 I'm now very pleased to introduce the F.A. Hayek Memorial Lecturer, Bruce Yandel. He has his talk, bears the tantalizing title, Hayek's Marvelous Eureka Moment and America's Regulatory Saga. Professor Yandel's talk is sponsored by Dr. Don Prince, who is with us today. Please. Thank you. Bruce Yandel is an economist, writer and speaker on economics and political economy. He is Mercatus Center Distinguished Adjunct Professor of Economics at George Mason University and participates regularly in the Center's Capitol Hill Lecture Series. Yandel is Dean Emeritus of Clemson University's College of Business and Behavioral Science and Senior Fellow Emeritus, Property and Environmental Research Center, popularly known as PERC, in Bozeman, Montana, while serving as Alumni Distinguished Professor of Economics at Clemson University, he taught in graduate programs in France, Italy, Germany, Czech Republic. He is the author or editor of 17 books, including his 2014 book, which was co-authored, entitled Bootlegers and Baptists. I like his title. How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics. Dr. Yandel served in Washington on two occasions, first as a senior economist on the White House staff during the Ford administration and later as executive director of the Federal Trade Commission in the Reagan administration. He was also a member and chairman of the South Carolina State Board of Economic Advisors. He received his AB degree from Mercy University and his MBA and PhD degrees from Georgia State University. Prior to entering an academic career, Dr. Yandel was in the industrial machinery business for 15 years. A quarterly economic situation report is distributed by Clemson University, their Strom Thurmond Institute, and George Mason University's Mercatus Center. So please welcome Professor Yandel. Thank you very much. What a delight to be with you today and yesterday, to be a part of the conference. Delight to be included. Highly honored to be asked to give a presentation that reflects in some ways on the marvelous ideas of F.A. Hayek. Don, thank you so much for your sponsorship. And while everyone in this room is very special, I want to call attention to three people that are unusually special. They're members of my family. All right. Back in the back of the room is my wife, Dot, and our two sons, Bruce and Eric, who live here in Auburn. And so we have all kinds of reasons to enjoy coming to Auburn. Just a few years ago, Dot and I celebrated our 60th wedding anniversary. And so as you grow old, there are some things that you can look forward to, big celebrations like that. So Dot and I decided to do something really special, since it was our 60th. We went to the Dairy Queen, and at that time, the Dairy Queen had a $4 meal that they were promoting. And so we sat there in the Dairy Queen, had a good time, and now we are working towards our 70th, and there is a big filling station chain over our way. We've got our eye on that filling station. They make some really wonderful hot dogs. And so we have a lot to celebrate as we gather today. And as mentioned, the topic, the title is Professor Hayek's Marvelous Eureka Moment in America's Regulatory Saga. There's going to be a subtitle to this, and we will discover that as we move along, and I will call attention to that discovery. But to get this started, I've got to tell you a story. Before there was Twitter, there was Facebook. And before there was Facebook, there were text messages. Before there were text messages, there was email. And before email, now we're really getting back decades, before email there was fax. And before fax, people wrote letters on university campuses. We had a regular mail person, mailman, mailwoman, mailperson who delivered mail, campus mail two times a day in our building, and we either looked forward to getting those brown inter-office envelopes or we despised them, but it came regularly. One day during that period, I received a letter, and every other faculty member at Clemson received a letter from the university librarian. I opened the letter, and it said, Professor Yandle, we are going to be organizing a display of professor's favorite books. They'll be stacked up in the lobby of the library, and we'll put a card on each book, Professor Yandle's favorite book. Now as I tell the story, I want you to think about what you might have chosen as your favorite book if you had been on that mailing list. And so the letter went on, if you want to participate, tell us your book. We'll pull it out of our holdings and we'll include it in the display. So I wrote back with my favorite book. Then several days later, when the mail made its way back, here was another letter from the librarian. Thank you very much for your letter. By the way, they taught people how to write letters back then. Thank you very much for your letter, Professor Yandle, but I'm sorry to tell you we don't have your book, your favorite book in our holdings. If you have a copy, if you will lend it to us, we will still be happy to include your book. And so I wrote a letter back. Thank you very much. When I have more than one copy, I will be happy to bring one and lend it to you. And so I brought my book in and there they put it up on the stack with Professor Yandle's favorite book. And that was my favorite book. I think it's one of the most important books written in the English language, or maybe any language, the little engine that could. A few days after the display showed up, I got a call. The semester was just getting started. I got a call. The voice on the other end says, is this Professor Yandle? Yes, yes. I'm a sophomore and I'm calling to ask you what you are teaching this semester. And then he interrupted himself and said, well, it really doesn't matter. I just want to take your course. And I said, well, that's interesting. He says, well, anyone who's crazy enough to think little engine that could is his favorite book is my kind of man. And he said, if I come over, will you sign my drop ad card so that I can add one of your courses? And I hesitate for a minute and I said, I think I can. And what did the little engine that could say? Well, I can't hear you. I'm getting old a little bit louder. What? What did it say? I think I can. And by the way, when you reread this book by Waddie Piper, you will discover if maybe you forgotten the little engine is female. There are some interesting twists to this story. I think I can. Now pause and think with me about the power of those four words. I think I can. Think about the institutional context. Think about the psychological context, the background, the ability to say, I think I can. It's