The Vampire Economy and the Market
[This article was originally published in New Perspectives in Political Economy, the academic journal of CEVRO Institute (School of Legal and Social Studies), vol. 7(1), pp. 141–154.]
1. Authoritarian Capitalism (Fascism) and Liberal Capitalism (the Free Market)
What is sometimes referred to as "authoritarian capitalism," or fascism, is in fact a variety of statism, specifically socialism, the system of political economy in which the prerogatives of ownership over the means of production and distribution are vested in the state. Under the fascist economic system, private capitalists are nominally regarded as the owners of the means of production, meaning that they hold property titles to these assets and are referred to as "owners" of these assets. However, this so-called ownership is merely illusory. The actual prerogatives of ownership are vested, not in the private capitalist, but in the state and its bureaucracy. It is the state that tells the private capitalist how he must use "his" property, under the threat of confiscation or even imprisonment. In the words of economist Ludwig von Mises, it is "socialism in the outward guise of capitalism."
This is a very different political-economic system from "liberal capitalism," also known as "free-market capitalism." Free-market capitalism is an authentically capitalist system, in which the prerogatives of ownership over the means of production are vested in private citizens, not in the state. Under this system, the means of production are genuinely privately owned, and the private-property owner holds, not just a property title, but, more importantly, the actual prerogatives of ownership and ultimate control. In the system of free-market capitalism, the private-property owner is regarded as having property rights (i.e., an enforceable moral claim to the prerogatives of ownership) that must be respected by all others, including the state and its functionaries.
In their purest forms, these two systems of political economy are fundamentally different in kind; in fact, they are polar opposites. However, this opposing nature stems from the degree to which the prerogatives of ownership of ostensibly private property are arrogated to the state — i.e., the degree of state intervention. On the one extreme we have the free market, in which there is no — or at least little — state interference with private-property ownership (which is therefore genuine); on the other extreme we have fascism, in which there is plentiful or total state interference with private-property ownership (which is therefore illusory).
Since fascism and the free market are distinguished by state intervention we can therefore see that the two systems are separated by a connecting bridge of interventionism through the system of the "mixed economy." The fascist system can be viewed as a system of hyperinterventionism, accruing when state interference with private-property rights is so extensive that the alleged private ownership of property becomes a mere farce, and the state may properly be regarded as the de facto owner of the means of production and distribution — i.e., there is de facto socialism. For this reason, the analysis of fascism and its long-term viability is very similar to the analysis of interventionism in the mixed economy, and the same kinds of economic and political insights apply.
2. Fascism and the Fusion of Business and State
Fascism is unlike other forms of socialism. Its expropriation of the means of production is done without overt nationalization and is not directed toward an egalitarian goal. It is far more subtle than this, and far more insidious. Fascism can arise by revolution, but it can also arise by gradual measures toward state control in the mixed economy. While noting the similarities between fascism and communism, philosopher Roderick Long observes that
there is a difference in emphasis and in strategy between fascism and Communism.… When faced with existing institutions that threaten the power of the state — be they corporations, churches, the family, tradition — the Communist impulse is by and large to abolish them, while the fascist impulse is by and large to absorb them.
The fascist economic strategy is also one of absorption: the regime attempts to secure economic growth and prosperity by fusing a "partnership" between business and the state, absorbing business into the state in this process. Such a strategy appeals to those who correctly judge that private business is the locus of production and economic growth but who incorrectly believe that this productivity is enhanced by partnership with government and central planning of production. The fascists, like interventionists more generally, seek to get the "best of both worlds" from the productive powers of private business under capitalism and the central planning of the state under socialism.
Of course, the "partnership" between business and state that occurs under fascism is of a coercive nature: the state determines its requirements from business and orders private entrepreneurs to meet these requirements, lest they be expropriated of their remaining property (nominally held), or even imprisoned. In describing the fusion of business and state in Nazi Germany, economist Günter Reimann explains the process as follows:
The State orders private capital to produce and does not itself function as a producer. Insofar as the State owns enterprises which participate in production, this can be regarded as an exception rather than a general rule. The fascist State does not merely grant the private entrepreneur the right to produce for the market, but insists on production as a duty which must be fulfilled even though there be no profit. The businessman cannot close down his factory or shop because he finds it unprofitable. To do this requires a special permit issues by the authorities.
