Chapter 5--Binary Intervention: Government Expenditures
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BINARY
INTERVENTION:
GOVERNMENT EXPENDITURES
When
writers on public finance and political economy reach the topic of
“government expenditures,” they have traditionally
abandoned analysis and turned to simple institutional description of
various types of governmental expenditure. In discussing taxation, they
engage in serious analysis, faulty as some of it may be; but they have
devoted little attention to a theoretical treatment of expenditure.
Harriss, in fact, goes so far as to say that a theory of government
expenditure is impossible or, at least, nonexistent.
The bulk of discussion of expenditures is devoted to describing their
great proliferation, absolute and relative, in the last decades,
coupled with the assumption (implicit or explicit) that this growth has
been necessary to “cope with the growing complexities of the
economy.” This slogan or similar ones have gained almost
universal acceptance but have never been rationally supported. On its
face, the statement is unproved and will remain so until proved.
Broadly, we may consider two categories of government expenditures: transfer
and resource-using. Resource-using activities
employ nonspecific resources that could have been used for other
production; they withdraw factors of production from private uses to
State-designated uses. Transfer activities may be defined as those
which use no resources, i.e., which transfer money directly from Peter
to Paul. These are the pure subsidy-granting
activities.
Now, of course, there is considerable similarity between the two
branches of government action. Both are transfer
activities insofar as they pay the salaries of the bureaucracy engaged
in these operations. Both even involve shifts of
resources, since transfer activities shift nonspecific factors from
free-market, voluntary activity to demands stemming from
State-privileged groups. Both subsidize: the supply
of governmental services, as well as the purchase of material by
government enterprises, constitutes a subsidy. But the difference is
important enough to preserve. For in one case, goods are used for and
resources are devoted to State purposes as the State wills; in the
other, the State subsidizes private individuals, who employ resources
as they think best. Transfer payments are pure
subsidies without prior diversion of resources.
We shall first analyze transfer payments as pure
subsidies and then see how the analysis applies to the subsidizing
aspects of resource-using activities.
1.
Government Subsidies: Transfer Payments
There are two and only two ways of acquiring wealth: the economic means
(voluntary production and exchange) and the political means
(confiscation by coercion). On the free market only the economic means
can be used, and consequently everyone earns only what other
individuals in society are willing to pay for his services. As long as
this continues, there is no separate process called
“distribution”; there are only production and
exchange of goods. Let government subsidies enter the scene, however,
and the situation changes. Now the political means to wealth becomes
available. On the free market, wealth is only a resultant of the
voluntary choices of all individuals and the extent to which men serve
each other. But the possibility of government subsidy permits a change:
it opens the way to an allocation of wealth in accordance with the
ability of a person or group to gain control of the State apparatus.
Government subsidy creates a separate distribution
process (not “redistribution,” as some would be
tempted to say). For the first time, earnings are severed from
production and exchange and become separately determined. To the extent
that this distribution occurs, therefore, the allocation of earnings is
distorted away from efficient service to consumers. Therefore, we may
say that all cases of subsidy coercively penalize
the efficient for the benefit of the inefficient.
Subsidies consequently prolong the life of inefficient firms at the
expense of efficient ones, distort the productive system, and hamper
the mobility of factors from less to more value-productive locations.
They injure the market greatly and prevent the full satisfaction of
consumer wants. Suppose, for example, an entrepreneur is sustaining
losses in some industry, or the owner of a factor is earning a very low
sum there. On the market, the factor owner would shift to a more
value-productive industry, where both the owner of the factor and the
consumers would be better served. If the government subsidizes him
where he is, however, the life of inefficient firms is prolonged, and
factors are encouraged not to enter their most
value-productive uses. The greater the extent of government subsidy in
the economy, therefore, the more the market is prevented from working,
and the more inefficient will the market be in catering to consumer
wants. Hence, the greater the government subsidy, the lower will be the
standard of living of everyone, of all the consumers.