not everyone in this world who would be inclined to say, I think I can, or turn it over and think about the other side of the coin, I don't think I can. I think I can. It's a message of optimism. It's a message of understanding about the world in which you live and operate. It's a message about living where you don't have to have perhaps too many licenses or permissions or else you've thought through all of that and you're still saying, I think I can. I think I can and the ability to say that in a way is part and parcel to the revolution of thinking that came from Professor Hayek's Eureka Moment, November 10th, 1939. When he delivered a speech, he was president of the London Economics Association Society and he delivered a speech that he had been working on and the speech was economics and knowledge. And we probably think of it now as what became the journal article, the use of knowledge in society. But we have to think back about the context for Professor Hayek in that regard, but before doing so, let's take a look at some of his words that relate very much to, I think I can. Hayek in his writings, this comes from the Constitution of Liberty, Hayek in his writings points out that how many courses of action that may be open to an individual is very important and you might pick one, but what's more important is picking out a course of action that is yours that represents you and your choices when you say, I think I can. In other words, it's about freedom. It's about doing your own thing without having to get permission. It's about the origin of all supply curves. Imagine someone who is in the building construction business, a drywall subcontractor, gets a telephone call from a home builder saying, hey, we're starting a couple of houses here out on a new development. You came out and took a look and you gave us an estimate. Do you think you can be on the job next Wednesday? I think I can. Tom DeLorensa, where are you, Tom? Yeah, Tom DeLorensa told us yesterday about getting a telephone call from a publisher saying, Tom, would you be able to turn out a book on socialism in 30 days? If I remember right, Tom. And Tom, paraphrasing Tom, Tom said, I think I can and he did. He considered all kinds of options and said, I think I can. Those are the supply curve origins that have to do with the ideas that were so rich that came in what I consider to be Professor Hayek's Eureka moment. Now in Nicholas Watshott's book about Hayek and Keynes, he gives us some context about this particular lecture, how it happened to take place and what was going on otherwise. It was 1936. Hayek had come to the London School of Economics in 1931. You remember the story. Lionel Robbins, his name is up here on the wall, was one of his good sponsors. So here is young Professor Hayek, fresh from the mentorship of Phonesis, with a heavy Austrian accent, I guess others would have said German accents, with a heavy accent, finding himself there in London. There's a rock star over at Cambridge, John Maynard Keynes. He was famous. He was a rock star to Hayek. After all, he had written the economic consequences of the peace after the British High Treaty. And that rang true with people throughout Europe. And so here was this rock star who already had a gigantic reputation as an economist who was putting forth ideas that would form what would later be labeled as macroeconomics. And so Hayek and Keynes engage in serious debate in the newspapers, writing letters, and then face-to-face debates, alternatively on the Cambridge campus, then on the London School of Economics campus. And Keynes always seemed to get the best of the debate. He was six feet, six inches tall. Can you imagine that? Spoke with a sonorous voice, was nimble on his toes, a brilliant speaker, and here was Professor Hayek. But Hayek was making marks. He was making a reputation, and the students loved it. Then Hayek, I beg your pardon, Keynes came out with his magnum opus, the general theory, 1936. And the students at the London School of Economics says, we can't wait now until Hayek and Keynes have their next debate, and they never had another debate. The use of knowledge in society intervened. Hayek stopped, in a sense, dead in his tracks in terms of that debate, and became energized by the power of his thoughts about knowledge in society. That then became the motivating force. I call it a eureka moment, and I do that because I really am interested in eureka moments. I collect them, people who wake up at night and have a song that they have composed in their sleep and they write it down and then can't read their writing the next morning. People who have all kinds of discoveries and dreams, or either they are out walking in a garden and they have a flash of insight, or either dicky bets there with the Armin brothers at two o'clock in the morning trying to think of a song, and there he sees his daughter, or has been playing with her, and he writes one of his beautiful songs. What's the name of that song, Eric? Millis? He writes a beautiful song, and there at the Armin brothers' home in Macon, Georgia, you can read the story about his eureka moment. So I'm interested in these things. But as I was working on this presentation, I wrote to Bruce Caldwell, up at Duke, and to Bill Butos, up at Trinity, and I said in my notes to them, look, I'm working on this, and I've got this hang up about eureka moments. Do you think Hayek's insight constitutes a eureka moment? And Bruce wrote back and said, I don't think so. I think there was some thinking ahead of time. In other words, it wasn't just a flash. But then I went to Bruce's work, and these are Hayek's words, quoted by Bruce in his book, The Hayek Challenge. Now the eureka's not part. And it was with a feeling of sudden illumination, sudden enlightenment, that I wrote that lecture in a certain excitement. I was aware that I was putting down things which were fairly well known in a new form, and perhaps it was the most exciting moment in my career when I saw it in print. And so maybe we wouldn't call it a eureka moment. Maybe we would call it something else, but let's call it Hayek's eureka moment. It redefined, basically, the rest of his life's work. He did not let go of the other work in interest that he had in trade theory and capital theory and production, but the idea that the division of knowledge is the ultimate challenge for any society and how to get all of those brains connected became a beautiful part of his work. Now in his work, which I would think was inspired to some degree by his personal background, I had a late colleague who told me, Bruce, any journal article or any book that anybody writes, if