DRI-306 for week of 3-23-14: Property Rights

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Property Rights

This space endlessly bemoans the depredations of the economics profession, often laments the teaching of economics and occasionally points out shortcomings of economics textbooks. The biggest error of omission made by economists in and out of the classroom concerns property rights. Nothing is more important to the successful function of society. Judging by the attacks launched against them by enemies of free markets, we might expect lively discussions of property rights inside every economics text. Yet they are virtually ignored by mainstream economics.

The great exponent of property rights was the late Armen Alchian, who may have been the greatest economist ever spurned by the Nobel Prize selection committee. Alchian wrote comparatively little, but his few papers are still among the most cited of any economist. They have been fixtures on the reading lists of graduate students for decades – except for his great work on the economics of property rights, which has been pointedly ignored by academia.

Property Rights and Human Rights

As Alchian observed, social critics have long maintained that the system of property rights maintained in capitalist societies conflicts with “human rights.” Ostensibly, this conflict hurts the poor by allowing those with property to exploit those without it. Only a society without private ownership of property can stop this exploitation.

Alchian insisted that property rights – indeed, all rights – must be human rights. The call for abolition of private property is really a call for government ownership or control of property. This has certain unavoidable implications for people of all income levels.

Alchian stated that the very concept of property is best understood as a system of rights governing the care and use of property. That system operates under the logic of economics.

The Three Elements of Property Rights

Alchian’s key writings on property rights are summarized in entries in the Fortune Encyclopedia of Economics and its successor, the Concise Library of Economics. Here Alchian identified the three key elements of a system of property rights.

First among these is control. A right to property entails control over its care and use. This applies particularly, but not exclusively, to physical or tangible property. We are accustomed to this proposition in its positive form; i.e., in the right of people to enjoy and preserve things they own. Its negative form is less familiar. Children enjoy fewer rights than adults because they lack the capability to properly exercise them. Property rights are a good example of this; since tangible property usually demands care and maintenance, children are less able to exercise a right to its ownership.

Second is the right of exclusion. A property right gives the owner the right to exclude others from the possession and enjoyment of the property. Perhaps the most common example of this is the price charged by sellers, which excludes non-payers from the enjoyment of goods for sale. One of the key requisites for a public good – one that must be produced by government because private producers cannot produce it – is “non-exclusivity,” the inability to exclude non-payers. National defense is a public good because once it is provided for one, it is available to all.

Finally comes the right of salability. A true property right gives the owner the right to sell, rent, assign or delegate all or part of the ownership interest in the property at discretion. This is a key distinction between so-called government ownership and private ownership. Although government ownership is frequently referred to as “public ownership,” this is a misnomer. The government, not “the public,” controls the use of the property. In principle, according to the Rule of Law, the government should not exclude the public, but it often does. The public lacks the right to sell, rent or bequeath all or part of its property interest. Thus, no individual owns the property when “the government” owns it.

Both history and theory are replete with examples that sharpen each of these distinctions. We offer a few of these below.

Case Study in Property Rights: The American Indian and European Settlement

North America was settled by Europeans – Spanish, French, English, Germans and Dutch – beginning in the 16th century. Prior to European settlement, the continent was inhabited by aboriginal peoples who came to be called by the mistaken appellation of “Indians.” Over a period of roughly 300 years, the Indians were displaced – that is, removed from their original habitations and resettled.

The continent was populated by a mixture of Europeans, dominated by the English but also including large numbers of French to the north and Spanish to the south. Beginning in the 17th century, the English established numerous colonies in the central section that later gained their independence and became the United States of America. The English and French coexisted more or less peacefully in the English colony of Canada, which later became part of the British Commonwealth. The Spanish colony of Mexico to the south eventually rebelled and gained its independence from Spain.

In Canada and the United States, the displacement of Indians was accomplished through treaty, land purchase and resettlement. This was historically significant, since conquered peoples were generally treated much more harshly. Indeed, for thousands of years, the principal method for mass acquisition of wealth was conquest and plunder – that is, redistribution rather than economic growth. In the U.S., the process was still violent, though, as treaties and resettlement were accompanied by Indian wars lasting from the early 17th centuries until the end of the 19th century.