On the free market, as we have seen, there is a harmony of interests,
for everyone demonstrably gains in utility from market exchange. Where
government intervenes, on the other hand, caste conflict
is thereby created, for one man benefits at the expense of
another. This is most clearly seen in the case of government
transfer subsidies paid from tax or inflation funds—an
obvious taking from Peter to give to Paul. Let the subsidy method
become general, then, and everyone will rush to gain control of the
government. Production will be more and more neglected, as people
divert their energies to the political struggles, to the scramble for
loot. It is obvious that production and general living standards are
lowered in two ways: (1) by the diversion of energy from production to
politics, and (2) by the fact that the government inevitably burdens
the producers with the incubus of an inefficient, privileged group. The
inefficient achieve a legal claim to ride herd on the efficient. This
is all the more true since those who succeed in any
occupation will inevitably tend to be those who are best at it.
Those who succeed on the free market, in economic life, will therefore
be those most adept at production and at serving their fellowmen; those
who succeed in the political struggle will be those most adept at
employing coercion and winning favors from wielders of coercion.
Generally, different people will be adept at these different tasks, in
accordance with universal specialization and the division of labor, and
hence the shackling of one set of people will be done for the benefit
of another set.
But perhaps it will be argued that the same people will be efficient at
both activities and that, therefore, there will be no exploitation of
one group at the expense of another. As we have said, this is hardly
likely; if true, the subsidy system would die out, because it would be
pointless for a group to pay the government to subsidize itself. But,
further, the subsidy system would promote the predatory skills of these
individuals and penalize their productive ones. In sum, governmental
subsidy systems promote inefficiency in production and efficiency in
coercion and subservience, while penalizing efficiency in production
and inefficiency in predation. Those people who ethically favor
voluntary production can gauge which system—the free market
or subsidies—scores the higher economic marks, while those
who favor conquest and confiscation must at least reckon with the
overall loss of production that their policy brings about.
This analysis applies to all forms of government subsidies, including
grants of monopolistic privilege to favored producers. A common example
of direct transfer subsidies is governmental poor relief.
State poor relief is clearly a subsidization of poverty. Men are now
automatically entitled to money from the State because of their
poverty. Hence, the marginal disutility of income forgone from leisure
diminishes, and idleness and poverty tend to increase. Thus, State
subsidization of poverty tends to increase poverty, which in turn
increases the amount of subsidy paid and extracted from those who are
not impoverished. When, as is generally the case, the amount of subsidy
depends directly on the number of children possessed by the pauper,
there is a further incentive for the pauper to have more children than
otherwise, since he is assured of a proportionate subsidy by the State.
Consequently, the number of paupers tends to multiply still further. As
Thomas Mackay aptly stated:
.
. . the cause of pauperism is relief. We shall not get rid of pauperism
by extending the sphere of State relief. . . . On the contrary, its
adoption would increase our pauperism, for, as is often said, we can
have exactly as many paupers as the country chooses to pay for.
Private charity to the poor, on the other hand, does not have the same
effect, for the poor would not have a compulsory and unlimited claim on
the rich. Instead, charity is a voluntary and flexible act of grace on
the part of the giver.
The sincerity of government’s desire to promote charity may
be gauged by two perennial governmental drives: one, to suppress
“charity rackets,” and the other, to drive
individual beggars off the streets because “the government
makes plenty of provision for them.”
The effect of both
measures is to suppress voluntary individual gifts of charity and to
force the public to route its giving into those channels approved by
and tied in with government officialdom.
Similarly, unemployment relief, instead of helping
to cure unemployment, as often imagined, actually subsidizes and
intensifies it. We have seen that unemployment arises when laborers or
unions set a minimum wage above what they can obtain on the free
market. Tax aid helps them to keep this unrealistic minimum and hence
prolongs the period in which they can continue to withhold their labor
from the market.
2.
Resource-Using
Activities: Government
Ownership versus Private Ownership
The bulk of government activities use resources, redirecting factors of
production to government-chosen ends. These activities generally
involve the real or supposed supply of services by government to some
or all of the populace. Government functions here as an owner and
enterpriser.
