It is spring break and the midterms are behind me. One of my best students came to talk to me about her grade. While she had given excellent answers to most questions on the test, she had completely messed up the big one on the redistributive effects of unexpected inflation. Putting together her class participation, results from earlier pop quizzes, ability to reason, positive attitude, and work ethic, and seeing the nature of her mistake, it was easy for me to conclude that this student has accomplished much more than was reflected by her current grade.

What should I do? I could not change the grading criteria, nor could I inflate everyone’s grades—both would stand against everything I teach. I tried to help the student by encouraging her to keep up the good work, cautioning her to be more careful on the next big exam, and expressing my time-tested conviction that she will reap long-term rewards by studying hard. As painful as it was for me, there was noting I could do to change her midterm score in an attempt to reward her more fairly for what she has learned in this course.

I woke up the night after confronting my student wondering if I had done the right thing. Have I acted as a mean person, one who cares for rules more than he cares for people? I found an answer in Paul Heyne’s essays on economics, ethics, and religion. Reading through his discussion of justice, I was reminded that the proper functioning of any social system larger than a family (such as a school or an economy) depends on how well the referees (teachers or public servants) resist the temptation to break the general rules in order to better “serve the known interests of particular people.”

I face the same information problem as any other professor, judge, congressman, or president—I am not omniscient. I learn more about some of my students than about others. Knowing the special circumstances of one particular case is precisely what makes me unqualified to interfere with the goal of fixing a seemingly unfair outcome. I may have created the rules for this course, but as soon as I release them I am subject to them as much as any of my students. And every person selected to serve us in one of the three branches of our government should never forget that.

“The man of system,” wrote Adam Smith, “is apt to be very wise to his own conceit. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.” History reminds us in very painful ways not to listen to imposters who promise to liberate us from our economic chains by socializing either the means of production or the finished products. Those that seek to plan and control our investment on a national level or to mandate the “proper” ways of enjoying the fruits of our labor are only marginally better that the full-blown socialists.

In his State of the Union address, President Obama paid lip service to private entrepreneurship. Unfortunately, most of his proposals lead—intentionally or not—to an expansion of the role of government bureaucracy in our personal affairs. That is the reason why his kind words and promises addressed to “small businesses” do not inspire much enthusiasm. The president, his advisors, and many of his supporters are victims of an old “misconception about the nature of the economic problem of society.” As Friedrich Hayek explained during the rise of Keynesian “macro” management, it is not about allocation of “given” resources, since such mathematical data would never be “given” to a single mind or a body of experts. The fundamental problem is one of securing “the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.”

Our government has already done enough damage stimulating the last housing bubble. Before they take more of our children’s money to extend a helping hand to businesses, big or small, they should perhaps take a minute to ponder the words of Marquis d’Argenson:

“Our speculative thinkers . . . want to direct commerce by their orders and regulations; but to do this one would need to be thoroughly acquainted with the interests involved in commerce . . . from one individual to another. In the absence of such knowledge, it [economic intervention] can only be . . . much worse than ignorance in its bad effects. . . . Therefore, laissez-faire!”

Why is healthcare reform arousing the passions of so many people and diverting the attention of the legislative and the executive branches of our federal government at a time when we are beseeched by a plenitude of severe economic problems? Radical Keynesians would naturally be enamored with any scheme that proposes to pour a trillion dollars of fresh cash in the economic engine. They believe that spending is spending—whether the government throws the future taxpayers’ money on waterboarding or heart transplants, in a recession we need more. Fortunately, such extremists are in a minority, even in the midst of today’s economic slump.

More sensible people want immediate reform because they recognize that the high cost of healthcare in the United States is an added drag on the economy, especially at a time when it is not in its best shape. Our artificially restricted markets for drugs and health services slow the creation of new jobs by small businesses and diminish the competitiveness of our products in the global market. But most of all, the heat is on in Congress these days because we have been spoiled by our own amazing economic success. We take our unprecedented prosperity as a natural state to a point that we cannot tolerate the fact that a small part of our population is not insured. Never mind that all Americans were in the same position not that long ago.