Much academic and popular history has condemned the acquisition of land from Indians by Europeans and, later, Americans. “We stole the land from the Indians” is a common phrase used to describe the process. This seems an odd way to characterize a process of negotiation and purchase, the historical successor to conquest, eradication or subjugation. More important is the implication that the proper course events would have been for Indians to have retained title to “their property.” This premise deserves careful study.

The social organization of American Indians was tribal. For most, though not all, their lifestyle was nomadic. In what later became the eastern U.S., the land was heavily forested in both the north and south. Most tribes subsisted by hunting deer. Historian Stanley Lebergott quoted one tribal chief: “[W]e must have a great deal of ground to live upon. A deer will serve us but a couple days, and a single deer must have a great deal of ground to put him in good condition. If we kill two or three hundred a year, ’tis the same as to eat all the wood and grass of the land they live on, and this is a great deal.”

This explains why Indians claimed such large quantities of land as “theirs.” They hunted deer. Deer were voracious consumers of forest grassland. (Today, deer thrive in urban American settings; a recent Wall Street Journal letter writer complained that deer are “urban locusts.”) Indians, in turn, consumed large numbers of deer. Deer would ravage a section of land, then migrate in search of fresh forage. Rather than build fixed settlements, Indians would follow the deer.

Prior to the Industrial Revolution, America – like the world – was overwhelmingly rural and agrarian. The overwhelming preoccupation was producing enough food to sustain life. Lebergott estimated that, by the early 1800s, the eastern Indian lifestyle demanded roughly two thousand acres, or three square miles, to produce enough calories to feed one Indian. This is consistent with contemporary accounts like the quoted passage above. In contrast, the American settlers who cleared land and build farms needed only two acres per person. In other words, the descendants of the European invaders had become one thousand times more economically productive than the Indians. The incentive for settlers to displace Indians on the land was enormous.

Even more to the point, the Indians’ claim to property rights was very weak. They could not control the use of the land they claimed as theirs, nor could they exclude non-users. Their only resort was sporadic violence against encroachments, which was by no means synonymous with enforcement of property rights since was violent, punished the innocent along with the guilty and affected only a small minority of the “violators.” Given their inability to command the first two elements of property rights, they could hardly execute the third. Thus, the basis for denying most Indian tribes a property-right claim to most of the North American continent rested on the same logic as that by which we deny most property rights to children. In both cases, the claimant lacks the competence and capability of exercising the claim.

Rather than grant Indians a dubious de jure property right they were sure to lose de facto anyway to white settlers, American governments in the early 1800s – particularly the administration of President Andrew Jackson – paid Indian tribes off and resettled them on federally owned land outside the boundaries of the United States. (Jackson maintained that it was unconstitutional to execute treaties with Indian tribes as if they were foreign nations, then force state governments to accept resettlement within their borders. He insisted that sovereign states were not bound by the terms of a treaty between the federal government and a foreign nation.)

There was much to regret about the execution of this approach, but the property-rights logic that underlay it was sound. It is quite clear now that salvation for Indians lay in assimilation with modern civilization rather than adherence to tribalism and outmoded economic organization. By treating Indians as wards of the state and preserving the reservation system and a separatist way of life for Indians, the federal government was guilty of the same false paternalism that has condemned much of the American underclass to inferiority today.

What about the western Indians, who occupied the plains and deserts of the Midwest and west? Once again, the predominant lifestyle was nomadic. In this case, subsistence derived from the buffalo or (more properly) bison, who roamed the plains in profusion during the 17th and 18th centuries. Once again, Indians followed the bison, which followed a seasonal pattern of migration throughout the plains. They hunted buffalo with bow and arrow – Plains Indians were amazingly proficient at driving arrows through the hides and deep into the muscular bodies of bison – and by stampeding the animals over cliffs. Although legend says that Indians were thrifty in their use of each part of the bison carcass, the truth is that carcasses were often left to rot.

As with the eastern Indians, the Plains Indians were highly unproductive compared with American settlers. Cattle fed upon grass proved to be vastly more profitable than bison – they dressed out better, their meat was in better demand, cattle could be domesticated whereas bison could not.  Despite the fact that the subjugation of warring Indians predated the near-extermination of the bison by about a decade, no serious attempt was made to establish the bison as a domestic meat animal on the western prairie.

