Abundance, Generosity, and the State

10

THE STATE AS A PROVIDER
OF GRATUITOUS GOODS

Government interventions provide gratuitous goods to the agents of the state and also to other people. Such gratuitous transfers are typically intended. They are not just an accidental by-product of taxation and regulation, but the very point of taxing and regulating the citizenry.

This is very clear when we look at the historical origins of modern states. In all cases, political power was originally established by war and conquest.In the typical scenario, a foreign tribe would invade a country and subject the autochthonous population. The members of the victorious tribe then split the territory among themselves, each one turning into a local aristocrat and bequeathing his title and possessions to the oldest son of the next generation. Younger sons would typically join the clergy or set out to conquer other lands. Daughters would be married to foreign aristocrats, typically to those who threatened (or might threaten) the power of their own family.

The very point of conquest is to obtain various economic goods below their market price, if not fully gratuitously, at the expense of unwilling victims. Once a political regime is firmly established, the motivation of the rulers often changes. They are henceforth interested in peaceful social relations, in order to keep the costs of ruling low. They wish their own rule not to be challenged. Established powers therefore typically favor strict respect for the law. However, the desire to uphold the rule of law as a matter of principle does not deter them from seeking various exceptions for their own gratification. This is the nature of legal monopolies, which we shall discuss in more detail below.

But political regimes also need popular support. All of them need it, whether royal, monarchical, tyrannical, oligarchical, republican, or democratic.And governments of all sorts have always been aware that gratuitous goods are likely to endear them to the population. Weak governments have never resisted the temptation to use this carrot. The Roman emperors offered bread and games to their proletarians, and virtually all modern democratic regimes do similar things. The lure of gratuitous carrots serves to secure majorities on election day. The biggest carrot ever has been the welfare state. It has grown without interruption throughout the last 150 years, with notable spurts in the 1930s, the 1970s, and in the present day (overview in Merrien 2007).

This being said, we should notice that during the centuries after the collapse of the Roman Empire, and before the advent of modern welfare states, the idea that the government should provide gratuitous goods to the citizens did not play much of a role in politics. Government activities were heavily centered on the so-called regalian duties of the state, which corresponded to their regalian prerogatives. The purpose of the military, of the police, and of the state-appointed judges was to protect and preserve the public order. The state fulfilled a public or collective mission. It was oriented toward the common good. But there was no notion of gratuitousness. Regalian duties were discharged within the tit for tat of feudal relations and of social-contract theories.

The same thing held true for non-regalian state activities. The state was supposed to provide goods that were not likely to be produced by private investors. Today such goods are called public goods. Examples are roads, bridges, canals, ports, and other elements of transport infrastructure, as well as higher education. Smith ([1776] 1994, p. 779) famously expressed this idea when he wrote that the state should erect and maintain “those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.”

Things began to change at the end of the nineteenth century with the advent of the modern welfare state. Initially, the idea that the welfare state should provide gratuitous services played a secondary role in politics. The Bismarckian welfare state was by and large a system of mandatory insurance schemes. Employers and employees were obliged to fund public old-age pensions, public health insurance, as well as public insurance against work-related accidents. This was state-imposed social security, but the idea was not to provide something for nothing. It was clear who paid the bills, and the beneficiaries expected to receive overall benefits in proportion to their overall contribution.

However, after World War I, the political objective of providing gratuitous services, especially for the benefit of low-income groups, became ever more important. Governments eventually proceeded to hand out cash subsidies to families and individuals in the context of an outright redistribution of incomes and wealth in the name of equality and solidarity.

Simultaneously, an alternative conception of welfare-state policies slowly raised its head. Its objectives were not collectivistic, but individualistic. Its fountainheads were not Plato or Hobbes, but Rousseau and Mill. They held that the state should not only care for the larger whole by providing public goods, redistributing incomes, and being a provider of last resort. It should also gratuitously enable each and every individual to liberate himself from the fetters of the circumstances into which he was born and in which he found himself. The enabling state, as we may call it, should empower each citizen to reduce his dependence on spouses, parents, children, employers, etc. Everyone should be free to live a life free from unwanted constraints, even the constraints of his biology. In the past thirty years, state-sponsored individualism of this sort has inspired policies all over the Western world, though under different names, such as emancipation, empowerment, or “self-realization,” as Hegel and Marx called it.

In what follows, we will first examine how state agents provide gratuitous goods to themselves and to close allies. Then we will study how and to what extent the state may provide gratuitous goods to others. We will conclude this chapter by considering the question of whether and to what extent state agents are likely to act unselfishly.

LEGAL MONOPOLIES

The very point of political power is to provide the rulers with various economic goods below their market price, if not fully gratuitously, at the expense of unwilling victims. But the latter are likely to resist if the rulers help themselves too generously. This would increase the costs of ruling, thereby annihilating its material advantages for the ruler. It is therefore necessary to balance these two objectives. The solution that has been found in the West is to establish a rule of law with various exceptions.

In other words, the law of the land is not held to be natural law. And the principles of the law are therefore not supposed to be universal rules which are strictly respected. Rather, even the principles apply only generally or unless otherwise stated by law—that is, unless otherwise stated by man-made or statutory law. The rule of law may therefore be plied from time to time to suit the needs of the rulers—of course, always under the pretext of serving the common good, the nation, the general interest, the environment, and other appropriate justifications. As a consequence, there are next to the common law various special rules or privileges. They come in various forms, from tax exemptions to impunity and exclusive rights to pursue certain activities. The most lucrative and well-known form is the legal monopoly—the exclusive right to sell certain products, often essential products for which there is a strong demand.

Legal monopolies are an all-out attack on gratuitous goods. They curb other people’s ability to use the gratuitous powers of their minds and the gratuitous forces of the natural and man-made resources that they own. The regalian prerogatives of the state hamper those who could very well protect themselves and others. They prevent ordinary people from representing themselves in court, and they lower the quality of jurisprudence and arbitration. State-imposed education systems kill the natural curiosity of children and turn teachers into cogs in a machine (see West [1965] 1994; Blankertz 1989; Tooley 1996). A monopoly on electricity production prevents all other people who also have the knowledge and capital to produce electricity from freely using their talents and material assets. State-imposed health systems hamper the ability of ordinary people to heal themselves and of doctors to apply those remedies that they find appropriate. In our day, state public health systems have been used to prevent people from breathing freely (mask mandates) and to violate the physical integrity of the human body (forced vaccinations).

It is not necessary to go through the endless list of legal monopolies that have come to dominate economic life in the Western world. We do not have to discuss the different theories about their pros and cons. As far as gratuitous goods are concerned, legal monopolies are an unmitigated disaster. They show that government interventions may have not only the pernicious effect of but sometimes also the loathsome intention to abolish the gratuitousness of various goods and to make owners pay for what they already possess.

PUBLIC GOODS

Let us now turn to consider the ways in which the state provides gratuitous goods to the population at large. It is appropriate to start with the theory of public goods, which is held in great esteem by present-day economists.

The theory goes back to Smith. The famous Scottish economist affirmed that the state needs to provide certain goods, rather than leaving their production to private initiative, because their production would not be profitable even “though they may be in the highest degree advantageous to a great society” (Smith [1776] 1994, p. 779). Bridges, roads, and various other goods fall into this category.

The state typically provides public goods within a tit for tat. The citizens pay taxes and in return they benefit from public goods. However, it is not the case that all citizens make equal contributions, and some citizens may not pay anything at all. This is where the theory of gratuitous goods comes into play. The first and fundamental question that is now in front of us is whether public goods need to be provided by the state. It is a fact that various goods are advantageous for many people but cannot be produced at a profit. It is also a fact that at least some people will receive such goods for free. However, does this demonstrate that these goods should be produced by the government? Is it unreasonable to expect that individuals, clubs, or firms would find no way to produce them? Should they be produced at all?

When it comes to a good that is “in the highest degree advantageous to a great society,” there are but two possibilities.

1. The good is really very advantageous to many people, and these advantages might prompt the market participants to find innovative ways to pay for it (for example, a toll station) or to produce that good themselves, on a noncommercial basis. For example, neighboring homeowners living close to the sea might join forces to build a dike (see Bagus 2006). In short, where there is a will, there will be a private way to produce this public good.

2. The good is not really that advantageous and, unsurprisingly, nobody cares to produce it. And, in fact, it should not be produced at all. Building a bridge would be advantageous, from an economic point of view, only if there were not any other more important project to which one could dedicate the same time and the same material resources which are now being allocated to build the bridge or if the money needed to pay other people to build the bridge could not be better used elsewhere. Saying that the bridge is not really advantageous means that other projects are more important. The bridge should therefore not be built.

