Abundance, Generosity, and the State

12

INTERVENTIONISM
AND SIDE-EFFECT GOODS

Interventionism does not only affect the ability and willingness of ordinary citizens to make donations. It also has a significant impact on side-effect goods such as the ones discussed in chapter 6. What happens to cultural commons such as language, law, and money in an interventionist economy? What happens to the unintended benefits of leisure, of human error, of market exchange, and of savings? How do they fare under a regime of legal monopolies, in a welfare state, and under inflationary monetary policies?

PRIVATIZATION OF PRICING EFFECTS

The beneficiaries of legal monopolies are shielded from the competitive market process. The law enables them to privatize some of the wealth effects of the market pricing process that we discussed in chapter 6.

Without the monopoly, these wealth effects would fall entirely on other people: the customers, who would be able to purchase the products at lower prices and as a consequence could spend more money on other products. Thanks to his privilege, the monopolist is able to obtain higher prices for his products. His revenue increases relative to the level that it would have reached under competitive conditions. He obtains gratuitous goods at the expense of his customers and of other producers.

Murray Rothbard famously demonstrated that legal monopolies entail completely different consequences than other forms of market dominance that emerge in the absence of legal privileges.The reason is that legal monopolies cannot be contested. The legal monopolist may be a very inefficient producer, but he stays in business because the law shields him from competitors. Things are different in the case of a firm that comes to dominate a trade or an industry without legal protection. The dominance of a free-market monopolist stems from superior efficiency. His competitors have, so far, been unable to match his services. But the competition goes on. One day, other producers may succeed in toppling the market leader. Until then, their competition drives down prices and costs. Such a contestable monopoly is therefore prima facie beneficial for the customers, and for the economy as a whole, most notably in that it entails spontaneous wealth effects. By contrast, any legal monopoly is prima facie detrimental for its customers and the economy at large.

PRIVATIZATION OF CULTURAL COMMONS

At all times and in all places, people have tried to privatize communal land and to make others pay for whatever advantages or benefits these others might have obtained, thus far, without payment. We have seen that such privatizations are strongly limited in the context of a private-property order. Where all social relations are based on custom and consent, communal land is privatized only in order to solve communal problems such as congestion or depletion.

But interventionist governments are not limited by custom and consent. They may infringe upon other people’s property rights in order to attain their ends. They therefore enjoy greater leeway in the quest to appropriate various goods. Historically, this concerned especially landed property, as well as cultural commons such as law and money, today also language and science. Governments have attempted to control all aspects of human culture. Their preferred means have been propaganda, legal monopolies, and forced migration.

Governments may facilitate the privatization of cultural commons by private persons or organizations; for example, by creating legal monopolies to the benefit of these parties. But legal monopolies may also serve to privatize side-effect goods for the immediate benefit of the government itself. From time immemorial, governments have created state monopolies in order to put into place monetary and legal systems of their own design.

Invariably, government propaganda has presented these systems as great boons for humanity. Today public schools and public universities teach the benefits of the Code Napoléon, the US Constitution, the Bretton Woods system, the European Economic and Monetary Union, and so forth. They typically do not teach that the creation of each of these systems was part and parcel of a privatization to the benefit of the state. They insinuate that, without the state, there would be no law and arbitration, no money and monetary exchange at all and that the state creates law and money out of nothing.

The truth is that both the law and money are older than the state. They are older than any form of political government. Before the advent of legal and monetary interventionism, arbitration and monetary exchange networks existed in the form of spontaneous orders, and these orders were cultural commons. They were not centrally controlled. They were not owned. There was competitive arbitration and there were competitive monetary exchanges. But even though these processes lacked central coordination, they were meaningful wholes, rather than mere coincidences of individual decisions and individual exchanges.

Before the advent of political legal systems, the competitive adjudication of conflicts did not occur in a normative vacuum. Each claim, each decision, was informed by precedent. Each decision was meant to prevent or diminish future conflicts. In other words, all individual claims and decisions were in one way or another related to all other claims and decisions. They were parts of a whole, of a spontaneous juridical order. And there were jurists who kept records of past decisions and of the principles that inspired them. And there were legal scholars who meditated on all these connected facts and principles and published their understanding of the whole legal order.

Similarly, before the advent of monetary systems, the exchange of concrete sums of money for other concrete goods did not occur in an economic vacuum. Each exchange was informed by the knowledge of past prices and by the expectation of certain future prices. Each exchange was geared toward the best use of the available resources in the larger economic context. As a consequence, all individual exchanges were related to one another. They were parts of a whole, of a spontaneous market order. And there were economists who wrote treatises in which they presented their understanding of this spontaneous monetary economy.

When governments intervene to impose one type of money on the economy, they impose one vision—their vision—of what money is and should be. They replace the free monetary order with a system of their own design.Unsurprisingly, all monetary systems have been biased in favor of the government. All of them have enabled the government to artificially increase the production of money and to spend the new money units first. In short, monetary systems serve the purposes of the state, whereas a monetary order—a cultural commons—does not strictly speaking serve anyone, even though it benefits all owners of money.

The story does not end here. Precisely because monetary systems are biased in favor of the state and its allies, they bring about an interventionist spiral that tends toward the destruction of the system. The gratuitous enjoyment of new money fresh off the printing press creates irresistible appetites for even more money from the printing press. Governments get into debt in anticipation of their future ability to meet all financial obligations with new units of fiat money. Government allies in the business world—most notably in banking—do the same. As the debt grows and the economy becomes fragile with debt, it becomes ever more necessary for central banks to bail out the big debtors, who are “too big to fail” because their default would create a tsunami that would sweep across the economy. Hence, more money is created in order to prevent a meltdown, with the perverse effect that the old debtors feel cocksure of being bailed out again and again—and with the further perverse effect that new groups of people will turn to funding their spending with credit in the hope of being bailed out as well.