The property-rights claims of Plains Indians were just as weak as those of eastern Indians, for similar reasons. The Plains Indians could not control use of the vast prairies, nor could they exclude interlopers. For many decades, a staple plot of Hollywood movies was the eviction of Plains Indians by greedy, unscrupulous whites hoping to profit thereby. Usually the motivation is gold, newly discovered by treaty violators in some place such as the Dakota Black Hills. In reality, gold discoveries were few and far between. The real motive behind the displacement of Plains Indians was cattle, not gold. White ranchers were vastly more productive on the plains than were Indians.

To be sure, the forest Indians of the east and the Plains Indians of the west do not encompass all Indians. Some Indians, like the Pueblo and Navaho in the west, did establish viable settlements and agricultural lifestyles. They did have valid property claims. Thus, their property rights should have been respected for the same reasons that the questionable claims of most Indians were rejected.

Pure Theory of Excludability: Alchian and Allen Offer a Proof By Negation

The most legendary of all economics textbooks may be University Economics (later reissued as Exchange and Production), by Armen Alchian and William Allen (AA). Blissfully sparse in its use of mathematics but lively and witty, it offers perhaps the most complete exposition of economic logic in any general textbook. Among its many famous applications is the authors’ imaginative defense of property rights, which takes the form of a “proof by negation.”

AA ask us to envision the following world: Automobiles exist, but are not privately owned. Instead, they exist as a common resource. Each is equipped with an auto-start that vitiates the need for an ignition key. Individuals are invited to make use of any car they find on the street, use it as long as required – purchasing their own gasoline – then leave it for someone else to use.

What would such a world be like?

A little thought suggests that the most salient automotive characteristic of that world would be that we would be driving a fleet of clunkers and junkers. Why? Because nobody would have an incentive to invest in either maintenance or repairs, at least beyond the point it took to get them to their immediate destination. From any one individual’s viewpoint, what would be the point of investing any substantial amount of money in an automobile that you would probably never see again once you reached your destination and left the car to go inside a building? Remember that everybody is not only entitled but expected to appropriate any unoccupied car for his own use. If you bought a new radiator for a car you picked up on the street, you might as well kiss that investment goodbye after leaving the repair shop and reaching your house.

With nobody wanting to repair cars to any significant degree or invest in preventive maintenance, their condition would deteriorate rapidly. People would carry their own motor oil, since they would likely have to add it to any vehicle to prevent the engine from blowing a gasket. Long trips would be a risky venture.

Another feature of this brave new world of socialized car ownership would be that everybody would drive off the bottom of their gas tank. Who would bother topping off the tank – unless undertaking a long trip – only to have somebody else drive off to enjoy most of the gas they purchased? For those who have not been subjected to this form of restraint, it can be a nerve-wracking experience calling for continual mental discipline.

AA suggest their example as an intellectual corrective for people who continue to regard property rights as a form of exploitation. Once absorbed, it can be applied to other forms of property to derive some idea what life without private property would be like. Alternatively, we can refer to the closest approximations provided by history. Visitors to socialist countries like Soviet Russia and Communist China often remarked upon the poor condition of the infrastructure and capital stock, usually without realizing that the lack of stock ownership and capital markets had killed off most of the incentive to maintain those capital goods.

Case Study in Salability: Property Rights and Species Preservation

The loss of species to extinction has been a chief selling point for the environmental movement ever since Rachel Carson published Silent Spring in 1962. Schoolchildren are taught the harrowing lesson of the passenger pigeon and the buffalo and told that only placing species on government’s “endangered species list” can save them. Typically, the grant of endangered status entails special protections and stern injunctions against harm.

A country whose wildlife has faced chronic preservation problems is Africa. Its exotic wildlife has always occupied a special place, if only because of its magnetic attraction for tourists. The elephant has been especially threatened because the unique properties of the ivory in its tusks have made it tremendously valuable. Poachers have reduced the elephant to the point of extinction in parts of its natural habitat.