In an age of air-conditioning, microwaves, high-speed internet, Nintendo, GPS, iPods, BlackBerries (not the fruity kind), Blue Rays, Kindles, Twittering, snowblowers, and so many other comforts, the words for which did not even exist a generation ago, a culture of instant gratification has evolved that sees unmet needs and unfulfilled wants as unacceptable. In a discussion on the ethics of redistribution, the French political economist Bertrand de Jouvenel drew our attention to this peculiar transformation of sentiments accompanying economic progress: Just as certain wealthy persons of the past had seen their riches as a scandal in the face of the prevailing poverty in the current environment, the widely spread riches of today make us see people without healthcare coverage as a sign of intolerable poverty. It seems that the curse of capitalism is in its capacity to turn formerly unknown luxuries into necessities.

With millions of Americans losing their jobs in 2009, we keep hearing more and more questions about the role our government should play in the labor market. From the day he was elected to serve us as president, Barack Obama has been constantly compared and judged against the FDR standard. A significant cause for disillusionment within the leftist electorate is the unwillingness of the White House to go far enough in embracing the “social-democratic” spirit of the New Deal.

With each consecutive month of job losses, the “progressive” electorate grows more and more restless. Is the “stimulus” money enough? How can we get a bigger bang out of spending our children’s inheritance? Doesn’t it make more sense within the resurrected Keynesian model if, instead of subsidizing the private sector to create new jobs, the government assumes direct responsibility for connecting the unemployed workers with the underutilized capital?

In 1848, Tocqueville gave a speech on a proposed amendment to the Constitution of the Second French Republic. It was dealing with the social obligations of the state. Had the amendment been adopted, it would have given every unemployed citizen a legal claim to the resources of the state, i.e., an entitlement to his hardworking neighbor’s property. It would have turned the French government into a principal and eventually a sole employer. Tocqueville removed the veil of noble intentions to “regularize public charity” and helped his fellow representatives reverse a “fatal tendency.” He saw grave danger in instituting the state’s responsibility for guaranteeing the “right to work.”

In the midst of economic hardships, there is an understandable temptation for us to draw our own government into providing work. Unfortunately it would have the same unintended consequences as a “public option” in healthcare. A “right to work” law would mean that the state would not be able to refuse employment. Such an employer creates perverse incentives and “imposes the least work.” Our government would become the master of our industry and our lives, “accumulating all individual capital . . . the sole owner of all property.”

“Well that,” as Tocqueville put it for the sake of preserving the ideals of liberty of the French Revolution, “is communism.” And we should take heed if we want to preserve our own republic.

Recent polls show that Americas are getting angrier day after day. President Barack Obama recently admitted that the door to the White House was opened to him by the frustration of independent voters. He achieved his success by blaming the financial crisis on the arranged marriage of money and power in the Washington establishment and promising to do something about it. Now he realizes that charm and eloquence may not be enough to propel his party through the midterm elections of 2010. In the absence of any real change in the way that organized special economic interests influence crucial legislation for trillions of dollars, the tide is quickly turning against the government.

Terrorism and healthcare costs, nuclear Iran and North Korea, high unemployment rates, and exploding national debt are scary enough, but it is instructive to note that the most vigorous critics of the current majority’s agenda are people concerned for the survival of the fundamental principles of our Constitution. Nothing new under the sun. With the election of Ronald Reagan as the 40th president of the United States, the progressive intellectuals went into hysteria that new legislation and changes in bureaucratic regulation would undermine the Bill of Rights. In a provocative essay titled “Capitalism or Democracy,” radical Keynesian economist Robert Lekachman gave voice to the fears of the “progressive” part of America that our Founding Fathers’ commitment to political freedom comes in conflict with inequalities produced by the system of free enterprise. “Political and economic markets overlap,” wrote Lekachman, “and wealth translates into political influence.”

If the American people are serious about preserving their civil liberties, they have only one option. They need to break the cursed cycle of concentration of political power in D.C. that redirects more and more of our resources from their productive uses toward wasteful and disruptive lobbyism. The nation is ripe for a revolution à la 1980. The only missing piece is a good communicator, a statesman who will bring Milton Friedman’s message to the voter: “The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. . . . By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.”