you scratch long enough, you will find it's autobiographical. That there's something in it that comes out of that person's life and life experiences. Now I'm not sure if he's talking about a book on matrix algebra when my friend said that, but Hayek's father was a professor of biology. So he grows up in a household where dad undoubtedly is talking about his work. Undoubtedly, there is discussion about evolutionary processes and organic processes. And then at one point Hayek writes that he wanted to be a psychiatrist, then got a job in a laboratory looking at brain tissues, which would make you think that he spent a lot of time thinking about the brain and the mind and how it works. And so here's another hook for my story. Between instinct and reason, Hayek makes the point that human beings, in a sense, live out lives between instinct and reason. There are certain things that we do that are just almost instinctive in our DNA. There are lots of other things that we do that constitute careful thought, reflection, reason. And then as he points out, there are a lot of things that we do that are based on custom and tradition. Maybe we celebrate Christmas. Maybe you celebrate Passover. Or maybe you're off on Saturday and Sunday. Maybe you work five days a week. Is that some reasoning, rational process that led you to decide I'll work five days a week? Most likely not. Much of our life is about instinct and reason. And while I'm saying these things, I want you to keep in mind the little engine that could. Maybe our predisposition to achieve is a part of tradition and custom. Maybe our predisposition to work, to be active, is buried back there in some of that. Some might say it's instinctive, but if you do, you'll have a hard time with some empirical data that has to do with cross-sectional analyses of populations across countries and cultures because that instinct isn't present in lots of places. And maybe there's an explanation for that. And so paraphrasing Hayek, he says, much human behavior is conditioned by habits of the heart, by custom, tradition, based on life's experiences. We act on the basis of these things that we really don't understand. We just get out there and do. So then the question, how do custom and tradition, the rules of behalve that get transmitted? Now an answer to that question is found in the wonderful work of David McClelland, one of the outstanding psychologists of my lifetime who taught and worked at Harvard for decades and turned out this fabulous book, the book was probably published more than 40 years ago, The Achieving Society. David McClelland wanted to know what explains the behavior of people across cultures, across countries that causes some people to achieve and others not. And so he got an army of graduate students working in his shop and they decided that they would gather data on countries worldwide measuring achievement and their measurement of achievement, you and I would say growth in real GDP. It's just they didn't have GDP data. They used electricity production as a proxy. And so they used what we might call an economic measure of achievement. And so they went across cultures and countries and people gathering data. Oh, is it about educational attainment? Oh, is it about natural resources? Oh, is it about climate? Whatever anyone might think of, whatever was in the literature, they tried to find through their multivariate analyses a common variable that would be present and would help to separate the variation in the data with respect to achievement across customs and countries and cultures. And they found one variable that seemed to survive in their studies. It was the frequency of the theme of achievement found in these stories that mothers and fathers read to preschool children. I think I can. It was the theme of achievement that may be buried in custom and tradition so that it was not present in some places in some cultures. It was present in others. Now, if you were going to try to take some of these ideas and say, well, if we want to try to find a way to speed up, gin up, lift up, economic performance across cultures and countries, well, then maybe there need to be programs for preschool children where they will have books read to them in some kind of systematic way. Now, if you thought about doing that, I kind of doubt that you would say, we need to get Dolly Parton on our side. I doubt that she would say, Dolly Parton is our dish and what a honey she is. She can sing, she can act. Let's see if we can get Dolly Parton to do this. Well, if you thought about Dolly Parton, you would be right on target because in 1995, Dolly Parton started something called Dolly Parton's Imagination Library. Talk about a government program. No. Since 1995, that program has distributed over 60 million books that are mailed every week to a child, mailed to that child by that child's name in locations in the United Kingdom, Canada and the United States with over 1600 local sponsors. Now, we have one of these programs in a town near Clemson in Anderson. There are two counties in the upstate of South Carolina that are participating in this. And I understand that there's a private firm that is now planning to make it possible to have Dolly Parton's program in every county in South Carolina. It has been active in every county in Tennessee for years. But if you want to participate in this program, it costs you 30 bucks a year. For $30 a year, Dot and I can sponsor a child in Anderson County so that that child will get a book mailed to that child once a month. But Dolly Parton doesn't just hand out cash, there has to be a partner on the ground and generally speaking, more often than not, in the United States at the Rotary Club. There has to be a local organization that shares in the process, but there's more. For any child's name to be added to the list, there has to be an adult who signs a commitment I will read to this child. And guess what the first book is that goes to every child that gets, you want to, the very first book that goes is a little engine that could. That's the subtitle to the presentation. Is what about the little engine that could? What might be its prospects? And the reason that's the first book is because that's Dolly Parton's favorite book. She and I have something in common after all. I love to hear her sing, but I was pleased to know that this book was important to her and the reason it was important to her was because this was a book that was read to her when she was a child and she decided as a result of this and a lot of other life's experiences to say yes to life. I think I can. Now, as Hayek goes on enriching this story, the