The reflexive response throughout Africa has been twofold: ban elephant hunting and ban trade in elephant by-products like ivory. In Kenya, the government banned the hunting of elephants, but poachers decimated the elephant population from 140,000 to 16,000. In Tanzania, the government likewise banned hunting in 1970, but the elephant population was reduced from 250,000 to 61,000 in little more than a decade. In neighboring Uganda, the situation was even worse; its elephant population dropped from 20,000 to only 1,600.

To an economist well-versed in property rights, the reason for these failures was that the ban on hunting or harvesting elephants for commercial use was born of good intentions but was bound to produce bad results. In fact, it had the effect of killing thousands of elephants!

How could this possibly be true? How could people so sensitive to the welfare of these noble creatures do something so brutal, so insensitive, so utterly contrary to their intention? Alas, reason and emotion are completely different expressions of human thought. A surplus of the latter does nothing to promote the former; if anything, emotion tends to hinder the exercise of reason.

The laws against killing elephants had no effect on poachers because poachers are criminals by definition. They would have deterred ordinary people from killing elephants, but they actually encouraged poachers by killing off the legal market for elephants and elephant by-products, thereby making all things elephantine much more valuable in the black market. Being criminals, poachers were delighted to violate the law and sell their kill in the black market. In effect, the government was operating a price-support mechanism for the benefit of poachers.

One way to protect elephants as a species is by preventing the killing of existing elephants. The elephant-protection laws failed utterly in this respect. An even better means of species protection is by encouraging the breeding of more elephants. And the elephant-protection laws failed even more dreadfully here by destroying the legal incentive to breed elephants by destroying the legal market for them.

What a travesty of logic! Is it any wonder the results were so counterproductive? Well, it is one thing to sneer at failure, but another to actually succeed where good intentions alone have failed. Does ivory-tower economics have anything to show in the way of actual results?

In 1979, the African countries of Zimbabwe and Botswana created private property rights in elephants and allowed harvesting of elephants for commercial purposes. In a little less than 15 years, Zimbabwe’s elephant population rose from 30,000 to about 70,000. Botswana’s rose from 20,000 to 68,000.

The really amazing thing about this case study is that people are amazed by it. After all, we butcher many millions of cattle, chickens, hogs and sheep every year, but these species are not endangered because the legal market for them provides a continual incentive for their preservation and maintenance in good health and sufficient numbers to ensure viability. It seems as though people switch off their reasoning faculties when environmental subjects like species preservation arise.

Property Rights and Economic Development

In South America, economic development has been frustratingly elusive. A country such as Brazil possesses vast supplies of people and natural resources and seems on the verge of breaking through to developed-nation status. A country like Argentina was once among the world leaders in industrial production and economic growth, but now lags far behind. Venezuela has gone from being a continent leader in economic growth to Third-World status and near-chaos.

The insecurity of property rights throughout the continent has been identified as a leading culprit in this lack of enduring progress. It is difficult for investment to flourish in a climate where bribery is commonplace and cronyism runs rampant, where expropriation is a continual threat and financial-market transparency cannot be assumed.

Alchian’s Ghost

Today regulation looms larger in the lives of business and consumers than ever before. The ghost of Armen Alchian hovers over our shoulders. He does not haunt us. He is friendly, but admonitory and stern.

DRI-391: The Man Who Won World War II

World War II was the transcendent historical event of the 20th century. It brought some 100 million men, representing most of the world’s nations, under arms. Between 50 and 70 million people died. In an event of this size and scope, who would so foolish as to assign credit for victory to one particular individual?

Five-star General of the Army Dwight D. Eisenhower, that’s who. Reviewing the war in his memoirs, Eisenhower named one person as “the man who won the war for us.” That man was Andrew Jackson Higgins.

Today few remember Higgins. Reviewing his story does more than restore rightful place to a forgotten hero. Higgins’ story teaches one of the most important lessons in economics.

