Man, Economy, and State with Power and Market

One of the most important philosophical problems of recent centuries is whether ethics is a rational discipline, or instead a purely arbitrary, unscientific set of personal values. Whichever side one may take in this debate, it would certainly be generally agreed that economics—or praxeology—cannot by itself suffice to establish an ethical, or politico-ethical, doctrine. Economics per se is therefore a Wertfrei science, which does not engage in ethical judgments. Yet, while economists will generally agree to this flat statement, it is certainly curious how much energy they have spent trying to justify—in some tortuous, presumably scientific, and Wertfrei manner—various activities and expenditures of government. The consequence is the widespread smuggling of unanalyzed, undefended ethical judgments into a supposedly Wertfrei system of economics.140 ,141

Two favorite, seemingly scientific, justifications for government activity and enterprise are (a) what we might call the argument of “external benefits” and (b) the argument of “collective goods” or “collective wants.” Stripped of seemingly scientific or quasi-mathematical trappings, the first argument reduces to the contention that A, B, and C do not seem to be able to do certain things without benefiting D, who may try to evade his “just share” of the payment. This and other “external benefit” arguments will be discussed shortly. The “collective goods” argument is, on its face, even more scientific; the economist simply asserts that some goods or services, by their very nature, must be supplied “collectively,” and “therefore” government must supply them out of tax revenue.

This seemingly simple, existential statement, however, cloaks a good many unanalyzed politico-ethical assumptions. In the first place, even if there were “collective goods,” it by no means follows either (1) that one agency must supply them or (2) that everyone in the collectivity must be forced to pay for them. In short, if X is a collective good, needed by most people in a certain community, and which can be supplied only to all, it by no means follows that every beneficiary must be forced to pay for the good, which, incidentally, he may not even want. In short, we are back squarely in the moral problem of external benefits, which we shall discuss below. The “collective goods” argument turns out, upon analysis, to reduce to the “external benefit” argument. Furthermore, even if only one agency must supply the good, it has not been proved that the government, rather than some voluntary agency, or even some private corporation, cannot supply that good.142

Secondly, the very concept of “collective goods” is a highly dubious one. How, first of all, can a “collective” want, think, or act? Only an individual exists, and can do these things. There is no existential referent of the “collective” that supposedly wants and then receives goods. Many attempts have been made, nevertheless, to salvage the concept of the “collective” good, to provide a seemingly ironclad, scientific justification for government operations. Molinari, for example, trying to establish defense as a collective good, asserted: “A police force serves every inhabitant of the district in which it acts, but the mere establishment of a bakery does not appease their hunger.” But, on the contrary, there is no absolute necessity for a police force to defend every inhabitant of an area or, still more, to give each one the same degree of protection. Furthermore, an absolute pacifist, a believer in total nonviolence, living in the area, would not consider himself protected by, or receiving defense service from, the police. On the contrary, he would consider any police in his area a detriment to him. Hence, defense cannot be considered a “collective good” or “collective want.” Similarly for such projects as dams, which cannot be simply assumed to benefit everyone in the area.143

Antonio De Viti De Marco defined “collective wants” as consisting of two categories: wants arising when an individual is not in isolation and wants connected with a conflict of interest. The first category, however, is so broad as to encompass most market products. There would be no point, for example, in putting on plays unless a certain number went to see them or in publishing newspapers without a certain wide market. Must all these industries therefore be nationalized and monopolized by the government? The second category is presumably meant to apply to defense. This, however, is incorrect. Defense, itself, does not reflect a conflict of interest, but a threat of invasion, against which defense is needed. Furthermore, it is hardly sensible to call “collective” that want which is precisely the least likely to be unanimous, since robbers will hardly desire it!144 Other economists write as if defense is necessarily collective because it is an immaterial service, whereas bread, autos, etc., are materially divisible and salable to individuals. But “immaterial” services to individuals abound in the market. Must concert-giving be monopolized by the State because its services are immaterial?