This basic conception of the role of the private entrepreneur puts him at the service of the state, and destroys any notion of self-ownership, including any genuine property rights. He exists, not to pursue his own happiness and satisfy his own personal desires, as is the case under liberal capitalism, but rather to produce for the fascist state. From here, the remaining regulations on his business affairs under this "partnership" are similarly directed toward the ends determined by the state: the state regulates the prices he can charge for his goods; the amount he can buy and sell; whom he can employ or dismiss from employment; the wages he must pay; how much of his profit he may keep (if there is any profit produced); and whether or not he will continue his business or shut it down.
In tandem with the enormous body of arbitrary state regulations is the ever-present threat of expropriation. Without any overt nationalization of property the state may send its auditors to scrutinize a business for breaches of regulations, using minor infractions as a pretext for massive fines, amounting essentially to a confiscation of assets.
3. Breakdown of the Rule of Law
Even the fact that every aspect of his business is regulated by the state does not give full appreciation for the perilous situation of the titular owners of property under fascism. In fact, it is not the specific content of regulations, but rather the inevitable breakdown of the rule of law that poses the greatest danger under a system of central planning.
The rule of law under the fascist system is replaced with the arbitrary and unconstrained power of the political elite in the state apparatus.
The capitalist under fascism has to be not merely a law-abiding citizen, he must be servile to the representatives of the State. He must not insist on "rights" and must not behave as if his private property rights were still sacred. He should be grateful to the Fuehrer that he still has private property.
It is the arbitrary power of the fascist regime that is the most important determinant of the relationship between the titular private-property owners and the state. However, it affects not only this relationship, but also the relationship between private citizens themselves.
As a rule, the relations between businessmen are still regulated by laws and customs. But customs have changed and modified law, and law has, in turn, been largely replaced by a vague conception of "honor." It is easier for a businessman to win a case in the German courts by appealing to "National-Socialist honor" than by referring to the exact text of the law.
Like other citizens, the businessman cannot find justice or challenge the predations of the state, even on sound legal grounds under the prescribed regulations. This is because the courts are themselves a mere cog in the workings of the ruling regime, which claims total power over the economy. Any private-property owner who is foolish enough to seek judicial relief from the impositions of the state quickly arouses the ire of state functionaries who have unlimited means to retaliate for any fleeting victories he might obtain.
4. Fascism and the Motivation Problem
Although enforceable property rights are nonexistent, and titular "ownership" is insecure, the fascist system still avoids the crude problems of motivation experienced under egalitarian variants of socialism (e.g., communism). By allowing inequalities in the nominal ownership of property and the consumption that is contingent on this nominal ownership, the state allows incentives for the acquisition of private property to remain, even though this ownership is subordinate to the whims of the state rulers.
This observation may seem to contradict the previous assertion that the private capitalist is only the illusory owner of the property to which he holds title. However, no contradiction exists: although the prerogatives of ownership ultimately accrue to the state under fascism, this does not prevent the private capitalist from enjoying additional consumption if he is the nominal owner of property. Consumption is consumption, and once a resource is consumed by its nominal owner, or otherwise used for his immediate benefit, the state cannot exercise its de facto ownership to prevent this, no matter how authoritarian it may be.
In fact, the acquisition of private property under fascism, even while subordinated to the state, offers more than just consumption benefits. Although all private capitalists are subject to the political power of the state rulers, large capitalists can use the residual economic power they maintain to capture smaller units of political power, particularly in the lower echelons of the bureaucratic apparatus. Reimann explains the interaction between political and economic power in Nazi Germany as follows:
The authoritarian position of the provincial and local bureaucrats — and the degree to which the local Party bureaucracy is independent of industrialists and businessmen — varies with the social structure in different sections of the country. In districts where big industrial magnates have direct relations with the top flight of Party leaders, the local bureaucracy is largely dependent on — in some cases, a tool of — the big concern or trust. In districts where only small and medium-sized firms exist, however, the Party bureaucracy is much more authoritarian and independent. A dual power exists under fascism: the indirect power of money and the direct power of the Party leader.
