Chapter 12—The Economics of Violent
Intervention in the Market (continued)
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Chapter 12—The
Economics of Violent Intervention in the Market
(continued)
E.
The Government as Promoter of Credit Expansion
Historically, governments have fostered and encouraged credit expansion
to a great degree. They have done so by weakening
the limitations that the market places on bank credit
expansion. One way of weakening is to anesthetize the bank
against the threat of bank runs. In nineteenth-century America, the
government permitted banks, when they got into trouble in a
business crisis, to suspend specie payment while continuing in
operation. They were temporarily freed from their contractual
obligation of paying their debts, while they could continue
lending and even force their debtors to repay in their own bank notes.
This is a powerful way to eradicate limitations on credit
expansion, since the banks know that if they overreach
themselves, the government will permit them blithely to avoid payment
of their contractual obligations.
Under a fiat money standard, governments (or their central banks) may
obligate themselves to bail out, with increased issues of standard
money, any bank or any major bank in distress. In the late nineteenth
century, the principle became accepted that the central bank must act
as the “lender of last resort,” which will lend
money freely to banks threatened with failure. Another recent American
device to abolish the confidence limitation on bank credit is
“deposit insurance,” whereby the government
guarantees to furnish paper money to redeem the
banks’ demand liabilities. These and similar devices
remove the market brakes on rampant credit expansion.
A second device, now so legitimized that any country lacking it is
considered hopelessly “backward,” is the central
bank. The central bank, while often nominally owned by private
individuals or banks, is run directly by the national government. Its
purpose, not always stated explicitly, is to remove the competitive
check on bank credit provided by a multiplicity of independent banks.
Its aim is to make sure that all the banks in the country are
co-ordinated and will therefore expand or contract
together—at the will of the government. And we have seen that
co-ordination of expansion greatly weakens the market’s
limits.
The crucial way by which governments have established central
bank control over the commercial banking system is by granting
the bank a monopoly of the note issue in the
country. As we have seen, money-substitutes may be issued in the form
of notes or book deposits. Economically, the two forms are identical.
The State has found it convenient, however, to distinguish between the
two and to outlaw all note issue by private banks. Such
nationalizing of the note-issue business forces the commercial
banks to go to the central bank whenever their customers desire to
exchange demand deposits for paper notes. To obtain notes to
furnish their clients, commercial banks must buy them from the
central bank. Such purchases can be made only by selling their gold
coin or other standard money or by drawing on the banks’
deposit accounts with the central bank.
Since the public always wishes to hold some of its money in the form of
notes and some in demand deposits, the banks must establish a
continuing relationship with the central bank to be assured a supply of
notes. Their most convenient procedure is to establish demand deposit
accounts with the central bank, which thereby becomes the
“bankers’ bank.” These demand deposits
(added to the gold in their vaults) become the reserves of the banks.
The central bank can also more freely create demand
liabilities not backed 100 percent by gold, and these
increased liabilities add to the reserves and demand deposits held by
banks or else increase central bank notes outstanding. The rise in
reserves of banks throughout the country will spur them to expand
credit, while any decrease in these reserves will induce a general
contraction in credit.
The central bank can increase the reserves of a country’s
banks in three ways: (a) by simply lending them
reserves; (b) by purchasing their assets,
thereby adding directly to the banks’ deposit accounts with
the central bank; or (c) by purchasing the
I.O.U.’s of the public, which will then deposit the drafts on
the central bank in the various banks that serve the public directly,
thereby enabling them to use the credits on the central bank to add to
their own reserves. The second process is known as discounting;
the latter as open market purchase. A lapse in
discounts as the loans mature will lower reserves, as will open
market sales. In open market sales, the people will pay the
central bank for its assets, purchased with checks drawn on their
accounts at the banks; and the central bank exacts payment by reducing
bank reserves on its books. In most cases, the assets purchased or sold
on the open market are government I.O.U.’s.