In recent years, Professor Samuelson has offered his own definition of “collective consumption goods,” in a so-called “pure” theory of government expenditures. Collective consumption goods, according to Samuelson, are those “which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good.” For some reason, these are supposed to be the proper goods (or at least these) for government, rather than the free market, to provide.145 Samuelson’s category has been attacked with due severity. Professor Enke, for example, pointed out that most governmental services simply do not fit Samuelson’s classification—including highways, libraries, judicial services, police, fire, hospitals, and military protection. In fact, we may go further and state that no goods would ever fit into Samuelson’s category of “collective consumption goods.” Margolis, for example, while critical of Samuelson, concedes the inclusion of national defense and lighthouses in this category. But “national defense” is surely not an absolute good with only one unit of supply. It consists of specific resources committed in certain definite and concrete ways—and these resources are necessarily scarce. A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco. Furthermore, a lighthouse shines over a certain fixed area only. Not only does a ship within the area prevent others from entering the area at the same time, but also the construction of a lighthouse in one place limits its construction elsewhere. In fact, if a good is really technologically “collective” in Samuelson’s sense, it is not a good at all, but a natural condition of human welfare, like air—superabundant to all, and therefore unowned by anyone. Indeed, it is not the lighthouse, but the ocean itself—when the lanes are not crowded—which is the “collective consumption good,” and which therefore remains unowned. Obviously, neither government nor anyone else is normally needed to produce or allocate the ocean.146

Tiebout, conceding that there is no “pure” way to establish an optimum level for government expenditures, tries to salvage such a theory specifically for local government. Realizing that the taxing, and even voting, process precludes voluntary demonstration of consumer choice in the governmental field, he argues that decentralization and freedom of internal migration renders local government expenditures more or less optimal—as we can say that free market expenditures by firms are “optimal”—since the residents can move in and out as they please. Certainly, it is true that the consumer will be better off if he can move readily out of a high-tax, and into a low tax, community. But this helps the consumer only to a degree; it does not solve the problem of government expenditures, which remains otherwise the same. There are, indeed, other factors than government entering into a man’s choice of residence, and enough people may be attached to a certain geographical area, for one reason or another, to permit a great deal of government depredation before they move. Furthermore, a major problem is that the world’s total land area is fixed, and that governments have universally pre-empted all the land and thus universally burden consumers.147

We come now to the problem of external benefits—the major justification for government activities expounded by economists.148 Where individuals simply benefit themselves by their actions, many writers concede that the free market may be safely left unhampered. But men’s actions may often, even inadvertently, benefit others. While one might think this a cause for rejoicing, critics charge that from this fact flow evils in abundance. A free exchange, where A and B mutually benefit, may be all very well, say these economists; but what if A does something voluntarily which benefits B as well as himself, but for which B pays nothing in exchange?

There are two general lines of attack on the free market, using external benefits as the point of criticism. Taken together, these arguments against the market and for governmental intervention or enterprise cancel each other out, but each must, in all fairness, be examined separately. The first type of criticism is to attack A for not doing enough for B. The benefactor is, in effect, denounced for taking his own selfish interests exclusively into account, and thereby neglecting the potential indirect recipient waiting silently in the wings.149 The second line of attack is to denounce B for accepting a benefit without paying A in return. The recipient is denounced as an ingrate and a virtual thief for accepting the free gift. The free market, then, is accused of injustice and distortion by both groups of attackers: the first believes that the selfishness of man is such that A will not act enough in ways to benefit B; the second that B will receive too much “unearned increment” without paying for it. Either way, the call is for remedial State action; on the one hand, to use violence in order to force or induce A to act more in ways which will aid B; on the other, to force B to pay A for his gift.

Generally, these ethical views are clothed in the “scientific” opinion that, in these cases, free-market action is no longer optimal, but should be brought back into optimality by corrective State action. Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.

It is amusing that while each line of attack is quite widespread, each can be rather successfully rebutted by using the essence of the other attack! Take, for example, the first—the attack on the benefactor. To denounce the benefactor and implicitly call for State punishment for insufficient good deeds is to advance a moral claim by the recipient upon the benefactor. We do not intend to argue ultimate values in this book. But it should be clearly understood that to adopt this position is to say that B is entitled peremptorily to call on A to do something to benefit him, and for which B does not pay anything in return. We do not have to go all the way with the second line of attack (on the “free rider”), but we can say perhaps that it is presumptuous of the free rider to assert his right to a post of majesty and command. For what the first line of attack asserts is the moral right of B to exact gifts from A, by force if necessary.