It follows that government intervention is not necessary to produce public goods. Private initiatives are fully sufficient for this mission, at least from a theoretical point of view. And if we turn to economic history, we find this point of view confirmed (see Rothbard [1973] 1994, chap. 11). Many bridges and roads are privately built, privately owned, and privately operated. Monks voluntarily drained swamps and created arable land in large stretches of western and central Europe in medieval times. These activities were not profitable in monetary terms, but this did not prevent the monks from doing what they considered to be a labor of love. No state intervention was necessary.

In short, public goods not only can be but have been privately produced on a massive scale. We might even go as far as to assert that Western civilization, insofar as it has been a Christian civilization, has been squarely built on the very ideal of providing public goods through private sacrifice. It goes without saying that Christians of flesh and blood have a hard time living up to this lofty standard. But as an ideal it has always provided guidance. The very symbol of Christianity, the cross, embodies this ideal. Jesus Christ did not arrange to be born into wealth and power. He did not set out to save the world by decrees and armies of bureaucrats. He taught and commanded those who sought his friendship but did not compel anybody. He warned the unwilling but did not coerce them. He produced the greatest public good—the possibility of eternal redemption—at the cost of His own life. His life and teachings have been an uninterrupted testimony to the truth that public goods can—and should be—privately produced.

The Neoclassical Theory of Public Goods

Today, the theory of public goods is taught in a different way. The modern version goes back to the American economist Paul Samuelson. Like Smith, Samuelson holds that private initiative would not provide certain goods because their production would be unprofitable and that, therefore, the state should provide them. But Samuelson sets out to explain which kinds of goods are likely to be concerned; namely, goods that have two characteristics: (1) their enjoyment is non-rivalrous and (2) it is not possible to exclude anyone from enjoying them because their benefits come in the form of externalities.

National defense is a case in point. All residents benefit from it, irrespective of the number of residents (non-rivalry) and it is impossible to exclude any resident from the enjoyment of these benefits (non-excludability). If the production of national defense were left to private initiative, Samuelson argues, then there would be a free-rider problem. Some residents would contribute to funding the army or spend their time serving in the army as volunteers in order to be protected. Other residents would make no contribution at all, and they would be protected just as well. Hence, there would be an economic incentive for each and every resident to not make any contribution at all. This does not necessarily mean that nobody would make any contribution. But it implies that there would be fewer contributions—probably much fewer—as compared to a situation in which people had an incentive to make a contribution. As a consequence, national defense would be underproduced. The country as a whole would lack protective services if the government did not come to the rescue. Indeed, the government has the power to tax the entire population. It can use the proceeds to fund the armed forces. Taxation therefore solves the free-rider problem.

Samuelson is more convincing than Smith. Moreover, his theory fits right into this book. It explains why public goods should be provided without payment; namely, because the benefits that result from them come in the form of side effects. However, his argument is just as untenable as its classical predecessor.

Notice first of all that, in Samuelson’s account, public goods are necessarily non-excludable goods (whereas the non-rivalry condition is secondary). Indeed, if it is possible to exclude potential beneficiaries of a good, then it is also possible to make the effective beneficiaries pay. We encountered the question of excludability when dealing with the idea that positive externalities are market failures (see pp. 237ff., above). Thus we know that, from a technical point of view, it is almost always possible to exclude potential beneficiaries from enjoying a good. But economically, it does not always make sense to exclude them under current conditions. Exclusion costs may be too high relative to expected income. But these costs are liable to change under the impact of moral, social, political, and technological factors. Right now (and for the foreseeable future), the costs might be too high to produce the good profitably, but there is no reason why this should always remain so.

Moreover, the presence of exclusion costs is not a specific problem of public goods. All economic goods are produced with at least some exclusion costs. Bakeries have glass windows, not only to protect from wind and rain, but also to make it more difficult for third parties to grab bread and pastry without payment. Factories have walls and fences for the same reason. In most cases, such exclusion costs are a small or negligible component of total costs. In other cases, that component may be a major one. Different businesses have different cost structures. Retail businesses tend to have a larger marketing component than business-to-business operations. Firms in the service sector spend most of their money on employee compensation, whereas steel producers spend most on equipment and raw materials. There seems to be no reason why any cost component should have the same importance in all trades. There is no reason why exclusion costs should not be preponderant in certain lines of business. Exclusion costs may very well turn out to be too high relative to expected income, at least under current circumstances. That would not be fundamentally different from other scenarios where certain costs are currently too high relative to income. In all such cases, the business should not be started or continued.

This brings us to the nub of the problem. The modern theory of public goods implicitly postulates that exclusion costs are special and warrant special legal or political treatment. In other words, it relies on an arbitrary value judgment, not on a sober assessment of facts. It asserts that the state should tax the population if the exclusion costs in any line of production are too high. But why should the taxman stay home when other cost components become too burdensome? Why should he not tax the population if payroll costs in some business are too high? And why should the state waste resources on any good if that good cannot be profitably produced under current conditions? Samuelson and his followers have not answered these questions. Their theory boils down to pleading for legal privileges on behalf of special interests. They assert that since nobody else commits the necessary resources voluntarily, the government should coerce some people to provide them, thereby depriving these people of the alternative uses that they had in mind for these resources and which they would have preferred. This means putting the special interests above the common law, above the rules that reconcile diverging private interests.

To sum up, no good is inherently a public good, independent of context. And even those goods that are public goods under present circumstances do not need to be produced by governments. They can be produced by individuals and private-law associations, and they would be produced privately if they are important enough, for in this case there would be a willingness to sacrifice the necessary resources. If a public good is not being produced by any individual or private association, this means that these individuals and associations consider other uses of their time and material resources to be more important. The good’s non-production is then intended and cannot be considered a market failure.

Collectivist Bias

One might argue that there is a special merit in providing a gratuitous good that is non-rivalrous. There can be little doubt that this is an important reason why the theory of public goods enjoys widespread popularity within academic circles. Once the good is there, everybody is likely to benefit, and to benefit gratuitously.

But this argument does not hold water, either. First of all, it relies on confusing non-rivalrous services with unlimited services. A standing army might protect all inhabitants of a territory in a nonrivalrous way. Any one resident might then enjoy protection without diminishing the all the others’ enjoyment of the same protection. But the protection would still be more or less limited, depending on the size of the army, its equipment, its discipline and morals, etc. In order to increase the level of (non-rivalrous) services, it is necessary to increase their production.

Those who argue that there is a special intrinsic merit in nonrivalrous goods are people with a peculiar aesthetic affection for services which are collectively provided to each and all. Most communists fall into that category. But not all people are communists. Providing non-rivalrous goods through government intervention, therefore, caters to special interests.

Public-Goods Theory in Practice: State-Funded Monopolies

It is true that government procurement of non-rivalrous goods would provide gratuitous services, of some sort, to the beneficiaries. It is a very different question whether all people would benefit, for the production of that good is not costless. It involves the renunciation of other goods that could have been enjoyed. If the government finances a public Wi-Fi network, then the taxes needed to pay for the relevant labor and materials are not available to fund the production of other goods. Or, what boils down to the same thing, the resources themselves—labor, raw materials, and capital goods—are not available for the production of other goods.

Moreover, such policies have unintended consequences that are unlikely to please people with egalitarian attitudes. Production usually takes place under conditions of diminishing physical returns. All individual factors of production are then employed in combination with other factors such that they produce diminishing marginal physical returns as well as decreasing average physical returns (see Rothbard [1962] 1993, chap. 7, pp. 468–75). Any one factor can produce increasing physical returns only in the presence of factors that produce negative physical returns. Now, in a free-market economy, no factors are deliberately employed in such a way that their physical productivity is negative, for the simple reason that nobody likes to waste resources or lose money. Correspondingly, in the long run, there are also no factors that produce increasing physical returns.

Things are different when the government provides factors of production that earn negative returns and covers the deficit with taxpayer money. Invariably, other factors then earn increasing returns. The revenue of the owners of such factors grows out of the ordinary proportion and allows for the creation of large firms and conglomerates. Present-day examples include Microsoft (benefits from government-sponsored transatlantic cables, urban cables, and internet), Amazon (idem), car makers (benefit from a publicly provided street network), banking (governments use taxpayer money to bail out insolvent banks), and payment systems (benefit from central-bank bailout guarantees). In other words, the application of public-goods theory is likely to pave the way for monopoly businesses. We may call these businesses side-effect legal monopolies, rather than deliberate legal monopolies of the sort that we have discussed.

