05/09/07 – David Henderson – The Scott Horton Show

For Antiwar.com and Chaos Radio 95.9 FM in Austin, Texas, I'm Scott Horton, and this is Antiwar Radio.
Introducing David R. Henderson.
He's a research fellow at the Hoover Institute, an associate professor of economics at the Naval Postgraduate School.
He's the author of the books The Joy of Freedom, An Economist's Odyssey, and Making Great Decisions in Business and Life.
He writes The Wartime Economist every other week for Antiwar.com.
Welcome to the show, David.
Oh, thanks, Scott.
It's great to have you on here.
It's great to be on.
I've been a big fan of your articles ever since you first started writing for Antiwar.com, and, well, of course, because you make the free market case against American interventionists.
Right, right.
Yeah, I've long been an advocate of free market, starting really in the late 60s when I was a teenager and reading people like Hayek and Friedman and Ayn Rand and Henry Haslett and Ludwig von Mises and Murray Rothbard.
But I was a strong hawk.
I think it's probably due to my upbringing.
I was brought up in Canada, where Winston Churchill was certainly a hero to people in English-speaking Canada, which is where I was.
And I just was kind of a reflexive Cold Warrior, and I've learned a lot since then.
And, you know, I noticed in reading back through some of your archives here, I remember that you'd written this case saying that Adam Smith, in his book The Wealth of Nations and articles and other things he wrote around that same time, that he was one of the biggest anti-imperialists of all.
He was, and it's funny how many people dismiss Adam Smith, and what I've noticed the people who dismiss Adam Smith almost all have in common.
They've never read him.
And I think you really need to read sections.
I think it's very hard to read it from cover to cover.
I've never done so.
I just dip into it and read it five to 20 pages at a time, and there's just so much valuable there.
He argued the following on British imperialism, and especially the thing I have focused on in my reading of him is what he said about the 13 colonies.
He said that, in fact, it made no sense to have them as colonies, that Britain was spending more on having them as colonies than it was getting in any kind of return.
From a narrow cost-benefit analysis, it didn't make sense to have those colonies.
He also predicted that the colonies would revolt.
He also predicted that the British would not accept the revolt and go away peacefully, but would have a war.
And he also predicted that the colonies would win a war, and that they would become the most powerful country on earth.
Not bad.
And he was in Nostradamus.
He was an economist, this guy?
Yeah.
And he was sitting wherever he was sitting, in Kirkcaldy or Edinburgh or whatever, and writing this stuff.
He'd been to Europe a couple of times and never been to the colonies, but it's amazing what you can learn from reading.
And this is the laws of unintended consequences, right?
Yeah, yeah.
And one of the most famous passages that I think a lot of people don't get is that this imperialist policy is not appropriate for a nation of shopkeepers, namely Britain, but it is appropriate for a nation whose government is run by shopkeepers.
And here's what he was saying, that if you look at the gains to the British from having these colonies, they were way below the cost, but if you look to a subset of people, namely merchants who got a special preferred set of customers because people in the colonies had to buy from Britain, that it benefited them.
The benefits to them were greater than their prorated share of the cost, but they were certainly smaller than the cost to the whole nation.
So that sounds kind of like our situation today.
I think there are some parallels.
I don't want to be too much in Halliburton because I think that's overdone.
I don't honestly believe that Halliburton had this huge role in fomenting the war, but I do believe it has a substantial role.
It certainly benefits hugely from the war.
And I think this is really the problem that liberals most often have, and I guess this is even really what Marx meant by capitalism when he coined the phrase, capitalism doesn't mean laws are fair and free markets, it means state corporatism.
Well, you know, I'm going to beg off as being an expert on Marx to the extent I am, knowledgeable about Marx to the extent I'm knowledgeable about Smith.
I'm not positive that's what Marx meant.
Marx had a real appreciation of capitalism, actually, and some of the most glowing statements about what capitalism created are from Marx.
So I'm not sure that that's true.
Hmm.
Okay.
Yeah, yeah.
By the way, I'm in my office, and if this were a normal interview three months ago, four months ago, I would go to my library and find this great quote from Marx.
Unfortunately, I had a huge fire that burned down my office in February, so I don't have that quote.
Oh, that's terrible.
It burned down your library.
Yeah, a huge portion of it, yeah.
Oh, yes.
I hope no one was hurt.
No.
Well, a fireman had cut his hand.
It was the biggest disaster a Monterey had in a hundred years.
A fireman cut his hand, but he was out of the hospital the same day.
So no, it was a fire late at night.
But anyway, I just wanted to point out that I normally can back these things up more than I can right this minute.