knowledge problem. He says if we can agree that the division of knowledge and the fact that knowledge is stored out there in four billion brains and problems are more specialized and now if we could just get that knowledge on the problem at the right time, then our problems would tend to be solved and then he suggests that we can't expect this to be solved by getting together a central board, a few people, the brightest and best in a room with a big library and you say, hey, you've got all these brains sitting in here today and we've got all these books, call out the problems and let's see if we can't get knowledge to come to bear. And so his call is for a decentralization of the process because that's where the brains are and of course that's where the problems are. And so let's put the brains on the problems where the problems are, the local knowledge is there. And so we would never try to get 20 or 30 people of the brightest and best in a progressive mood to in the United States to go to Washington and say, here we are guys, we're the brightest and best, let's get the information and solve the problem. No, that wouldn't make a lot of sense. What matters are brains and knowledge, but that's not enough, we gotta get them connected. And so I'm going to qualify the kind of knowledge that I think Professor Hayek was talking about. He would have never called it this. I want to call it little engine knowledge. It's not just knowledge, there could be knowledge about ancient Greek alphabets that are stored in brains and a host of every other thing imaginable. But I think he's perhaps more interested in knowledge that comes to bear on human problems and maybe knowledge of ancient Greek alphabet would be in a situation, important there. But I want to call it little engine knowledge, the origin of supply curves. If we can just figure out a way to get that engaged and Matt Ridley writes about this problem in his book, The Rational Optimist. If you haven't read it, put it on that list of, that long list that you have of things that someone recommends that you read. Matt Ridley refers to it as the collective brain of mankind. He's dealing directly with Hayek's problem and with his issue and Ridley suggests that the solution to this problem, the connections that began to form that brought man's collective knowledge together to address problems began a long, long time ago. In fact, in his book, he says it began 250,000 years ago. It was 250,000 years ago, according to researchers, that some tribes in some part of Africa began to do things that exceeded their biological limits, their biological limits. They were ending up with products, things that were beyond what they biologically would have been expected to be able to produce. And as Ridley tells the story, they engaged in trade. Some people from some other places showed up in those villages, but note this. Ridley says the trade was important, but what was more important was the ideas that came from another village. And sometimes that was what was so frightening. We don't want to trade because we don't want those strange ideas coming in. And so in his writing, he says somewhere in Africa, they got connected to markets and trade, and they began to form leakages to the collective brain. And of course, as transactions cost fall and as trade has expanded, then tapping into that collective brain becomes far, far more feasible. And so we begin to get an image of what we might think of as a beautiful world. Wow, all of this knowledge out there is being tapped into now and gains from trade or occurring populations of people or sharing ideas. And they may be shooting each other from time to time also because they are kind of strange, but the world is getting to be a better place with decentralized approach that Professor Hayek so admired. But wait a minute, wait a minute, this story is too good or is it? Why so much command and control? And now we get to the second part of the title. America's regulatory saga. How could it be that we would have this kind of wisdom, this kind of knowledge agreed to by lots of people about the knowledge problem and the decentralization and the merits for that, yet at the same time when we look at our own country, it is a country that is up to its hips, up to its neck, up to its eyeballs in regulations. You say, I think I can, well wait a minute, you better check, do you have an EPA permit? You think you can? You think you can get a permit? Is that what you're saying? How much optimism do you have? And so now can we draw on Professor Hayek to help us to understand America's regulatory saga? Before doing so, something that is truly paradoxical that I wanted to share with you. Cass Sunstein is a marvelous legal scholar, brilliant Harvard professor of law, most recently the White House director of the Office of Information and Regulatory Affairs. That's the White House regulatory czar. Cass Sunstein has written a number of books and most recently in his book called Valuing Life, which tells about his work there in OIRA, Office of Information and Regulatory Affairs. By the way, that office has the responsibility to review and evaluate every major federal regulation before it becomes final, to interact with the regulatory agencies to try to make those rules more meaningful, more effective, fill in the blank with words, interacting there. And here's the paradoxical thing. This is a direct quote from his book, page 14. And there's a fragmented sentence at the end, we'll forget about that. My broadest themes here might loosely be described as Hayakian, wow, after the great economist Friedrich Hayek, the Hayakian theme emphasizes the dispersed nature of human knowledge and our role in attempting to acquire as much of that knowledge as possible. In other words, to centralize the knowledge with a small staff of people, fewer than a hundred, we are going to centralize through hearings, testimony and federal register comments, we will get that knowledge and we will bring it to bear here in Washington and we will make regulations better and smarter. Thank you, Professor Hayek. And so we have behavioral economics which is flourishing now, not just because of what some might call the wonderful and inspiring work of Sunstein, but his book, Valuing Life, notice the subtitle, Humanizing the Regulatory State. Humanizing the Regulatory State. So be careful when you see that humanizing part of the subtitle. And so here we have a regulatory giant as we look at a nation that has become a code law country which once was a common law country. We look at a country that has become a code law country, a regulatory state and how can