Thus, the banking system becomes co-ordinated under the aegis of the
government. The central bank is always accorded a great deal of
prestige by its creator government. Often the government makes its
notes legal tender. Under the gold standard, the wide resources which
it commands, added to the fact that the whole country is its clientele,
usually make negligible any trouble the bank may have in redeeming its
liabilities in gold. Furthermore, it is certain that no government will
let its own central bank (i.e., itself) go bankrupt; the central bank
will always be permitted to suspend specie payment in times of
serious difficulty. It can therefore inflate and expand credit itself
(through rediscounts and open market purchases) and, by adding
to bank reserves, spur a multiple bank
credit expansion throughout the country. The effect is multiple because
banks will generally keep a certain proportion of reserves to
liabilities—based on estimates of nonclient
redemption—and a general increase in their reserves will
induce a multiple expansion of fiduciary media. In fact, the multiple
will even increase, for the knowledge that all the banks are
co-ordinated and expanding together decreases the possibility of
nonclient redemption and therefore the proportion of reserves that each
bank will wish to keep.
When the government “goes off” the gold standard,
central bank notes then become legal tender and virtually the standard
money. It then cannot possibly fail, and this, of course,
practically eliminates limitations on its credit expansion. In
the present-day United States, for example, the current
basically fiat standard (also known as a “restricted
international gold bullion standard”) virtually eliminates
pressure for redemption, while the central bank’s ready
provision of reserves as well as deposit insurance eliminates
the threat of bank failure.
In order to
insure centralized control by the government over bank credit,
the United States enforces on banks a certain minimum ratio of
reserves (almost wholly deposits with the central bank) to
deposits.
So long as a country is in any sense “on the gold
standard,” the central bank and the banking system must worry
about an external drain of specie should the inflation become too
great. Under an unrestricted gold standard, it must also worry about an
internal drain resulting from the demands of those who do not use the
banks. A shift in public taste from deposits to notes will embarrass
the commercial banks, though not the central bank. Assiduous propaganda
on the conveniences of banking, however, has reduced the ranks of those
not using banks to a few malcontents. As a result, the only
limitation on credit expansion is now external. Governments, of course,
are always anxious to remove all checks on their powers of inducing
monetary expansion. One way of removing the external threat is to
foster international cooperation, so that all governments and
central banks expand their money supply at a uniform rate. The
“ideal” condition for unlimited inflation
is, of course, a world fiat paper money, issued by a world central bank
or other governmental authority. Pure fiat money on a national scale
would serve almost as well, but there would then be the embarrassment
of national moneys depreciating in terms of other moneys, and
imports becoming much more expensive.
F.
The Ultimate Limit: The Runaway Boom
With the establishment of fiat money by a State or by a World State, it
would seem that all limitations on credit expansion, or on any
inflation, are eliminated. The central bank can issue limitless amounts
of nominal units of paper, unchecked by any necessity of digging a
commodity out of the ground. They may be supplied to banks to bolster
their credit at the pleasure of the government. No problems of internal
or external drain exist. And if there existed a World State, or a
co-operating cartel of States, with a world bank and world
paper money, and gold and silver money were outlawed, could not the
World State then expand the money supply at will with no foreign
exchange or foreign trade difficulties, permanently redistributing
wealth from the market’s choice to its own favorites, from
voluntary producers to the ruling castes?
Many economists and most other people assume that the State could
accomplish this goal. Actually, it could not, for there is an ultimate
limit on inflation, a very wide one, to be sure, but a terrible limit
that will in the end conquer any inflation. Paradoxically,
this is the phenomenon of runaway inflation, or hyperinflation.
When the government and the banking system begin inflating, the public
will usually aid them unwittingly in this task. The public, not
cognizant of the true nature of the process, believes that the rise in
prices is transient and that prices will soon return to
“normal.” As we have noted above, people will
therefore hoard more money, i.e., keep a greater proportion of
their income in the form of cash balances. The social demand for money,
in short, increases. As a result, prices tend to increase less than
proportionately to the increase in the quantity of money. The
government obtains more real resources from the
public than it had expected, since the public’s demand for
these resources has declined.
Eventually, the public begins to realize what is taking place. It seems
that the government is attempting to use inflation as a permanent form
of taxation. But the public has a weapon to combat this depredation.