Resource-using expenditures by government are often considered
“investment,” and this classification forms an
essential part of the Keynesian doctrine. We have argued that, on the
contrary, all of this expenditure must be considered consumption.
Investment occurs where producers’ goods are bought by
entrepreneurs, not at all for their own use or satisfaction, but merely
to reshape and resell them to others—ultimately to the
consumers. But government redirects the resources of society to its
ends, chosen by it and backed by the use of force. Hence, these
purchases must be considered consumption expenditures, whatever their
intention or physical result. They are a particularly wasteful form of
“consumption,” however, since they are generally
not regarded as consumption expenditures by
government officials.
Government enterprises may either provide “free”
services or charge a price or fee to users. “Free”
services are particularly characteristic of government. Police and
military protection, fire fighting, education, some water supply come
to mind as examples. The first point to note, of course, is that these
services are not and cannot be truly free. A free
good would not be a good and thus not an object of human action; it
would exist in abundance for all. If a good does not exist plentifully
for all, then the resource is scarce, and supplying it costs society
other goods forgone. Hence, it cannot be free. The resources needed to
supply the free governmental service are extracted from the rest of
production. Payment is made, however, not by users on the basis of
their voluntary purchases, but by a coerced levy on the taxpayers. A
basic split is effected between payment for and receipt of service.
Many grave consequences follow from this split and from the
“free” service. As in all cases where price is
below the free-market price, an enormous and excessive demand is
stimulated for the good, far beyond the supply of such service
available. Consequently, there will always be
“shortages” of the free good, constant complaints
of insufficiency, overcrowding, etc. To illustrate, we need only cite
such common conditions as police shortages, particularly in
crime-ridden districts, teacher and school shortages in the public
school system, traffic jams on government-owned streets and highways,
etc. In no area of the free market are there chronic complaints about
shortages and insufficiencies. In all areas of private enterprise,
firms try to coax and persuade consumers to buy more of their product.
Where government owns, on the other hand, there are invariably calls on
consumers for patience and sacrifice, and there are continual problems
of shortages and deficiencies. It is doubtful if any private enterprise
would ever do what the government of New York and other cities have
done: exhort the consumers to use less water. It is
also characteristic of government operation that when a water shortage
develops, it is the consumers and not the government
“enterprisers” who are blamed for the shortage. The
pressure is on consumers to sacrifice and use less, while in private
industry the (welcome) pressure is on entrepreneurs to supply more.
The well-known inefficiencies of government operation are not empirical
accidents, resulting perhaps from the lack of a civil-service
tradition. They are inherent in all government
enterprise, and the excessive demand fomented by free and other
underpriced services is just one of the many reasons for this condition.
Thus, free supply not only subsidizes the users at the expense of
nonusing taxpayers; it also misallocates resources by failing to supply
the service where it is most needed. The same is true, to a lesser
extent, wherever the price is under the free-market
price. On the free market, consumers can dictate the pricing and
thereby assure the best allocation of productive resources to supply
their wants. In a government enterprise, this cannot be done. Let us
take again the case of the free service. Since there is no pricing, and
therefore no exclusion of submarginal uses, there is no way that
government, even if it wanted to, could allocate its services to the
most important uses and to the most eager buyers. All buyers, all uses,
are artificially kept on the same plane. As a result, the most
important uses will be slighted, and the government is faced with
insuperable allocation problems, which it cannot solve even
to its own satisfaction. Thus, the government will be
confronted with the problem: Should we build a road in place A or place
B? There is no rational way by which it can make this decision. It
cannot aid the private consumers of the road in the best way. It can
decide only according to the whim of the ruling government official,
i.e., only if the government official, not the
public, does the “consuming.” If the government
wishes to do what is best for the public, it is faced with an
impossible task.