CHARITY VERSUS THE WELFARE STATE

Present-day governments gratuitously provide numerous goods and services, but next to none of these could be classified as a public good (see Salin 2020, p. 171). Postal services, public schooling, medical services, housing, transport, television, radio, etc., are obviously not public goods, at least not in the sense of the neoclassical economic theory that we just discussed. All of these goods have been privately produced in the past, and all of them could still be produced by private agents. So why are they today provided by the state?

While there are several answers to this question, we should begin with the one that was emphasized by Frédéric Bastiat. He argued that the citizens like to have these goods provided by the government because they hope to obtain something for nothing. The state lives by the great fiction that it provides goods for free. This fiction stands on three legs: ignorance, fear, and wishful thinking.

The citizens typically do not know that there are non-statist alternatives to obtaining housing, medical services, and so on. They do not know that, and why, these alternatives tend to be superior alternatives, both in terms of their costs and of their benefits. They do not know that private charity has covered destitute people; and that the welfare state does not come free, especially not for poor people.

And this ignorance fuels their fears. Because they are ignorant of the non-statist alternatives, they fear that unless the state is there to provide them with various essential goods, the latter will not be available at all, or only at prices that they could not afford.

Of course, when the state is ubiquitous and omnipotent, the citizens are dependent on it. They realize that this dependence could be turned against them. But they do not wish this to be so. They therefore disregard the well-known conceit, ambition, and corruption of state leaders. They believe that the latter primarily work for the common good and out of altruistic motives. And they desire not to offend such virtuous persons by entertaining any critical thoughts about them.

To dispel the great fiction, it is first of all necessary to compare private charity to the workings of the welfare state, the classical “provider of last resort.” This is the subject of the following pages.

Private Welfare Organizations

In his magnificent study of the British welfare state, James Bartholomew highlights a few important lessons from its prehistory.He points out that until the early sixteenth century, welfare services to the poor were typically provided by monasteries. But then the monks were expropriated by Henry VIII and the poor become destitute. In order to address this problem, Elizabeth I created the first English welfare state in 1563, by instituting an obligation for affluent people to give to the poor. This obligation was eventually enshrined into the Poor Laws, which were enacted in 1601 and remained the law of the land until the early nineteenth century.

Then something unheard of happened. Bartholomew points out that between the 1830s and the early twentieth century, welfare services in Britain were overwhelmingly provided by private organizations. In other words, there was a non-statist interlude between the Poor Laws and the new welfare state. The latter gained steam only after the turn of the century.

This non-statist interlude started with the Chadwick Report. In 1832, the British government commissioned Edwin Chadwick to study the workings of the traditional Poor Laws, which had provided parish-based poor relief in the form of gratuitous housing and gratuitous food. Chadwick expected to find that the Poor Laws reduced the incentives for the beneficiaries to seek employment. He expected them to be a growing burden on local parish budgets. And indeed, this is what he found. But he also gained another insight. He came to understand that the high monetary costs of the traditional welfare system and its negative incidence on the labor supply were just the tip of the iceberg. The greatest problem was its nefarious impact on the character and the morals of the direct and indirect beneficiaries.

The Poor Laws relieved destitute and poorly educated persons from the necessity of changing themselves and becoming serviceable to others. Learning professional and social skills and exercising self-restraint were discouraged. People who once became dependent on welfare therefore tended to remain welfare wards. The unemployed who benefitted from public relief tended to remain unemployed. Welfare benefits for unmarried mothers increased the number of children born out of wedlock. In short, the system tended to perpetuate and aggravate the very problems it was supposed to relieve. It created a dependence trap.

More than that, the Poor Laws were breeding a culture of corruption and crime. Many beneficiaries used their time to obtain income from illegal activities, such as theft and drug smuggling. Welfare fraud was rampant (multiple relief payments from different parishes) and infected the rest of the economy. Employment subsidies allowed employers to pay less than they would have had to pay otherwise. Housing subsidies allowed landlords to charge more than they would otherwise have obtained. Hence, the subsidies ended up in the pockets of employers and landlords, who thereby were drawn into dependency on the subsidy system.

When the Chadwick Report was published in 1834, it entailed a veritable welfare revolution. The British Parliament enacted a radical reform of the Poor Laws. Henceforth, no taxpayer-funded benefits would be provided outside of the poorhouse, and all payments would be drastically curtailed.

Within a generation, this reform produced the most impressive results. It destroyed the material incentives to seek public assistance and to lead a life on welfare. It gave birth to the Victorian age, a “period in which virtue, duty and work came to be highly esteemed” (Bartholomew 2014, p. 38). But the most surprising result was the emergence of numerous private initiatives and private associations designed for mutual help, and of countless charitable organizations.

Before Lloyd George and Winston Churchill introduced a compulsory national unemployment insurance in the early twentieth century, there were literally thousands of private associations with millions of members—trade unions and private welfare clubs called Friendly Societies—which provided material assistance to those who had lost their job or to families which had lost one of the parents. Most of these associations were not formed by wealthy philanthropists but had middle-class and working-class members (pp. 46–48).

Before the advent of the National Health Service after World War II under the auspices of Aneurin Bevan, Britain enjoyed the services of hundreds of privately funded and privately run hospitals (p. 93). These institutions were world leaders in medical innovation, and they treated poor patients at low rates or without payment. As a rule, young doctors would work their mornings at the hospitals without monetary compensation (it was their training ground) and treat paying customers in the afternoons.

In 1880, education became compulsory in Britain, but already twenty years before, virtually all children were educated in schools run by the churches and charitable organizations. In the words of Edwin G. West (1994, p. 173), the foremost authority on the history of British education:

When the government made its debut in education in 1833 mainly in the role of a subsidiser it was as if it jumped into the saddle of a horse that was already galloping. The question was: would the new rider improve its speed and if so, could this be done without injury?

It turned out that these premonitions were justified. The horse slowed down and started to trample on various bystanders.

Destructive Welfare

British nineteenth-century private charity had been able to provide an abundance of gratuitous services, yet without replicating the problems that had stymied the Elizabethan welfare state. Why?

Superficially, the two systems seem to be variants of the same gift economy. Private gifts dissociate economic benefits from productive activities. Friends and beggars do not have to pay for the gifts they receive. And so does the interventionist state dissociate payments from benefits. The state does not have to provide any service in exchange for tax money. The beneficiaries of the welfare state do not have to pay upon receiving services. It is true that the interventionist state obtains its resources at the point of a gun. But this may very well appear to be a secondary circumstance that does not affect the gratuitous nature of the goods that are provided and obtained. Or does it?

It turns out that it does. Private charity and the welfare state have completely dissimilar consequences in practice. The reason is that private charity preserves the direct and voluntary bond between donors and donees. Genuine gifts and the side-effect goods discussed in chapter 6 tend to improve the welfare of both the providers and the beneficiaries. Genuine gifts tend to be productive, not necessarily in the sense that they help the beneficiaries to gain monetary income, but in the general sense that they improve the beneficiaries’ lives. These gifts are made to embellish the beneficiaries’ homes, to comfort them with the idea that other persons love or appreciate them, and so on. In most cases, it is not expected that the gift will be permanently renewed, nor would this be necessary. Most people are capable of taking care of themselves. Whenever they truly need gratuitous material support, they usually need it temporarily.

While private charity keeps donors and donees responsible and other regarding, the welfare state makes them indifferent to each other’s needs. The frustrated and resentful taxpayer seeks to avoid the unwanted burden as much as possible. The welfare ward is seduced into licentiousness and eventually becomes dependent and despondent. The overall result is a dependence trap on the side of the beneficiaries and the loss of genuine community. Welfare services therefore perpetuate the problems they are supposed to mend. They do not build but destroy. Despondent people are not likely to climb the social ladder. They are not likely to do well in school and lead a healthy lifestyle. In Bartholomew’s (2014, p. 340) words:

The poor are the ones who have ended up with the worst schools and the worst healthcare. The poor now find it much more difficult to see a consultant than sixty years ago. There was no consultant shortage then. The poor, not the rich, have been induced by the welfare state not to save, not to marry and to divorce or separate if they have married. The poor have been similarly led to unemployment. The children of the poor are subsequently more likely to have suffered from broken parenting, more likely to have become alienated and to have turned to crime. Because the poor tend to live amongst each other, they are also more likely to be the victims of the vastly increased crime. The poorest now often live in ghettos, leading lives without hope or dignity.

The root of these problems lies in the moral-hazard problem that we discussed in chapter 3. Government handouts are not genuine gifts. They are legal claims enshrined in the law. And precisely because these subsidies can be claimed as a right—whereas genuine gifts can never be so claimed—they create massive moral-hazard problems, both on the side of the beneficiaries and on the side of the benefactors.