Once people realize that the government will continue to
inflate, and therefore that prices will continue to rise, they
will step up their purchases of goods. For they will realize that they
are gaining by buying now, instead of waiting until a future
date when the value of the monetary unit will be lower and prices
higher. In other words, the social demand for money falls, and prices
now begin to rise more rapidly than the increase in the supply of
money. When this happens, the confiscation by the government,
or the “taxation” effect of inflation, will be
lower than the government had expected, for the increased
money will be reduced in purchasing power by the greater rise in
prices. This stage of the inflation is the beginning of
hyperinflation, of the runaway boom.
The lower demand for money allows fewer resources to be
extracted by the government, but the government can still
obtain resources so long as the market continues to use the money. The
accelerated price rise will, in fact, lead to complaints of a
“scarcity of money” and stimulate the
government to greater efforts of inflation, thereby causing even more
accelerated price increases. This process will not continue long,
however. As the rise in prices continues, the public begins a
“flight from money,” getting rid of money as soon
as possible in order to invest in real goods—almost any
real goods—as a store of value for the future. This mad
scramble away from money, lowering the demand for money to hold
practically to zero, causes prices to rise upward in
astronomical proportions. The value of the monetary unit falls
practically to zero. The devastation and havoc that the
runaway boom causes among the populace is enormous. The relatively
fixed-income groups are wiped out. Production declines
drastically (sending up prices further), as people lose the
incentive to work—since they must spend much of their time
getting rid of money. The main desideratum becomes getting hold of real
goods, whatever they may be, and spending money as soon as received.
When this runaway stage is reached, the economy in effect breaks down,
the market is virtually ended, and society reverts to a state of
virtual barter and complete impoverishment.
Commodities are then
slowly built up as media of exchange. The public has rid itself of the
inflation burden by its ultimate weapon: lowering the demand
for money to such an extent that the government’s money has
become worthless. When all other limits and forms of
persuasion fail, this is the only way—through chaos
and economic breakdown—for the people to force a return to
the “hard” commodity money of the free
market.
The most famous runaway inflation was the German experience of 1923. It
is particularly instructive because it took place in one of the
world’s most advanced industrial countries.
The chaotic events of the
German hyperinflation and other accelerated booms, however, are only a
pale shadow of what would happen under a World State inflation. For
Germany was able to recover and return to a full monetary
market economy quickly, since it could institute a new currency based
on exchanges with other pre-existing moneys (gold or foreign
paper). As we have seen, however, Mises’ regression theorem
shows that no money can be established on the market except as it can
be exchanged for a previously existing money (which in turn
must have ultimately related back to a commodity in barter). If a World
State outlaws gold and silver and establishes a unitary fiat money,
which it proceeds to inflate until a runaway boom destroys it, there
will be no pre-existing money on the market. The
task of reconstruction will then be enormously more difficult.
G.
Inflation and Compensatory Fiscal Policy
Inflation, in recent years, has been generally defined as an increase
in prices. This is a highly unsatisfactory definition. Prices are
highly complex phenomena, activated by many different causal factors.
They may increase or decrease from the goods side—i.e., as a
result of a change in the supply of goods on the market. They may
increase or decrease because of a change in the social demand
for money to hold; or they may rise or fall from a change in the supply
of money. To lump all of these causes together is misleading, for it
glosses over the separate influences, the isolation of which
is the goal of science. Thus, the money supply may be increasing, while
at the same time the social demand for money is increasing from the
goods side, in the form of increased supplies of goods. Each
may offset the other, with no general price changes occurring. Yet both
processes perform their work nevertheless. Resources will
still shift as a result of inflation, and the business cycle caused by
credit expansion will still appear. It is, therefore, highly
inexpedient to define inflation as a rise in prices.
Movements in the supply-of-goods and in the demand-for-money schedules
are all the results of voluntary changes of preferences on the market.
The same is true for increases in the supply of gold or silver. But
increases in fiduciary or fiat media are acts of fraudulent
intervention in the market, distorting voluntary preferences
and the voluntarily determined pattern of income and wealth. Therefore,
the most expedient definition of “inflation” is one
we have set forth above: an increase in the supply of money beyond any
increase in specie.
The absurdity of the various governmental programs for
“fighting inflation” now becomes evident.
Most people believe that government officials must constantly
pace the ramparts, armed with a huge variety of
“control” programs designed to combat the
inflation enemy. Yet all that is really necessary is that the
government and the banks (nowadays controlled almost
completely by the government) cease inflating.