In short, the creation of monetary systems goes hand in hand with the deterioration of the entire economy. Highly leveraged firms and households are forced to use much of their resources to monitor and manage their debt. This leaves them less time and money to pursue their genuine activities. Moreover, the economy becomes ever more centralized, fragile, and dependent on central banks and government bailouts.

This leads to an interesting conclusion. A monetary economy is sustainable only if it is built on a spontaneous monetary order. In other words, it is sustainable only if it is built on a gratuitous monetary order. The privatization of this cultural common is ultimately abortive. Any monetary system sooner or later destroys itself.

Bruno Leoni and others have presented analogous arguments in regard to the juridical order. The law is beneficial and sustainable only to the extent that it is part and parcel of a free and spontaneous juridical order. The privatization of the legal process to the benefit of the state entails interventionist dynamics that pervert and undermine the role of the law. Rather than being an unowned vehicle for maintaining good social relations and making the enjoyment of property gratuitous, the law is turned into a tool of the state, by the state, and for the state.And this privatization of the law does not only destroy the gratuitous benefits of the legal order. It destroys the legal order itself. In the end there is neither law nor order.

Michael Esfeld (2023) has recently presented a similar argument with respect to science. He points out that scientific endeavors thrive on the possibility of questioning and challenging all propositions. Science is an ongoing and never-ending process rather than any single state of knowledge. The “science” on any subject is this cultural common, not the seemingly authoritative summary in a textbook or a medical protocol. State intervention into this process invariably brings about a tendency toward its corruption and destruction. Esfeld therefore calls for a strict separation of science from the state.

STERILE EXAMPLES

Examples are important side-effect goods. Literature, sculpture, and the modern media show the virtues and vices of heroes, antiheroes, and villains. The successful management of a business, a saintly life, heroic resistance against overwhelming odds, and personal consecration to an art or to a science are costless models for others, as are failure and bankruptcy. Good and bad examples may be instructive to others. Both are goods. Both are gratuitously available to whoever cares to understand them.

However, examples are beneficial only under three conditions: the observer must be able to understand the example, be willing to understand it, and have the independent capability to translate his understanding into action. Interventionism tends to destroy all three.

The very difference between good and bad examples disappears when governments and central banks bail out bad behavior. The ability to distinguish good from bad examples is also hampered by public schooling (see West 1965; Rickenbacker 1974; Blankertz 1989; Caplan 2018). Countries that spend the most money on their public schooling system—such as France and the US—very often achieve exceedingly poor results in terms of student performance in reading, mathematics, and science. The reason is that government-run schools suffer from two basic handicaps. On the one hand, they have an enormous administrative overhead that eats a lion’s share of the financial resources and often paralyzes the teachers on the ground. On the other hand, they bring into play—and then tend to focus on—bureaucratic and political objectives such as graduation rates and equality of outcomes, rather than on scholarship. This focus thoroughly perverts the entire learning process. It undermines the students’ willingness to learn or do anything. Uninterested students and frustrated teachers therefore have become the hallmarks of public education systems. With very few exceptions (such as Finland and South Korea), public schools have become engines of incompetence and of indifference to learning.

Moreover, notice that government interventions also curtail the ability to independently apply the lessons learned from examples. We have seen that monetary interventions tend to discourage savings, especially in low-income families. Yet without personal savings it is next to impossible to go one’s own way in establishing a trade or a business. And those who do possess personal savings still face other formidable obstacles: patent laws and mandatory product requirements.In what follows, we shall discuss the combined incidence of such laws in some more detail.

Unhampered Imitations

Human development has been, and is still, very largely based on the imitation of other people. Infants copy their parents, pupils their teachers, students their professors. Even the geniuses who make original contributions have learned the basic techniques of thinking, writing, calculating, and crafting from other people. Their own contributions are, as a rule, but marginal developments based on what they have received from others.

More generally, all progress is made by learning and adopting the best practices of others. Following Rémi Brague (1999), we have seen that this concerns not only products and services, but also cultural patterns. The Romans became transmitters and developers of Greek culture, and all Europeans adopted and developed the culture of the Romans. Later they assimilated what they believed to be the best elements of other civilizations such as the Chinese and Japanese civilizations. In short, man progresses by imitating and copying other human beings.

Throughout human history—with the sole exception of the past 150 years or so—the process of imitating and copying occurred gratuitously. In the late eighteenth century, the French revolutionaries recognized patents (1791) and author’s rights (1793)—roughly speaking, copyrights—as a matter of absolute principle, yet in the same breath limited their application both in time and otherwise. In the early nineteenth century, economic pressure groups agitated for a more generous application of the law. Then a countermovement emerged in Paris and other places, among socialists and among economists of a free-market orientation. The debate reached its apex after an 1858 congress in Brussels with some four hundred participants from fifteen countries. Eventually an international convention on copyrights was signed in Berne in 1886 which established a framework for subsequent national legislations until intellectual property rights became a contested topic again with the advent of information technologies in the 1980s and 1990s.