Professor Hayek or anybody else help us when we look here at the count of pages in the federal register from 1940 through 2014 and this is not cumulative. These are total pages of new and revised rules annually and Mr. Sunstein or anybody else who works in that office and I did it one time during the Ford administration, anybody else who works in that office is staring at this process and this count of pages and the federal register notices and attempting to try to make it better or make sense out of it. And so when we look at that growth, by the way, that tallest of point, they're almost in the middle of the chart for those of you who are interested in regulatory trivia pursuit. That's the last year of the Carter administration. That's the all-time high. Most of the regulations that are in that one observation, the tallest in the chart were published the last week of the Carter administration. They are the so-called midnight regulations and if you look systematically at this time series and you tested statistically to see if there is a significant difference in the number of pages of rules published in the last year of an outgoing administration when the party changes, you will find that there are significantly more, whether it's Republican or Democrat, they all be saved the same way. Get the rules out while we are in charge. That's part of the regulatory process. By the way, this is the number of lawyers per thousand population in America. This is for a time series of 1955 to 2012. Now let's map that into the pages just for the heck of it. And that's what you get. In this wonderful book, Crone Capitalism, Hunter Lewis tells us about what used to be called the American Trial Lawyers Association that is now called the American Association for Justice. So much more beautiful name. That is the second largest contributor to presidential campaigns in the most recent presidential cycle, 2008, 2010. The trial lawyers contributed $2.6 million to the presidential campaigns. The number one contributor, the brotherhood of electrical workers of America. And so you ask, well, why would the lawyers be contributing so much? Why would they have such an interest in being on the right side of anyone who's going to go for office? And when we look at the regulatory state, we certainly can understand at least a linkage that is there. Hayek gives us an explanation. Welcome to Politics U.S. Style. What's going on? Basically, it's public choice politics. In order for a party in power to stay in power, they've got to dance with them that brung them. They have got to make good on their campaign promises. And a lot of those campaign promises today have to do with regulation. And so as we map this thing together, we end up with a rather interesting phenomenon. It's not just any regulation. It's not just any kind of regulation. It's one specific kind of regulation that now enters into the picture. It is called command and control regulation. That's where the regulatory authority describes in precise terms how something must be done or the kind of process that must be used or the kinds of machinery that must be applied command and control. There's an alternative. It's called a performance standard. You can have the same goal and the same objective. Let us say you wanted to reduce the level of suspended particulates in the air in some ambient reading. That's your goal. You could do that by saying the level must be reduced by this amount by 50% less than the present within five years or something bad is going to happen to you and I don't care how you do it. What matters is reducing the suspended particulates. Then you would be relying on the competitive and the creative and the ingenuity process to come up with new and lower costs, better ways to clean up the air. Or you could say I'm going to put a price on it, friend. The more you put out, the more you're going to pay. Or we're going to bring common lawsuits against you. No one has right to impose cost on his neighbor without the neighbor's permission, according to Murray Worth, Rothbard. We will bring a suit and we'll see you in court. There are several alternatives. The most costly alternative is to say we're going to bring together the brightest and best in one room at the US EPA and we're going to gather data on the entire industry. We're going to study technologies and we're going to find the very best technology and specify it for everyone in the industry and then it will be frozen. But we will know that the brightest and best came up with it and so think for a moment about command and control regulation and now you get an interesting dance whose technology is going to be chosen. Wow. What if I, as an industrialist, could persuade them to choose the technology I'm already using in my newest plants and impose that on those sorry competitors of mine. Wow. Then I could have a targeted regulation and command and control enables that phenomenon to happen and so we have in the United States as we look at the regulatory saga a dominance of command and control technology based regulation. We have practically eliminated common law remedies. We hardly ever have performance standards and now we're left in a sense looking for a fuller explanation as to why that has happened. In order to get around to measuring this, there are some economists at the Mercatus Center at George Mason University led by Patrick McLaughlin who developed a technique for counting words in the Code of Federal Regulations. Now, if I were to stack up the Code of Federal Regulations, this would be a set of binders that contain all of the final rules now in practice. If we were to stack them up, they would go from this floor up to the ceiling just to give you an idea of the magnitude in terms of the number of pages and what Patrick and his colleagues with some other people helping who were excellent software design engineers, they came up with a piece of software so they count the frequency of the words that you see at the bottom of this picture. Shall, must, may not, prohibited, required. They count the frequency of those words in the entire Code of Regulation by year, by industry, three digit, four digit SIC code. And so now we can get a reading at least on the extent to which command and control is dominating the regulatory state. And I've put together a chart which just shows four industries. The white line that you see there is the industry mean. The origin is 1997. And so if you look at the industry mean, you will see there's been a 20% increase in the frequency of those command and control words for the entire U.S. economy. And then you can see the variation just for a few selected