The absurdity of the term
“inflationary pressure” also becomes
clear. Either the government and banks are inflating or
they are not; there is no such thing as “inflationary
pressure.”
The idea that the government has the duty to tax the public in order to
“sop up excess purchasing power” is particularly
ludicrous.
If inflation has been
under way, this “excess purchasing power”
is precisely the result of previous governmental inflation. In
short, the government is supposed to burden the public twice:
once in appropriating the resources of society by inflating
the money supply, and again, by taxing back the new money from the
public. Rather than “checking inflationary
pressure,” then, a tax surplus in a boom will simply
place an additional burden upon the public. If the taxes are
used for further government spending, or for repaying debts to the
public, then there is not even a deflationary effect. If the taxes are
used to redeem government debt held by the banks, the deflationary
effect will not be a credit contraction and therefore will not
correct maladjustments brought about by the previous
inflation. It will, indeed, create further dislocations and distortions
of its own.
Keynesian and neo-Keynesian “compensatory fiscal
policy” advocates that government deflate during an
“inflationary” period and inflate (incur deficits,
financed by borrowing from the banks) to combat a depression. It is
clear that government inflation can relieve unemployment and unsold
stocks only if the process dupes the owners into accepting lower real
prices or wages. This “money illusion” relies on
the owners’ being too ignorant to realize when their real
incomes have declined—a slender basis on which to ground a
cure. Furthermore, the inflation will benefit part of the public at the
expense of the rest, and any credit expansion will only set a further
“boom-bust” cycle into motion. The
Keynesians depict the free market’s monetary-fiscal
system as minus a steering wheel, so that the economy, though readily
adjustable in other ways, is constantly walking a precarious tightrope
between depression and unemployment on the one side and inflation on
the other. It is then necessary for the government, in its wisdom, to
step in and steer the economy on an even course. After our completed
analysis of money and business cycles, however, it should be evident
that the true picture is just about the reverse. The free market,
unhampered, would not be in danger of suffering inflation,
deflation, depression, or unemployment. But the intervention of
government creates the tightrope for the economy
and is constantly, if sometimes unwittingly, pushing the economy into
these pitfalls.
12.
Conclusion: The Free Market and Coercion
We have thus concluded our analysis of voluntary and free action and
its consequences in the free market, and of violent and coercive action
and its consequences in economic intervention. Superficially,
it looks to many people as if the free market is a chaotic and anarchic
place, while government intervention imposes order and community values
upon this anarchy. Actually,
praxeology—economics—shows us that the truth is
quite the reverse. We may divide our analysis into the direct,
or palpable, effects, and the indirect, hidden effects of the two
principles. Directly, voluntary action—free
exchange—leads to the mutual benefit of both parties
to the exchange. Indirectly, as our investigations have shown,
the network of these free exchanges in society—known
as the “free market”—creates a delicate
and even awe-inspiring mechanism of harmony, adjustment, and precision
in allocating productive resources, deciding upon prices, and gently
but swiftly guiding the economic system toward the greatest
possible satisfaction of the desires of all the consumers. In short,
not only does the free market directly benefit all parties and leave
them free and uncoerced; it also creates a mighty and efficient
instrument of social order. Proudhon, indeed, wrote better
than he knew when he called “Liberty, the Mother, not the
Daughter, of Order.”
On the other hand, coercion has diametrically opposite
features. Directly, coercion benefits one party only at the
expense of others. Coerced exchange is a system of exploitation of man
by man, in contrast to the free market, which is a system of
co-operative exchanges in the exploitation of nature
alone. And not only does coerced exchange mean that some live at the
expense of others, but, indirectly, as we have just observed, coercion
leads only to further problems: it is inefficient and chaotic, it
cripples production, and it leads to cumulative and unforeseen
difficulties. Seemingly orderly, coercion is not only exploitative; it
is also profoundly disorderly.
