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Hoppeism and the Bailout

August 6, 2002

The Bush administration's $1.5 billion bailout of Uruguay's banking system cries out for explanation. If there has been one issue that the administration has been pretty good on, it is international bailouts. There are many on-record comments from the likes of Treasury Secretary Paul O'Neill that these bailouts are wasteful, destructive, and generate moral hazard. He has even suggested that bailout funds are likely to be stolen by government elites and shifted to secret bank accounts. In other words, he, and probably Bush, knows the score.

So why did they do it? You could say that they are very bad men and have no moral reservations about looting billions in other people's property in order to reward their friends in the financial industry. Even if that were true, that is certainly not the way Bush and Co. think of themselves. For all their compromises with principle, they believe they are engaged in real-world political and economic management that requires a certain sense of expediency, even if they doubt that what they do is ultimately sound.

It is possible, too, Bush might have imagined worse consequences for Latin America had Uruguay not been bailed out. This is how Alan Greenspan apologists have dealt with Greenspan's hypocrisies. They have compared his reckless Fed policy to a fire truck that must drive the wrong way on a one-way street in order to put out a fire. And truly, to this class of politicos, a short-term fix is far more important than long-term economic health. That's the usual expediency explanation for their behavior, and it is true enough, as far as it goes.

And yet why is the political class so prone to expediency, and why must the price for that expediency always be paid for by the public? There are many things that are expedient for people in real life to do that we do not do. It might be expedient for us to run up a high credit card debt, beyond that which we could pay, but we are generally deterred. It might be expedient for us to take out second mortgages and buy stocks in a bear market, but we do not because we are concerned about the long-term implications. Why are we so restrained, or at least consider carefully the consequences of dramatic financial decisions, whereas the political class is not? The expediency explanation doesn't address that point.

Another explanation of the Bush administration's behavior might resort to a Public Choice argument: Bailing out Uruguay was more in Bush's and the bureaucracy's self-interest than allowing its banking system to go under. Yes, Bush knew it was a bad idea, but he was concerned about his polls. Maybe he figures that more financial instability would harm Republicans in the fall. Maybe Bush has many campaign contributors who have Uruguayan debt hanging in the balance.

No doubt that self-interested behavior is nefarious in political hands. The Public Choicers argue that this is why we need constitutions: because they impose rules that limit the hands of political crooks. Hoppe's book Democracy: The God that Failed includes a wonderful discussion of the fallacies of constitutions. He shows that they do not finally restrain the state, now or ever, and, even more profoundly, as a factual matter, constitutions are not instituted to limit government but rather to enhance the political power of an elite that seeks to entrench itself.

But what I want to highlight here is how an aspect of the Hoppeian view of the world goes much further to explain something like the Uruguayan bailout (and also the Bush's administration's protectionist policies, big spending, and other such betrayals of its stated principles) than conventional arguments concerning immorality, expediency, Public Choice, or any other alternative.

Again, Public Choice posits self-interest as the explanation for bad policy and prescribes law to restrain such behavior. Let's think about this. There are plenty of socially bad things that are in our self-interest and that are not restrained by law, and yet we do not do them. In fact, if this were really a world where the only thing standing between us and pure self-interest were the police, chaos would be the order of the day, because in the real world, law does very little restraining. There are no policemen patrolling my subdivision on a constant basis. There are no cops at the country club to make sure that people do not rob and loot.

Laws are primarily designed to deter Justice Oliver Wendell Holmes's "bad man," the person who will do only the minimum necessary to avoid the negative material consequences of his behavior. This does not describe most people, who, on the whole, voluntarily refrain from harming others. Were it otherwise, civilization would not be possible.

Why does rampant self-interest not generally lead to destruction unless it is exercised through government? Why is private self-interest generally channeled to the social good, while political self-interest leads to every manner of horror? The Public Choice school, because it does not distinguish clearly between a business firm and the government, and because it does not want to address fundamental questions of property, can't really provide an explanation for why this is so.

