made the prevailing economic order, like nearly all such orders in reality, a form of “mixed economy”?

My friend Sheldon Richman has been on something of a crusade recently against the defense of capitalism by those who favor a free society, which of course includes a free-market economy. He prefers that defenders of freedom avoid the defense of something called capitalism because, first, the term derives in large part from enemies of the free society, such as the Marxists, and, second, because it has always served and continues to serve the enemies of a free society as a perennial object of misplaced responsibility, a (nonexistent) malefactor to be blamed for every economic problem the government’s countless interventions bring about.

Thus, most recently, by undertaking a series of decisive interventions stretching from the Fed‘s mismanagement of monetary policy, to Fannie and Freddie’s subsidies of unqualified home buyers, to the self-serving idiocies of Barney Frank, Chris Dodd, and Co., among other ill-fated actions, the government created the complex of interrelated disasters that includes the housing boom and bust, the financial debacle of 2008, and the economic recession since 2007. And who’s to blame? That’s right: capitalism. Which must then be “reformed” by mountains of additional government interventions laid atop the previously existing mountain, leaving, of course, Barney and Chris sitting pretty as the reformers, and the key troublemakers―the Fed, Fannie, and Freddie―smelling like roses, with the Fed being given even more power, and Fannie and Freddie being fed a diet of hundreds of billions of dollars in ongoing taxpayer-funded bailouts to continue doing the damage they do.

Perhaps, if we all frankly admitted that capitalism has been as dead as a dodo since 1914, if not even longer, then such factually absurd, ideologically inspired, politically tactical blame-casting would be precluded. It would make no more sense than blaming our economic troubles on the divine right of absolute monarchs, centuries after that doctrine has been abandoned. Perhaps.

So far, however, I have refrained from coming completely onboard Richman’s crusade ship. For many proponents of the free society, capitalism has always signified the ideal of the free-market society more than it has referred to any of its deeply compromised and distorted instantiations that have occurred historically. These people are understandably reluctant to give up still another cherished shibboleth to their enemies, as they previously surrendered their most positive and important ideological identity as liberals. So, even though I rarely use the term capitalism, and I strive to make as clear as I can the difference between the ideal free society (which I defend) and the realities of any existing or previously existing society (which I only study), for now, I decline to condemn those who continue to defend capitalism. They may be making a rhetorical mistake, as Richman insists, yet their hearts are in the right place. It will be easier to straighten out people’s rhetoric in due course than to bring about the change of heart that so many misguided people must experience, if even a shred of freedom is to be preserved.

For decades, some Christians, both “conservative” and “liberal,” have unfortunately embraced an ill-conceived “progressive” (i.e., authoritarian) vision to wield intrusive government powers as an unquestionable and even sanctified calling for both domestic and international matters, abandoning the Christian, natural-law tradition in moral ethics and economics. In contrast, the Oxford/Cambridge scholar and best-selling author C. S. Lewis did not suffer such delusions, despite the gigantic and deeply disturbing advances and conflicts of total war, the total state, and genocides that developed during his lifetime.

Lewis’s aversion to government was clearly revealed in 1951 when Winston Churchill, within weeks after he regained office as prime minister of Great Britain, wrote to Lewis offering to have him knighted as “Commander of the Order of the British Empire.” Lewis flatly declined the honor because he, unlike the “progressives,” was never interested in politics and was deeply skeptical of government power and politicians, as expressed in the first two lines of his poem “Lines during a General Election”: “Their threats are terrible enough, but we could bear / All that; it is their promises that bring despair” (in Poems, p. 62).

Lewis had held this view for many years. In 1940, he had written in a letter to his brother Warren, “Could one start a Stagnation Party—which at General Elections would boast that during its term of office no event of the least importance had taken place?” He further stated, “I was by nature ‘against Government'” (Letters of C. S. Lewis, p. 179).

. . . .

For the full article, please click here.

Part 2 Part 3

Many people are aware that over the years upper-income people have been paying an increasingly large share of federal income taxes.  One consideration is determining someone’s “fair share” of the tax burden.  For example, (all data taken from this web site), in 1980 the top 1% of income earners paid 19% of all income taxes.  By 2007 the top 1% paid more than 40% of all income taxes.

Similarly, the top 5% of income earners paid 37% of all income taxes in 1980, and 61% in 2007.  The top 25% paid 73% of all income tax payments in 1980 and 87% in 2007.

I will leave it to others to decide if these tax shares are fair.  Another concern, which I will set aside for the moment, is that if a minority of taxpayers are paying virtually all taxes (the bottom 50% paid less than 3% of all federal income tax payments), it’s easy for the majority at the bottom end of the income distribution to want more federal spending, because other people will be paying for it.

Something I haven’t seen discussed is that incomes at the upper end of the income distribution tend to be more volatile.  Wages don’t fluctuate as much as investment returns, bonuses, commissions, and so forth that make up a larger share of the incomes of upper-income people.  So, as we increasingly move toward taxing the rich, the tax portfolio of Uncle Sam becomes increasingly volatile.