The major function of praxeology—of economics—is to
bring to the world the knowledge of these indirect, these hidden,
consequences of the different forms of human action. The
hidden order, harmony, and efficiency of the voluntary free market, the
hidden disorder, conflict, and gross inefficiency of coercion and
intervention—these are the great truths that economic
science, through deductive analysis from self-evident axioms, reveals
to us. Praxeology cannot, by itself, pass ethical judgment or make
policy decisions. Praxeology, through its Wertfrei
laws, informs us that the workings of the voluntary principle and of
the free market lead inexorably to freedom, prosperity,
harmony, efficiency, and order; while coercion and government
intervention lead inexorably to hegemony, conflict,
exploitation of man by man, inefficiency, poverty, and chaos.
At this point, praxeology retires from the scene; and it is up to the
citizen—the ethicist—to choose his political course
according to the values that he holds dear.
APPENDIX A
GOVERNMENT BORROWING
The major source of government revenue is taxation. Another source is
government borrowing. Government borrowing from the banking system is
really a form of inflation: it creates new money-substitutes
that go first to the government and then diffuse, with each step of
spending, into the community. Inflation is discussed in the text above.
This is a process entirely different from borrowing from the public,
which is not inflationary, for the latter transfers saved funds from
private to governmental hands rather than creates new funds. Its
economic effect is to divert savings from the channels most desired by
the consumers and to shift them to the uses desired by government
officials. Hence, from the point of view of the consumers, borrowing
from the public wastes savings. The consequences of this waste are a
lowering of the capital structure of the society and a lowering of the
general standard of living in the present and the future. Diversion and
waste of savings from investment causes interest rates to be higher
than they otherwise would, since now private uses must compete with
government demands. Public borrowing strikes at individual savings more
effectively even than taxation, for it specifically lures away savings
rather than taxing income in general.
It might be objected that lending to the government is voluntary and is
therefore equivalent to any other voluntary contribution to the
government; the “diversion” of funds is something
desired by the consumers and hence by society.
Yet the process is
“voluntary” only in a one-sided way. For we must
not forget that the government enters the time market as a bearer of
coercion and as a guarantor that it will use this coercion to obtain
funds for repayment. The government is armed by coercion with a crucial
power denied to all other people on the market; it is always assured of
funds, whether by taxation or by inflation. The government will
therefore be able to divert considerable funds from savers, and at an
interest rate lower than any paid elsewhere. For the risk component in
the interest rate paid by the government will be lower than that paid
by any other borrowers.
Lending to government, therefore, may be voluntary, but the process is
hardly voluntary when considered as a whole. It is rather a voluntary
participation in future confiscation to be committed by the government.
In fact, lending to government twice involves
diversion of private funds to the government: once when the
loan is made, and private savings are diverted to government spending;
and again when the government taxes or inflates (or borrows again) to
obtain the money to repay the loan. Then, once more, a coerced
diversion takes place from private producers to the government, the
proceeds of which, after payment of the bureaucracy for handling
services, accrues to the government bondholders. The latter have thus
become a part of the State apparatus and are engaging in a
“relation of State” with the tax-paying producers.
The ingenious slogan that the public debt does not matter because
“we owe it to ourselves” is clearly absurd. The
crucial question is: Who is the “we” and who are
the “ourselves”? Analysis of the world must be
individualistic and not holistic. Certain people owe money to certain
other people, and it is precisely this fact that makes the borrowing as
well as the taxing process important. For we might just as well say
that taxes are unimportant for the same reason.
Many “right-wing” opponents of public borrowing, on
the other hand, have greatly exaggerated the dangers of the public debt
and have raised persistent alarms about imminent
“bankruptcy.” It is obvious that the government
cannot become “insolvent” like private
individuals—for it can always obtain money by coercion, while
private citizens cannot. Further, the periodic agitation that the
government “reduce the public debt” generally
forgets that—short of outright repudiation—the debt
can be reduced only by increasing, at least for a
time, the tax and/or inflation in society. Social utility can therefore
not be enhanced by debt-reduction, except by the
method of repudiation—the one
way that the public debt can be lowered without a concomitant increase
in fiscal coercion. Repudiation would also have the further merit (from
the standpoint of the free market) of casting a pall on all future
government credit, so that the government could no longer so easily
divert savings to government use. It is therefore one of the most
curious and inconsistent features of the history of politico-economic
thought that it is precisely the “right-wingers,”
the presumed champions of the free market, who attack repudiation most
strongly and who insist on as swift a payment of the public debt as
possible.