In short, the beginnings of our present-day international patent system go back to the second half of the nineteenth century. The creation of that system was driven by the most advanced countries and fiercely opposed by those—like the young US—who sought to catch up with the economic leaders by copying their products. No human invention before that time had been protected by patent laws on a worldwide scale, and many inventions in the present day have no such protection, either.

Another important fact is that sweeping technological progress can occur, has occurred, and is occurring without any special legal protection. Patent laws are not necessary to make it happen. In the past, patent laws have usually slowed progress down (see Kealey 1996; Boldrin and Levine 2008). Examples include the development of railways, computers, cell phones, and arms, to name just a few of the better-known cases. The steam engine and other parts of railway technology were developed slowly from scratch in the second half of the eighteenth century and then, once the initial patent rights had expired, developed rapidly all throughout the nineteenth and twentieth centuries.

It is true that, in the absence of patent laws, there is a distinct incentive to focus on innovations and inventions that make marginal contributions. But this is not necessarily a disadvantage. Incremental improvements that are easy to imitate and do not cost much are likely to spread particularly fast. From an overall point of view, this should be considered a distinct advantage. Moreover, the absence of patent laws does not prevent inventors and innovators from starting large-scale projects. It is true that such projects as a rule do not make business sense if they cannot hope to benefit from patents. But this does not mean that large-scale projects are necessarily doomed without patents. Grant-making foundations are likely to fill the gaps that profit-driven firms cannot fill. In fact, as Richard Cornuelle (1965, chap. 16) and others have convincingly argued, this is the proper role of foundations within the larger economy. They are created to fund precisely those projects that are too large for individual sponsors and too risky for businesses. Cancer research and various other fields have benefitted from such private funding.

The Incidence of Patent Laws

How do patent laws stand up in comparison to the working of a purely private-law economy, in which nobody benefits from legal monopolies of any kind?

Patent laws are an outgrowth not of the free market but of government interventions. The idea is to reward creative activities and thereby to stimulate research and development. Patent holders may concentrate the benefits of any technological progress on themselves and on their clients, which in turn allows them to exact (higher) payments in compensation for these benefits. In other words, the very objective of patent laws is to privatize the benefits of inventions. Without patents, useful inventions could be freely imitated and improved by others. Patent laws seek to destroy the possibility of gratuitous imitation and thereby to privatize a greater part of the benefits of inventions.

There is no disagreement as far as this matter is concerned. From the economic point of view, the only question is whether this forced privatization of side-effect goods amounts to anything more than a redistribution of wealth in favor of the patent holders. The advocates of patent laws claim that the latter serve the common good. Patent laws do not simply enrich some at the expense of others but provide genuine benefits for society as a whole. They deprive many people of gratuitous goods, but this is the price to pay in order to stimulate research and development. But is this claim true?

Notice first of all that patent laws do not favor technological progress per se. Rather typically they benefit a special kind of technological progress, one that is based on capital-intensive research, which might not be worth the while if others can copy the results of that research without contributing to the costs.

Patent laws channel some creative activities into “patentable” forms at the expense of forms that do not benefit from legal protection. They allow the patent holders to hamper others. They are monopoly laws. They encourage creative activities only indirectly. The direct incentive is to “produce patents” with the maximum revenue impact.

Now, the stark fact is that, outside of pharmacy and a few other areas, patents play no significant role in technological development. They have so far played no significant role in the development of cell-phone technology, of the internet, etc. Patents have played a considerable role only in those areas where patented products have been imposed on the public (mandatory product requirements). For example, patents for medical techniques and pharmaceutical products as such do not prevent the development and use of alternative treatments and traditional plant-based medication. In a competitive economy, the market share and the profits of the patented products would therefore be limited and probably modest. But the economic value of these patents is greatly enhanced by the simultaneous obligation for all citizens to use only such techniques and medication as are authorized by the state, and by the fact that the state typically ordains the use of patented techniques and medication. In other words, the main damage comes from the state-sponsored imposition of patented goods.

Wherever only patented goods may be used or produced, good examples may no longer be followed and therefore become sterile. Investments in low-budget technologies with moderate returns are discouraged, even though these might be most rewarding for the producers and most useful for the customers.

These problems are reinforced by the fact that the imposition of patented products creates artificially large corporations and conglomerates that are likely to bear on the political process, thereby self-validating their products. Examples for such products are mandatory vaccinations, state-imposed medical protocols including standard medication, army contracts, etc. Once mandatory product requirements are established, there is a great temptation to put the cart before the horse and to focus research on those products that are especially likely to be validated through (imposed by) the political process rather than the market. There is also a temptation to use political connections to outlaw low-cost alternative technologies, especially in medicine, agriculture, and banking.

Bankruptcy Laws

Interventionism not only tends to destroy the benefits of good examples. It also creates a proliferation of bad examples and eliminates the positive side effects that would result from bad examples in a free society. This occurs most notably through bankruptcy laws and bailouts.

Bankruptcy sooner or later entails the liquidation of the assets of the failing business. Regrettable though it is for the former owners, such liquidation enables others to purchase those assets at prices below production costs. The new owners of the assets therefore obtain a gratuitous benefit as a side effect of the errors of the bankrupt entrepreneurs. At the same time, such liquidations also entail a beneficial aggregate side effect in that the resources end up in hands that presumably will use them better than the previous owners.

However, governments have the ability to procrastinate the bankruptcy of unprofitable or insolvent organizations with taxpayer money, with new money fresh from the printing press, or with amendments to bankruptcy law. As a consequence, governments usually have the power to either eliminate the gratuitous side effects of bankruptcy or to privatize these side effects by steering the liquidation process. Bankruptcy laws enable the authorities to decide who benefits from other people’s errors and thereby privatize the benefits of other people’s errors.