Well, you're doing fine.
And, you know, Karl Marx aside, this is what left-wingers nowadays, most liberals think of when you say capitalism, they think of Halliburton, right?
Yes, I think that's right.
And another thing that shocked me, and these are friends of mine with no particular acts to grind who are political liberals in the modern sense, who thought that South African apartheid was an example of capitalism.
But as an economist friend named Tom Hazlett, who has written about apartheid, said in an article in my Encyclopedia of Economics, he said apartheid was socialism with a racist face.
In other words, it was an attempt to actually benefit a group of workers, a minority group of workers, namely white workers, by hobbling black workers.
And the major people pushing for apartheid were not capitalists.
The capitalists loved to hire black workers because they were skilled and they would do it a little more cheaply.
The major people pushing for apartheid were white labor unions.
And in fact, in a famous 1923 strike in the Rand mining region, there was a banner by the Socialist Labor Party that was a racist party, and it said, workers of the world unite and fight for a white South Africa.
Wow.
I never heard that history.
I guess I need to read more about South Africa.
Yeah, yeah.
Well, in fact, you can read about it.
My encyclopedia that I did, the Fortune Encyclopedia of Economics, the rights reverted to me in the late 90s, and it's now on the web called The Concise Encyclopedia of Economics.
And if you go to my website, davidrhenderson.com, you just click on Encyclopedia, it'll take you right there to completely free access.
Wow, that's very interesting.
And I guess there's kind of a segue into China there.
Are libertarians and capitalists, not so much the right-wing hawk types, but the libertarians, are they making the mistake of confusing national socialism in China with a more libertarian capitalist system?
Well, gee, if they are, then I'm more than making it.
I think that China is moving more towards a capitalist system.
It certainly is not capitalist in the usual sense.
There's a whole lot of state control.
A huge number of firms are owned by the army.
But nevertheless, they are substantially more free-market oriented than they were, say, under Chairman Mao.
And there's been a clear-cut movement in the right direction as far as economic freedom goes.
And they just recently implemented their actual protection of private property, which is huge for China.
And now, the Democrats, well, not just the Democrats, I guess.
The foreign policy establishment now has bought into this thing they call the Democratic Peace Theory, where despite 100 or 150 least examples to the contrary, they say democracies never fight each other.
And yet you have this new article where you're basically promoting a thing called the Capitalist Peace Theory.
Right.
And by the way, I wasn't aware of that 100 to 150 counterexamples.
I've seen a pretty long list.
It may not be that many, but it's at least dozens and dozens.
Well, let me give you a little background on that.
There's a guy named R.J.
Rummel.
He's a retired political scientist at the University of Hawaii.
And he was the one who started pushing this idea that democracies don't make war on each other.
And I don't know if he said they literally don't or they very rarely do.
And I think he's absolutely right that they rarely do.
By the way, interestingly enough, the biggest counterexamples I know of in terms of, and one way to count a war is by death.
That's kind of a pretty reasonable way to count a war, how many people are killed.
The biggest counterexamples I know of are where the United States attacked another country.
So, for example, the United States attacking Yugoslavia, you know, Clinton attacking Yugoslavia in the 90s.
That was a democracy.
It was a lousy democracy, but it was a democracy.
Now, this political scientist at Columbia named Eric Gartsky put out an article in the American Journal of Political Science in January of this year.
In which he dug beneath that and said, okay, is it really democracy that's causing there to be peace, or is it something else that's highly correlated with democracy?
And he found that it was something else, namely relative economic freedom.
So that all other things equal, the freer a country was economically, or the freer two countries were economically, the less likely one was to attack the other.
And that's freedom to trade between each other.
Freedom to trade, freedom, relatively free capital markets, just a whole number of dimensions of freedom.
And so he found that when you put those variables in for economic freedom, the effect of democracy per se went away.
In other words, there's no independent effect on democracy.
Well, what that means is clearly China is not a democracy, but China has increasing economic freedom.
So again, I'm not saying in using his article to talk about China that there's no way China would attack the United States, although my bigger fear is the United States would attack China, frankly.
But what I'm saying is I teach at the Naval Postgraduate School, I teach military officers, a number of them worry about China becoming more powerful economically, and then using that economic power to have a bigger military that's going to threaten the United States.
And I'm saying not that that couldn't happen, but that all other things equal, the more economic freedom they have, which is presumably one of the main things behind their economic growth, the less likely they are to attack the United States.
And now, the neocons took power, basically focusing on China.
I learned recently that really the only fight that Colin Powell ever won in the administration in the first term was to use diplomacy and scale down the rhetoric when the spy plane was forced down at the beginning of Bush's term.
