Myths and Truths About Iran

On Sunday, Aug. 19, the Peace Coalition of Monterey County held a public meeting at the Unitarian Universalist Church in Monterey, Calif. The main topic of discussion was Iran. My local chapter of Libertarians for Peace is a member of the Coalition, and so I had volunteered to speak at the event, to tell what I know about Iran’s history and economics. The other speaker was Paola Gilbert, an English professor at Monterey Peninsula College.

What follows is the talk I gave, plus some highlights from Professor Gilbert’s talk.

As was mentioned in my introduction, I’m a member of the local chapter of Libertarians for Peace. I’m also an economics professor at the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford. I also write a regular column on

I want to make five points, starting with the issue on which I’m least expert and continuing in order of my expertise. But the overarching point I want to make is that the way governments get more power over us is to scare us, to make us afraid of various things. Governments run by Democrats have things they want us to be afraid of so that we will support their policies. Governments run by Republicans try to make us afraid of other things so that we will support them and their policies. The Iranian government tries to make people afraid so that people will support its policies. Governments around the world do that. Now, of course there are some things we should be afraid of. I’m afraid of jumping off cliffs, for example. And there are some things that government warns us about that we should fear. But how afraid should we be? And, since the topic today is Iran, how afraid should Americans be that the Iranian government will harm them? My answer is "not very."

That brings me to my first point. One of the things that some people in the U.S. have used to make us afraid is the famous quote from Iran’s President Ahmadinejad about "wiping Israel off the map." Here’s the problem: from what I can tell, he never said that. I have no expertise in Farsi, and so I could be wrong here. But one expert in Farsi, Arash Norouzi, wrote an article on the Web on January 18, 2007, laying out what Ahmadinejad did and did not say. With my 10-minute time limit, I don’t want to go into it in much detail, but I do want to highlight one word that Ahmadinejad used in his famous quote: "rezhim-e." What does that sound like to you? [Members of the audience answered "regime."] Right. So what he was saying was that the Zionist regime should be eliminated. This is not at all the same as proposing that a country be wiped out. Democrats want the Bush "regime" eliminated, and Republicans wanted Bill Clinton’s "regime" eliminated.

I should add that al-Jazeera itself quoted Ahmadinejad as saying that Israel should be wiped off the map. This has less credibility than appears, though, because al-Jazeera is Arabic and has no special expertise in Farsi either. Moreover, the Arabs and the Iranians in the Middle East have often been at odds, and it is plausible that al-Jazeera, funded by the government of Qatar, was trying to portray Iran in a bad light.

The second point I want to make is that one cannot understand Iranians and how they think about the world without understanding the important role in their lives of the 1980-88 war between Iran and Iraq. A minimum estimate of Iranian lives lost in that war is 300,000. By the time the war had ended, Iran’s population was 60 million – meaning that Iran had lost about one half of 1 percent of its population. To put that in an American context, consider how many American lives were lost in the Vietnam war: approximately 58,000. In 1970, by which time most of the U.S. deaths had occurred, the U.S. population was about 200 million. Had we lost the same one half of 1 percent, our war deaths would have been a staggering 1 million. This is 17 times the number actually killed and 2.5 times the number of U.S. lives lost during World War II.

My third point is about war for oil: given the amount of oil we in America consume and the large percentage of our consumption we import, is there a case for making war to obtain oil? My answer is no. I actually answered this question in an op-ed in the Wall Street Journal in August 1990, before the first Gulf War. When Americans over age 40 think about governments in other countries reducing the supply of oil, they tend to think of line-ups for gasoline. But no foreign government, no matter how powerful, can make us line up for gasoline. Only our government can do that, by imposing price controls on gasoline that prevent the price from rising to the point where the amount demanded equals the amount supplied. Result: shortages and line-ups. Our line-ups in the early 1970s were due to the price controls on the U.S. economy that Richard Nixon had imposed on Aug. 15, 1971. And the line-ups in the late 1970s were due to the fact that the price controls on oil and gasoline were retained until Ronald Reagan eliminated them.