Bailouts inflict gratuitous harm on the economy as a whole. They enable incompetent entrepreneurs to remain in business. These entrepreneurs keep hiring people who could be working elsewhere, they keep buying raw materials that could be sold to other firms, and they keep ordering equipment that is specially designed and made for them by suppliers that could also work for other clients. The resources therefore tend to remain in the wrong hands. They are wasted. The economy is deprived of improvements that could have been obtained if the available resources had been used by others.

Moreover, bailouts create a moral-hazard problem. The beneficiaries may henceforth expect to be bailed out. Rather than avoiding the erroneous strategy that brought them to the verge of bankruptcy the first time, they may be insouciant and try it again. Or they may even develop an outright preference for strategies that have no business justification but which increase the likelihood of being bailed out. For example, a firm might choose a production technology that is particularly labor-intensive precisely because the massive unemployment that would result from its failure would make it more likely that the government will provide subsidies in such a scenario. Furthermore, bailouts also create an inverse moral-hazard problem for competitors by discouraging them from preparing for the liquidation of badly run companies. In other words, bailouts destroy the safety net that would otherwise cushion bankruptcies. When no one prepares to step in when others fail, asset prices are likely to fall much more deeply. The dependency on government bailouts increases.

THE INFLATION CULTURE

The most powerful engine for the destruction of side-effect goods is monetary interventionism. In chapter 9, we explained that inflationary monetary policy entails rationality traps and intervention spirals. Let us now see how this pertains to our present issue.

We have repeatedly underscored that the return on capital tends to be driven down when more capital is invested. While this decline could be offset, totally or in part, by increased financial leverage at low interest rates, most investors would shun leverage because it also increases liquidity and solvency risks. Therefore, under ordinary circumstances, capital accumulation leads to ever-lower returns on capital. The use of savings as capital is increasingly discouraged, and more and more savings end up in donations and other nonprofit employments (see p. 148). However, we have also seen that these natural tendencies are inverted when the authorities subsidize financial leverage with the printing press and taxpayer money. When they lend at low interest rates and also bail out investors on the verge of default, the natural limits of leveraged investments are destroyed and the saturation mechanism of capital accumulation disappears (see pp. 341f.).

The authorities thereby set up a rationality trap.Saver-investors now have material incentives to turn all of their personal savings into capital. Though they are saving ever less, they are rewarded for allocating an ever-greater share of these diminished savings to for-profit rather than nonprofit ventures. But rationality traps do not only hold material wealth in their grip. They also subvert the allocation of time. They invert the values that are fundamental for a free society. They destroy the various side-effect goods that we discussed in chapter 6.

The inversion of traditional values is not likely to happen over-night. The introduction of inflationary policies rarely brings about sudden and widespread changes in human behavior. But when they are pursued over decades or centuries, they cannot fail to bring about radical and pervasive changes of behavior. They then create a permissive “inflation culture” in which the tendencies that we just described become readily apparent. The willingness to make donations of time and material goods is compromised. Less time is spent on disinterested activities, whether reading, music, sports, education of one’s children, worship, or spending time with others. The important word here is “disinterested.” People might still read a lot, for example, or spend time with others. But these would tend to serve distinct purposes, such as professional training, social standing, or networking. Friendships would still exist, but utilitarian friendship would rise in importance. Let us examine these cultural casualties of permissive interventionism in some more detail.

The Inversion of Values

Because of the rationality trap set up through permissive interventionism, bad examples proliferate. More precisely, the very meaning of good and bad is inverted. People do things that are objectively bad for other people, and sometimes bad for themselves in the long run.

They stay at home, living on welfare checks, rather than getting a job and doing something useful for others. They leverage their investments and thereby make their firms, and the economy as a whole, more fragile and centralized. But all of these decisions pay the bills. They are therefore likely to be emulated by others. The welfare family becomes a business model. So does the civil service. So does the private-equity firm which buys healthy businesses with loans out of the printing press and then guts them of their financial substance. So do all artists and writers and researchers who specialize in the noisy marketing of their services.

At the same time, and for the same reasons, all sorts of activities that provide goods for free are now avoided, disparaged, and ridiculed. The stay-at-home mother is mocked, the cash saver is a simpleton, the quiet artist who is dedicated to his work, rather than to selling it, is neglected and shunned.

Much has been written about the inversion of traditional values, an inversion so characteristic of our times. God has been proclaimed dead, and without God, anything seems to go. But the material driving force of this inversion is rampant government interventionism, especially monetary interventionism. In a free society, there are people who do silly and perverse things. But such people are few, and they do not indulge in their excesses all of the time because they mind the consequences. Silly choices cost money. Perverse choices cost good company. Yet government has the power to subsidize silliness and perversion, and with the printing press the subsidies may flow without apparent limitation. Under such circumstances, as we have seen, the very meaning of good and bad is inverted. It is very difficult to dissuade someone from doing something when he is paid to do it. The most extreme case is that of negative interest rates (see pp. 317ff.).

Trust, Cohesion, and Solidarity under Inflated Markets

The foregoing considerations can be extended in a slightly different direction. In chapter 4, we highlighted Émile Durkheim’s contention that solidarity and social cohesion cannot result from market activity but have to be imposed on markets by suitable laws and regulations. From this point of view, “the extension of market exchanges undermines trust, cohesion and solidarity in the system” (Hodgson 1988, p. 170). Growing markets therefore seem to require an ever-growing body of regulation and legislation.