Andrew Higgins and the Development of the Higgins Boat

Andrew Higgins was born in Nebraska in 1889. After dropping out of high school, Higgins entered the business world. In the 1920s, he started a lumber import/export business and operated it with his own large fleet of sailing ships. To service them, he built a shipyard. A few years along, Higgins designed a shallow-draft vessel with a spoonbill-shaped bow for coastal and river use, which he named Eureka. This boat was able to run up onto and off riverbanks to unload people and cargo. Higgins proved to be a genius at boat design and eventually shipbuilding replaced lumber trade as the primary business of Higgins Industries.

The Eurekaattracted the interest of the U.S. Marine Corps for use as a landing craft. It beat a boat designed by the Navy’s Bureau of Construction and Repair in tests in 1938 and 1939. The Eureka‘s only drawback was that men and cargo had to be offloaded over the side, risking exposure to enemy fire.

Since 1937, the Japanese navy had utilized ramps on its landing craft. Higgins directed his engineer to emulate this principle. The result was the unique landing craft whose technical name was “Landing Craft, Vehicle, Personnel,” (LCVP) but which became better known as the “Higgins Boat.”

The Higgins Boat was one of the most revolutionary advances in the history of military technology. Heretofore, maritime invasion forces had to disembark at port cities – a substantial disadvantage since the opponent could predict the likely arrival location(s) and accordingly prepare bristling defenses. A large army had to travel in large troop ships which, of necessity, were deep-draft vessels. Troop ships would run aground and founder if they tried to dock at most coastal locations. Only at ports with natural deep harbors could they safely dock and unload.

The Higgins Boat allowed men and equipment to be transferred from troop ships to smaller, shallow-draft vessels that could run right onto an ordinary beach, drop their ramps, unload men and equipment and then withdraw to repeat the process. This meant that opponents now had to worry about defending the majority of a coastline, not just one or a few ports.

Amazing as it seems today, the Higgins Boat did not win immediate acceptance upon rolling off the assembly line. Its fight for survival paralleled that of the Allies in the early stage of the war itself.

The Entrepreneur vs. the Bureaucracy

In the early part of World War II, authority for designing and building the Navy’s landing craft was entrusted to the Bureau of Ships. Higgins was viewed coolly by the Bureau. What could a Nebraskan teach the Navy about shipbuilding? Besides, the department had designed and built its own model. Somehow, the Navy could always find an excuse for dismissing Higgins’ designs even when they defeated the Navy’s boats in head-to-head competition.

There was one other minor obstacle standing between Higgins and the bureaucrats at the Bureau of Ships. He hated their guts, viewed their work with contempt and said so openly. “If the ‘red tape’ and the outmoded and outlandish Civil War methods of doing business were eliminated, the work could be done in the Bureau of Ships very efficiently with about one-sixth the present personnel,” Higgins observed. Fortunately for Higgins, he managed to sell his ideas to other friendly powers, this keeping himself in business even though lacking honor in his own land. “If the power structure in place during the early months of the war had stayed in place,” said historians Burton and Anita Fulsom in their book FDR Goes to War, “Higgins would have been out of work and Americans, according to Eisenhower, would have either lost the war or had victory long delayed.”

Two unlikely saviors came to Higgins’ aid. The first of them was none other than Franklin Delano Roosevelt. The President had waged a bitter fight with Republicans in favor of his New Deal economic policies for more than two terms in office, only to watch those policies fail to restore the U.S. economy to its pre-Depression levels of income and employment. His Treasury Secretary, Henry Morganthau, Jr., confessed to his diary that administration policymakers had tried everything they could think of to revive the economy – and failed. Despite Roosevelt’s unwavering faith in the New Deal – and in himself – he sensed that he would need the support of the business community in order to win the war.

Thus, FDR changed tactics abruptly, going from excoriating businessmen as “economic royalists” to abjuring them to ramp up production of war materiel in the national interest. Suddenly, it became politically correct to view business as part of the team, pulling together to win the war. Roosevelt announced this change in philosophy even before Pearl Harbor, in a fireside chat of May 26, 1940. He was fond of describing the change as a switch from “old Dr. New Deal” to “Dr. Win the War” – a characterization that reveals as much about Roosevelt’s view of himself as Physician-In-Chief for the country as it does about his strategy.