Thus, under fascism, there remains a large incentive for the acquisition of private property. Although the private capitalist has no enforceable property rights against the state, he can protect his titular ownership and subsidiary control of property by acquiring political power. His control over property, even though it is at the mercy of the state, can allow him to capture some of the political power of the state, which can in turn protect his control. If he is a small private capitalist, the local bureaucrats will be his masters, and he will be forced to pay endless tribute to them merely to survive. However, if his business concern is large and profitable, he may be able to form relationships with more powerful political figures, thereby acquiring political influence, and bringing himself within the ambit of the state apparatus.
The motivation problem in fascism is therefore of a different and more subtle form than the motivation problem in egalitarian socialist systems. Under fascism, the private citizen is at the mercy of the state, which can take his nominally held property from him at any time. He is therefore motivated to consume more of his property than he otherwise would, and to use his savings to buy political influence, rather than engaging in productive endeavors. He is motivated, in short, to engage in political rather than economic entrepreneurialism.
5. The Rise of Political Entrepreneurialism
Under fascism, businessmen may continue to work within the regulatory regime, eking out whatever living they can maintain under the arbitrary decrees of the state bureaucracies. But in order to do so they must seek to obtain influence over the state functionaries in order to survive unmolested. Under fascist regimes that have historically existed, this has given rise to large investments in maintaining good relations with the state, employing "contact men" with connections to politically powerful members of the fascist regime. For example, under the fascist economic system of Nazi Germany such "contact men" became a crucial part of any business concern:
The business organization of private enterprise has had to be reorganized in accordance with the new state of things. Departments which previously were the heart of a firm have become of minor importance. Other departments which either did not exist or which had only auxiliary functions have become dominant and have usurped the real functions of management.
Formerly the purchasing agent and the salesmanager were among the most important members of a business organization. Today the emphasis has shifted and a curious new business aide, a sort of combination "go between" and public relations counsel, is now all-important. His job — not the least interesting outgrowth of the Nazi economic system — is to maintain good personal relations with officials in the Economic Ministry, where he is an almost daily caller … 
As with political lobbying in the mixed economy, this heavy investment in influence over the state bureaucracies is used by businesses both for protection from the state itself and to obtain special privilege. Having invested successfully in political influence, a successful business enterprise will seek to use the state as a buyer of its products or services, and will seek to use state power to destroy its competitors. Economic and political powers jostle for control in this system, and large business entities can come to dominate smaller political units, with businessmen becoming powerful political entrepreneurs in the regime.
This interaction between political and economic power under fascism is very similar to that which exists in highly interventionist industries in the mixed economy. In the latter case, problems of regulatory capture are well known, and it is common for large firms to use their connections with the state to obtain special privileges. This leads to a concentration of economic power in a few large firms, who are able to rely on government contracts to boost their income, while at the same time using captured regulatory bodies as a means to block smaller competitors from their market.
If the level of state intervention in such a system increases, government contracts and captured regulatory bodies become more and more valuable, and more effort is shifted away from productive activities and toward the capture of political power. In short, as interventionism grows, and the economic system moves toward fascism, firms will shift their efforts away from economic entrepreneurialism and toward political entrepreneurialism.
Under the pure fascist system, state intervention is ubiquitous, and connections and influence in the state apparatus become all important for business. Instead of productive success and economic entrepreneurialism, political entrepreneurialism becomes the means to acquiring wealth, and protecting it from state predation. Any firm that fails to forge state connections or find an adequate contact man will be forced out of business, while a few big firms with strong political connections will come to dominate the market.
At the same time, political figures in the regime take advantage of their political power to become wealthy private capitalists themselves. High-ranking members of the ruling regime are able to exercise their political power to favor their own business interests and expand their economic power as private capitalists.
Over a period of time, this process means that productive firms and economic entrepreneurs are destroyed, while unproductive (parasitic) enterprises run by political entrepreneurs take their place. Reimann explains the outcome in Nazi Germany:
[The genuinely independent businessman] is disappearing but another type is prospering. He enriches himself through his Party ties; he is himself a Party member devoted to the Fuehrer, favoured by the bureaucracy, entrenched because of family connections and political affiliations. In a number of cases, the wealth of these Party capitalists has been created through the Party's exercise of naked power. It is to the advantage of these capitalists to strengthen the Party which has strengthened them.