When discussing private charity, we have emphasized the crucial difference between doing good and wishing to do good. It is actually quite difficult to be a good altruist. Throwing money around is usually not the way to go. Handing out all sorts of goodies indiscriminately typically leads to dependence, self-righteousness, laziness, and various other problems. In a private setting, these problems are moderated by the limits of private property. A private donor will wish to make sure that his donation really achieves its purpose, and he can stop funding any projects that are contrary to purpose.

In the context of a welfare state, such limits do not exist. The agents of the welfare state do not have any personal incentive to worry about misappropriations. It is not their money that is at stake, but other people’s money. They cannot possibly turn themselves into good altruists. Moreover, the agents of the welfare state have no authority to hold back any services. Because the public services are enshrined in the law, bureaucrats are unable to effectively monitor welfare beneficiaries. They are unable to stop the abusive and parasitical consumption of welfare services if this consumption fulfills the formal requirements of the law. The employee of a private charity could withhold services in such cases, but bureaucrats may not do this. They are not authorized to use their own judgment and their discretion. They must apply the inflexible letter of the law. This is not an unfortunate accident, but a necessary feature of bureaucratic operations under the rule of law (Mises 1944a). It is this very inflexibility, after all, that protects all citizens from the arbitrariness of individual officials. The tragedy of the welfare state is that the very bulwarks that are meant to protect the citizens from official arbitrariness represent a gateway for indifference and abuse.

This holds true irrespective of whether the beneficiaries are affluent or poor. It holds for the welfare protégés, but also for subsidies to the corporate world. The recipients of poor relief and of unemployment relief know that the state is there to assist them, but only if they remain poor (or unemployed) and unable to help themselves. They therefore have a perverse incentive to remain poor, incompetent, and without initiative (see Rothbard [1970] 1977, pp. 171–72). Similarly, commercial banks and other financial market players know that the government and the central bank are there to bail them out, if they cannot help themselves. They therefore have a material incentive to remain as insolvent and as illiquid as possible, because becoming more solvent and more liquid would only diminish their bottom line.

Such problems can lead to interventionist spirals of the sort that we referred to in chapter 9. When welfare state payments to the poor and to the unemployed lead to an increase in the number of poor and unemployed people, the champions of the welfare state are likely to pinpoint this deterioration as a justification for even higher and more prolonged payouts. When subsidies to commercial banks encourage the latter to reduce their own precautions, so that they become even more fragile, the champions of financial interventionism are likely to highlight this very fragility as a justification for even higher and more prolonged subsidies.

The empirical record of the welfare state is without appeal. The great objectives that have inspired its creation and expansion have not been attained. Quite to the contrary, educational achievements and health conditions have significantly deteriorated, families have been destroyed, retirement funds have been looted, ghettoes have been created, and all of this at an ever-increasing tax bill.

One example among many others is the War on Poverty, which was launched in 1965 as part of President Lyndon Johnson’s Great Society Program. Rather than alleviating poverty, it created a new way of life: being on welfare. The professed intention had been to help people who presently could not help themselves. But the effective result was to provide higher-than-market incomes to large groups of persons. This destroyed first their desire and then their ability to integrate themselves into the labor market. John F. Cogan (2017) highlights that welfare payments to single mothers had the perverse effect of making single parenthood a desirable objective for many young women who could not hope to obtain a similar income on the market.The consequence was the destruction of the family in low-income groups and a surge of crime half a generation later. Entire generations of boys who had been raised without fathers turned out to be severely handicapped for the labor market. Many of them then fell for the short-run lures of a criminal existence.

James Bartholomew shows that the failure of the welfare state had been anticipated by the practitioners of private charity, who had wished to prevent the advent of public unemployment relief, public poor relief, public healthcare, and public schooling. This failure has also been abundantly covered by historians, economists, political scientists, sociologists, psychiatrists, and philosophers.But it had been dreaded, too, by several of its most influential champions.

A case in point is William Beveridge. He paved the way for the British social-security system with the widely read Beveridge Report (1942). In it, he recommended the establishment of a national social-security system with the objective of assuring a certain minimal level of income. Yet Beveridge took pains to emphasize that the new system should “not stifle incentive, opportunity, responsibility” (p. 7) and he pointed out various ways by which the welfare services should be limited to a subsistence minimum. Alas, as was to be expected, Beveridge’s advice was heeded only for a few years. Beginning in the late 1950s, unemployment benefits soared and so did the unemployment rate, and Beveridge, Pigou, and other erstwhile champions of the welfare state began to distance themselves from the scheme.But it was too late. The system had been created and it now took care of itself. The British unemployment rate eventually reached a peak in the early 1980s. From there on, it declined, because the Thatcher government remembered that incentives matter.

Social Inclusion

While the welfare state is not needed to take care of the poor, arguably it provides another benefit of an overall or collective nature. It has often been argued that the redistribution of incomes and wealth was necessary and expedient to mend the problems of exclusion and of social cohesion that result from market exchange. Without the welfare state, modern society would be ripped apart.

Now, the fact is that Western societies have disintegrated since the 1960s. The rich have become richer and the poor poorer. At the same time, the traditionally large middle class has shrunken dramatically. What is more, the shared cultural background and outlook, which until the 1960s united all citizens of the same ethnic origin irrespective of their incomes and professions, has been lost. As Charles Murray (2012) put it, white Americans have been “coming apart.” Many other sociologists and geographers in the US and in Europe have described essentially the same tendencies in painstaking detail (see, for example, Guilluy 2014). We do not need to cover the same ground. But we need to highlight that this decline was fueled by government interventionism, and that further interventionism is likely to reinforce it.

Long-term welfare beneficiaries, by excluding themselves from the workplace community, compromise the spontaneous solidarity of that community. Their vertical covenant with the state supplants and replaces all other horizontal communities arising spontaneously out of the division of labor. The state gives material relief to the unemployed, to single mothers, and to various other groups confronting difficult challenges. But it thereby saps these groups’ material incentives for bottom-up social integration. It erodes their personal drive to cultivate attitudes and abilities that facilitate relating to others, from work ethic and honesty to family and religion.

The problems resulting from monetary interventionism are of the same type, even though the first impression might be altogether different. Indeed, as we have seen, expansionary monetary policy stimulates the debt economy. A superficial observer might see here a salutary tendency as far as social relations are concerned. More debt seems to be tantamount to greater interdependence between borrowers and debtors. The debt economy may therefore appear to entail “a higher level of socialization and a reduction of individualistic independence of separate households.”

However, a closer look reveals that this is not the case. The debt economy springing from the printing press does not result from greater acquaintance with the needs of others or from greater trust in them. It does not reinforce the horizontal social bonds between various debtors and various creditors. Rather, it creates a vertical dependence of all market participants on one central agent—the central bank—on whom they all depend. This is not social inclusion, but social atomization. While the development of market exchange brings about a tissue of organic social bonds, the inflation of ex nihilo credit transforms all market participants into homogeneous units stratified around a common center.

THE ENABLING STATE

In the past thirty years, the manifest failure of the welfare state in its traditional core activities—unemployment relief, medical services, education, housing, pensions—has led the champions of the welfare state to a shift of emphasis. It has become clear that the welfare state can no longer be defended with the traditional arguments. It has become necessary to rethink and to reinvent it. This has led to the development of new, individualistic conceptions of the state as the provider of gratuitous services.

State-sponsored individualism goes back to Rousseau and has been developed by Wilhelm von Humboldt, Mill, and Proudhon. The young Marx, too, praised Hegelian self-realization (Selbstverwirklichung) as a political ideal. The fundamental mission of the enabling state is to empower each individual to develop and use his personal talents as far as possible. This necessitates that the individual receive a basic income and that he be shielded from social pressures of all sorts.

According to Mill (1859), the state should promote freedom of choice for individuals by removing some of the stones of life from their path. In particular, the state should liberate them from some of the constraints and oppressive forces of their social environment. Mill’s followers have developed this approach with great relish. His most extreme disciples today understand “constraints” and “oppression” to mean anything that restricts human arbitrariness—anything that could prevent individuals from doing what they would like to do or from being what they would like to be. Oppression arises not only from laws, taxes, and personal economic circumstances. It also originates from authorities such as the church, fathers, mothers, and CEOs. It shows up in border fences and walls. In extreme form, it shows itself in the circumstances of one’s own identity. Your own gender and your own body should also be freely selectable, and the state should also help the individual with this free choice.