While the Obama administration is interested in taxing high-income people more, such a move will make the tax system increasingly dependent on the condition of the economy.  When high-income people are taxed more, tax revenues will go up more in a boom than they would with a tax system that spread the burden out more, and will decline more when the economy is sluggish, as it is now.

Many of President Obama’s policy proposals would have negative impacts on economic growth, ranging from his health care initiatives (partially passed this year), his energy policies (which face an uphill battle at the moment), his redistributional policies (including the extension of unemployment benefits), and his regulatory initiatives (such as the recently-passed financial regulations).  Setting aside whether they are in any larger sense desirable policies, one thing they will do is reduce tax revenues by more than if the tax burden were more evenly shared.

As the president proposes placing an even larger share of the income tax burden on upper-income Americans, this, in concert with his other policies, will have a negative impact on aggregate revenues collected.  The president claims to be concerned about the looming future deficits, but his policy proposals suggest otherwise.

Back in 1980, when the top 1% of income earners paid 19% of total income taxes, the highest marginal income tax rate was 70%.  Now, the highest rate is 35%, and the share of taxes paid by the top 1% is more than double what it was in 1980.  Higher tax rates on upper-income taxpayers don’t necessarily bring in more revenue.

Tax volatility like this has been referred to as an “automatic stabilizer,” designed to slow the economy down as it grows, and stimulate it during downturns (with “automatic” tax reductions).  If the economy starts to recover, do we really want to slow that recovery down?  And on the other side, it should be obvious that increasing tax rates won’t “stabilize” a sluggish economy.

There are many reasons I have seen mentioned to oppose the tax increases President Obama proposes as the Bush tax cuts expire at the end of 2010.  One I haven’t seen mentioned is the increased volatility this would induce in aggregate income tax revenues.

I recently ran a nationally-syndicated column “The Presidential Race Card.” Well, Jon Stewart shows that the race card isn’t working on its targets (guilty whites) like it used to “back in the day.” Check this out:

http://www.thedailyshow.com/watch/thu-august-5-2010/race-card-is-maxed-out

From Damon Root’s “Hit and Run” blog over at Reason, a splendid reminder of how open-minded (and open border) the United States was in the 19th century. Imagine Republicans standing up and arguing that the Chinese and all other immigrants have a “natural right” to migrate wherever they choose. And the Republicans preserved the right of their children to be here as full-fledged citizens born on U.S. soil. (They lost the 1882 debate over Chinese entry into the USA but correctly predicted that the Exclusion Act would be remembered as a “blot” on our civilization).

From the Fourteenth Amendment (1870):

“All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.”

Excerpt from Root’s “Born in the U.S.A.”:

“[T]he Radical Republicans of the 39th Congress passed the Civil Rights Act of 1866 over the president’s veto. As Sen. Lyman Trumbull (R-Ill.) declared from the Senate floor, “the child of an Asiatic is just as much a citizen as the child of a European.”

Today, the GOP is on the other side of this issue as they try to repeal the “birthright citizenship” clause of the 14th amendment. The business wing of the party (those who read the Wall Street Journal) might counter with a utilitarian argument that the net benefit of immigration (and resulting citizenship) outweighs costs. But consider how surprised I was at the arguments in the 1880s that “We [Republican opponents of immigration exclusion] claim that the right to liberty is a natural, inherent, God-given right, and his liberty is imperfect unless it carries with it the right of expatriation. . . .” Those sentiments echo in the immigration debates I chronicled in Race and Liberty: The Essential Reader.

Those earlier Republicans also rejected the religious prejudice that then motivated so many, first against the Irish (Catholics) and then against Asians. In the midst of the debate over the Chinese Exclusion Act, the Republican minority quoted from Senator Oliver Morton (R-IN): “Absolute religious toleration was regarded by our fathers as of vital importance. Not only were the different sects of Christians to be tolerated, but the deist, the atheist, the Mohammedan, and the Buddhist were to be free to express and enjoy their opinions. . . .”

My, how far the Grand Old Party has come to be so short sighted. And how farsighted were those in the 19th century who recognized that the Chinese were just as intelligent, hard working, and useful to America as any others. So will it be with today’s immigrants after the scare mongering dies down.

Earth to race hustlers in the GOP: The 14th amendment is here to say. Get used to it!

In Sacramento, they are scheming of ways to put a camera in your car. It is supposedly for safety and to learn about accidents. But if that’s needed, it should be up to the owner of the car, as the ACLU says in its timid qualified critique. However, if the driver can own the car camera, why can’t he choose not to buy a car with one of these cameras in the first place? Why can’t the auto companies and their customers decide? If it’s truly for safety, leave it up to the market. But this is just another excuse for the government to pry into our lives, in this case in a very intimate way.

This week’s Lighthouse (available online here) deals with a wide variety of topics, including economic recovery (Robert Higgs), double-taxation of income of gas and oil producers (William F. Shughart II), Afghanistan (Ivan Eland), and bullfighting in Spain (Alvaro Vargas Llosa).

Links to the individual items appear below:

1. How to Revive a Stagnant Economy
2. Double-Taxing the U.S. Energy Sector: Closing a Loophole–or Tightening a Noose?
3. Progress in Afghanistan Requires Realism about Pakistan
4. Bullfighting Ban Sparks Controversy

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