industries. The one at the very top is the paper industry, then oil and gas, chemical. And you can go to the website, just type into Google Reg Data, all one word, and then you will be able to have fun producing these kinds of charts. And when you produce yours, you can know that there's somebody else in Clemson doing the same thing. And I just love it. You know, sometimes I get these and I'll call down to the dot and I say, you've just got to come up and look at this. She says, oh no, I'll send the cat. So my cat and I look at these charts together and admire a measurement of regulation. Now, in case you're curious, they've also done it for administrations in recent years. So we probably should have had a multiple-choice exam on this chart before showing it to you. So if you would see the least regulatory president in modern times, it's Bill Clinton. Probably in economic terms, one of the best presidents we've had, notice I qualified in economic terms, one of the best presidents we've had. If you just look at economic data, you can see George W. Bush is kind of going to the sky well above Reagan and George H. W. Bush only had one term and you can see where Barack Obama is headed now to the sky. When we look at this, you know, you could look at this through a number of lens. One would be to say, wow, what a burden. And it is a burden. We're looking at the cost side. It is a burden. Well, surely there's some benefits somewhere. But if you're looking at it from the standpoint of a rent-seeking player in a major industry, what you are looking at here is victory. The industry that got the most regulation is where the rent seekers won by imposing higher cost on their competitors. Give you an example. When you mentioned in the introduction, thank you that I was a bit player there when you say White House staff, well, there are 3,600 people, big time. Never saw the president. When you're on the White House staff and I was there during the Ford administration, I thought, how long ago was that? Is there anybody in the room that can remember that far back? Was that 40 years ago? It was. I was there in 1976, 40 years ago. One of the last things I worked on, EPA was my beat. I had the responsibility of reviewing documents coming from the U.S. Environmental Protection Agency, making comments on their proposed rules, attempting to make the burden lighter, make them more cost-effective, and so forth. One of the last rules I worked on were the rules, the final rules that were going to be published for the U.S. copper smeltering industry. Copper smelters are dirty. They, at that time, and they still do, produce a lot of sulfur dioxide emissions. A lot. Goes up those stacks when you smelt copper. The last paragraph in that nice document, very well done economic analysis, said, when these rules become final, there will never be another copper smelter built in the United States of America. Well, how would you feel if you were a major shareholder in Connecticut Copper when you read that last paragraph? Do you write your senator and say, to heck with all of this, get those regulations off our... No, wait a minute. You say there will never be another one? Are people going to continue to buy copper? Sounds like our prices are going to go up. Two colleagues of mine decided to do a piece of financial markets analysis on that episode, and you do that by building portfolios of stocks, any you wish to select, and they built a portfolio that included all the copper companies in America. They looked at the relative movement of that portfolio relative to all the stocks in the New York Stock Exchange in association with particular dates. It's called event analysis, and you can make a window as small or as large as you want to, and we'll open that window and we will see if the portfolio moves abnormally relative to total market. And so they had three possibilities that when the rule became final and they opened the window and looked, there could be abnormally negative returns to that portfolio. The market investors would be punishing those companies, or there would be nothing, oh, huh, or it could be positive. By abnormal, I mean statistically significant wealth creating or wealth destroying. What did they find out? Strong, positive, abnormal returns for shareholders in the copper industry, for the portfolios observed with differential effects across companies. Some companies were greater winners than others, and so there are multiple groups that supported those rules. Among them were industrialists who said, anybody in my industry who's going to build a plant ought to build the most modern plant the way we always do and use the greatest technology. I like these rules. And there was another group, generically speaking, that wanted those tight rules and costly rules, and that was the environmental community. And so you had a rather interesting combination then of industrialists and environmentalists who wanted the same thing. Now before reading leaving this tall stack of code of federal regulations, just to give you an idea of how long it would take you, our friend there, Patrick McLaughlin, has now counted how many hours it would take you to read the entire code of federal regulation if you read at the normal pace of 300 words a minute. It would take you 5,000 hours. That's a little less than two years working full time reading now nobody's going to do that. It's just to suggest that not only is nobody going to do that, nobody has ever done that. No human being reads the entire code so in a sense nobody really knows what's going on. Well if they read the whole thing they would not be able to remember it so it's a bad idea from the outset. And so then how did it happen? Bootleggers and Baptists greased the rails. When I made the illusion just a minute ago or made the reference to industrialists and environmentalists, the metaphor is bootleggers and Baptists. Bootleggers and Baptists greased the rails that have contributed to that do not explain totally certainly but have contributed to the growth of targeted command and control regulation throughout our economy. And so there they are. Of course the metaphor comes from this cartoon. The metaphor comes from the cartoon that there are two individuals who really liked prohibition and those are the Baptists. Now I have to tell you I'm a Methodist and you could call it Bootleggers and Methodists but I would lose the alliteration. So it's going to be Bootleggers and Baptists. The Baptists are in favor of a diminution in the consumption of alcohol and the Bootleggers are in favor of a consumption of alcohol sold by legitimate dealers. And so the Bootleggers