Compulsory thrift, or attacks on potential savers for not saving and investing enough, are examples of this line of attack. Another is an attack on the user of a natural resource that is being depleted. Anyone who uses such a resource at all, whatever the extent, “deprives” some future descendant of the use. “Conservationists,” therefore, call for lower present use of such resources in favor of greater future use. Not only is this compulsory benefaction an example of the first line of attack, but, if this argument is adopted, logically no resource subject to depletion could ever be used at all. For when the future generation comes of age, it too faces a future generation. This entire line of argument is therefore a peculiarly absurd one.

The second line of attack is of the opposite form—a denunciation of the recipient of the “gift.” The recipient is denounced as a “free rider,” as a man who wickedly enjoys the “unearned increment” of the productive actions of others. This, too, is a curious line of attack. It is an argument which has cogency only when directed against the first line of attack, i.e., against the free rider who wants compulsory free rides. But here we have a situation where A’s actions, taken purely because they benefit himself, also have the happy effect of benefiting someone else. Are we to be indignant because happiness is being diffused throughout society? Are we to be critical because more than one person benefits from someone’s actions? After all, the free rider did not ask for his ride. He received it, unasked, as a boon because A benefits from his own action. To adopt the second line of attack is to call in the gendarmes to apply punishment because too many people in the society are happy. In short, am I to be taxed for enjoying the view of my neighbor’s well-kept garden?150

One striking instance of this second line of attack is the nub of the Henry Georgist position: an attack on the “unearned increment” derived from a rise in the capital values of ground land. We have seen above that as the economy progresses, real land rents will rise with real wage rates, and the result will be increases in the real capital values of land. Growing capital structure, division of labor, and population tend to make site land relatively more scarce and hence cause the increase. The argument of the Georgists is that the landowner is not morally responsible for this rise, which comes about from events external to his landholding; yet he reaps the benefit. The landowner is therefore a free rider, and his “unearned increment” rightfully belongs to “society.” Setting aside the problem of the reality of society and whether “it” can own anything, we have here a moral attack on a free-rider situation.

The difficulty with this argument is that it proves far too much. For which one of us would earn anything like our present real income were it not for external benefits that we derive from the actions of others? Specifically, the great modern accumulation of capital goods is an inheritance from all the net savings of our ancestors. Without them, we would, regardless of the quality of our own moral character, be living in a primitive jungle. The inheritance of money capital from our ancestors is, of course, simply inheritance of shares in this capital structure. We are all, therefore, free riders on the past. We are also free riders on the present, because we benefit from the continuing investment of our fellow men and from their specialized skills on the market. Certainly the vast bulk of our wages, if they could be so imputed, would be due to this heritage on which we are free riders. The landowner has no more of an unearned increment than any one of us. Are all of us to suffer confiscation, therefore, and to be taxed for our happiness? And who then is to receive the loot? Our dead ancestors, who were our benefactors in investing the capital?151

An important case of external benefits is “external economies,” which could be reaped by investment in certain industries, but which would not accrue as profit to the entrepreneurs. There is no need to dwell on the lengthy discussion in the literature on the actual range of such external economies, although they are apparently negligible. The suggestion has been persistently advanced that the government subsidize these investments so that “society” can reap the external economies. Such is the Pigou argument for subsidizing external economies, as well as the old and still dominant “infant industries” argument for a protective tariff.

The call for state subsidization of external economy investments amounts to a third line of attack on the free market, i.e., that B, the potential beneficiaries, be forced to subsidize the benefactors A, so that the latter will produce the former’s benefits. This third line is the favorite argument of economists for such proposals as government-aided dams or reclamations (recipients taxed to pay for their benefits) or compulsory schooling (the taxpayers will eventually benefit from others’ education), etc. The recipients are again bearing the onus of the policy; but here they are not criticized for free riding. They are now being “saved” from a situation in which they would not have obtained certain benefits. Since they would not have paid for them, it is difficult to understand exactly what they are being saved from. The third line of attack therefore agrees with the first that the free market does not, because of human selfishness, produce enough external-economy actions; but it joins the second line of attack in placing the cost of remedying the situation on the strangely unwilling recipients. If this subsidy takes place, it is obvious that the recipients are no longer free riders: indeed, they are simply being coerced into buying benefits for which, acting by free choice, they would not have paid.