The fascist economic system causes a convergence of economic and political power, both through the politicization of existing private capitalists, and the enrichment of political figures. The attempt to form a partnership between business and state eventually leads to a situation where business is the state, and the state is business. The resulting system is fittingly described by what philosopher Ayn Rand called the "aristocracy of pull." Under this system, business enterprises are run by an entrenched class of politically privileged capitalists, with little prospect of outside competition.
6. Why Corruption Is Not the Problem
It is worth noting that the breakdown of the rule of law under the fascist system means that corruption of the legal and bureaucratic system is likely to be rampant. However, it is not lawbreaking that is the problem — the problem is the law itself.
The fascist system empowers the state to intervene in all aspects of business, violating property rights at will. Its repudiation of free-market capitalism means that central planners are expected to take an active part in running the economy and cannot merely stand back and leave business alone (at least not without implicitly repudiating the fascist system). This interventionism means that considerations of property rights must necessarily be replaced by the amorphous notion of the "public good" (however this happens to be expressed), creating conditions where business success is determined primarily by influencing the judgment of bureaucrats and powerful political figures.
Because property rights have been discarded, political entrepreneurialism becomes crucial to success, regardless of whether bureaucrats are "corrupt." It occurs whether bureaucrats exercise their judgment in a transparent and impartial manner, or sell their power directly to wealthy business entities. It is not the corruption of bureaucrats that is the problem; it is the fact that there is no honest way to dole out special favors to business under a system in which the state has total control.
7. Information and Calculation Problems in the Fascist Commonwealth
The rise of political entrepreneurialism is not the only problem with the fascist economy. It is augmented by the standard information and calculation problems of socialism, stemming from the lack of any genuine private ownership and the extensive price and wage controls imposed by the state. (Even if price and wage controls are absent, prices and wages will be heavily distorted by state interventions in the economy, so that these prices are not commensurate to the true costs of resources.)
As with other variants of socialism, the economic exchanges in the fascist economy are not driven by the preferences of consumers or the requirements of productive entrepreneurs. Instead, the exchange of goods proceeds, mimicking the market economy in some respects, but the price system reflects the extensive price and wage controls of the fascist state, or, in the absence of price controls, the distorting effects of its other interventions. This means that the central-planning bureaucrats in the fascist state are unable to determine the true value of resources. They distort the prices of goods to such an extent that rational allocation of resources becomes impossible. Misallocations of resources occur as prices of good are artificially suppressed or inflated.
At best, the central planners can increase output for favored businesses or areas of the economy at the expense of other businesses and areas of the economy, while at the same time destroying the very price system that allows entrepreneurs to calculate rationally under the free market. Since they have no method to objectively value competing projects, their interventions will involve a misallocation of resources compared with the free-market case, and will frequently involve an aggregated loss of resources even ignoring opportunity costs. Thus, despite any pretensions to the contrary, the state is unable to increase total economic output through its central planning; instead, it destroys the price system and causes loss. This gradually leads to economic decline.
8. Economic Decline and the Incentives of the Ruling Elite
The forgoing analysis of the motivations of businessmen and the economic ineptitude of the central-planning apparatus is pregnant with obvious economic conclusions. The more authoritarian the economic system becomes, the more valuable is the capture of political power and the less valuable is the expansion of productive capacity. All other things being equal, the authoritarian system will lead businessmen (and others) to shift their efforts away from production and toward the acquisition of political power.
The result is obvious: under an authoritarian system, political entrepreneurialism increases, and production decreases. This further politicizes the economy and leads to ever-greater distortions of prices, making rational calculation impossible. As authority over the means of production grows, more and more people compete more and more ferociously through the political process for a smaller total economic output. With no genuine conception of property rights to guide them, there is no moral impediment to the coveting of property that is "owned" by others, and there is no legal impediment to its capture.