But couldn’t governments of oil-producing countries make us worse off by cutting off oil to the United States? Not really. Imagine that Venezuela, which ships oil to us, decides to cut its shipments, with the purpose of hurting U.S. consumers. But if Venezuela wants to maintain its output, it has to find new buyers for this freed-up oil. So it does. Then the producers that some of those new buyers had been purchasing from will have freed-up oil to sell to – guess who? – people in the United States. So it’s like a game of musical chairs, where the number of people equals the number of chairs. It makes for a boring game, but when it comes to oil supply and international trade, boring is good. In fact, it’s even easier than I’ve suggested to avoid being the victim of a selective embargo. Oil is traded internationally, and the ownership of a tanker of oil changes multiple times as it crosses the ocean. So, whomever a particular government sells its oil to is not necessarily the same entity as who ends up with the oil.

My fourth point is that Iranians have some reason to fear the United States, based on past history. One reason many Iranians hated the U.S. government was that, in 1953, the CIA, with Kermit Roosevelt and Norman Schwarzkopf Sr. leading the charge, had given money to dissidents in Iran who deposed the democratically elected premier, Mohammed Mossadegh, and reinstalled the shah of Iran. The shah created a secret terrorist police force, SAVAK, that tortured its own citizens and imprisoned political opponents. The CIA helped train SAVAK. On domestic policy, the shah undertook a highly inflationary monetary policy that caused the value of the Iranian currency to plummet. Inflation, torture. Funny how that pisses people off.

Interestingly, when James Woolsey, former director of intelligence for the Clinton administration’s CIA, spoke at the Naval Postgraduate School in August 2003, he addressed the 1953 uprising in response to a question from me. During his speech, Woolsey had stated that the war with militant Islam had begun in November 1979 when some Iranians took over the U.S. embassy. I asked him whether he didn’t think it might have begun in 1953, when the CIA helped depose Mossadegh. Laughing, Woolsey replied that, as Winston Churchill had said, when it came to the Middle East, the Americans, after doing many wrong things, would always end up doing the right thing. In other words, Woolsey seemed to admit CIA complicity, but dismissed the idea that this mattered because the U.S., at some point, (he didn’t specify when) had gotten it right. The bad consequences of the U.S. government’s intervention in 1953 have been horrendous and cannot be laughingly dismissed.

In 1980, by the way, President Jimmy Carter, asked at a press conference whether he thought "it was proper for the United States to restore the shah to the throne in 1953 against the popular will within Iran," answered, "That’s ancient history." Have any of you ever had a course in ancient history? In the course, did you cover events that happened just 27 years earlier?

My fifth and final point is that some people’s prima facie evidence for their claim that the Iranian government wants to develop nuclear weapons is not evidence at all. I’m not claiming that the Iranian government does not want to develop nuclear weapons: I don’t know. But one major alleged piece of evidence for this conclusion is not really evidence. And to show why, I need to bring in a concept from economics, the concept of "opportunity cost."

Imagine that you have an oil well that contains enough oil to supply annually three times the amount you would ever want to use in a year. Suppose that one of your main current uses of oil is to generate electric power for your ranch. Would you want to buy electric power from someone else, power that is generated by burning some other fuel, or, possibly, made by a nuclear reactor?

It’s a trick question. You can’t answer it without comparing two crucial numbers: the cost of the oil you use to generate power and the price you would pay for the alternate form of electricity. If, for example, the cost to you of generating your own power were 7 cents per kilowatt hour (kWh) and the cost to you of buying electric power were 9 cents per kWh, then, all other things equal, you would want to make your own. If, on the other hand, these numbers were reversed, then, all other things equal, you would want to buy your electric power.