The absurdity of the third approach may be revealed by pondering the question: Who benefits from the suggested policy? The benefactor A receives a subsidy, it is true. But it is often doubtful if he benefits, since he would otherwise have acted and invested profitably in some other direction. The State has simply compensated him for losses which he would have received and has adjusted the proceeds so that he receives the equivalent of an opportunity forgone. Therefore A, if a business firm, does not benefit. As for the recipients, they are being forced by the State to pay for benefits that they otherwise would not have purchased. How can we say that they “benefit”?

A standard reply is that the recipients “could not” have obtained the benefit even if they had wanted to buy it voluntarily. The first problem here is by what mysterious process the critics know that the recipients would have liked to purchase the “benefit.” Our only way of knowing the content of preference scales is to see them revealed in concrete choices. Since the choice concretely was not to buy the benefit, there is no justification for outsiders to assert that B’s preference scale was “really” different from what was revealed in his actions.

Secondly, there is no reason why the prospective recipients could not have bought the benefit. In all cases a benefit produced can be sold on the market and earn its value product to consumers. The fact that producing the benefit would not be profitable to the investor signifies that the consumers do not value it as much as they value the uses of nonspecific factors in alternative lines of production. For costs to be higher than prospective selling price means that the nonspecific factors earn more in other channels of production. Furthermore, in possible cases where some consumers are not satisfied with the extent of the market production of some benefit, they are at perfect liberty to subsidize the investors themselves. Such a voluntary subsidy would be equivalent to paying a higher market price for the benefit and would reveal their willingness to pay that price. The fact that, in any case, such a subsidy has not emerged eliminates any justification for a coerced subsidy by the government. Rather than providing a benefit to the taxed “beneficiaries,” in fact, the coerced subsidy inflicts a loss upon them, for they could have spent their funds themselves on goods and services of greater utility.152