and Baptists supported prohibition and they support dry counties and they support Sunday closing laws that make it illegal to sell wine or beer or liquor on Sunday. And the Baptists run around to make sure the law gets enforced. The Bootleggers don't have to do that. The Baptists do it for them. And when the legislation is up for renewal before the State House, of course the Bootleggers go down with signs, help your local Bootleggers make a dishonest living. No, they don't have to go down in lobby. Who lobbies for them? The Baptists and the Methodists and any other group that thinks the world would be better off with a diminution of the consumption of alcoholic beverages. And so then the Bootleggers rakes in the gold sometimes perhaps contributing to the local Baptist church and for heaven's sake maybe he's a Baptist, I don't know. But sometimes funding the politicians when they run for office to help them continue the process of Bootleggers and Baptists. And so that's our story and I've just summarized it. But now back to Mr. Hayek. Mr. Hayek described two kinds of rules that he tells us that most of us ordinary folks live in two worlds. We live in a world of family and loved ones in close community. And when a child comes in the kitchen at night and says, hey, daddy, I'd like a drink glass of milk. You don't say how much you're going to bid, son. We're getting a little bit low and the price is going up. No, you don't auction off milk to your children. No, or your neighbor. Neighbor comes knocking on the door. Hey, I was just making up a cake and I need a stick of butter. Oh, okay, two dollars and a half. Or maybe how about having me cut the grass tomorrow? No, hey, we live in two worlds. One world that is dominated by cooperation, by love, by showing kindness to each other and sometimes long-term relationships where it does put us all back together again. And then we live in a very impersonal world. So that when we go out to trade cars, I have never met anyone and I've asked a lot when they were getting ready to talk to a salesperson at the chosen dealership. I've asked them, did you ask the sales manager who was really hurting and needed the commission the most this week? Did you check around to see if anybody had cancer in their family? No, I didn't. Well, what were you looking at? The bottom line. That's the impersonal world. And Hayek warns us that if we were to try to apply the rules that work so beautifully in our families and small communities with small groups to that impersonal world, we would crush it. We would destroy it because that impersonal world has to work impersonally. And now do you remember the book that Sunstein wrote about making, improving regulations for our country? He was talking in terms of applying rules of love and kindness, making regulation more lovable. Now, of course, the Baptist would like to destroy that world. The Baptist would like for all of the smelters to close or at least to stop spewing up soot. And so now we have something rather interesting, at least perhaps interesting, as we think about Hayek's advice. Every president since President Nixon has had a function in the White House or the Office of Management and Budget that relates to the review of newly proposed regulations. Every one of them has. Each administration has written an executive order, sometimes pretty much copying or form presidents, adding a little few wrinkles. But the executive orders read pretty much alike as you go back. This function has been around a long time. The executive orders say things like benefit cost analysis will have to be applied, and evaluation will have to be made, and a regulatory agency will have to justify its choice if it chooses to do things in a more costly way than they have already shown as an alternative. So the executive order spells out a process of review. The Obama administration in 2011 added a paragraph. To that executive order, it says that in addition to considering benefits and costs traditionally estimated as best you can, things that are hard to estimate and impossible to estimate should be considered. Equity, fairness, distribution of income. And so now we're beginning to apply in the White House the rules of the family and the close community in the evaluation of a process. And who is it that loves that? In quotation marks, the Baptist. And when the Baptist love it, who's going to join them in that love affair, the bootleggers? And so as I think about this process, Mr. Hayek tells us that of course the interest groups have to be paid off by people in political power or they will no longer support them. And so we have interest groups that I describe as the engine that is operating. The bootleggers in Baptist, that's the transmission that connects back to the politicians and the brokers because the politicians have a problem. First, they have a knowledge problem. What is the problem? How can we fix it? But then they have a justification problem. When someone comes into the White House and says, look what I really want you to do is to do in my lousy competitors. Well, we understand that you might feel that way. Thank you for coming in. But I don't think that when we talk to the reporter from the Washington Post that's sitting out there waiting to hear the justification for our rule that we can say that's why we adopted this rule. You've got to give us a better explanation than that. And so the copper industry might say, well, the reason you ought to impose command and control regulation is that it will reduce by 85%. The amount of sulfur dioxide that goes into our air and that is going to reduce the occurrence of asthma and pneumonia. It's going to increase life expectancies for our population and you will be able to see the glorious sunset more clearly. Doesn't that sound a lot better? That good, good, good, good. That good Baptist talk. Now, just to give you a little bit of a sampling and this particular one is literally a case of Baptist and a wine seller. There was a referendum in Nashville, Tennessee that was going to make it possible for supermarkets to sell wine. They can now sell beer. No other alcoholic beverages. And here's the spokesman from the local Baptist church saying, hey, we don't see a lot of good in this. And here's a spokesman from a local wine seller who is already in the business saying, wow, we don't like this rule proposal either. It'll be hard on our business. One of my favorites is Smithfield Foods. Now acquired by a Chinese company, Smithfield is the nation's largest producer of pork products. Joe Luther was the CEO. Smithfield had some huge pork swine production facilities in North Carolina. Huge. In