Part of Roosevelt’s new emphasis involved the creation of the Truman Committee, headed by then-Senator Harry Truman of Missouri, to investigate government waste and mismanagement. Truman’s efforts in his home state had made him very popular, so when the Marines went to bat with his committee on Higgins’ behalf, the combination was too much for the Bureau of Ships to resist. Truman told the Bureau to produce a landing craft and test it in competition with a Higgins Boat. The test took place on May 25, 1942.

Each boat carried a thirty-ton tank through rough seas. The Navy’s craft barely avoided the loss of cargo and all hands. The Higgins Boat delivered the tank to its destination. The Committee declared Higgins’ design the winner.

Truman was scathing in his verdict on the conduct of the Bureau of Ships. “The Bureau of Ships has, for reasons known only to itself, stubbornly persisted for over five years in clinging to an unseaworthy …design of its own… Higgins Industries did actually design and build a superior [design],” only to run up against the Bureau’s “flagrant disregard for the facts, if not for the safety and success of American troops.”

The Entrepreneur vs. the Rules

Higgins’ trials and tribulations did not cease when he won government contracts to produce his landing craft (and other boats, including PT boats). He succeeded in scrounging up the capital necessary to expand his boatbuilding plant in New Orleans into a facility capable of supplying the armies of the Free World. But in 1942, fully automated manufacturing plants did not exist – Higgins next faced the problem of attracting the labor necessary to man the plant. Even in peacetime, that problem would have been daunting. In the wartime environment of wage and price controls, the chief legal inducement for attracting labor, a wage increase, was limited.

Higgins attitude to this and other problems can be appreciated from his own summation of his personal philosophy: “I don’t wait for opportunity to knock. I send out a welcoming committee to drag the old harlot in.” Higgins raised wages to the allowable maximum. Then he helped to set a precedent that persists to the present day by offering free medical care to his employees. Since this did not qualify as a wage, it was exempt from the controls and from the confiscatory wartime income-tax rates as well.

One plentiful source of labor was black workers. But this was New Orleans; segregation reared its ugly head. Higgins gritted his teeth and complied, while providing equal wages and benefits to all workers.

Shortages of metals and minerals were a throbbing headache. Higgins treated it by buying steel on the black market and stealing some items (such as bronze) that he couldn’t buy. (He later paid for stolen materials.)

Victory in Europe

Andrew Higgins went from employing 50 people in a plant worth $14,000 to hiring 20,000 employees to work seven huge plants. Over 10,000 Higgins Boats were produced, comprising most U.S. landing craft. His plants also built PT and antisubmarine boats.

Prior to landings in Sicily and North Africa in early 1943, Eisenhower moaned that “when I die, my coffin should be in the shape of a landing craft,” since they were killing him with worry. By D-Day, Higgins Boats had forced Hitler to stretch his defenses thin along the French coast. Although favoring the port of Pas-de-Calais, Hitler set up a string of defenses in Normandy as well. The Germans had concentrated nearly enough firepower to defeat the American landing at Omaha Beach, but “nearly” wasn’t enough to thwart the eventual beachhead. Meanwhile, the other four landings went relatively smoothly; the Higgins Boats had made it impossible for Hitler to keep all his bases covered. As Rommel and other high-level strategists recognized, once the landings succeeded, the war’s outcome was a foregone conclusion. Even Hitler couldn’t conceal his admiration for Higgins, calling the boat builder the “new Noah.”

On Thanksgiving, 1944, Eisenhower gave thanks for the Higgins Boats. “Let us thank God,” he intoned, “for Higgins Industries, management, and labor which has given us the landing boats with which to conduct our campaign.” And after the war, in his memoirs, Eisenhower laid it on the line: “Andrew Higgins is the man who won the war for us… If Higgins had not designed and built those LCVPs, we never could have landed over an open beach. The whole strategy of the war would have been different.”

The Thanks of a Grateful Nation

Along with many of the other entrepreneurs whose Herculean efforts supplied the American, British, Chinese and Russian armies, Andrew Higgins was rewarded after the war with an IRS investigation into the “excess profits” earned by his firms during the war. Since his death in 1952, his name has been placed on a Navy ship and an expressway in Ohio. Recently, a memorial (including a statue) has been raised to him in his hometown of Columbus, NE.

