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duced government services as the state's record budget surplus
turned into a record deficit. It is doubtful whether Californians
paid a dime less after the politicians' grandstand rescue of them
with price controls than they would have paid had the state gov-
ernment stayed out of it and let the price be determined by supply
and demand. When all the costs are counted, they may well have
ended up paying more than they would have if the increased costs
had simply led to higher prices through the marketplace. But the
governor was re-elected.
In general outlines, none of this was unique to California or to
electricity. Price controls have been causing shortages in countries
around the world, and for literally thousands of years of recorded
history, whether the prices that were being controlled were the
prices of food, housing, fuel, medical care, or innumerable other
goods and services. Almost all these price controls were popular
when they were first instituted because most people did not think
beyond stage one. After imposing the first peacetime wage and
price controls in American history, President Richard Nixon was
re-elected in a landslide, even though he had been elected initially
by a very narrow margin.
Politics versus Economics 13

Another major difference between private and governmental in-
stitutions is that, no matter how big and successful a private busi-
ness is, it can always be forced out of business when it is no longer
satisfying its customers”whether because of its own inadequacies
or because competing firms or alternative technologies can satisfy
the customers better. Government agencies, however, can continue
on despite demonstrable failures, and the power of government
can prevent rivals from arising.
Despite innumerable complaints about the U. S. Postal Service
over the years, it continues to maintain a monopoly so strict that it
is illegal for anyone else to put things in a citizen's mailbox, even
though that mailbox was bought and paid for by the citizen, rather
than by the government. Postal authorities clearly understand
what a competitive threat it would be to them if the public had a
choice of private companies delivering mail to their homes. Pri-
vate package-delivery companies like United Parcel Service and
Federal Express have long ago overtaken the Postal Service in the
number of packages delivered. Indeed, federal government agen-
cies themselves often prefer to rely on private package-delivery


Prices play many roles in allocating time and effort, as well as
goods and services. Recycling, for example, requires time and ef-
fort, and the incremental value of the things being recycled may or
may not be worth the time and effort spent in salvaging them.
Where the incremental value of the salvaged goods is greater than
the value of the alternative uses of the time and effort, recycling
can take place spontaneously, as a result of the ordinary operations
of a free market”without laws or exhortations. There are some
salvageable things whose incremental value would lead to their be-
ing recycled without government intervention and other salvage-

able things whose incremental value would lead to their being
thrown away. Recycling is not categorically justified or unjustified,
but is incrementally either worth or not worth the costs.
In some Third World countries, or among the chronically unem-
ployed or homeless population in affluent countries like the
United States, it may make perfect sense to collect discarded cans
and bottles to sell”and some people do so voluntarily, without be-
ing forced or exhorted to do so. In mid-twentieth century West
Africa, a distinguished British economist named Peter Bauer
noted the "extensive trade in empty containers such as kerosene,
cigarette and soup tins, flour, salt, and cement bags and beer bot-
tles." Although many third-party European observers at that time
regarded such African recycling activities as wasteful uses of labor
because Europeans did not spend their time doing such things,
Professor Bauer explained why it was not wasteful:

Some types of container are turned into various household articles
or other commodities. Cigarette and soup tins become small oil
lamps, and salt bags are made into shirts or tunics. But more usu-
ally the containers are used again in the storage and movement of
goods. Those who seek out, purchase, and carry and distribute
second-hand containers maintain the stock of capital. They pre-
vent the destruction of the containers, usually improve their con-
dition, distribute them to where they can best be used, and so
extend their usefulness, the intensity of their use, and their effec-
tive life. The activities of the traders represent a substitution of
labour for capital.

Most of these African recyclers were women and children, and
the meager alternative employment open to them made it efficient
for them to make a small profit on recycled containers, when that
profit exceeded what they could earn elsewhere. It was also more
Politics versus Economics 15

efficient for the society as a whole: "So far from the system being
wasteful it is highly economic in substituting superabundant for
scarce resources"”the superabundant resource being the time of
otherwise idle labor.
Both when recycling was criticized in mid-twentieth century
Africa and exhorted in late-twentieth century America, third-
party observers simply assumed that they had superior under-
standing than that of the people directly involved, even though
these observers had seldom bothered to think through the eco-
nomics of what they were saying. At some point it pays virtually
everyone to recycle and at some other point it pays virtually no
one. What is crucial is the value of the thing being recycled and
the value of the alternative uses of resources, including the time of
the people who might do the recycling.
Even in an affluent country such as the United States, cameras
have long been recycled, and there are stores such as KEH in At-
lanta or Midwest Photo in Columbus which specialize in nation-
wide sales of used cameras, most costing hundreds of dollars each
and some costing thousands. The sale of used cars has likewise
long been common virtually everywhere, and most houses that are
sold are used houses, though that term is almost never applied, be-
cause houses that have been lived in before are the norm, even
among mansions, and it is newly built houses which are singled
out for labeling.
Where recycling takes place only in response to political pres-
sures and exhortations, it need not meet the test of being incre-
mentally worth its incremental costs. Accordingly, studies of
government-imposed recycling programs in the United States
have shown that what they salvage is usually worth less than the
cost of salvaging it. This situation is parallel with inducing people
to pay as taxpayers for incremental benefits that they would not
pay for as consumers.