fact, North Carolina had a distinction of having more hogs than people in the state and the population of hogs was growing and hogs can be a little bit dirty and there had been some serious problems after some flooding. And so the state of North Carolina, the legislature wrote a law saying there will never be another confined animal feed operation in North Carolina. It's all over. At an Iowa, they amended their constitution to close them down. A reporter from the Wall Street Journal shortly after that was talking to the CEO and says, hey, what do you think about this? And what did Luther say? Nobody can duplicate what we've done. Pull up the gang plank. Price of pork is going up. And we are in the business. Yes, I think I can. Recently there in Colorado, three of the largest natural gas and oil producers and major environmental organizations petitioned the state to impose stricter methane standards on everybody producing gas and oil in that state. Opposed by the trade association of which they had been apart, the rules finally became final. In other words, the bootleggers and the Baptists were there together lobbying for the rule. Mr. Putin has been on an anti-fracking campaign for quite some time. He gave a speech in 2013 in London talking about the terrible things that happen when fracking takes place, that you turn on your water faucet and black stuff starts coming out. And so Russian organizations were funding environmental organizations in Europe trying to get nations to pass a law, making it illegal to frack. By the way, Russia was fracking all along. And of course, they wanted to sell their oil and their gas. And so Mr. Putin then had suddenly become a bootlegger and a Baptist. And so sometimes it takes a particular kind of surgery for that to come off. But we do see that happening. A more recent one is the Volkswagen problem with their emission control game that they have played. And now Tesla Motors has entered the picture. Elon Musk is petitioning the California Air Board, along with the Sierra Club, saying, here's what you ought to make VW do. Let's up the ante on those rascals. And so regulation becomes a part of a dramatic competitive process very quickly. Let's look at some effects very quickly. What we're looking at here is the exit function of firms in industries in America. These are firms who exit the market. I'm showing you data for firms that have fewer than 20 employees and firms that have more than 500 employees. Notice how the exit rate has diminished sharply for the big guys. It hasn't changed much, but it has increased for the little guys. And so crony capitalism is a pretty good thing for the big guys through the regulatory process. There's someone who keeps up with something called the regulatory policy uncertainty index. That's when rules are up for change. They plot that on a daily basis. The black line that you see is the regulatory uncertainty index. The red line that you see is the U.S. unemployment rate. When regulatory uncertainty rises, unemployment goes up with it, just to show you the linkage that is there. And one last effect, the underground economy. The size and magnitude of the U.S. underground economy is estimated based on the number of $100 bills circulating per capita. That economy operates with $100 bills. And what I'm showing you here is the number of $100 bills in circulation. Notice how it has picked up since 2009. So we have a huge underground economy, which is a way to avoid regulations and taxes and lots of other things. And so now we're at the point Professor Hayek suggested, and this was written a long time ago, where we may destroy those spontaneous forces which have made advance possible. Back in 1969, there was a wonderful novel that was written by John Foles. The French Lieutenant's Woman. Does anybody in here remember that? Maybe I'm the only one who was able to read at that time. The French Lieutenant's Woman was a beautifully written novel. It was unusual in a number of ways, but particularly, Foles chose to write two endings to the novel. And he was one of those rare novelists that would talk to the reader. And occasionally, you're reading along and all of a sudden, the author comes and says, hey, I want to tell you something. I want you to notice something. And so as you approach the end of the book, Foles says there will be two endings, and you get to choose the one you like. And so there are two final chapters. And so I want you to choose the one you like in the final images of my presentation in honor of F.A. Hayek. There's a little engine that could, for those of you who are way back in the back, we might revise this. It says the little engine whose parents did everything for him, or you might call it, the little engine whose society did everything for him. And the little engine says, push me. Mom, I'm waiting. Who's going to give me a shove? In other words, his Hayek's forecast is that's what we're going to live with. So the dynamism of the U.S. economy is just history. Hey, we're rich, we got a good pace, we got a good life, but it ain't what it used to be. Or is it going to be that one? You get to pick in a sense, it probably depends upon whether you're in an optimistic or pessimistic mood. My mother loved me a lot when I was little. I should have forewarned you at the very outset. She loved me a lot when I was little, and so I'm an optimist. Not only did they read the little engine that could as I was growing up, no, it wasn't around then. But the optimist in me says, well, let's hold on to some things that are precious. Mises in his wonderful book, Theory and History, he doesn't say, I think I can, but he does tell us that most people are common men. They do not have thoughts of their own. They only receive, they do not create new ideas. They report what they have heard and let me imitate what they have seen. If the world were people only by such as these, there would not be any change and any history. And so what produces change is new ideas and actions guided by them. What distinguishes one group from another is the effect of such innovations. These innovations are not accomplished by a group mind. They are always the achievement of individuals. And so as I was going over some thoughts on this presentation with a very good friend and one who has plowed this ground, perhaps more carefully than I have, in his own research, and I was telling him, which ending is it pessimistic or optimistic? He says, Bruce, it's not just about the United States. It's about humanity. And the little engine that could is going to stay alive. Thanks so much for your kind attention. It's been wonderful being here.