Government can either deliberately subsidize by giving a service away
free, or it may genuinely try to find the true market price, i.e., to
“operate on a business basis.” This is often the
cry raised by conservatives—that government enterprise be
placed on a “business footing,” that deficits be
ended, etc. Almost always this means raising the price. Is this a
solution, however? It is often stated that a single government
enterprise, operating within the sphere of a private market, buying
from it, etc., can price its services and allocate its resources
efficiently. This, however, is incorrect. There is a fatal
flaw that permeates every conceivable scheme of government
enterprise and ineluctably prevents it from rational pricing and
efficient allocation of resources. Because of this flaw, government
enterprise can never be operated on a
“business” basis, no matter what the
government’s intentions.
What is this fatal flaw? It is the fact that government can obtain
virtually unlimited resources by means of its coercive tax power.
Private businesses must obtain their funds from investors. It is this
allocation of funds by investors on the basis of time preference and
foresight that rations funds and resources to the most profitable and
therefore the most serviceable uses. Private firms can get funds only
from consumers and investors; they can get funds, in other words, only
from people who value and buy their services and from investors who are
willing to risk investment of their saved funds in anticipation of
profit. In short, payment and service are, once again, indissolubly
linked on the market. Government, on the other hand, can get as much
money as it likes. The free market provides a
“mechanism” for allocating funds for future and
present consumption, for directing resources to their most
value-productive uses for all the people. It thereby provides a means
for businessmen to allocate resources and to price services to insure
such optimum use. Government, however, has no checkrein on itself,
i.e., no requirement for meeting a profit-and-loss test of valued
service to consumers, to enable it to obtain funds. Private enterprise
can get funds only from satisfied, valuing customers and from investors
guided by profits and losses. Government can get funds literally at its
own whim.
With the checkrein gone, gone also is any opportunity for government to
allocate resources rationally. How can it know whether to build road A
or road B, whether to “invest” in a road or a
school—in fact, how much to spend for all
its activities? There is no rational way that it can allocate funds or
even decide how much to have. When there is a shortage of teachers or
schoolrooms or police or streets, the government and its supporters
have only one answer: more money. The people must relinquish more of
their money to the government. Why is this answer never offered on the
free market? The reason is that money must be withdrawn
from some other use in consumption or investment—and this
withdrawal must be justified. This justification is provided by the
test of profit and loss: the indication that the most urgent wants of
the consumers are being satisfied. If an enterprise or product is
earning high profits for its owners, and these profits are expected to
continue, more money will be
forthcoming; if not, and losses are being incurred, money will flow out
of the industry. The profit-and-loss test serves as the critical guide
for directing the flow of productive resources. No such guide exists
for the government, which has no rational way to decide how
much money to spend, either in total, or in each specific
line. The more money it spends, the more service it can
supply—but where to stop?
Proponents of government enterprise may retort that the government
could simply tell its bureau to act as if it were a
profit-making enterprise and to establish itself in the same way as a
private business. There are two flaws in this theory. First, it is
impossible to play enterprise. Enterprise means
risking one’s own money in investment. Bureaucratic managers
and politicians have no real incentive to develop entrepreneurial
skill, to really adjust to consumer demands. They do not risk loss of
their money in the enterprise. Secondly, aside from the question of
incentives, even the most eager managers could not
function as a business. Regardless of the treatment accorded the
operation after it is established, the initial
launching of the firm is made with government money, and therefore by
coercive levy. An arbitrary element has been “built
into” the very vitals of the enterprise. Further, any future
expenditures may be made out of tax funds, and therefore the decisions
of the managers will be subject to the same flaw. The ease of obtaining
money will inherently distort the operations of the government
enterprise. Moreover, suppose the government
“invests” in an enterprise, E. Either the free
market, left alone, would also have invested the same amount in the
selfsame enterprise, or it would not. If it would have, then the
economy suffers at least from the “take” going to
the intermediary bureaucracy. If not, and this is almost certain, then
it follows immediately that the expenditure on E is a distortion of
private utility on the market—that some other expenditure
would have greater monetary returns. It follows once again that a
government enterprise cannot duplicate the conditions of private
business.