That was a great experience.
I remember talking to a number of military friends who either were civilian advisors to the military or people in the military who were saying, look, this thing can be solved without any kind of threat.
I mean, there's some wrong on both sides here, and we can work this out.
And they turned out to be absolutely right.
Incidentally, one of my students was one of the people on one of those planes.
Oh, really?
Yeah, she was a student of mine after the fact, not before.
And now, it occurred to me that when you have Dick Cheney and his cabal running things up there, that basically, I have no idea what went on behind the scenes, really, but I imagine that some millionaires and billionaires from New York City called and said, hey, we're not going to have problems with China, right?
And at the end of the day, the big business wing of the Republican Party, they want peace.
They don't want war.
That's right.
I remember reading that at the time, and you know what?
I should have put that in the article because I remember there were some references to that after the fact when it was safe to kind of reveal what had happened.
Yeah, so there you go, that you have Richard Pearl and Doug Feist say, oh, good, an excuse to have a war with this major power and prevent them from rising up and challenging our hegemony, et cetera.
And somewhere a businessman says, uh-uh, the numbers on my piece of paper say, don't do it.
Yeah, I think that's right.
And another example of that that doesn't directly involve the United States was the big confrontation a few years ago between India and Pakistan.
And I remember, really, myself getting a little nervous about that.
And talking to a cab driver when I was in D.C., a cab driver from one of those two, forgotten which, Pakistan, I think, who said, no, no, no, they'll all work it out.
They've got so much trade going on now between India and Pakistan.
And sure enough, he was right.
And I don't want to go from there and be kind of like Tom Friedman of The New York Times and start propounding a cab driver viewer that they're always right.
But nevertheless, he was right in this case.
Yeah, well, I'm a cab driver, and we are always right.
That's right, I forgot.
Okay, well, I'm not really a cab driver anymore.
I was a cab driver, and I was right then.
And you know what?
No, actually, reading this article reminded me of the great book by Jim Powell, Wilson's War.
And in the introduction to his story, I guess the prologue or what have you, to the real story about how Woodrow Wilson destroyed everything for everyone forever, he talks about how in the 19th century, they had these two separate trade pacts, and that basically the Allies and the Central Powers from World War I were opposing trade blocs, the countries who had competing free trade agreements.
So they all got along with each other, but ended up basically being sort of kind of combining their empires together, I think, and then pitching two big empires against each other.
Yeah, now, by the way, I think that World War I is actually the big counter example to what I said in my article.
In other words, you had relatively free countries, Germany, United Kingdom, and France, relatively free economies, and there was a huge amount of globalization between those countries.
You had a whole lot, for example, of cab drivers, going back to that, German cab drivers who had driven cab in London who came back and were then conscripted to fight in the war.
And so you had a degree of globalization back about 1913, 1914, that the world didn't reach again until the early 1970s, if you measure it by percent of the economy, counted for by trade.
And there was a guy named Angel Angel, I'm not sure how you say it, A-N-G-E-L-L, who talked about the great illusion, and the illusion was that you could gain from war.
People misinterpreted that to say he predicted there wouldn't be a war.
He was very careful not to say that.
What he said was there wasn't a good reason for a war.
And so Gartsky, the Columbia University professor, goes back to Angel Angel and points out what he actually said and says, but now let's take the next step and all of the things equal, the fact of economic freedom at least makes war less likely.
Well, so is Powell wrong then that there were basically two competing free trade zones?
No, I don't think he was necessarily wrong.
I'm just saying that even with competing free trade zones, there was still a large amount of trade between, say, Germany and the United Kingdom.
And so there was a fair amount of freedom.
There wasn't as much maybe as there could have been.
And then when war broke out, those were the alliances, where the former competing free trade agreements became the alliances in the war.
You know what?
Again, I don't want to get beyond what I know.
That's probably right.
I'm sure Powell got that right.
I just don't know that.
And now you talk about outsourcing a bit in your article too, that Americans are really worried that all their good, wage-paying factory jobs are going to China.
Why shouldn't they be worried about that?
It comes down to something that an economist named David Ricardo talked about 990 years ago, 1817, the theory of comparative advantage.
What we tend to trade in, what we tend to produce and specialize in producing so we can trade is the things in which we have a comparative advantage, and other countries do the same.
And so you can do better by trading than not trading.
So, for example, if someone in China is doing something more cheaply than it's done here, we can free up our resources by buying the goods from China, and then people here get employed in other jobs.
This is not controversial among economists.