• 140One venerable example, used constantly in texts on public finance (an area particularly prone to camouflaged ethical judgments) is the “canons of justice” for taxation propounded by Adam Smith. For a critique of these supposedly “self-evident” canons, see Rothbard, “Mantle of Science.”
• 141The analysis of the economic nature and consequences of government ownership in this book is Wertfrei and does not involve ethical judgments. It is a mistake, for example, to believe that anyone, knowing the economic laws demonstrating the great inefficiencies of government ownership, would necessarily have to choose private over government ownership although, of course, he may well do so. Those who place a high moral value, for example, on social conflict or on poverty or on inefficiency, or those who greatly desire to wield bureaucratic power over others (or to see people subjected to bureaucratic power) may well opt even more enthusiastically for government ownership. Ultimate ethical principles and choices are outside the scope of this book. This, of course, does not mean that the present author deprecates their importance. On the contrary, he believes that ethics is a rational discipline.
• 142Thus, cf. Molinari, Society of Tomorrow, pp. 47–95.
• 143Ibid., p. 63. On the fallacy of collective goods, see S.R., “Spencer As His Own Critic,” Liberty, June, 1904, and Merlin H. Hunter and Harry K. Allen, Principles of Public Finance (New York: Harpers, 1940), p. 22. Molinari had not always believed in the existence of “collective goods,” as can be seen from his remarkable “De la production de la sécurité,” Journal des Economistes, February 15, 1849, and Molinari, “Onzième soirée” in Les soirées de la Rue Saint Lazare (Paris, 1849).
• 144Antonio De Viti De Marco, First Principles of Public Finance (London: Jonathan Cape, 1936), pp. 37–41. Similar to De Viti’s first category is Baumol’s attempted criterion of “jointly” financed goods, for a critique of which see Rothbard, “Toward A Reconstruction of Utility and Welfare Economics,” pp. 255–60.
• 145Paul A. Samuelson, “The Pure Theory of Public Expenditures,” Review of Economics and Statistics, November, 1954, pp. 387–89.
• 146Stephen Enke, “More on the Misuse of Mathematics in Economics: A Rejoinder,” Review of Economics and Statistics, May, 1955, pp. 131–33; Julius Margolis, “A Comment On the Pure Theory of Public Expenditures,” Review of Economics and Statistics, November, 1955, pp. 347–49. In his reply to critics, Samuelson, after hastening to deny any possible implication that he wished to confine the sphere of government to collective goods alone, asserts that his category is really a “polar” concept. Goods in the real world are supposed to be only blends of the “polar extremes” of public and private goods. But these concepts, even in Samuelson’s own terms, are decidedly not polar, but exhaustive. Either A’s consumption of a good diminishes B’s possible consumption, or it does not: these two alternatives are mutually exclusive and exhaust the possibilities. In effect, Samuelson has abandoned his category either as a theoretical or as a practical device. Paul A. Samuelson, “Diagrammatic Exposition of a Theory of Public Expenditure,” Review of Economics and Statistics, November, 1955, pp. 350–56.
• 147Charles M. Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy, October, 1956, pp. 416–24. At one point, Tiebout seems to admit that his theory would be valid only if each person could somehow be “his own municipal government.” Ibid., p. 421.
       In the course of an acute critique of the idea of competition in government, the Colorado Springs Gazette-Telegraph wrote as follows:
  Were the taxpayer free to act as a customer, buying only those services he deemed useful to himself and which were priced within his reach, then this competition between governments would be a wonderful thing. But because the taxpayer is not a customer, but only the governed, he is not free to choose. He is only compelled to pay. ... With government there is no producer-customer relationship. There is only the relation that always exists between those who rule and those who are ruled. The ruled are never free to refuse the services of the products of the ruler. ... Instead of trying to see which government could best serve the governed, each government began to vie with every other government on the basis of its tax collections. ... The victim of this competition is always the taxpayer. ... The taxpayer is now set upon by the federal, state, school board, county and city governments. Each of these is competing for the last dollar he has. (Colorado Springs Gazette-Telegraph, July 16, 1958)
• 148The problem of “external costs,” usually treated as symmetrical with external benefits, is not really related: it is a consequence of failure to enforce fully the rights of property. If A’s actions injure B’s property, and the government refuses to stop the act and enforce damages, property rights and hence the free market are not being fully defended and maintained. Hence, external costs (e.g., smoke damage) are failures to maintain a fully free market, rather than defects of that market. See Mises, Human Action, pp. 650–53; and de Jouvenel, “Political Economy of Gratuity,” pp. 522–26.
• 149For some unexplained reason, the benefits worried over are only the indirect ones, where B benefits inadvertently from A’s action. Direct gifts, or charity, where A simply donates money to B, are not attacked under the category of external benefit.
• 150“If my neighbors hire private watchmen they benefit me indirectly and incidentally. If my neighbors build fine houses or cultivate gardens, they indirectly minister to my leisure. Are they entitled to tax me for these benefits because I cannot ‘surrender’ them?” (S.R., “Spencer As His Own Critic”).
• 151There is justice as well as bluntnesss in Benjamin Tucker’s criticism:
  “What gives value to land?” asks Rev. Hugh O. Pentecost [a Georgist]. And he answers: “The presence of population —the community. Then rent, or the value of land, morally belongs to the community.” What gives value to Mr. Pentecost’s preaching? The presence of population—the community. Then Mr. Pentecost’s salary, or the value of his preaching, morally belongs to the community. (Tucker, Instead of a Book, p. 357)
• 152As Mises states:
  ... the means which a government needs in order to run a plant at a loss or to subsidize an unprofitable project must be withdrawn either from the taxpayers’ spending and investing power or from the loan market. ... What the government spends more, the public spends less. Public works ... are paid for by funds taken away from the citizens. If the government had not interfered, the citizens would have employed them for the realization of profit-promising projects the realization of which is neglected merely on account of the government’s intervention. Yet this nonrealized project would have been profitable, i.e., it would have employed the scarce means of production in accordance with the most urgent needs of the consumers. From the point of view of the consumers the employment of these means of production for the realization of an unprofitable project is wasteful. It deprives them of satisfactions which they prefer to those which the government-sponsored project can furnish them. (Mises, Human Action, p. 655)      Ellis and Fellner, in their discussion of external economies, ignore the primordial fact that the subsidization of these economies must be at the expense of funds usable for greater satisfactions elsewhere. Ellis and Fellner do not realize that their refutation of the Pigou thesis that increasing-cost industries are over-expanded destroys any possible basis for a subsidy to the decreasing-cost industries. Howard S. Ellis and William Fellner, “External Economies and Diseconomies,” in Readings in Price Theory (Chicago: Blakiston Co., 1952), pp. 242–63.