Eight decades after Mill, his countryman C. S. Lewis gave some thought to the implications of such liberty. In the opening pages of The Great Divorce, he portrays a “grey city” removed from planet Earth in which all residents enjoy complete material emancipation, as under a perfect enabling state. The city extends day by day because it is costless for all newcomers to build new houses. They just need to imagine their houses and then they pop up on the outskirts of the existing settlements. The grey city thereby turns into an infinite suburbia. One of the residents explains to the storyteller, who has just arrived:

What’s the trouble about this place? Not that people are quarrelsome—that’s only human nature and was always the same even on Earth. The trouble is they have no Needs. You get everything you want (not very good quality, of course) by just imagining it. That’s why it never costs any trouble to move to another street or build another house. In other words, there’s no proper economic basis for any community life. If they needed real shops, chaps would have to stay near where the real shops were. If they needed real houses they’d have to stay near where builders were. It’s scarcity that enables a society to exist. (Lewis 1945, p. 13)

As the story unfolds, the storyteller comes to realize that the grey city is the lower level of purgatory. It is a part of pre-hell. It is a place full of egomaniacs who avoid one another because they can. They are enabled to remain in the prison of their self, and most of them are eager to stay there and to wither away.

Even when it is not yet fully developed, the enabling state destroys individual responsibility and infantilizes the population. It saps the economic incentives to form social bonds of any kind, professional, public, or private. It weakens families, clubs, firms, and ultimately the state itself. It promotes egoism on a grand scale and dents the virtues. It facilitates excesses of all sorts, because it destroys the necessity to balance all aspects of human existence. When applied massively and over several generations, it is likely to create armies of narcissistic and unhinged solitaries who are unable to lead their lives without support.In short, state-sponsored individualism is an all-out program of destruction. It not only afflicts the social dimension of human existence, but also cripples the individual human soul.

Much has been written about the idea of a universal basic income, which is one of the chief instruments of the enabling state (see Jouvenel 1952; Blankertz 2001; Sammeroff 2019; Bidadanure 2019). We will therefore not cover these grounds again and rather focus on two financial instruments which have the same inspiration: gratuitous credits and negative interest rates. Let us discuss them in turn.

Gratuitous Credit

According to a proposal that goes back to Proudhon, a socialist writer of the nineteenth century, the state should provide gratuitous credit. Fiat money can be produced without any physical or commercial limitation. It is not per se scarce in any meaningful sense of the word and therefore can be lent free of charge. Since the government has the power to create a bank that issues fiat money, it should create such a bank and provide gratuitous loans to everybody. All citizens would thereby be enabled to pursue their personal projects. The printing press would be an instrument of individual liberation.

Proudhon’s argument was famously contested by his contemporary Bastiat. The two of them exchanged a series of public letters, and Bastiat (1850) eventually published this correspondence in a booklet under the title Gratuité du crédit (Gratuitous credit).

Bastiat focuses on the question of whether it is legitimate to ask the debtor to pay back the credit and interest. He answers this question affirmatively, arguing that the price of credit plays an important social role. Interest compensates the savers and encourages the formation of capital. As a consequence, capital becomes more abundant and its remuneration (interest) is therefore bound to diminish. Furthermore, all wages are paid out of monetary capital. The stimulation of savings at ever-smaller prices therefore turns out to be highly beneficial, not only for the capitalists, but also for the working classes. It promotes the harmony of interests between saver-capitalists on the one hand and wage earners on the other hand.

With respect to Proudhon’s idea of gratuitous credit for all, Bastiat objects that the entire idea is based on a confusion between money and real wealth. The Proudhonian bank would be free to issue as many notes as it liked, but these notes could only be exchanged for the economic goods that exist. Doubling the amount of credit would not double the amount of goods that could be bought by the creditors. It is therefore not true that gratuitous credit would be an instrument of individual liberation or emancipation. It would be impossible for all people to realize their personal projects.

Furthermore, the Proudhonian bank would quickly face a stark choice: either it would have to give in to all demands for free loans, in which case it would have to massively increase the money stock, with a corresponding loss of its value; or it would have to ration the credit supply, which means that interest would make a comeback, in one way or another.

Last but not least, Bastiat points out that the system would bring about the exact opposite of the proposed objectives. Proudhon imagined his system would liberate the working classes from dependence on capitalists and reduce the inequality of wealth. But this is not likely to happen. Bankers would prefer to do business with wealthy persons because the latter can pledge collateral to secure their loans, whereas credit would be denied to poorer persons, who have no wealth to pledge. It would not help wage earners if the interest rate were zero. Without collateral, they could not expect to be funded at all. The system would therefore not only perpetuate but aggravate the inequality of wealth.

At the beginning of the twentieth century, Mises added another argument to Bastiat’s rebuttal of gratuitous credit. He showed that credit out of thin air was likely to entail widespread investment errors. Cheap credit would bring about a short-lived boom that would end in a valley of tears. We will present his theory in more detail in chapter 11.

Negative Interest Rates

The Proudhon-Bastiat debate anticipated the international monetary and financial system at the beginning of the twenty-first century. Gratuitous credit has finally made it from the conceptual stage to become a social reality. Arguably, it has surpassed Proudhon’s wildest hopes. Central banks all over the world have lent at negative interest rates, especially to OECD governments.

Unfortunately, however, Bastiat’s apprehensions turned out to be right. The brave new fiat-money world has not brought about a new era of emancipation and equality. While interest rates are low and even negative, the inequality of wealth is skyrocketing. At the same time, overall real wealth is in decline.

The reasons for which negative interest rates have appeared are very different from the motivations undergirding Proudhon’s plan. Today’s negative interest rates are not meant to emancipate the working classes. They are just a very suitable technique for central banks to achieve their objectives.

Present-day central banks pursue two main objectives: stabilizing the price-inflation rate and boosting the level of monetary spending, or, in their current jargon, increasing aggregate demand. Both objectives require that central banks bring ever more money into circulation. But here they face an obstacle. The only way they can increase the money supply is by lending more money. This means that they cannot increase the money supply by unilateral decisions. They need borrowers who are willing to take out additional loans. Traditionally, central banks have stimulated the demand for credit by reducing their lending rate. Negative interest rates are fully in line with this. What is unusual is that they are negative. And indeed, this is a big problem, as we shall see.

Central banks can lend even if they do not expect to be reimbursed. This is why they can invert the normal relationship between debtor and creditor. Normally it is the debtor who rewards the creditor for temporarily sharing his savings, for savings are scarce and require the sacrifice of current consumption. But if the creditor can obtain virtually unlimited quantities of new money gratuitously from the printing press, he may renounce any compensation. He may even proceed to reward the debtor, for example, lending him one hundred dollars and asking him to pay back ninety-eight. The credit relationship then turns into a source of revenue for the debtor. For him, being in debt is no longer a liability but an asset. Most western governments have been in this happy situation from 2014 through 2021.

Let us emphasize that negative interest rates are premised on fiat money. Creditors normally do not wish to pay their debtors. They expect debtors to reward them. Only an institution that can create money gratuitously and at the same time force all others to use this money has the possibility to lend at negative rates.

What, then, are the adverse effects of this policy? Negative rates seem to be a boon rather than a bane for the economy. Where is the problem when governments—and potentially everybody—may obtain free loans or even be paid to sign a loan contract? Clearly, there is no immediate problem as far as these beneficiaries are concerned. But negative interest rates are a formidable economic problem for the economy as a whole. They are not a microeconomic problem, but a macroeconomic one.

The very purpose of any economic activity is to transform man’s environment—both the natural and the social environment—in such a way as to improve its value. Man works to plant wheat fields, then harvest them and turn the wheat into bread. The reason is that wheat in the form of bread is for him more valuable than wheat on the stalk. And the same motivation comes into play when he establishes a company to produce bread for the market. He hires farmers, salesmen, accountants, and many others whom he directs to cooperate to produce and sell bread. In all cases, he transforms things that all together have less value into other things that all together have more value. Value creation is the essence of the human economy. Without it, mankind could not survive.

In a market economy, value creation shows up most notably in a positive return on capital. A person who earns profits or interest is a person who has used savings to transform something of less value into something of more value. More precisely, he has created value for other people. He has bought factors of production that others could have bought as well and transformed them into products that others appreciate more than those factors of production.

This brings us to understand that negative interest rates are an economic absurdity. They allow the funding of human activities that do not contribute to value creation, and they even remunerate activities that destroy value. An economy running on negative returns on capital is an economy that pays people to destroy its collective substance. It is an economy that rewards capital consumption for its own sake. It is an economy in which some people get rich by razing the foundations of future collective prosperity. Such an economy is not on a growth path, but on a road to misery.