In addition, the establishment of government enterprise creates an
inherent competitive advantage over private firms, for at least part of
its capital was gained by coercion rather than service. It is clear
that government, with its subsidization, if it wishes can drive private
business out of the field. Private investment in the same industry will
be greatly restricted, since future investors will anticipate losses at
the hands of the privileged governmental competitors. Moreover, since
all services compete for the consumer’s dollar, all private
firms and all private investment will to some degree be affected and
hampered. And when a government enterprise opens, it generates fears in
other industries that they will be next, and that they will be either
confiscated or forced to compete with government-subsidized
enterprises. This fear tends to repress productive investment further
and thus lower the general standard of living still more.
The clinching argument, and one that is used quite correctly by
opponents of government ownership, is: If business operation is so
desirable, why take such a tortuous route? Why not scrap government
ownership and turn the operation over to private enterprise? Why go to
such lengths to try to imitate the apparent ideal (private ownership)
when the ideal may be pursued directly? The plea for business
principles in government, therefore, makes little sense, even if it
could be successful.
The inefficiencies of government operation are compounded by several
other factors. As we have seen, a government enterprise competing in an
industry can usually drive out private owners, since the government can
subsidize itself in many ways and supply itself with unlimited funds
when desired. Thus, it has little incentive to be efficient. In cases
where it cannot compete even under these conditions, it can arrogate to
itself a compulsory monopoly, driving out competitors by force. This
was done in the United States in the case of the post office.When the government thus grants
itself a monopoly, it may go to the other extreme from free service: it
may charge a monopoly price. Charging a monopoly
price—identifiably different from a free-market
price—distorts resources again and creates an artificial
scarcity of the particular good. It also permits an enormously lowered
quality of service. A governmental monopoly need not worry that
customers may go elsewhere or that inefficiency may mean its demise.
A further reason for governmental inefficiency has been touched on
already: that the personnel have no incentive to be efficient. In fact,
the skills they will develop will not be the
economic skills of production, but political
skills—how to fawn on political superiors, how demagogically
to attract the electorate, how to wield force most effectively. These
skills are very different from the productive ones, and therefore
different people will rise to the top in the government from those who
succeed in the market.
It is particularly absurd to call for “business
principles” where a government enterprise functions as a
monopoly. Periodically, there are demands that the post office be put
on a “business basis” and end its deficit, which
must be paid by the taxpayers. But ending the deficit of an inherently
and necessarily inefficient government operation does not mean going on
a business basis. In order to do so, the price must be raised high
enough to achieve a monopoly price and thus cover the costs of the
government’s inefficiencies. A monopoly price will levy an
excessive burden on the users of the postal service, especially since
the monopoly is compulsory. On the other hand, we have seen that even
monopolists must abide by the consumers’ demand schedule. If
this demand schedule is elastic enough, it may well happen that a
monopoly price will reduce revenue so much or cut down so much on its
increase that a higher price will increase deficits
rather than decrease them. An outstanding example has been the New York
subway system in recent years, which has been raising its fares in a
vain attempt to end its deficit, only to see passenger volume fall so
drastically that the deficit increased even further after a time.
Many “criteria” have been offered by writers as
guides for the pricing of government services. One criterion supports
pricing according to “marginal cost.” However, this
is hardly a criterion at all and rests on classical economic fallacies
of price determination by costs. For one thing,
“marginal” varies according to the period of time
surveyed. Furthermore, costs are not static, but flexible; they change
according to selling prices and hence cannot be used as a guide to
those prices. Moreover, prices equal average costs—or rather,
average costs equal prices—only in final equilibrium, and
equilibrium cannot be regarded as an ideal for the real world. The
market only tends toward this goal. Finally, costs
of government operation will be higher than for a similar operation on
the free market.
Government enterprise will not only hamper and repress private
investment and entrepreneurship in the same industry and in industries
throughout the economy; it will also disrupt the entire labor market.
For (a) the government will decrease production and
living standards in the society by siphoning off potentially productive
labor to the bureaucracy; (b) in using confiscated
funds, the government will be able to pay more than the market rate for
labor, and hence set up a clamor by government job seekers for an
expansion of the unproductive bureaucratic machine; and (c)
through high, tax-supported wages the government may well mislead
workers and unions into believing that this reflects the market wage in
private industry, thereby causing unwanted unemployment.