The opportunity cost of the oil you use is the value of the highest-valued alternate use of the oil. Even though you could use the oil yourself, you also could choose to sell it. And if you could get a high enough price for it, then it might well be cheaper for you to sell the oil and buy electric power made from some other fuel.

Many people, when they hear the term “opportunity cost,” think of a concept that they learned in an economics class years ago but didn’t think mattered much. In fact, “opportunity cost” is a powerful concept in economics that can explain a lot of behavior we see around us – from why high-income people almost never use the bus (due to the high opportunity cost of their time, which actually makes the bus very expensive relative to airplanes) to why hotel rooms in Manhattan are so much smaller than rooms in Houston (due to the high opportunity cost of land in Manhattan compared to Houston.)

In fact, the concept of opportunity cost is so powerful that it leads to an alternate explanation of the behavior of Iran’s government in recent years. When the Iranian government announces that it wants uranium enrichment in order to have nuclear power, many people scoff at the idea. “Why,” they say, “would the Iranians want nuclear power? Look at all the oil they have.” Here’s the way the U.S. Joint Economic Committee put it in the opening sentence of a March 2006 report:

"Iran’s vast oil and gas resources undermine the Iranian regime’s claim that its nuclear program is needed for domestic energy generation."

But these oil and gas resources don’t undermine the regime’s claim at all, as the concept of opportunity cost makes clear. Now it’s possible that the Iranian government is lying: it is, after all, a government, and governments often tell lies. But it’s also possible that the Iranian government is telling the truth. And opportunity cost is the relevant concept that helps us see how.

Just as in my ranch example, Iran may find its oil less valuable in generating power than in selling on the world market. The numbers for Iran are similar to the hypothetical numbers I gave for the ranch. In 2005, Iran produced 4.2 million barrels per day and exported two-thirds of its barrels, or 2.7 million barrels per day. That Iran would want to consider exporting even more is especially easy to understand when you consider that world oil prices this year have averaged more than $65 a barrel, which is, adjusted for inflation, about double the world price as recently as 2003. Iran’s opportunity cost for oil has risen.

Again, I emphasize that I don’t know enough about the situation to know what the Iranian government’s motive is for wanting to go more nuclear. But my point is a narrower one: you can’t simply, as the U.S. Joint Economic Committee did, observe two facts – that the Iranian government wants more nuclear production and that Iran is a net exporter of oil to the world – and conclude that, of course, Iran’s goal is to have nuclear weapons. The concept of opportunity cost explains why.

The next speaker, Professor Gilbert, gave an interesting talk about what she knows about Iran, both as a converted Muslim (she grew up as an Army brat in the United States) who has read Iran’s history over the years and as someone who has visited there. She emphasized that she wasn’t saying that Iran was perfect but, rather, that it has been vilified beyond what any available evidence would justify. I don’t want to scoop her speech, which she may want to write up elsewhere. Also, I did not independently check all her facts. But some of the facts went strikingly against the negative view that many Americans have accepted. Professor Gilbert stated, for example, that one of the top racecar drivers in Iran is a woman and that 65 percent of college students are women. And although after the 1978 revolution, women were not allowed to be judges, now, stated Professor Gilbert, some judges are women. Professor Gilbert also challenged the conventional view that Iran is rife with anti-Semitism and gave some evidence (which, again, I have not verified) for that view.

Both Professor Gilbert and I received warm, sustained applause from the audience of about 40, most of whom were probably liberal to left. George Riley, a local official of the Green Party, came up afterward and told us we should take the show on the road. Another audience member, a retired Peace Corps volunteer, came up to me and said, enthusiastically, "I want to know in advance every place you’re going to give a speech. I’d even like to take your class." All in all, a good event.

Copyright © 2007 by David R. Henderson. Requests for permission to reprint should be directed to the author or

Author: David R. Henderson

David R. Henderson is a research fellow with the Hoover Institution and an emeritus professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life(Chicago Park Press). His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008). He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, MSNBC, RT, Fox Business Channel, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, The Hill, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. He blogs at