One of the best ways to see it, one of the standard examples we give our students, actually I give two examples, the standard one everyone gives, a lawyer who's a really good typist and can type way faster than his secretary should not then become a typist.
He should stay as a lawyer, produce his hourly output, which is worth much more than typing output, and then use some of those funds to hire a typist.
Another favorite example is the basketball player with Atlanta, the real tall guy from Africa, and his name is Dikembe Mutombo.
He came over to the United States with no goal of becoming a basketball player.
He didn't even know he was good at it.
He came over to learn how to be a doctor so he could go back and help people medically in his poor country.
I think it was the Congo or Nigeria or one of those countries.
He found out he was good at basketball.
He decided to play basketball and made a fortune.
He used a small part of that fortune to build a clinic and hire a couple of doctors.
In other words, that was the best use of his resources, not to become a doctor himself, but to do what he had a comparative advantage in, which was playing basketball, and then give that money to people back there so they could get medical care and probably having two doctors in a clinic was better than they would have had if he'd just gone back there as a doctor on his own with very little equipment.
So it's the same principle.
It's also why it makes sense for me to take my shirts to a dry cleaner rather than launder them myself and instead use my time for freelancing articles and so on where I'm paid more than the return I would get from doing my own laundry.
And the very same principle carries over to trade between nations.
Yeah, there's no difference in principle when the person you're trading with is named John or Dikembe or Rutger.
In other words, the point is trade across borders, there's nothing magic about borders.
And so the same principles that say trade is good between you and me and the country say that trade is good between you and someone else outside the country.
Do they go wrong when they talk about trade between America and China when what they really mean is trade between David Henderson and Wang Li?
Well put.
They absolutely do.
Trade is virtually never between nations.
It's between individuals at most companies in nations and individuals or companies in other nations, and they do go wrong.
That's why I make a point of trying to say, although I sometimes get sloppy, of trying not to talk about trade between the United States and China but rather to talk about trade between Americans and Chinese.
It's very different.
Also, by the way, a related point is you might have noticed another article on the antiwar.com website that's one of my favorite articles called Who Is We?
Yes, that was one of my favorite articles and I actually sometimes just mangle the language like the President of the United States trying to figure out a way to not say we when I'm talking about the American government.
Yeah, and the way I do it, and it's more long-winded but it's more accurate is I talk about the U.S. government or I talk about specific decision-makers within the United States government and I talk about some of the tragic consequences of mistaking the actions of the U.S. government for our actions.
And I do that in the context of September 11th.
And that's so important, too.
In fact, I've heard people on TV news stations and stuff criticize people for always saying the U.S. government instead of we.
But, you know, Mr. Henderson, if you and I both did everything in our power to oppose this war then it isn't we over there at all, is it?
It isn't.
And let's say we did nothing to oppose this war.
We're just going about our job, you know, providing for our families and so on.
We still didn't do anything.
It takes actually doing something to be responsible.
Yeah.
And, yeah, and by the way, I'm still trying to persuade some of my foreign policy friends to talk that way.
One of my biggest allies in this, well, two biggest allies are people I'm sure you know of, Ted Carpenter at Cato and Doug Bondo, who used to be at Cato.
Right, who I just spoke with last week.
And I keep emailing him and saying, well, especially Doug, who's a closer friend, I keep emailing him and saying, please don't contribute the United States government's actions to me.
You know, he's always doing it.
He's saying, we did this.
We bombed Vietnam.
We did that.
I didn't.
I had nothing to do with it.
Yeah, well, and it really is that individualist perspective that you don't start with the state, you start with the person.
Yes.
And work the other way, if at all.
Yes, that's right.
Yeah, and it really is.
It's just a matter of semantics, but it changes so much.
It does.
I mean, actually, I think I wouldn't say, unless I misunderstand the word semantics, I would say it is not just a matter of semantics.
It's actual, it's an important difference in meaning.
Right, right.
Yeah, yeah, I guess I didn't really say that right.
Well, maybe you did.
That was my semantics.
I mean, I've never looked up the word semantics, so maybe you're right.
I'm just not sure.
No, I think I, in my semantics, I misused the word semantics there.
And now, you know, something else that you wrote that I thought was very interesting, and this is a subject that nobody will ever talk about, and that is that Iran has a perfectly legitimate economic interest in enriching uranium for their electricity program.
Right.
And if you notice, I was very careful not to say that they don't have other motives.
But what I was challenging in that article was the idea, I've heard so many people say, oh, well, they must want to have enriched uranium in order to have nuclear weapons, because why else would they do it, sitting on all this oil?