Some of my friends “buy American” (Group A).

Some buy “fair-trade” coffee (Group B).

Some do both (Group AB).

And then there are those selfish guys who buy free trade (Group 0).

The first three groups pay a higher price for lower quality. How does that make sense? Don’t such acts promote waste of scarce resources around the world at considerable cost to the perpetrators themselves? Are such people a living proof that economics is based on faulty assumptions? Not at all!

Choices made by people in the first three groups are all examples of rational human behavior as much as the ones made in the last group. You make additional sacrifices because you attach additional value to a product based on location and/or method of production. As a supporter of economic freedom, I fight for your consumer right to make any choice without coercion—even if I see it as wrong (hurting the poor despite your good intentions) or inefficient. And I also fight for your right to engage in discussion for the purpose of finding out the truth and/or promoting your beliefs. So here are a few questions for you:

• Group A: We have heard arguments that free trade promotes the health of our national economy. I assume that your choice is a result of patriotic feelings and/or self-interest (preserving your own job). Shouldn’t you also buy only American coffee? We have millions of unemployed people—perhaps we should subsidize them to grow it for us even if it costs $10 per cup? How exactly does your behavior promote your goals?
• Group B: We have witnessed many distinguished economists’ efforts trying to convince us that free trade is a necessary condition for lifting people in the underdeveloped nations out of misery. I assume that your choice is a result of your desire to help the poor farmers in Third World countries. Do you also buy only fair-trade bananas? Clothes? Shoes? Laptops? Do you only fly on planes made by fair-trade parts? Do you think that this is the most efficient (it’s about Christ’s exhortation to us to be good stewards) way to spend your money to achieve your goals?
• Group AB: “The rarest of all human qualities is consistency,” wrote Jeremy Bentham. How do you reconcile in your mind doing both at the same time?
• Group 0: How can you sleep at night? Don’t your choices promote “exploitation?”

Michelle Obama received a standing ovation during her husband’s State of the Union address for her crusade against obesity. A worthy cause considering how yesterday’s “fat” has become today’s norm. Unfortunately, naked enthusiasm is not sufficient to bring good results. The first lady’s noble intentions are sabotaged by the socialistic bootlickers around her who are pushing the idea of a ban on the expansion of the fast food industry. Yes, there is an epidemic of obesity, but its epicenter is in Washington, D.C. It is the government that has to go on a diet, more so than the people who feed it. And we could start by financially starving the food fascists.

Why do some people think that it is legitimate for our federal or local governments to make our lifestyle choices for us? Why do such policies deserve the label “socialist?” I will let Tocqueville answer these questions for us. What characterizes socialists of all parties, according to him, is “a continuous, many-sided, incessant attempt to curtail . . . human freedom in every way; it is the idea that the State must not only direct society, but must be . . . the master of every man . . . that for fear of letting man fail, the State must always be beside him, above him, around him, in order to guide him, protect him, sustain him, restrain him.”

I personally have nothing to fear if all fast food places disappear tomorrow. My wife cooks delicious meals. Our daughter loves helping in the kitchen. I can prepare a hundred things from scratch. So we can do great without the occasional cheeseburger with fries. What we can also do without is a government treating us as drooling idiots. The government is not our mom, or schoolteacher, or boss. It is not our doctor or pastor. And it is not our friend. It is our servant. So please stick to the Constitution and do not violate our God-given rights to choose what to eat or how much to exercise.

President Obama said recently that he would rather be a great one-term president than a mediocre two-year term president. Hogwash! With his State of the Union address, the president made a desperate attempt to preserve his chances for reelection at all cost. The humiliating defeats of his candidates in New Jersey, Virginia, and Massachusetts have made it clear that the honeymoon is over. The independent voter is waking up with a bad hangover and starting to question the wisdom of his 2008 decision. And Obama is demonstrating willingness to compromise previously professed principles in order to hold on to an estranged and rather inconvenient but very useful partner.