Moreover, government enterprise, basing itself on coercion over the
consumer, can hardly fail to substitute its own values for those of its
customers. Hence, artificially standardized services of poorer
quality—fashioned to governmental taste and
convenience—will hold sway, in contrast to those of the free
market, where diversified services of high quality are supplied to fit
the varied tastes of a multitude of individuals.
One cartel or one firm could not own all the means of production in the
economy, because it could not calculate prices and allocate factors in
a rational manner. This is the reason why State socialism could not
plan or allocate rationally either. In fact, even two or more stages
could not be completely integrated vertically on
the market, for total integration would eliminate a whole segment of
the market and establish an island of calculational and allocational
chaos, an island that would preclude optimal planning for profits and
maximum satisfaction for the consumers.
In the case of simple government ownership, still another extension of
this thesis unfolds. For each governmental firm
introduces its own island of chaos into the economy; there is
no need to wait for socialism for chaos to begin its work. No
government enterprise can ever determine prices or costs or allocate
factors or funds in a rational, welfare-maximizing manner. No
government enterprise can be established on a “business
basis” even if the desire were present. Thus, any government
operation injects a point of chaos into the economy; and since all
markets are interconnected in the economy, every governmental activity
disrupts and distorts pricing, the allocation of factors, consumption/
investment ratios, etc. Every government enterprise not only lowers the
social utilities of the consumers by forcing the allocation of funds to
ends other than those desired by the public; it also lowers the utility
of everyone (including, perhaps, the utilities of government officials)
by distorting the market and spreading calculational chaos. The greater
the extent of government ownership, of course, the more pronounced will
this impact become.
Aside from its purely economic consequences, government ownership has
another kind of impact on society: it necessarily substitutes conflict
for the harmony of the free market. Since government service means
service by one set of decision-makers, it comes to mean uniform
service. The desires of all those forced, directly or indirectly, to
pay for the government service cannot be satisfied. Only some forms of
the service can or will be produced by the government agency. As a
result, government enterprise creates enormous caste conflicts
among the citizens, each of whom has a different idea on the best form
of service.
In recent years, government schools in America have furnished a
striking example of such conflicts. Some parents prefer racially
segregated schools; others prefer integrated education. Some parents
want their children taught socialism; others want antisocialist
teaching in the schools. There is no way that government can resolve
these conflicts. It can only impose the will of the majority (or a
bureaucratic “interpretation” of it) by coercion
and leave an often large minority dissatisfied and unhappy. Whichever
type of school is chosen, some groups of parents will suffer. On the
other hand, there is no such conflict on the free market, which
provides any type of service demanded. On the market, those who want
segregated or integrated, socialist or individualist schools can have
their wants satisfied. It is obvious, therefore, that governmental, as
opposed to private, provision of services, lowers the standard of
living of much of the population.
The degrees of government ownership in the economy vary from one
country to another, but in all countries the State
has made sure that it owns the vital nerve centers, the command posts
of the society. It has acquired compulsory monopoly ownership over
these command posts, and it has always tried to convince the
populace that private ownership and enterprise in these fields is
simply and a priori impossible. We have seen, on
the contrary, that every service can be supplied on
the free market.
The vital command posts invariably owned monopolistically by the State
are: (1) police and military protection; (2) judicial protection; (3)
monopoly of the mint (and monopoly of defining money); (4) rivers and
coastal seas; (5) urban streets and highways, and land generally
(unused land, in addition to the power of eminent domain); and (6) the
post office. The defense function is the one reserved most jealously by
the State. It is vital to the State’s existence, for on its
monopoly of force depends its ability to exact taxes from the citizens.
If citizens were permitted privately owned courts and armies, then they
would possess the means to defend themselves against invasive acts by
the government as well as by private individuals. Control of the basic
land resources—particularly transportation—is, of
course, an excellent method of ensuring overall control. The post
office has always been a very convenient tool for the inspection and
prohibition of messages by heretics or enemies of the State. In recent
years, the State has constantly sought to expand these outposts.