Now to the Hoppeian model, which addresses the most fundamental issue of all: the question of ownership rights. In the case of both the office and the home, we have an incentive to maintain the property value of the thing in question precisely because both are owned privately. Along with this incentive comes a clear picture of valuation: because the private markets provide prices that permit calculation, we have a compass to follow as we exercise our self-interest. Private property is the institutional framework that gives us both reason to enhance the value of things owned and the means to show us how to go about doing it.

Now, there is nothing spectacular about this insight alone. Since Aristotle, it has been observed that people care more for private property than socially owned property. What Hoppe has observed in his new book relates to the peculiar character of democracy in contrast to the personal states of old: it represents an attempt to create a socially owned government, a public government where no one individual or dynasty or group or exercises ownership rights over public property.

What are the consequences of this? It means that the leaders of a democratic nation are roughly in the position of squatters who take over someone else's home for the summer while he is out of town. Assuming that they will not get caught, squatters have every reason to loot and steal and drive down the value of the place as much as possible and leave the mess for the next guy. Yes, it may be wrong. It is a privately and socially harmful thing to do. But in the end, there is no good reason for the squatters not to do this because they have no personal investment in the value of the property they control.

Hoppe writes:

"A democratic caretaker faces no logical obstacle to the redistribution of private property. Rather than involving himself with the preservation and improvement of capital values, he will be concerned primarily with the protection and advancement of his own position… This type of caretaker's legitimacy does not rest on the legitimacy of private property. It rests on the legitimacy of 'social' or 'public' property. Thus, if he takes property from one person and gives it to another, as a caretaker he does not contradict his own ideological foundation. Rather, he affirms the supremacy of the different principle of social ownership. Consequently, under democratic conditions private law--the law of property and contract underlying civil society--disappears as an independent domain of law and is absorbed by an all-encompassing public--government made--law (legislation)…. [B]ecause caretakers do not own the country's capital stock, the counterproductive effects of income and wealth redistribution are of little or no concern. However, the long-term repercussions of redistributive measures are unimportant to them, while the immediate and short effects are not."(pp. 85-86)

The Bush administration is something of a caretaker-squatter in the management of international economics affairs, for example. It does not own the United States and has no strong reason to care about its long-term financial health. It does not own Uruguay and has no interest in its value, and neither does it much care whether the policies it imposes are actually good for that nation. As for the $1.5 billion that went flying out of the U.S. Treasury, it is not owned by anyone either. What good reason--other than economic honesty and good government and other such old-fashioned ideals--is there for the Bush administration not to bail out Uruguay?

The strain running through Hoppe's book is to analyze the workings of modern government, democratic government, in terms of the property relations that are implied by the complete lack of authentic ownership over any of its resources, among which Hoppe includes its citizens, its economies, and its policies. He shows that sound public policy is always elusive under democratic control because sound policy, whether in private morals or in business management or anything else, presupposes the existence of private ownership. Take that away, and all bets are off.

There are many other reasons why Uruguay was bailed out, of course, but Hoppe's theory addresses the core issue of how it is that the political class is engaged in not only this but a relentless series of betrayals of the public trust, and predictably so. Not being the owners of the things they control, and not having been contracted by owners to act as responsible managers, there are few if any restraints on what they do. In any case, they lack the key restraint that constantly operates in private markets--namely, the will to preserve and enhance the value of resources.

Is there another model of political economy that has more explanatory power? I don't believe so. Whereas Public Choice sees symptoms and explains those quite well, Hoppe has seen the cause. Whereas the constitutionalists have proposed paper restraints, Hoppe sees that, without clear lines of property ownership, there is no long term way to stop the looting and the growth of the state.

Thus, even apart from Hoppe's policy prescription--that private ownership ought to characterize all of society, economy, and government, while all public ownership should be banned as a form of theft--the Hoppe thesis offers a highly fruitful framework for understanding everyday political affairs. It explains why the Bush administration defies its own principles, and why, in doing so, it is doing precisely what we should expect from a group of social managers who suffer no loss for the wreckage they cause.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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