However, as we also pointed out when discussing Durkheim’s contention, it is not the case that free markets operate in a moral limbo. Trust, cohesion, and solidarity can develop very well in a free economy. In our view, they can only thrive there.

Moreover, when it comes to understanding “the extension of market exchanges,” it is necessary to distinguish between the different causes that bring forth such an extension. The growth of markets under the common law (in a private-property order) brings about different consequences than the inflation of markets (the artificial creation of markets) resulting from government interventions. Free markets are not in any sense opposed to donations, nonmarket activities, trust, or solidarity. Quite to the contrary, these develop organically along with markets, are nourished by them, and nourish them in turn. By contrast, the artificial markets that result from interventionism are plagued by irresponsibility, injustice, and indifference. In such a context, trust, cohesion, and solidarity dry out. But it is a logical fallacy to ascribe these excesses to markets in general. They concern specifically the artificial extension of markets through government interventions.

Friendships under Interventionism

Genuine friendship is premised on virtuous lives. It presupposes that the friends habitually consecrate their time to doing things that are good in and of themselves. The stronger is this personal habit, the deeper is the soil on which friendship may grow. When the habit vanishes, the soil becomes shallow and genuine friendship fades away. But this is exactly what happens under interventionism.

While repressive interventionism destroys friendship in a similar way to permissive interventionism, there are also notable differences.

Repressive interventions pit one group against other groups. They willy-nilly create conflicts of interest between taxpayers and tax receivers; the government and the citizens; employers and employees; men and women; blacks and whites; old retirees and young professionals; and so on, depending on the nature of the repressive intervention. Individuals will therefore be enticed to think of themselves as members of a group. They will have incentives to organize themselves in order to obtain power sufficient to loot others or to fend off other looters. We may therefore say that the characteristic friendship of repressive interventionism is the robber gang. This is most tangible in the cases of the various professional pressure groups and of the civil service. It is also characteristic of revolutionary regimes.

The incentives are distinctly different under the permissive interventionism of the printing press. While welfare-state protégés and civil servants recognize that they must band together in order to live at the expense of other people, the beneficiaries of easy credit can indulge in insouciant individualism. Debtors, bankers, accountants, lawyers, and civil servants may blissfully assume that they are just minding their own business and that the services they provide are not in the least obtained at the expense of others. The benefits that they enjoy do not obviously spring from expropriations, prohibitions, and regulations that hurt other people. Yet they come to some extent out of the printing press, which subversively dilutes the purchasing power of money in the easy-credit beneficiaries’ favor.

The characteristic friendship of a developed inflation culture is the business friendship. (But even business friendships may be undermined when wealth evaporates.) This is not only because less time is allocated to cultivating friendships, but also because the foundation of nonutilitarian friendship withers away. Such genuine friendship is rooted in the love of others nurtured by shared virtues. Both of these elements will be sapped in a permissive culture.

Friendship in an inflation culture therefore tends to be rare and shallow. Monetary interventionism entails indifference and aloofness, rather than the collective fury of class struggle. It produces the pre-hell of isolation in suburbia rather than the pre-hell of dog-eat-dog.

Contrived Rationality and Mindless Compliance

Another victim of permissive interventionism is the culture of reason. Permissive interventionism tends to discourage and destroy the use of reason and to replace it with two opposite deviations: contrived rationality and mindless compliance (cf. Hayek 1979, chap. 15, pp. 413–15).

A truly reasonable person is not a mere specialist who knows about the relationships between cause and effect in this or that area of knowledge. He is not just a technician, able to devise solutions for a given problem. He is able to see any individual problem in a wider context. He is able to ponder its importance relative to other problems, both present and future. He is able to grasp that human existence involves a multiplicity of dimensions and objectives which cannot be reduced to any one of them, except insofar as all human striving leads (intentionally or unintentionally) to God. A reasonable person is able to question the quality and the limits of his own knowledge and of the statements of others.

Permissive interventionism inflates markets at the expense of leisure. It thereby creates an artificial focus on the sort of rationality that is useful for the conduct of a business firm. This focus is encouraged if the economy turns into a debt economy, which is another typical consequence of monetary interventionism, as we have seen. With debt comes a further reduction of the intellectual radar screen. The long-term dimension of decision-making tends to become less important and the short run more important. In a highly leveraged economy, the short-run necessity of servicing the debt reigns supreme. With this necessity comes a tunnel vision in economic life, a focus on monetary returns and on the short-run volatility of product and factor prices. The constricted rationality of the highly leveraged investor is most notably expressed in the “advanced techniques of modern finance,” which are attempts to reduce all the relevant dimensions of business life to a few single-dimension parameters— such as value at risk—that allow for rapid decisions for the near future.

On the other hand, as we have seen, permissive interventionism creates a formidable moral-hazard problem. It creates benefits without responsibility, and this has the perverse consequence of attracting ever more beneficiaries, to the detriment of the larger whole. When financial leverage is subsidized with the printing press and government bailouts, more and more people will willingly seek to leverage their investments, while fragilizing the economy as a whole.