Monopoly of the mint and of the definition of money (legal tender laws)
has been used to achieve full control of the nation’s
monetary system. This was one of the State’s most difficult
tasks, since for centuries paper money was thoroughly distrusted by the
people. Monopoly over the mint and the definition of monetary standards
has led to the debasement of the coinage, a shift of monetary names
from units of weight to meaningless terms, and the replacement of gold
and silver by bank or government paper. At present, the State in nearly
every country has achieved its major monetary goal: the ability to
expand its revenue by inflating the currency at will. In the other
areas—land and natural resources, transportation and
communication—the State is more and more in control. Finally,
another critical command post held, though not wholly monopolized by
the State, is education. For government schooling permits influencing
the youthful mind to accept the virtues of the government and of
government intervention.
In many countries, the
government does not have a compulsory monopoly of schooling, but it
approaches this ideal by compelling attendance of all children at
either a government school or a private school approved or accredited
by government. Compulsory attendance herds into the schools those who
do not desire schooling and thus drives too many children into
education. Too few youngsters remain in such competing fields as
leisure, home study, and business employment.
One very curious
governmental activity has grown enormously in the present century. Its
great popularity is a notable indication of widespread popular
ignorance of praxeological law. We are referring to what is called
“social security” legislation. This system
confiscates the income of the poorer wage earners and then presumes to
invest the money more wisely than they could themselves, later paying
out the money to them or their beneficiaries in their old age.
Considered as “social insurance,” this is a typical
example of government enterprise: there is no relation between premiums
and benefits, both changing yearly under the impact of political
pressures. On the free market, anyone who wishes to invest in an
insurance annuity or in stocks or real estate may do so. Compelling
everyone to transfer his funds to the government forces him to lose
utility.
Thus, even on its face, it is difficult to understand the great
popularity of the social security system. But the true nature of the
operation differs greatly from its official image. For the government
does not invest the funds it takes in taxes; it
simply spends them, giving itself bonds, which must be later cashed
when the benefits fall due. How will the cash then be obtained? Only
from further taxes or inflation. Thus, the public must pay twice for
“social security.” The social security program
taxes twice for one payment; it is a device to permit palatable
taxation of the lower-income groups by the government. And, as is true
of all taxes, the proceeds go into governmental consumption.
In weighing the question of private or governmental ownership of any
enterprise, then, one should keep in mind the following conclusions of
our analysis: (1) every service can be supplied privately on the
market; (2) private ownership will be more efficient in providing
better quality of service at lower cost; (3) allocation of resources in
a private enterprise will better satisfy consumer demands, while
government enterprise will distort allocations and introduce islands of
calculational chaos; (4) government ownership will repress private
activity in noncompeting as well as competing firms; (5) private
ownership insures the harmonious and co-operative satisfaction of
desires, while government ownership creates caste conflict.
The subject of government binary
intervention in the form of credit expansion is covered in Man,
Economy, and State, pp. 989–1024.
Harriss, “The Public
Finance” in Haley, ed., Survey of Contemporary
Economics, II, 262.
Thomas Mackay, Methods
of Social Reform (London: John Murray, 1896), p. 210.
Recently, economists have begun to recognize that government relief
encourages leisure, discourages work, and subsidizes poverty. See
Yale Brozen, “Welfare Without the Welfare State,” The
Freeman, December, 1966, pp. 40–42; C.T. Brehm and
T.R. Saving, “The Demand for General Assistance
Payments,” American Economic Review,
December, 1964, pp. 1002–18; idem,
“Reply,” American Economic Review,
June, 1967, pp. 585–88; and Henry Hazlitt, “Income
Without Work,” The Freeman, July, 1966,
pp. 20–36.
From the following admiring
anecdote of such a drive, the reader can gauge just who
was the true friend of the poor organ-grinder—his customer or
the government:
.