At his death, Higgins held some 30 patents.

The Economic Lessons of Andrew Higgins and American Entrepreneurship in World War II: The Value of Profit Maximization

The story of Andrew J. Higgins is perhaps the most dramatic of many similar stories of American entrepreneurship in World War II. Jack Simplot developed a process for dehydrated potatoes that enabled him to feed American soldiers around the globe. After the war, he turned his expertise to frozen foods and ended by supplying frozen French fries to the McDonald’s fast-food restaurant chain. Henry Kaiser was the preeminent wartime shipbuilder. He cut average construction time per ship by a factor exceeding ten (!). Like Higgins, he sometimes resorted to buying steel on the black market. Before the war, he built roads. After the war, he switched to steel and aluminum.

Men like Higgins, Simplot and Kaiser were entrepreneurs of demonstrable, and demonstrated, skill. Today, we relate their exploits with something resembling awe, yet it should have been no surprise that they succeeded. Their success often came on the heels of government’s failure at the tasks they undertook; this should likewise come as no surprise. The fact that government actively resisted their best efforts should dismay us, but not surprise us. After all, we have seen the same lessons repeated since the war.

Consider the test of the Higgins Boat, in which the Navy landing craft designed by the Bureau of Ships faced off against the Higgins Boat. Had the Higgins Boat lost the contract, the Allies would have lost the war or been seriously threatened with losing it. (So said Dwight Eisenhower, the man who led the Allied war effort.) The tacit premise behind government regulation of business is that – of course – government regulators will always act in the “public interest” while private businessmen act from greedy self-interest which must run athwart the general welfare. Yet in this case, government bureaucrats spent years acting in a manner directly contradictory to the public interest, albeit apparently in their own interest. (So said Harry Truman, certainly no advocate of laissez-faire capitalism.)

Should we be surprised that it was the profit-maximizer who won the war and the government bureaucrats who pursued their own interest at the risk of losing it? Certainly not. Higgins had spent his life in private business, where he could gain success and happiness only by building boats that worked. The naval bureaucrats did not have to build boats that worked in order to “succeed” in their domain; e.g., remain bureaucrats and keep their staffs and budgets intact. We know this because they succeeded in thwarting Higgins’ design for five years in spite of Higgins’ triumphs in testing against the Navy. Indeed, granting a contract to the boat that worked would have threatened their success, since their own design and model would have been replaced.

The only surprising thing about the episode is that how close America came to losing the war. Had FDR not done two things that were utterly unexpected – namely, abandon his allegiance to the New Deal and set up the Truman Committee to overrule wasteful measures undertaken by bureaucrats – we might have done just that. In that sense, it might with some justice be said that it was really FDR who won the war. And, in fact, Roosevelt made several additional decisions that were crucial in determining the war’s outcome. Naming George Marshall as Chief of Staff is one such decision. Marshall chose men like Eisenhower, Omar Bradley and George Patton for key commands, in each case jumping them over many other men with seniority and more impressive resumes.

The problem with calling FDR the guarantor of victory is that each of his good decisions only offset other decisions that were dreadfully bad. FDR wouldn’t have had to abandon the New Deal had he not adopted such a disastrous mélange of counterproductive and unworkable policies in the first place. The appointment of Marshall merely undid the damage done by the appointment of mediocre yes-men like Harold Stark and Henry Stimson, to high administrative and cabinet positions in the military bureaucracy.

The Second Lesson: Abandonment of the New Deal

FDR’s abandonment of the New Deal illustrates the second lesson to be drawn from the example of Higgins and his fellow entrepreneurs. Conventional thinking posits wartime as the time of preoccupation with “guns,” whereas in peacetime we can safely concentrate on “butter.” Butter production, so tradition tells us, is effected using markets and a price system, but guns are a different proposition entirely. Combating militarism demands that we use the methods of the militarists by turning the country into an armed camp, as did Germany and Japan.

However difficult it may have been to see through this fallacy at the time, it is obvious in retrospect. America won the war with production, by supplying not only its own needs but those of Great Britain, Russia and China as well. Those needs included not only military goods narrowly defined, but foodstuffs, clothing, medicines and all manner of civilian goods as well. It is highly significant that both Roosevelt and Churchill concurred in urging major motion picture studios to maintain the volume and quality of their products rather than sacrificing resources to the war effort. They realized that movies were part of the war effort.