In other words, negative interest rates create massive rationality traps. They induce the beneficiaries to use scarce resources in the pursuit of their own pet projects without consideration for the preservation of the capital stock and without consideration for the needs of other people. Under negative interest rates, objectively bad behavior is turned into good behavior, at least in the short run. Conversely, a prudent investor becomes a bad investor, at least in the short run, since he will not invest at the inflated prices that result from the profligate spending of the beneficiaries of negative interest rates.

This inversion of values is one of the characteristic features of the enabling state. Whether through universal basic income, gratuitous credit, or negative interest rates, in all cases the seemingly gratuitous liberation of the beneficiaries entails devastating effects on their environment and on themselves. State-sponsored individualism is an all-out program of destruction, much more so than the traditional welfare state, which “merely” destroyed the lives of low-income families.

FISCAL ILLUSIONS

So far, we have highlighted the adverse consequences that result from the welfare state and from the enabling state. From an overall point of view, one obtains very bad deals by putting the state in charge of poor relief, unemployment relief, housing, medical care, loans, and just about anything. In that sense, without a doubt, the state is the great fiction denounced by Bastiat.

However, one could argue that the state might still be the only institution that delivers gratuitous services to those who are most in need of them. The deal may be bad from an overall point of view, but for the downtrodden and the destitute, this is of no concern as long as others pay the bill.

We should therefore look at this more closely, with special emphasis on the situation of the very poor. This can best be done by reconsidering private charity. As David Green, Bartholomew, and others have shown, private charity has always provided unpaid services to the poor, and it does so to the present day. There has never been any genuine need for the state to step in and help those who are unable to help themselves.

Another way to go about the same question is to consider how much the very poor actually do pay, directly or indirectly, when they become wards of the state. Economic analysis shows that they may pay a lot. Even for them, the gratuitous services of the state may very well be an illusion—a fiscal illusion, as the Italian economist Amilcare Puviani ([1903] 1960) called it.

At the turn of the twentieth century, Puviani studied the various ways by which politicians dissimulate and obfuscate the true costs of taxation and government handouts. Fiscal illusions in Puviani’s sense concern not only the overall costs of government, but also, and especially, the costs for each taxpayer individually.

From a politician’s point of view, it would be ideal if each voter had the impression that he receives something for free.In a market economy, the connection between goods received and costs paid is made patent by exchange. Government interventions modify the causal chain, and fiscal illusions make it next to impossible to ascertain with any degree of exactitude how much each person effectively pays.

Puviani discusses most notably the following techniques of fiscal illusion: indirect taxation (sales taxes, value-added taxes [VAT], etc.); funding the state with the printing press; funding the state through the credit market rather than through outright taxation; taxing luxury goods; introducing new taxes on a “temporary basis” and then making them permanent; taxing “despicable” goods (gas, meat, cigarettes, alcohol) and “despicable” persons ( Jews, Germans, whites, Chinese, Russians); justifying tax increases with looming mayhem (financial crisis, public health crisis); prorating tax payments rather than demanding lump-sum payments; creating taxes the incidence of which is not quite clear (profit taxes, corporate taxes); using complicated terminology and complicated classifications when setting up the government budget; using shadow budgets for public expenditures; and displaying general items in the main presentation of the government budget while hiding the dirt in the footnotes.

In what follows, let us take a closer look at two items in Puviani’s list: shadow budgets and taxes with unknown incidence. Notice that both of these techniques concern monetary payments. In our day, a more ancient technique of fiscal obfuscation has made a comeback. It is called forced labor. Citizens are forced to perform various gratuitous activities for and on behalf of the state. This comes in the form of compulsory military service, but also in the form of doing paperwork (submitting forms and reports), complying with government-imposed procedures, and acting as a fiscal agent for the state (withholding income from employees and shareholders).

Shadow Budgets and Fake NGOs

As we have seen, Puviani underscored the importance of shadow budgets in hiding public expenditure. This technique of fiscal obfuscation also plays a great role in our time, especially in regard to welfare services and other gratuitous goods.

Government shadow budgets are hidden in statistical records through the misclassification of various activities and organizations. For example, government-sponsored enterprises (GSEs), such as railroad companies, airline companies, and central banks, are often classified as private entities, even though the state exercises substantial control over them. State control does not necessarily mean that the state is a shareholder in these organizations at all. Very often it means that the state controls the legal and regulatory environment in which these organizations have to operate.

The same thing can be said about the misclassification of GSEs and government-sponsored organizations (GSOs) as nongovernmental organizations (NGOs). State agents very often wish their projects to be executed by parties that appear to be independent from the state. Sometimes the state wishes to obfuscate its intentions. At other times it wishes to evade its own rules. It then commissions private organizations or sets up organizations under the mantle of private law. These private firms or private clubs enter a bargain with the state, usually overtly but sometimes in a hidden way. They perform a variety of activities that the government may not legally perform or which the government could perform only at a much higher monetary or political cost. For example, commercial banks execute a number of central-bank-sponsored missions on commodity markets or on stock markets, private companies spy on their suppliers or customers on behalf of the government, etc.

As a consequence, today there are entire armies of ostensibly nongovernmental organizations that are largely and sometimes exclusively controlled by the state. They are fake NGOs. Materially, they are state organizations. They do the work of the welfare state, of diplomats, of armies, and of secret services, yet they do not show up as GSEs or GSOs in the official statistics. Needless to say, this is a great nuisance for empirical research that seeks to quantify the importance of nonmarket and non-state human activities. But it confirms our previous contention that the juridical form of an organization does not say much about its true nature (see pp. 164f.).

The Incidence of Taxation

The services dispensed by the welfare state or by the enabling state may be gratuitous for their beneficiaries insofar as the latter are not required to pay for them directly. But this does not mean that they do not pay for them at all. They may very well pay for them indirectly. To be sure, the beneficiaries typically hope not to pay anything or to pay less than they would have to pay on the market. But they may ignore the indirect ways in which they are likely to pay the full amount anyway, or even more. Let us illustrate this with a hypothetical example.

Peter likes the idea that other people should pay for his medical bills, or at least a part of them. He votes for a party that is going to establish a tax-funded public healthcare system. John pays more taxes than Peter, so Peter thinks that part of his medical bills are paid by John. But this happy thought may very well be an illusion. Indeed, John may also be Peter’s customer or his boss. Taxation may force John to cut his spending, and he may very well spend less on Peter. In this case, while Peter does not directly pay for his medical bills, he may very well end up paying for them indirectly—in part or in full. He may even pay more for them than he would have paid if the public health system had not been established. The problem is that it is quite impossible to know how much he pays exactly.

Economists call this the problem of the incidence of taxation. One reason why the welfare state is so popular is that this problem is more often than not neglected. Most people never consider that even though they are direct beneficiaries of government benefits, they might very well pay for these benefits in other ways. Professor Pascal Salin (2020), argues that taxation is by its very nature tyrannical because nobody really knows—and nobody really can know— just how much he pays for the services provided by the state.

The Logic of Political Democracy

The modern welfare state has failed in its most popular objective. It has not reduced economic inequalities. It has not helped the poor at the expense of the rich. Quite to the contrary, it has reinforced their differences. What is more, it has brought about a redistribution of incomes and wealth from the poor to the rich. And it has cloaked this redistribution with the mantle of fiscal illusions.

Can this reality be changed with new resolve and better politics? Economic analysis gives a sobering verdict. The failure of the welfare state to reduce economic inequalities is to be expected. It is not an accident, but the natural tendency of modern democratic systems. By the very logic of modern electoral politics, the welfare state is not likely to help the poor. It is likely to impoverish them further.

Fifty years ago, Gordon Tullock demonstrated that a democracy is unlikely to deliver any egalitarian results. The reason is that the poor are by definition not a majority. They are just one part of the population, and they need to form political alliances with people from the middle or upper income brackets to create a majority. But there is no reason why the poor should be especially attractive coalition partners for the rich or for middle-income earners. Even if they form a coalition with low middle-income earners, they are not likely to be the main beneficiaries (see Tullock 1971, p. 382). He concludes:

There can be no doubt whatsoever that massive redistributions of income do occur by way of the political process. These redistributions, however, are not in the main transfers of funds from the wealthy to the poor, but transfers of funds among the middle-class. The bulk of these transfers come from people who lie between the twentieth and the ninetieth percentile of income, and the bulk of them go to the same income classes. This is, of course, the area with the largest taxable capacity, and also the area where political power is concentrated in a democracy. (Tullock 1971, pp. 384–85)

He goes on:

These transfers do not meet any egalitarian criteria. Basically they are transfers from groups of people who, for one reason or another, are not politically powerful to people who are. (p. 385)

We see here why state-sponsored welfare programs have tended to be completely ineffective as far as the reduction of income inequality is concerned. Within democratic regimes, government spending has the objective of bribing a majority of potential voters, and that majority is to be found in the middle class, not in the low-income minority.