It is again worth noting that this is merely the most extreme manifestation of the economic effects of interventionism in the mixed economy. Since fascism is, in essence, a system of hyperinterventionism, the economic effects of the fascist system are merely the logical extremes of smaller "pragmatic" interventionist programs. Each intervention in a mixed economy distorts prices, misallocates resources to unproductive endeavors, and results in a net loss of production. At the same time intervention increases the value of political influence and thereby shifts effort from production to political lobbying.
With enough political intervention in the economy, this culminates in economic stagnation, then net capital consumption, and, finally, economic collapse, occurring when capital supplies become insufficient to sustain basic services. As this process occurs, parasitic groups in the system suck as much as possible from the dying economy, with their parasitic activities becoming increasingly frantic as the economy collapses and the resources available for capture become scarcer.
The problems with the fascist economic system become more and more clear, but there is no incentive for those in control of the state apparatus to avoid the approaching disaster. Since the only antidote to the problem is liberalization of the economy from state control, the cure for the economic decline threatens the personal livelihoods of the state bureaucrats and the ideological program of the higher-level members of the ruling regime.
Of course, it is true that sustained economic decline will eventually threaten the position of the ruling elite, particularly since they must make some appeals to the "public good" in their efforts to maintain their own power. However, their situation is threatened far more directly and far more immediately by the cure for economic decline than from the decline itself.
The authoritarian State breeds irresponsibility on the part of this ever-growing and legally privileged group. Their position is secure — unless they are purged by their own friends, often as a result of rivalries — whereas the general economy is insecure. They do no work which adds goods or social services to the market. Their job is: to hold their job. The rest of the community finds itself serving as the hardworking host upon which the bureaucratic clique is feeding and fattening.
We therefore see the most terrifying aspect of the fascist system. The problem is not merely that its authoritarian controls destroy the economy in the long-term. The greater problem is that as this process occurs, the authoritarian system undermines the human capital of the society it operates on. In particular, it creates a privileged ruling elite who have wrested all economic and political power from the productive capitalists they have expropriated, at the expense of impossible promises to the masses. Their sole incentive is to maintain the parasitic system that gives them power, prestige, and money — and they will do anything to keep it, even as they watch the general economy collapse into ruin.
9. The Drive to War
The economic decline ensuing from state intervention, misallocation of resources, and rising political entrepreneurialism must eventually lead to a crisis of confidence in the state, if not deflected by some nationalistic endeavor to rouse the support of the public and instill them with some alternative fear. Even the most authoritarian regime must rely on compliance from the public to maintain its power, and so it is natural that the fascist state will turn to war and conquest as its economic problems become a threat to its rule.
War and conquest serve three main purposes for the fascist state. Firstly, notwithstanding its risks, war promises the possibility of conquered territories to serve as resource cash cows for the declining economy. Secondly, the presence of an external military threat allows the ruling elite to rationalize their authoritarian rule and expand their domestic power over the public, while imbuing them with nationalist fervor. Finally, the threat of death and ruin from real or alleged foreign enemies makes the predations of the state look to many of its citizens like the lesser of two evils, and so the discontent of the public is directed to an alternative source.
This drive to war is a logical consequence of the ideology and economic program of fascism and interventionism more generally. It is no accident that fascist ideology promotes war as an energizing and righteous endeavor. Because the domestic policies of the authoritarian state revolve around appeals to nationalistic ideals (e.g., the "public good"), militarism is a natural corollary, and it is easy for the state to rouse the public to war.
Of course, war is economically destructive, and more rapidly so than domestic intervention. It involves a massive reallocation of resources to military projects, a full or partial withdrawal from the international division of labor, and the direct destruction of resources by enemy forces. Moreover, war involves the risk of military defeat, a prospect that usually ends the rule of the existing political elite. Nevertheless, it is the only option for a ruling class that has repudiated liberalism and hitched its reputation to the fascist system of authoritarian control. In describing the motivation of the Nazis in World War II, Reimann explains that
Nazi leaders in Germany do not fear possible national economic ruin in wartime. They feel that, whatever happens, they will remain on top, that the worse matters become, the more dependent on them will be the propertied classes. And if the worst comes to the worst, they are prepared to sacrifice all other interests to maintain their hold on the State. If they themselves go, they are ready to pull the temple down with them.
