Having one's deeply felt moral convictions about social justice dismissed as either rationalized self-interest or unadorned stupidity is unlikely to put many people in a mood that is receptive to argument, much less create a willingness to follow some rather abstruse lines of economic reasoning.

I personally did not mind Hazlitt's tone when I read his book, but then, I was already inclined to agree with him. A friend of mine told me she was put off by it, while another friend was struck by the lack of humour in Hazlitt—a strange defect given how consistently funny Bastiat is.

Heath's tone is not grating, and I say this as someone who frequently disagrees with him. I therefore have reason to hope that when he says "critics of capitalism have not done nearly a good enough job at learning their economics," his target audience will take him seriously. I believe that when he criticizes cooperatives, or price fixing, his readers will sit up and take notice. When he questions the usefulness of paper recycling, or the "costs" smokers impose upon society, or the supposed explosion of cancer rates, or the notion that more public transit will relieve traffic congestion, I think that people on the left will at least consider his arguments.

Giving Libertarianism a Hearing

The biggest problem I had with Filthy Lucre came in Chapter One, which is all about—get ready to be surprised again—libertarianism. Heath's purpose is clear: once he has shown why a consistent, principled commitment to economic freedom is unworkable, he and his opponents will be left arguing about the details of how much regulation the market needs.

His opening volley is to declare that libertarianism, like its opposite, communism, is now "thoroughly discredited." He grants that it is not merely "a smokescreen for the expression of crass commercial interests," as many on the left will argue. Rather, it is "a sophisticated political doctrine, rigorously developed, based upon a set of very simple and intuitively compelling ideas." However, "It's also a house of cards, founded entirely upon a fallacy," although one that is "sufficiently unobvious that generations of very clever people were able to overlook it."

What is this fatal flaw at the root of libertarianism, according to Heath? It is the notion that market order could arise spontaneously and promote the good of society without any guidance at all from above. He writes that "for the market to function correctly, people have to refrain from all sorts of nuisance behavior: stealing, defaulting on payment, misrepresenting their goods, coercing others, and so on." While it is in everyone's interest if everyone refrains from behaving badly, each individual has an incentive to cheat if he can get away with it. This is the free rider problem, and it is a real concern, but reputation is a powerful (if not all-powerful) antidote. It is worth quite a lot to be known as someone who keeps his promises, or alternately, as someone who backs up his threats. Heath, however, considers reputation as "far too weak a mechanism to sustain a system of rights." Reputation, he writes, "will not be of much use," either in getting people to make credible promises or to in getting them to make credible threats.

This, Heath thinks, proves that markets cannot function on their own. "[S]ome kind of conscious guidance is also required, to get the invisible hand going in the first place." But as Bryan Caplan pointed out recently in his book, The Myth of the Rational Voter, markets for illegal drugs do function not merely without government protection or guidance, but in spite of gargantuan government efforts to eradicate them. Heath in fact recognizes this in a later chapter, but fails to see how it undermines his case here.

And Another Thing…

Heath's next move, once he thinks he has dealt with the no-state libertarians, is to address the minimal-state libertarians. Here, he argues that even a minimal state that was restricted to protecting individual rights would still need to be funded by taxes, which would have to be mandatory to avoid generating another free rider problem. He thinks that once libertarians concede this point, we have no principled basis for preferring a minimal state.

There are two, complementary responses a libertarian can make, however. First, a minimal state would require far fewer taxes than current states, and so generate a far smaller free rider problem. Heath tries to argue that the amount would still be substantial, quoting a figure of $73 billion spent by the U.S. government in 1992 just on "police protection and criminal corrections," but he provides no context for this number. Even ignoring the fact that this figure includes funds spent on the massively wasteful injustice known as The War on Drugs, total U.S. government budgets lately have been in the $3-4 trillion range. In this context, $73 billion represents just 2 to 2.5 percent, a tiny fraction of current expenditures.

The second response is to point out that taxes, at least in more reasonable amounts, can be voluntary. State lotteries are one example of voluntary taxation. Another, proposed by Ayn Rand in an essay entitled "Government Financing in a Free Society," collected in The Virtue of Selfishness, is for the government to collect voluntary premiums for the service of enforcing contracts and only enforce those contracts which have been insured in this manner. Rand stressed that this example was for illustration purposes only, and that voluntary taxation would be "the last, not the first, step on the road to a free society." Needless to say, Americans would not voluntarily cough up three or four trillion every year.

Heath supports his inadequate arguments against libertarianism with a pretty standard, but mistaken, reading of history. He writes that "the problem with nineteenth-century capitalism is that it didn't work very well. It certainly was not the well-oiled wealth-producing machine that we are familiar with today." In fact, the problems he focuses on—boom and bust business cycles—were created by government-backed fractional reserve banking, which Austrian economists, at least, have always criticized. The Federal Reserve system made things worse, not better as Heath claims, paving the way for the Great Depression, which was far worse than any nineteenth-century business cycle. Federal Deposit insurance and other government guarantees are mere band-aid solutions to a government-created problem. They may patch up a symptom, but only at the cost of encouraging even riskier banking behaviour, as our current crisis shows.

Still Worth Reading

On the basis of the kinds of arguments and historical backup Heath provides, his report of the death of libertarianism is greatly exaggerated. There are other problems with his book, too. Take his discussion of time preference, which takes up an entire chapter in Part II. The fact that he devotes so much space to this much-neglected topic is commendable in and of itself, and most of what he says is informative. People with high time preference prefer to satisfy their present wants and needs than invest in the future, a problem which leads to poverty, and explains why poverty is such an intractable problem. Merely taking money from the rich and giving it to the poor will not help them escape poverty if they have high time preferences, which many of them do.

Heath, however, concludes that instead of simple cash transfers, what the poor really need is more paternalism. He writes, "Many social policies that force people to act in their own best interests can be understood not as the high-handed intervention of the 'nanny state,' but rather as a self-binding strategy that individuals themselves may be perfectly happy to support." Well, some of them may be perfectly happy to support it, and some of them may not. Why must those who want "self-binding" bind the rest of us in the bargain? Why not simply have them enter into binding commitments on the open market? Heath does not even consider this option.

Still, overall, Heath has many worthwhile things to say and he says them well. In the other chapters on right-wing fallacies, his propositions range from wrongheaded (government is efficient at providing public goods) to unobjectionable (pecuniary interests are not the only incentives that matter) to downright excellent (the right-wing tendency to see international trade as a competition undermines the comparative advantage case for free trade). In the chapters on left-wing fallacies, he attacks price fixing; the idea that profit is evil; the fear (hope?) that capitalism is doomed; the "equal pay for equal work" notion that ignores the laws of supply and demand; the idea that spreading wealth around will cure poverty (see above); and the pursuit of levelling at the expense of efficiency and growth.

I have indicated some of the areas where I disagree with Heath. There are others. But if the left could read this book and absorb its message, there are a whole slew of arguments that we could move beyond. The left would become a more credible opponent on economic matters, but that would be all for the good. The more fallacies we can leave in the dustbin of history, the more useful our debates will be in helping us perceive reality more clearly.

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* Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL's English Editor.