Other authors have confirmed these conclusions based on their own empirical research. Mark Hughes concluded his study of the post-World War II welfare state in Canada with these words:

It is the nature of the democratic political process that forced income redistribution will work against the interest of the poor. This fact supersedes attempts to implement strict means testing and greater system efficiency in welfare programs; they are ultimately rendered fruitless. It is reasonable to conclude that the poor would be much better off under a system of voluntary charity than they ever will be under a democratic welfare state. (Hughes 1991, p. 20)

Twenty-six years later, John F. Cogan observed exactly the same state of affairs in the US:

In 2015, 62 percent of [welfare] recipient households, encompassing over 100 million U.S. residents, had incomes that were above the poverty line prior to the receipt of assistance. Thirty-one percent, nearly 60 million persons, were in the upper half of the U.S. income distribution. (Cogan 2017, p. 381)

Inside and outside of academia, these facts are widely known. Sometimes they are conveniently forgotten in exercises of state glorification. Welfare checks are not written by people with generous hearts. They usually are hidden prices, designed to bribe the population into complacency and apathy. The impotence of the welfare state to achieve its core mission—helping those who cannot help themselves—is not mysterious from the point of view of economics.

SELFLESS STATE AGENTS

If the welfare state is a bad deal, especially for those who cannot help themselves, then why is it so perennial? Is it a pure fiction? Or does serve at least some people? And if so, who are they?

The Welfare State Serves Its Servants

Among the main beneficiaries of the welfare state are the welfare intermediaries and, more generally, the agents of the state. The state fills the pockets and bank accounts of the millions of civil servants and consultants running its offices and administrations. This is sometimes called the poverty industrial complex.In Cogan’s (2017, p. 207) words:

The main beneficiaries were the service providers, mainly middle-class professional social workers in and outside government welfare agencies, educators in schools of social work, legal services lawyers, and academicians. The federal government was spending more on professional social workers than on school lunches for poor children.

This has been so right from the inception of the welfare state. Its real beneficiaries have always been different from the professed ones. As the welfare state grew and developed over many decades, this problem increased. Welfare programs were increasingly perverted into bribing the middle-class majority rather than helping the poor, as we have already seen.

The personal perception of these beneficiaries may be very different. As they see it, they work long hours at lousy pay. And there is much truth in this contention if we think, for example, of frontline welfare agents and nurses in public hospitals. Indeed, in the long run, both welfare clients and frontline welfare intermediaries are likely to be entrapped in a spiral of dependence and impoverishment. The poor may benefit at first, but at the price of losing the willingness and ability to integrate themselves into the labor market. Similarly, frontline welfare agents may benefit when their administrations are created (then they are typically paid well, sometimes excessively well), only to find out that they may eventually become the victims of changing political priorities. When other topics come to dominate the electoral cycle, political leaders are likely to reshuffle state budgets. They then come to see their numerous frontline helpers as a financial burden. They no longer adjust their monetary compensation to the permanently rising price level. Mid-career nurses, teachers, and social workers are then trapped. Their real incomes lag behind the rise of the price level. At the same time, they have become unemployable—or difficult to employ—in the private sector. There is tragedy in these circumstances. Frontline welfare agents are very often motivated by the genuine desire to help others. But a long professional life full of disillusion is likely to wear down the initial enthusiasm. The spiral of dependency and impoverishment that we just described very often does the rest.

Things are different in regard to political leaders and the upper echelons of the welfare administrations. For them, the welfare state is a permanent source of income and power. It serves them as a carrot to lure voters and followers, as an engine of compliance and subservience.

Selflessness as an Ideal for Public Office

The problem that we just discussed has been known since antiquity. Can it be overcome by virtuous leaders? Can it be alleviated by selflessness?

In chapter 5, we argued that the development of a market economy presupposes virtues and that virtues need to be cultivated for their own sake. The market economy thrives only when a critical mass of people behaves, at least some of the time, selflessly, by cultivating the virtues for their own sake.

But this also holds true for the state. Its leading agents are constantly tempted to be selfish, and more often than not, they give in to this temptation. They break faith, lie, steal, rob, kill, and cheat in the pursuit of their own personal goals (see, for example, Jauvert 2021). Arguably, this temptation is even greater than in the private sector, because upper-level state agents are often in the lucky position of being judged by their colleagues and therefore open for tit for tat of various sorts.

This is the reason why political philosophers such as Plato and Aristotle, and all other people who have reflected on the proper organization of the state, have emphasized the necessity of selfless behavior on the part of persons with political responsibility.

Classical Greek philosophers famously held that the true calling of a free man, of a citizen, was to partake in the management of the affairs of the political community, and to do so without compensation. To discharge a public office selflessly requires that this activity be carried out without pay or compensation, lest there be conflicts of interest. Officeholders in Athens and other Greek states in antiquity were therefore typically not paid. They were supposed to contribute their time and money gratuitously to the commonwealth. In later times, too, this conception of public office was often an ideal, and for the very practical reasons that we have just mentioned, it has remained so until the present day. Even today, local political organizations are called “municipalities,” a word that stems from the Latin noun munus, meaning both gift and public office.

As an ideal, this conception has much to commend it. But it is also necessary to consider its significant shortcomings. Unpaid public office does not attract persons who are mainly—or exclusively—motivated by monetary reward. This can indeed be a crucial advantage, especially in life-or-death situations when the right cause is not supported by power or income or wealth. The officeholder who is motivated by the desire to serve his countrymen will not be easily corrupted. He has the right attitude to withstand the temptations of wealth and the lure of power. However, such an attitude is relevant only in life-or-death situations, which require ultimate leadership.In ordinary situations, when power and wealth can be aligned with the common good, it is much less important. In ordinary situations, the common good is not necessarily best served by the people willing to promote (their idea of ) the common good. Rather, the country will be best served by the most competent executives. Administrative skills will not always be found in persons who excel through their moral disposition and who therefore seek public office without compensation. But it is possible to attract the best technical talent to public office by providing sufficient remuneration. There is in this regard not the slightest difference between public office and various vital occupations in the private sector. For example, in most Western countries there is great intellectual talent and skill available for medical services precisely because such services are very well paid.

A government could be run by voluntary parliamentarians and officeholders only if this government were extremely small, as in a minimal state of the classical-liberal sort. As soon as government embarks on running more or less complex public administrations, it must rely not just on goodwill, but on technical competence. And the way to get such technical skills in a society based on the division of labor is through adequate remuneration.

Officeholders Are Typically Not Selfless

In ancient Greece, the motivation to serve gratuitously in public office was not usually prompted by an altruistic love for one’s country or for one’s fellow citizens. It was driven by robust self-interest. It was the pastime of the privileged few, who profited from the forced labor of the many. The freemen—the citizens—could consecrate their time and energy to public affairs. They could afford to do this without exacting any sort of remuneration because they had slaves to provide for them.

Republican officeholders sought to enrich themselves even though they were not openly and officially remunerated (see Jhering 1893, pp. 109–10). They sought public office to abuse their position of power when it came to handling conflicts over trade and land that involved them or their families. They sought to persecute competitors or rival families. They corrupted the voting process by making payments to a clientele of destitute citizens in exchange for votes.

Officeholders sought to preserve and promote the welfare of their own families. They could not risk abusing their position overly much because they would have reprisals to fear when the office changed hands. They were personally responsible, not in the abstract and vacuous sense in which modern politicians and civil servants are said to be responsible, but in a very tangible and material way. Wrong or abusive decisions in public office were likely to entail retaliation.

This was one of the reasons why public office in ancient Greece was often allotted by lottery.Again, whatever the merits of this approach, it is unsuitable under modern conditions. The modern interventionist state is not a small state of the ancient Greek sort, and for perfectly intelligible reasons. It needs thousands of specialized professionals to invent, design, implement, and run the innumerable systems by which the government intervenes in the lives of the citizens (see Gottfried 2001). It could not possibly survive or thrive if it had to rely on volunteers who contributed their services gratuitously.

Today, outright selfish behavior among the servants of the state is not the exception, but the rule. The men and women who make it to the executive level of public administrations or into government office are subject to fierce competition, just like professionals in the private sector. In modern democracies, their positions are actually less secure than those of private-sector leaders. Entrepreneurs own their firms, but politicians and civil servants do not own their offices.The latter therefore have very strong incentives to use all means available to fend off any rivals and to reinforce their own positions. Rather than giving money away without expecting anything in return, they funnel public money to the people who are likely to support them—most notably to vote for them—and they make sure that everyone knows that they did it.