Differences between political decision-making and economic
decision-making stand out in sharpest contrast when comparing
whole systems of comprehensive economic planning by government
officials with economic systems in which market competition among
privately owned businesses determines what is produced by whom
and at what prices. In both cases”socialism3 and capitalism”the
rationales of the systems must be compared with the actual results,
the rhetoric with the reality. The relevant question is not which
system sounds more plausible but which produces what results.
What must also be understood is that both systems”in fact, all
economic systems, including feudalism, fascism and voluntary col-
lectives”operate within the inherent constraint that what every-
one wants adds up to more than they can possibly get. This means
that all economic systems must find ways of restricting and deny-
ing the use of both resources and finished products through one
mechanism or another. In some systems this is done by imposing
rationing or central allocation and in other systems people ration
themselves according to how much money they have available to
spend for various items.
All economic systems not only provide people with goods and
services, but also restrict or prevent them from getting as much of
these goods and services as they wish, since no economy can sup-
ply everything that everyone wants in the amounts that everyone
wants. The systems differ in the manner in which they restrict

While socialism may be conceived of in political terms as a system that aims at greater equality,
a planned economy, job security, and other humane goals, in economic terms socialism is more likely
to be described in terms of what it actually does, rather than in terms of what it hopes to achieve. In
these latter terms, socialism is a system in which property rights in industry, commerce, and agricul-
ture can be defined and assigned only by political authorities, rather than by private transactions
among individuals and organizations in the marketplace. Whether such arrangements actually lead
toward or away from the various proclaimed goals of socialism is left as an empirical question, rather
than a foregone conclusion.
Politics versus Economics I7

consumption and in the effectiveness with which they allocate re-
sources in ways that produce lower or higher standards of living.

Central Planning

The term "planning" is often used to describe an economic system
where the key decisions are made by political authorities, whether
these are democratically elected officials or representatives of a
communist or other totalitarian government. However, there is
just as much planning engaged in by owners and managers of pri-
vate enterprises under capitalism. The difference is in who is plan-
ning for whom. In a free market economy, millions of consumers,
business owners and managers, investors, and others have their
own plans”each for his or her own well-being, leaving the over-
all coordination of these plans in the economy at large to changing
prices and the economic incentives that these prices provide for
mutual accommodation. What has generally been called "plan-
ning" has been central planning”planning by a small group of of-
ficials for the economy as a whole.
The same general principle of collective decision-making has
also been applied by smaller settlements, such as the Israeli kib-
butz4 or various other small enclaves of like-minded people who
wish to produce and consume collectively, outside the framework
of a capitalist market economy.
The most thorough-going control of entire national economies
occurred during the era of the Soviet Union, which set a pattern
that was later followed in China and other communist states.
However, the governments of India and France also at one time

There are many forms of socialism, including the voluntary socialism of the kibbutz in Israel, as
distinguished from the state-imposed socialism of the Soviet Union or Maoist China. So devoted to
ideals of equality and sharing were the members of the kibbutz that there were objections when one
young member received a gift of a teapot from her parents, who lived outside the kibbutz, and she
"began to brew tea in her own room, and to invite some friends to join her." Purists "regarded the

either owned or controlled large segments of their respective
economies. Moreover, wide sections of the political, intellectual
and even business communities were often in favor of this expan-
sive role of government. Swedish economist Gunnar Myrdal de-
fined economic central planning this way:

The basic idea of economic planning is that the state shall take an
active, indeed the decisive, role in the economy: by its own acts of
enterprise and investment, and by its various controls”inducements
and restrictions”over the private sector, the state shall initiate, spur,
and steer economic development. These public policy measures shall
be coordinated and the coordination made explicit in an over-all
plan for a specified number of years ahead.

Although some have contrasted government planning with un-
controlled chaos in the private marketplace, in fact government
central planning means over-riding other people's plans, since private
individuals and organizations have their own plans, which are co-
ordinated with one another through price movements. How well
either set of plans is likely to work out is the issue. For much of the
twentieth century, it was widely assumed that central planning was
more likely to produce desired results than the uncontrolled com-
petition of the marketplace. It was only after such planning was
put into effect in a variety of countries around the world that the
results turned out to be worse than anyone expected”leaving
planned economies falling behind the economic progress in coun-
tries where the coordination of the economy as a whole was left to
market competition and resulting price movements that directed

possession of a private teapot not only as a breach of equality but also as an egregious violation of
the principle of communal eating and an unacceptable rejection of communality in favor of personal
privacy. It symbolized the erosion of society by a gradual accommodation to the baser human drives,
and the 'teapot scandal' as it became known, was debated endlessly in the General Meetings
throughout the kibbutz movement."
Politics versus Economics 19

resources and products to where they were most in demand. By
the last decade of the twentieth century, even socialist govern-
ments and communist governments had begun abandoning cen-
tral planning and selling government-owned enterprises to private
Prices not only direct goods and the resources needed to pro-
duce goods where they are most in demand, these prices also
force consumers to limit their own consumption. Just as we can
appreciate the important role of water more clearly during a
drought, so the role of prices can be more clearly demonstrated
by looking at places where prices are not allowed to play their
usual role. For example, communal living in a kibbutz in Israel
was based on its members' collectively producing and supplying
their members' needs, without resort to money or prices. How-
ever, supplying electricity and food without charging prices led to
a situation where electric lights were left on during the day, and
members would bring friends from outside the kibbutz to join
them for meals. Later, after the kibbutz began to charge prices for
electricity and food, there was a sharp drop in the consumption of
The presence or absence of prices affects the use of the resources
which go into the production of goods, as well as in the consump-
tion of the goods themselves. Soviet industry used more electricity
than American industry, even though American industry pro-
duced more output. Enterprises in the United States had to pay
market prices for electricity and keep their production costs below
the prices that supply and demand in the market would allow
them to charge for their output. Otherwise they would make


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