. . during a similar campaign to clean up the streets of organ-grinders
(most of whom were simply licensed beggars) a woman came up to
LaGuardia at a social function and begged him not to deprive her of her
favorite organ grinder.
“Where
do you live?” he asked her.
“On
Park Avenue!”
LaGuardia
successfully pushed through his plan to eliminate the organ-grinders
and the peddlers, despite the pleas of the penthouse slummers. (Newbold
Morris and Dana Lee Thomas, Let the Chips Fall [New
York: Appleton-Century-Crofts, 1955], pp. 119–20)
See Murray
N. Rothbard, “Government in Business,” in Essays
on Liberty (Irvington-on-Hudson, N.Y.: Foundation for
Economic Education, 1958), IV, 186ff.
Cf. Ludwig von Mises, Bureaucracy
(New Haven: Yale University Press, 1946), pp. 50, 53.
See the
interesting pamphlet by Frank Chodorov, The Myth of the Post
Office, reprinted in Chodorov, One Is A Crowd
(New York: Devin Adair, 1952), pp. 132–52. On the similar
situation in England, see Frederick Millar,
“The Evils of State Trading as Illustrated by the Post
Office” in Thomas Mackay, ed., A Plea for Liberty
(New York: D. Appleton, 1891), pp. 305–25.
Only governments can make
self-satisfied announcements of cuts in service to effect economies. In
private business, economies must be made as a corollary of improvements
in service. A recent example of governmental cuts is the decline in
American postal deliveries—joined, of course, with request
for higher rates. When France nationalized the important Western
Railway system in 1908, freight was increasingly damaged, trains slowed
down, and accidents grew to such an extent that an economist
caustically observed that the French government had added railway
accidents to its growing list of monopolies. See
Murray N. Rothbard, “The Railroads of France,” Ideas
on Liberty, September, 1955, p. 42.
Hayek showed us that the
“worst get on top” in a collectivist regime. This
is true for any government-run enterprise, however.
For our purposes, we may excise the moral evaluation and say that, for
any task, those who get on top will be those with the most skill in
that particular task—a praxeological law. The difference is
that the market promotes and rewards the skills of production and
voluntary co-operation; government enterprise promotes the skills of
mass coercion and bureaucratic submission. See F.A.
Hayek, The Road to Serfdom (Chicago: University of
Chicago Press, 1944), pp. 134–52.
On the market, workers get paid in
accordance with their (discounted) marginal value product. But in a
government enterprise, which can charge any price it pleases, there is no
discernible value product, and workers are hired and paid according to
the personal charm or political attractions that they have for their
superiors. See Mises, Bureaucracy,
p. 53.
Ironically enough, the
higher fares have driven many customers to buying and driving their own
cars, thus aggravating the perennial traffic problem (scarcity of
government street space). Another example of government intervention
creating and multiplying its own difficulties! On the subways, see
Ludwig von Mises, “Agony of the Welfare State,” The
Freeman, May 4, 1953, pp. 556–57.
Governments, despite bickering
before a decision, generally end up speaking with a single voice. This
is true of the executive and judicial arms, which are organized like a
military force, with command from the top down; and of the legislative
arm, where the majority may impose its will.
Those defenders of the free market
who attack socialistic teaching in the government schools are tilting
at windmills. The very fact that a government school exists and is
therefore presumed to be good, teaches its little charges the virtues
of government ownership, regardless of what is formally taught in
textbooks. And if government ownership is preferable in schooling, why
not in other educational media, such as newspapers, or in other
important areas of society?
For a trenchant critique of
compulsory attendance laws, see Goodman, Compulsory
Mis-Education and the Community of Scholars.
Various other criteria advanced to
decide between private and State action are fallacious. Thus, a common
rule states that government should weigh “marginal social
costs” against “marginal social benefits”
in making a decision. But, aside from many other flaws, there is no
such thing as “society” apart from constituent
individuals, so that this criterion is meaningless. Cf. Martin
Anderson, “Discussion,” American Economic
Review, May, 1967, pp. 105–07.
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