APPENDIX
B
"COLLECTIVE GOODS" AND "EXTERNAL BENEFITS"
TWO ARGUMENTS FOR GOVERNMENT ACTIVITY
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.
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.
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.
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!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.
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.
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.
We come now to the problem of external benefits—the major
justification for government activities expounded by
economists.
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.
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?
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?
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.
There is a fourth way by which a
central bank may increase bank reserves: in countries, such as the
United States, where banks must keep a legally required minimum ratio
of reserves to deposits, the bank may simply lower the required ratio.
Foreign central banks and
governments are still permitted to redeem in gold bullion, but this is
hardly a consolation for either foreign citizens or
Americans. The result is that gold is still an ultimate
“balancing” item between national governments, and
therefore a kind of medium of exchange for governments
and central banks in international transactions.
The transition from gold to fiat
money will be greatly smoothed if the State has previously abandoned
ounces, grams, grains, and other units of weight in naming its monetary
units and substituted unique names, such as dollar, mark, franc, etc.
It will then be far easier to eliminate the public’s
association of monetary units with weight and to
teach the public to value the names themselves.
Furthermore, if each national government sponsors its own unique name,
it will be far easier for each State to control its own fiat issue
absolutely.
Cf. the analysis by John Maynard
Keynes in his A Tract on Monetary Reform (London:
Macmillan & Co., 1923), chap. ii, section 1.
On runaway inflation, see
Mises, Theory of Money and Credit, pp.
227–31.
Costantino Bresciani-Turroni, The
Economics of Inflation (London: George Allen & Unwin,
1937), is a brilliant and definitive work on the German inflation.
Inflation is here defined as any
increase in the money supply greater than an increase in specie, not as
a big change in that supply. As here defined,
therefore, the terms “inflation” and
“deflation” are praxeological
categories. See Mises, Human Action,
pp. 419–20. But also see Mises’ remarks in Aaron
Director, ed., Defense, Controls, and Inflation
(Chicago: University of Chicago Press, 1952), p. 3 n.
See George Ferdinand,
“Review of Albert G. Hart, Defense without Inflation,”
Christian Economics, Vol. III, No. 19 (October 23, 1951).
See Mises in
Director, Defense, Controls, and Inflation, p. 334.
See section 8F above.
A recent objection of this sort
appears in James M. Buchanan, Public Principles of Public Debt
(Homewood, Ill.: Richard D. Irwin, 1958), especially pp.
104–05.
It is incorrect, however, to say
that government loans are “riskless” and therefore
that the interest yield on government bonds may be taken to be the pure
interest rate. Governments may always repudiate their obligations if
they wish, or they may be overturned and their successors may refuse to
honor the I.O.U.’s.
Hence, despite
Buchanan’s criticism, the classical economists such as Mill
were right: the public debt is a double burden on
the free market; in the present, because resources are withdrawn from
private to unproductive governmental employment; and in the
future, when private citizens are taxed to pay the debt.
Indeed, for Buchanan to be right, and the public debt to be no burden,
two extreme conditions would have to be met: (1) the bondholder would
have to tear up his bond, so that the loan would be a genuinely
voluntary contribution to the government; and
(2) the government would have to be a totally voluntary
institution, subsisting on voluntary payments alone, not just
for this particular debt, but for all in transactions with the
rest of society. Cf. Buchanan, Public Principles of Public
Debt.
In the same way, we would have to
assert that the Jews killed by the Nazis during World War II really
committed suicide: “They did it to themselves.”
For the rare exception of a
libertarian who recognizes the merit of repudiation from a free-market
point of view, see Frank Chodorov,
“Don’t Buy Bonds,” analysis,
Vol. IV, No. 9 (July, 1948), pp. 1–2.
One 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.”
The 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.
Thus, cf. Molinari, Society
of Tomorrow, pp. 47–95.
Ibid., 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).
Antonio 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.
Paul A. Samuelson, “The
Pure Theory of Public Expenditures,” Review
of Economics and Statistics, November, 1954, pp.
387–89.
Stephen 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.
Charles 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)
The 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.
For 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.
“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”).
There 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)
As 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.
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