The self-interest of government agents is sometimes transfigured into selflessness. Working for the government or holding a public office is occasionally presented as some sort of a Maussian gift swap—or as something else that does not quite sound like “exchange” and which would therefore insinuate premeditated payments for definite services. Some civil servants consider that working for the government is no ordinary job, but a calling, a self-sacrifice to a higher cause.They do not serve in order to be paid. As they see it, they serve selflessly and then it fortunately so happens that the government has enough propriety to give them a decent amount of money.

It is true—and also good and praiseworthy—that many people who work for the state do so out of conviction that they serve a higher cause. It may even be true that some of them follow this calling against their material self-interest. However, this lofty attitude is certainly not shared by all. Like the employees of the private sector, civil servants are well aware of the material benefits that come with their position, and most are inclined to defend these advantages vigorously, to the detriment of the taxpayers. The fact is that public administrations all over the world suffer from particularly high rates of absenteeism and often provide lavish retirement benefits at taxpayer expenses.

Moreover, it must be pointed out that private-sector employees too may have, and often do have, an elevated sense of their professional mission. And indeed, why should a baker or a shoemaker or an entrepreneur or a farmer entertain less lofty views of their own calling than a tax inspector or a townhall secretary or a prime minister?

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See Hume ([1777] 1987, pt. 2, chap. 12), Thierry ([1825] 1856), Spencer (1898, vol. 2, chaps. 4 and 17), Oppenheimer ([1907] 1990), and Rothbard (1965).

See Aquinas (1949, bk. 1, chaps. 4 and 6), La Boétie ([1576] 1993), and Hume ([1777] 1987, pt. 1, chap. 4).

State monopolies in the fields of protection, adjudication, money, transport, education, energy, etc., are particular forms of legal monopolies.

The ambition to thoroughly transform man and society with the help of compulsory medical treatments goes back to the French revolutionaries of the eighteenth century. See the very well documented studies of Xavier Martin (2008, 2013). On the political dimensions of the 2020 coronavirus crisis, see the overview in Earle (2020) and the brilliant discussion by Esfeld (2023).

Samuelson (1958) highlighted the crucial role of positive externalities. In previous work on public expenditure (Samuelson 1954, 1955), he had defined public goods and their suboptimal production on the free market, but not in connection with externalities.

Ronald Coase (1974) refuted one of the standard examples: lighthouses are not public goods and have been privately built in the past. Block (1983, pp. 11ff.) and Hoppe (1987, pp. 23–24; 1989, chap. 10; 1993, chap. 1) have demolished the theoretical case for public goods. See also Bagus (2006).

In other words, the theory of public goods, in a similar way to the theory of positive externalities, which we discussed in chapter 7, relies on perfectly arbitrary value judgments or norms, rather than an assessment of empirical facts. Hans-Hermann Hoppe points out: “The norm required to reach the above conclusion is this: whenever one can somehow prove that the production of a particular good or service has a positive effect on someone else but would not be produced at all or would not be produced in a definite quantity or quality unless certain people participated in its financing, then the use of aggressive violence against these persons is allowed, either directly or indirectly with the help of the state, and these persons may be forced to share in the necessary financial burden. It does not need much comment to show that chaos would result from implementing this rule, as it amounts to saying that anyone can attack anyone else whenever he feels like it.” And he adds that “this norm could never be justified as a fair norm” (Hoppe [1993] 2006, pp. 12–13).

See Bartholomew (2014, pp. 32 ff.). See also Schweinitz (1943) and Seldon (1996). On the French welfare state, see Padioleau (1982). On the German case, see Habermann ([1994] 2013).

We should also duly note that being deprived of something is not necessarily unbecoming, but may be an important stimulus for human progress. Hermits and monks deliberately choose material poverty in order to facilitate the realization of their spiritual and moral objectives. But poverty may also be a driving force of material progress, precisely in those cases in which it is suffered rather than desired. See Leontjeva, Vainė, and Vyšniauskaitė (2016).

This was most notably true of the Aid to Families with Dependent Children (AFDC) program, especially for families with an unemployed parent (under the AFDC for Unemployed Parents Nationwide [AFDC-UP]).

Besides Bartholomew (2014), see, for example, Mises ([1949] 1998, chap. 35), Jouvenel ([1952] 1990), Clark (1954), Cornuelle (1965), West ([1965] 1994), Rothbard ([1970] 1977), Burleigh (1973), Murray (1984, 2012), Blankertz (1989), Green (1993), Habermann ([1994] 2013), Tooley (1996), Dalrymple (2003, 2005), and Rhonheimer (2018).

In the 1950s, Wilhelm Röpke ([1951, 1957] 1977, pp. 69–70) pointed out that Beveridge and Pigou had turned against the welfare state in various public pronouncements.

See, for example, Lefebvre and Pestiau (2017). This line of argument goes back to Durkheim ([1893] 2013) and is possibly even older. As we have seen in discussing the views of Marcel Mauss, it is most notably motivated by the conviction that free markets are amoral or immoral.

The next three paragraphs are adapted from Hülsmann (2018).

Knies (1879, pp. 174, 170). The full passage reads in the original: “Darum stellt der Creditverkehr eine höhere Stufe der ‘Vergesellschaftung’ und eine Verminderung der individualistischen Verselbständigung der Einzelnhaushaltungen her. Die in die Zukunft verlegte Gabe des Schuldners und der in die Zukunft hinein andauernde Gebrauch der Vermögenstheile des Gläubigers durch eine andere Person verknüpft andauernd das wirtschaftliche Schicksal der Gläubiger mit dem persönlichen Thun und Erlebniss der Schuldner” (emphasis original).

In the short run, these destructive tendencies may be dampened by traditions and habits. The permissiveness of an emerging enabling state may also compensate for older traditions of coercive collectivism, and the overall result may then resemble some sort of healthy normality. An example is present-day Sweden. For a sympathetic presentation of the new “Nordic way” of “radical individualism,” see Berggren and Trägårdh ([2006] 2016, 2011).

“Politicians have obviously an interest in offering well noticeable benefits to voters. In return, they must try to minimize the loss of votes due to the displeasure of taxpayers obliged to pay for state goods. Therefore, they have an interest either in concentrating taxes on a very small number of taxpayers, or instead diluting the tax across a very large number of taxpayers in the most painless way possible” (Salin 2020, p. 174).

In the case of international government aid programs, this effect is especially clear and well-known. The main beneficiaries have been government leaders and administrative agents in the donor countries and the recipient countries. While the taxpayers have been looted, the large population in the developing countries has come off worse than it would have without the international welfare state. On the poverty industrial complex, see Hazlitt (1973), Vaubel (1986), Ayittey (1991), Bauer (2000), Hatcher (2016), and the Acton Institute’s documentary film Poverty, Inc.

We should add that ultimate leadership is greatly facilitated by ownership. Owners are natural leaders because they do not suffer from conflicts of interest. Employees are good leaders only in exceptional cases. Great virtues must overcome the temptations of the hired hand. The biblical parable of the good shepherd expounds this problem.

Weber (1922, p. 661) points out that despite being remunerated, bureaucratic labor is often cheaper than the work of voluntary amateur officials. On the historical emergence of professional politicians, see Weber (1919, pp. 5–20; 1922, pp. 660–65).

This corruption was at the heart of the transition from the Roman Republic to the principate. See Anton von Premerstein (1937, pp. 15–60), quoted in Voegelin ([1952] 1959, pp. 132–39). Knies (1879, p. 171) underscores the role that credit played in this context, both in antiquity and the Middle Ages.

Aristotle (1995, vol. 4) asserted that “the appointment of magistrates by lot is thought to be democratical” (Politics, bk. 4, chap. 9). On the history of the lottery procedure, see Sintomer (2016). Frey and Osterloh (2016), as well as Follert (2020), make the case for “aleatoric democracy” in present-day politics.

Rothbard ([1962] 1993, pp. 828–29; [1970] 1977, p. 189) and Hoppe (2001) have pointed out that for the same reason, politicians and bureaucrats tend to have a shorter time horizon than private-sector agents.

In the world outside of the state bureaucracies, many people hold the very opposite point of view, which might be expressed as by Honoré de Balzac ([1838] 1985, p. 20): “No one comes or stays in the government offices but idlers, incapables, or fools” (Il ne restait ou ne venait que des paresseux, des incapables ou des niais). I am indebted to Dr. Ira Katz for this reference.