To curb such excesses, the authorities typically follow up with various rules and regulations and ethical guidelines. Such rules do not change the underlying driving force (permissive interventions), but they calm down the superficial observer and thereby prevent uncontrollable political shifts on election day (Hülsmann 2013, chap. 11). Most importantly, the rules give peace of mind to the beneficiaries of the interventions and to the authorities who are supposed to combat any abuses. By strictly respecting the rules, the beneficiaries avoid any personal liability. And by supervising and enforcing strict respect for the rules and regulations, the civil servants employed in the various public offices and bureaus, too, avoid any personal liability. This seems to be right and just. The only little problem is that the rules are pointless. They are ineffective in curbing the root cause of irresponsible behavior (see Gertchev 2023). To be effective, they would have to out-law permissive interventions, but this is the one thing they will never be brought to do. They do not serve to put a lid on the use of the printing press. They serve to reassure the electorate and to eliminate liability. The beneficiaries comply with them, and the authorities supervise the compliance, but it makes no difference as far as the underlying problem is concerned. There is compliance, but the compliance is mindless.

Such mindlessness is a higher form of stupidity. It takes considerable intelligence to conceive and design hundreds and thousands of regulations for a business or an industry. It takes intelligence and dedication to understand and apply these rules. It even takes a philosophical bent of mind to devise appropriate ethical guidelines. But intelligence does not protect against foolishness (Sternberg 2002). It takes more than mere intelligence to be wise. And intelligence by itself does not prompt people to question authority and to tackle problems at their root.

THE EVAPORATION OF OWNERSHIP

Various observers have highlighted for more than a hundred years the profound transformations of capitalism. They have noticed that the nature of business and of business leadership has changed. But only a handful of them, including Mises, Melchior Palyi, and Wilhelm Röpke, have noticed the interventionist origin of this great transformation. Röpke stressed that inflationary monetary policies invariably go hand in hand with a vanishing respect for private property:

Inflation, and the spirit which nourishes it and accepts it, is merely the monetary aspect of that general decay of law and of respect for law. It requires no special astuteness to realize that the vanishing respect for property is very intimately related to the numbing of respect for the integrity of money and its value. In fact, laxity about property and laxity about money are very closely bound up together; in both cases what is firm, durable, earned, secured, and designed for continuity gives place to what is fragile, fugitive, fleeting, unsure, and ephemeral. And that is not the kind of foundation on which the free society can long remain standing. (Röpke [1957] 1987, p. 103)

In an inflation culture, the “vanishing respect for property” is not only to be found among thieves and taxmen. It also affects the owners themselves. When they leverage investments and fragilize their firms, they too become lax about their own property. The facilities of the printing press seduce them to adopt a new lifestyle and a new mindset.

Nobody has described this transition of capitalism more vividly than Joseph Schumpeter ([1942] 2003). But Schumpeter, like Werner Sombart (1913) and so many others before, failed to see its root. As they had it, the history of capitalism was the history of rationalism.

After the Renaissance, rationalism had spread first to philosophy and the arts, and later to economic life. According to Schumpeter ([1942] 2003, p. 127), it was this tendency that led to the rise of large-scale firms in the nineteenth century. The latter embodied the victory of rational management over the competition of the craftsmen but also the separation of ownership and control between shareholders and managing directors, which slowly but surely leads to a “volatilization of the property substance.” The shareholder is much more indifferent to his property than the patriarchal master craftsman and even the early capitalist merchants and entrepreneurs. He will no longer defend his belongings to the last. He is hapless against the onslaught of communist agitators bent on socializing the means of production. In Schumpeter’s ([1942] 2003, p. 142) words:

The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the actual ability to do as one pleases with one’s own; the grip also in the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps. And this evaporation of what we may term the material substance of property—its visible and touchable reality—affects not only the attitude of holders but also that of the workmen and of the public in general. Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.

Schumpeter ([1942] 2003, p. 156) observed that the modern businessman was an executive and as such prone to a servile and indifferent mind. In his words:

From the logic of his position he acquires something of the psychology of the salaried employee working in a bureaucratic organization. Whether a stockholder or not, his will to fight and to hold on is not and cannot be what it was with the man who knew ownership and its responsibilities in the full-blooded sense of those words. His system of values and his conception of duty undergo a profound change. Mere stockholders of course have ceased to count at all—quite independently of the clipping of their share by a regulating and taxing state. Thus the modern corporation, although the product of the capitalist process, socializes the bourgeois mind; it relentlessly narrows the scope of capitalist motivation; not only that, it will eventually kill its roots.

The most startling shortcoming in Schumpeter’s text is the complete lack of any reference to state interventionism as a possible cause of servility and indifference, even though shareholder capitalism is entirely premised on permissive interventions. Most of the corporations could not grow very fast without cheap credit from ex nihilo money production. Similarly, there would be no significant market for shares in commercial enterprise in the absence of limited liability for civil responsibility. Most investors who buy the shares of a company on the stock market wish to acquire an option on potentially unlimited future dividends and share price increases, while limiting the risks for themselves. But without limited liability, the risks would be open ended. The debts of an insolvent company would have to be served by its shareholders.

Schumpeter is similarly mute on credit-money creation, central banks, fiat money, fractional-reserve banking, and the welfare state. But the symptoms he describes have their roots here. Permissive monetary interventions had already entailed unprecedented growth in the debt economy during Schumpeter’s lifetime (1883–1950). Yet this had not been a triumphant advance of “rationality,” but an economically wasteful subsidy for corporations and other large companies at the expense of small and medium-sized businesses.Permanent price inflation creates material incentives for all market participants to behave like financial agents. They leverage their investments and allocate more capital to liquid financial assets. And it is this financialization of the economy which evaporates ownership.