Put in this light, Roosevelt’s decision to substitute “Dr. Win-the-War” for “Dr. New Deal” takes on vastly more meaning. Without even consciously realizing it, he was admitting the failure of his own policies in peacetime as well as their unsuitability for war. And war’s end brought this lesson home with stunning force. During the war, Roosevelt had abandoned New Deal staples like the WPA and the CCC. After the war, President Truman was able to retain various “permanent” features of the New Deal, like Social Security, banking and stock-market regulation and pro-union regulations. Pervasive control of the price system faded away along with the gradual obsolescence of wartime price controls.

FDR had predicted that it would take total employment of 60 million to absorb the ramped-up levels of total production reached during the war. (Before the war, total employment had been only 47 million.) Keynesian economists predicted a return to Depression, with unemployment ranging from 10-20%, after the war unless massive federal-government spending was undertaken. Instead – appalled at the unprecedented level of federal-government debt as a percentage of gross national product – the Republican Congress of 1946 cut spending and taxes. The result was an increase in civilian employment from 39 million to 55 million and total employment (including government workers) reached Roosevelt’s goal of 60 million without the New Deal-type spending he had envisaged. Unemployment was 3.6%. Annual growth in gross national product reached an all-time high of 30%.

Wartime entrepreneurship battered New Deal economic policy to its knees. 1946 delivered the coup de grace.

The Third Lesson: The Primacy of the Price System

The third and final lesson to be learned concerns the impatience of the entrepreneurs with bureaucracy, rules and laws. In particular, their resort to the black market was exactly what patriotic citizens were being implored not to do during the war. Should we be surprised that entrepreneurs won the war by ignoring the anti-market directives of the bureaucrats?

Hardly. Everybody seemed to take for granted that normal commercial attitudes and impulses should be suppressed during wartime, that the success of any collective goal requires the suppression of all individual wants. But upon reflection, this simply cannot be true.

As usual, the most cogent analysis of the problem was provided by F. A. Hayek, in a short essay called, “Pricing Versus Rationing.” He pointed out that in wartime politicians’ standard recourse is to controls on prices and rationing of “essential” war materials by queue. Any professional economist would, he declared, recognize the fatuity and futility of that modus operandi. “It deprives industry of all basis of rational calculation. It throws the burden of securing economy on a bureaucracy which is neither equipped nor adequate in number for the task. Even worse, such a system would deprive those in control of even the whole economic machine of essential guides for their plans and reduce major decisions of policy and even strategy to little more than guesswork.” This will “inevitably cause inefficiency and waste of resources.”

In other words, the best policy for allocating resources in wartime is the same as the best policy for allocating resources in peacetime; namely, use the price system to determine relative values. Where so many people go wrong is by blithely assuming that because so many military goods are now required, command and control must be used to bring them into existence by forbidding the production of other things. But among the many problems caused by this approach is that the production of any good for a military use means the foreclosure of resource use for production of some other military good. Without a price system to determine relative values, the war itself cannot be run on any kind of rational or efficient basis. This is another reason why the Allies were lucky to win – the Axis were wedded to a Fascist, command-and-control economic system that foreswore free markets even more than the Allies did.

Black markets are the outgrowth of prohibition and/or price controls. They arise because legal, licit markets are forbidden. Whether it is bootleg liquor during Prohibition, illicit drugs in contemporary America or under-the-table trading of ration coupons during wartime, a black market is a sign of a free market trying to escape confinement. Higgins, Kaiser, et al were illustrating the logic of Hayek. Rationing and price controls are just as bad in wartime as in peacetime. They were violating statutory law, but were obeying the higher wartime law of salus populi suprema lex.

The Man Who Won World War II

The man who won World War II was not a soldier. He was a businessman. He won it by applying the great economic principles of free markets. This transcendent truth was acknowledged by World War II’s greatest soldier. The power and meaning of this should persuade even those unimpressed by the logic of economic theory itself.