Or, as Nazi propaganda minister Joseph Goebbels expressed it in his diary,
The war made possible for us the solution of a whole series of problems that could never have been solved in normal times.
For those outside the ruling elite, there is a sense of inevitability to the whole process, from economic decline to war. They are stripped of any genuine property rights and exist at the mercy of the state and its functionaries. They are devoid of economic or political power, and are mere pawns in the machinations of the fascist state and its leaders.
The fatalism which was typical of the spirit of the German businessman before Europe was plunged into [World War II] was not due to economic difficulties alone, but far more to a feeling that he had become part of a machine inexorably leading him to disaster.
10. Concluding Remarks
The economic system of fascism is economically unviable in the long run, and what is true of this most extreme manifestation of hyperinterventionism is true, to a lesser extent, of any interventionist system of government. The central planning of the state and the concomitant destruction of private-property rights destroy the independent businessman and replace him with a parasitic impostor, the political entrepreneur, who succeeds by special privilege rather than by economic production.
The vast power of the state leads to a convergence of all economic and political power into a small elite of political entrepreneurs, who will hold on to their power and privilege at the expense of the general economy. Combined with all-pervading regulations, price and wage controls, and other distortions of prices under state central planning, this leads to economic stagnation, then economic decline and collapse.
The long-run result of the fascist or interventionist economic systems is the drive toward war and conquest, with the ruling class desperately seeking to maintain its power at all costs, even if the cost is the complete destruction of the nation. The endpoint is tyranny, death, and destruction.
Becker, G.S. (1985) Public policy, pressure groups, and dead-weight costs. Journal of Public Economics 28(3), pp. 329–347. Reprinted in Stigler (1988), pp. 85–105.
Buchanan, J.M. (1972) Theory of Public Choice: Political Applications of Economics. University of Michigan Press: Ann-Arbor.
Hayek, F. (ed.) (2009a) Collectivist Economic Planning. Ludwig von Mises Institute: Auburn.
Hayek, F. (2009b) Individualism and Economic Order. Ludwig von Mises Institute: Auburn.
Hayek, F. (1994) The Road to Serfdom. University of Chicago Press: Chicago.
Kolko, G. (1963) The Triumph of Conservatism. Free Press: New York.
Laffont, J.J. and Tirole, J. (1991) The politics of government decision making: a theory of regulatory capture. Quarterly Journal of Economics 106(4), pp. 1089–1127.
Lochner, L. (ed.) (1948) The Goebbels Diaries, 1942–1943. Doubleday and Company: New York.
Mises, L. (1981) Socialism: An Economic and Sociological Analysis. Liberty Fund: Indianapolis.
Mises, L. (1985) Omnipotent Government: The Rise of the Total State and Total War. Libertarian Press, Inc.: Grove City.
Mises, L. (2008) Economic Calculation in the Socialist Commonwealth. Ludwig von Mises Institute: Auburn.
Moyra, G. (2003) Key Ideas in Politics. Nelson Thornes Ltd: Cheltenham.
Rand, A. (1967) Capitalism: The Unknown Ideal. Signet: New York.
Reimann, G. (2007) The Vampire Economy: Doing Business under Fascism. Ludwig von Mises Institute: Auburn.
Riker, W.H. (1962) The Theory of Political Coalitions. Yale University Press: New Haven.
Salvemini, G. (1936) Under the Axe of Fascism. Victor Gollancz: London.
Shaffer, B. (2009) Boundaries of Order: Private Property as a Social System. Ludwig von Mises Institute: Auburn.
Sowell, T. (1996) Knowledge and Decisions. Basic Books: New York.
Stigler, G. (1971) The theory of economic regulation. Bell Journal of Economics and Management Science 2 (Spring Issue), pp. 3–21.
Stigler, G.J. (ed.) (1988) Chicago Studies in Political Economy. University of Chicago Press: Chicago.
Temkin, G. (1996) Information and motivation: reflections on the failure of the socialist economic system. Communist and Post Communist Studies 29(1), pp. 25–41.
Tullock, G. (1989) The Economics of Special Privilege and Rent Seeking. Boston and Dordrecht: Netherlands.
Tullock, G. (2002) Government Failure: A Primer in Public Choice. Cato Institute: Washington D.C.