Today, financialization is manifest in the blatant disinterest of many start-up entrepreneurs in the long-run welfare of their firms. And the heirs of many established industrial firms are equally indifferent. They see their industrial property above all as collateral needed to obtain cheap credit, with which they grow the firm before selling it off and cashing in. Clearly, such an attitude undermines the long-run potential of any industrial enterprise. It is one thing for all of one’s emotional and material fortune to be tied to a firm, in many cases handed down from one generation to the next. It is another thing to be a temporary user trying to maximize profits over seven years, the typical time horizon of private-equity investors. The demise of the old-school owner-entrepreneur drastically reduces the entrepreneur’s decision-making horizon, both intellectually and in so far as investments are concerned. It reduces the efforts made to cultivate strategic long-run human resources. It subverts the community between the owner, the employees, the suppliers, and the customers.

Moreover, financialization draws great numbers of the most gifted and well-trained young people into the financial sector. Their behavior is entirely rational and acceptable from a microeconomic perspective. They make the best use of their talents to provide for themselves, for their families, and for all the causes they cherish. But from a macroeconomic perspective it seems to be rather disastrous that, year after year, thousands of brilliant young university graduates use their time and ingenuity to find ways to leverage investments ever more and to evade taxation. Financialization is one of the most wasteful brain drains ever devised.

EVASION

Ownership evaporates when owners no longer want to be owners, when they evade their responsibilities. But evasion is not limited to this particular case. It is a general consequence of interventionism that manifests itself in different forms.

For example, the evaporation of the family results from spouses’ evasion of childrearing. Interest in starting a family and raising children decreases when other people’s children are forcibly recruited to finance nonparents’ old age. Divorce rates and the number of unwedded couples rise when the state undermines the freedom of contract in order to give the supposedly weaker spouse more and more legal advantages at the expense of the other spouse.

The evasion of government interventions may also take the form of tit for tat. Rather than exchanging outright on the market, tax dodgers try to reduce their outright monetary income by resorting to tit-for-tat strategies. And such strategies are also encouraged because repressive interventions stimulate corruption (see Dreher and Schneider 2006).

Ironically, evasion is especially widespread among those who create and enforce repressive interventions. The agents of the state constantly seek to evade being controlled by the taxpayers, for example, by funding public expenditure with debt and with the printing press (rather than with taxes); by creating taxes with unclear incidence; or by using various shadow budgets (see pp. 321–22).

Government agencies also evade their own rules. For example, in most Western countries, the secret service is typically not allowed to spy on its own population. But these limitations are very often not respected (as revealed by Edward Snowden and other whistleblowers), or they are sidestepped through tit for tat with foreign governments and with private-sector partners. Similarly, central banks are typically not allowed to buy shares in companies listed on the national stock markets, but they may engage in confidential tit for tat with foreign central banks or with private commercial banks to achieve their illegal objectives.

UNDER THE MANTLE OF STABILITY

Today, even the champions of monetary interventionism admit that the activities of central banks tend to inflate the financial sector and to redistribute wealth in favor of those who are already rich. Nevertheless, they argue that monetary interventionism conveys distinct advantages to the working classes, too. The creation of new money units out of nothing enables the central banks to stabilize the economy and thereby to preserve existing jobs. It also allows them to fund the creation of new jobs. These benefits do not require that the price level remain stable. They may also be obtained when the increase of the price level is stabilized. A policy of inflation targeting, which seeks to produce a permanent increase of the price level at preannounced levels, is therefore held to be beneficial for wage earners.

In the short run, it is indeed possible that expansionary monetary policy may stabilize or increase employment. This is most notably the case when market participants confuse monetary revenue with real revenue (see Fisher 1928). However, the trouble is that central banks cannot know in advance whether such confusion will prevail. They have to test the market. As a consequence, they frequently produce price inflation without reducing unemployment. More often than not, unemployment even increases under price inflation. Furthermore, any beneficial employment effects typically go hand in hand with the consumption of capital (see p. 337). They are therefore also likely to go hand in hand with a reduced demand for labor in the longer run. In the short run, inflation targeting frequently diminishes employment. In the long run, it generally does (see Ravier 2013; Israel 2017).

But monetary interventions also influence real wages indirectly, through the side effects on savings. In chapter 6 we saw that the cash saver confers higher purchasing power to the money units spent by all other people and that the saver who invests his money savings bestows wealth effects on others. Most notably, he swells the purchasing power of wage earners. This is not only because all wages are paid out of money savings (Reisman 1996; Braun 2014), but also because the investment of savings is conducive to economic growth. In a growing economy, all material goods become ever less scarce relative to labor. The more capital is accumulated, therefore, the fewer years of labor it takes to buy a house or a car.

These wealth effects diminish and vanish as a consequence of inflation targeting and similar monetary interventions. Since World War II, the price level in virtually all countries has increased every single year. Such permanent price inflation eliminates the material incentives to save in cash.The available revenue then either is not saved but spent on consumers’ goods or is invested. The former is typical for low-income persons; the latter prevails among higher-income persons (see Campbell 2006).

Privatizing the Side Effects of Money Hoarding

Low-income savers typically prefer to save cash—they stock-pile money in checking or savings accounts. But the relentless price inflation of the past seventy years has discouraged this habit. The problem is that it has not only discouraged cash savings, but savings in general. The simple worker who despairs of the one form of saving that he knows and trusts—saving cash under his own direct control—is not likely to turn to other forms of savings. He is not likely to open a financial account with a bank or a broker. He knows nothing about financial markets. Deep down, he often distrusts and even despises the world of bankers and brokers. As a consequence, the permanent price inflation since World War II has destroyed the entire savings culture of the working classes.