And my answer is something economists call opportunity cost, that it costs Iran the same amount for oil that costs us, namely that if the Iranian government were to use that oil, or the Iranian people were to use that oil, they are using something that they could get $64 a barrel from on the world market.
And so it's very high cost to use that oil, and it makes just as much sense for them to consider nuclear power as it does for us.
Well, and I guess it's, again, that same principle about the lawyer and his secretary.
Yes.
It basically just comes down to an equation.
Are we better off running our electric plants off of the oil in our ground, or off the uranium in our ground and selling the oil?
There's not as much of a market for uranium, but there's plenty of market for oil, so use up the uranium and sell the oil.
It makes perfect sense.
In fact, it made sense back in the 1970s when the Nixon and Ford administrations and Carter administrations helped the Shah of Iran develop his nuclear program.
Yes, that's right.
Same country, just different people in charge.
Yeah, that's exactly right.
And now, one more thing before I let you go here, Mr. Henderson, is the left-right alliance, the new realignment, as my last guest, Anthony Gregory, was explaining.
Through the confusion of seeing, for example, Ron Paul and Mike Gravel agreeing about the war from their positions in two different parties, that eventually through some of this confusion created by that will come the clarity of the problems with our left-right way of looking at things and perhaps help lead to a new realignment where Ron Paul and Mike Gravel will be considered on the same side, not opposites.
Yeah, I hope for that too.
I think that certainly what Mike Gravel said in the quote-debate-unquote among the Democratic candidates and what Ron Paul said in the quote-debate-unquote among the Republican candidates, that was the best content there was both evenings.
And I think, by the way, a lot of people who responded to polls thought the same way.
And they were the only ones really saying something, and they were saying important things, and they were saying sensible things.
Put aside Mike Gravel's somewhat crotchety nature, which actually I found kind of refreshing, and you still have a lot of good content there.
Yeah, and in fact, when you wrote your article working with the left on the war, that was published the same day that I posted up an interview that I did with a guy from the Socialist Workers International Union or something, and we had a great conversation for an hour all about the war and how Iraqis are human beings and all kinds of great things.
Yeah, I think that's right, and that was kind of stepping out for me because that thing I wrote, it was basically a big part of it was my reprint of the speech I'd given in favor of my local Democrat Congressman, and I'd never done that in favor of a Democrat in my life.
And so that was kind of a big step personally.
Yeah, is that kind of worrisome about your reputation at the Hoover Institute or something like that?
I don't know.
There's this myth that the people at Hoover are all these Republicans.
I think 50% of them are registered Democrats, but I also suspect, although I don't know, that among those 50% are a whole lot of hawkish Democrats of the Ben Wattenberg kind of school.
And so maybe that would hurt my reputation.
But the great thing about this country generally is just how much freedom we still have to express our views.
And about my particular occupation being an academic is that a wide range of views is generally tolerated.
Right.
Yeah, that's always good to know.
I know David Bezos says he listens to my show with the door closed.
I don't want to get into too much trouble.
Well, does he have tenure?
Yeah, I think he does.
I think he does.
That's my rule.
Do it with the door closed when you don't have tenure, but then open the door when you do.
Although, by the way, that was a big risk I took in 1990 that turned to repay handsomely as far as my reputation.
I wrote a piece in the Wall Street Journal in August 1990 laying out how there was not a good case for going to war with Saddam Hussein over oil, which was the case that Baker and Bush had made.
And the Journal published it to their credit.
And I left off my affiliation because I was concerned.
I was coming up for tenure in a year, but I got a chance to go on CNN live around the world and talk about this.
And I wanted to list my affiliation with the school.
And I went through the chain of command all the way up to the provost.
And not only did the provost say, yes, you may use our affiliation, but he said, kudos, thanks for doing this.
So that was nice.
And, you know, really this is our only hope, isn't it, at the point we're at where our government costs $3 trillion a year, that we can have some sort of, well, I guess in my local community college I learned that for the election of 1933 it was a realignment where pretty much everybody except H.L.
Mencken came into the fold and to the new consensus supporting Franklin Roosevelt.
And I guess that's the kind of realignment I'm looking for to undo what Roosevelt did.
Yeah, and who knows.
And I think you have different kinds of realignments.
So, for example, you could have a realignment on foreign policy where one party or the other goes more noninterventionist.
And I don't know which one it would be, but that would be a nice realignment, too, even if they didn't do much else on domestic policy.
All right, well, I know you're a busy man and have to go, so let me thank you very much for your time today.
Thank you, Scott.
And tell everybody you can find David R. Henderson and everything he writes at davidrhenderson.com and also at antiwar.com/henderson.
Thanks again.
Thank you.