In mid January I attended a seminar at the New York Federal Reserve Bank. The speakers were honest to admit that they were trying to steer the economy in uncharted waters. Had they updated their economic models and kept their eyes on long-term inflation targets, they could have tightened the credit markets and ended the speculative bubble before it had affected the global economy. Now, fears of inflation clash with depression warnings from economists like Paul Krugman. The specter of a “Double Dip” a la 1937 hangs over our central bankers and they cannot make up their minds on the right moment and rate of withdrawal from the stimulus. The president, however, may be running out of time.

Since the beginning of the financial crisis I have maintained that a return to the Keynesian philosophy of “spending our way out of it,” while bringing temporary relief, does nothing to solve our structural problems. Now Obama is trying on for size the mantle of a fiscal conservative. Has he learned his lesson in just one year? Should I open the champagne bottle and put my dancing shoes on? I’d like to give the president the benefit of the doubt, but I understand the logic of politics too well to be that naïve. The simple truth is that at the current stage of his presidency, it is politically expedient for Obama to appeal to the center-right even it means alienating his former “progressive” comrades.

P.S. But if Obama had been sincere in his first statement, he has nothing to fear from the 2012 election; regardless of achievements, guys with an excess of charisma don’t get labeled “mediocre.”

In That Which Is Seen, and That Which Is Not Seen, Frederic Bastiat helps us overcome our inability and/or unwillingness to consider the hidden costs of our actions. The classical example of the “broken window” explains why acts of vandalism do not create new jobs. Shifting our focus on the “unseen” may also help us understand why the net result in saving lives of the current system of Food and Drug Administration regulation is not a positive one.

Perhaps pharmaceutical corporations do not have much of an incentive to discover cures. After all, chronically ill people such as my diabetic wife make the best customers. They will buy your product again and again. Any drug manufacturer, however, can only make money if its products save and/or improve the quality of his customers’ lives. The huge investments necessary to succeed in that market create the right incentives for businesses to consider long-term outcomes above the possibility of making a quick buck. Concerns for reputation force drug companies to test carefully and to reject any new substance that could harm their patients, reputations, and profits.

What is the incentive of an FDA bureaucrat to release in a timely manner (or at all) an effective drug? None. He gets no bonuses or other benefits for approving more good drugs. Yet, with each new substance he sets free on the market, he increases the chances that people will get hurt, his career ruined, and his name covered in shame for the rest of his life.

Yes, the FDA is saving thousands of lives. That is, Which Is Seen. That Which Is Not Seen by our domestic economophobes is the fact that the FDA saves those lives by killing hundreds of thousands and letting millions more suffer unnecessarily. Oh, and let’s not forget the biggest beneficiaries of government regulation—the established giant pharmaceutical companies get insulated against competition by the astronomical costs of developing new drugs.

“The natural progress of things is for liberty to yield and government to gain ground,” wrote Thomas Jefferson. It is a natural trend even in functional constitutional democracies where the vast majority claims to value liberty. The explanation of this phenomenon is quite simple: economophobia. Most people go though their lives in blissful ignorance or stubborn denial of the fact that we live in a world of trade-offs. An example of this is the unqualified support that most of us give to the Food and Drug Administration. We simply refuse to acknowledge the fact that choosing more safety means killing more people.

In the vastly influential Free to Choose, Milton Friedman asks that we put ourselves in the position of the decision-makers at the FDA. We have the terrible job of controlling one of the largest American markets and deciding who should live and who should die. What incentives shape our behavior? We evaluate the probability of allowing a bad drug to reach the market versus the probability of delaying or banning a good drug. Which mistake would we rather make?

Now it becomes obvious that the FDA’s legal mandate to decide which drugs should be made available to patients in the United States has created a skewed structure of incentives where concerns for safety vastly outweigh concerns for efficacy. Since we don’t want to enter history as those approving the next “thalidomide,” we would be extra careful with all new drugs. What’s wrong with that? Nothing, unless we count the lives that could be saved by all efficient drugs whose approval we delay for extra testing. We would do anything to increase the chances that some Elixir Sulfanilamide will not kill a handful of people under our watch since their tragedy will be observed by all through the media. We may be very decent fellows yet we would gladly sacrifice any number of unseen fellow Americans for the safety of a few and our own comforts.