This destruction has its own ramifications. On the one hand, permanent price inflation traps low-income groups in poverty by turning them into permanent clients of the welfare state. On the other hand, it facilitates the privatization of the side effects that spring from cash savings.

Indeed, permanent price inflation is a formidable boon for the development of financial markets. When saving in cash is no longer a rational option, when savings virtually have to be invested, then they have to be (a) invested in one’s own business, (b) invested in the businesses of other people, (c) invested in real estate, or (d) lent to a private household or to a government. All these scenarios bring about an increased demand for the services of financial intermediaries, and of commercial banks in particular. This is obvious in cases (b) and (d). But in an inflation culture, it also holds true for (a) and (c). Indeed, as we have seen, under permanent price inflation there are strong incentives for all agents to leverage real-estate investments, as well as investments in their own business.

The side-effect goods that result from cash saving therefore tend to be privatized for the benefit of commercial banks and other financial intermediaries. When savers hoard cash, their savings entail myriads of infinitesimally small wealth effects that are spread out among all other money users in unknown and unknowable proportions. By contrast, when savers make financial investments, they concentrate the wealth effects on selected counterparties and to the detriment of all others (see Hülsmann 2013, pp. 63–68). Financial investments therefore privatize the wealth effects of savings, whereas cash saving conveys them to others in the form of side effects.

Notice that this privatization occurs spontaneously. Money savings are not confiscated. The savers are not robbed. Rather monetary interventionism changes the costs and benefits of cash savings as compared to financial savings. As a result, the savers themselves decide to exchange their money rather than hold it.

The Plight of Labor

Since World War II, across all income groups, the available savings have been increasingly invested. But these investments now serve two objectives: to earn revenue and to protect savings against price inflation. The consequence has been a shift in the appreciation of labor (the quintessential nondurable good) as compared to real-estate and to the shares of companies quoted on stock markets (the quintessential durable goods). In a price-inflationary environment, labor tends to become less important in comparison to durable material goods. Its subjective value diminishes in the eyes of all market participants.

Indeed, under price inflation, durable goods serve as a hedge against the diminishing purchasing power of money. The prices of these goods therefore tend to rise relative to what they would have been without price inflation. They also tend to rise relative to the prices of all goods that are less durable, not only labor, unless there are attenuating circumstances. As a consequence, it takes more years of work to buy a house or car in a price-inflationary environment. Empirically, since the dissolution of the Bretton Woods system, the purchasing power of labor has diminished in terms of durable goods (see Hülsmann 2014a; Dorobăț 2015).

These deleterious effects are compounded by the Cantillon effects of money production. The latter typically benefit white-collar professions in and around the financial sector (both in terms of capital incomes and wages) at the expense of professions removed from that sector. Blue-collar wages, which are typically earned in activities removed from financial markets, are therefore the prime casualties of inflationist policies.

To sum up, inflation targeting and similar expansionary monetary policies raze the wealth effects of cash savings, and this concerns all money users. These policies also devastate some of the wealth effects of invested savings, and this especially concerns all wage earners, whose purchasing power tends to fall in terms of durable goods. The experience of the past fifty years illustrates these tendencies.

The Fight against Price Deflation

The foregoing considerations shed new light on one of the most important justifications of monetary interventionism; namely, the fight against price deflation. In an economy unhampered by expansionist monetary policy, the general tendency is for prices to fall (see pp. 153ff.). In such a price-deflationary environment, there are strong incentives for cash saving, and the value of durable goods tends to fall relative to the value of nondurable goods. Cash savings entail side-effect benefits for all money users, and decreasing prices for nondurable goods go hand in hand with wealth effects favoring wage earners. The fight against price deflation eliminates these side-effect goods. Whatever the merits of anti-deflation policies may be on other grounds, therefore, they have very negative consequences for the gratuitous goods enjoyed by employees. And they are out-right devastating for all people whose only source of income is the labor of their own hands.

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For the general question of whether interventionism is likely to entail any side-effect goods on its own, see the earlier discussion on pp. 285ff.

See Rothbard ([1962] 1993, chap. 10) and also Armentano (1986, 1990), Hoppe ([1989] 2010, chap. 9), Salin (1995), and Salerno, Dorobăț, and McCaffrey (2021).

The parallel features of legal and monetary orders have been stressed by the Italian legal scholar Bruno Leoni ([1961] 1991). See also Benson ([1990] 2011).

See Hülsmann (2008a, pp. 193ff.). Rather than speaking of orders and systems, Hayek (1973) used the terms cosmos and taxis. From our point of view, it appears to be important to emphasize that a system (or taxis) does not cease to be part of the overarching order. A system is an order that is hampered by interventionism. A system is always built on (and parasitical on) the underlying order. The most famous poetic expression of a system is the One Ring in Tolkien’s Lord of the Rings.

Xavier Martin (2003) has documented this process very thoroughly for the case of the origin of the Code Napoléon, the first French civil law code.

Copyrights and trademarks do not prevent anyone from learning and from applying that knowledge. We can therefore neglect them here.

For general surveys of the nineteenth-century debate on patents, see Machlup and Penrose (1950) and Lemennicier (1997). See also the texts collected in Sagot-Duvauroux (2002).

This mirrors a general feature of all public enterprise. Government-run organizations usually fail unless two conditions are simultaneously met: (1) the services they provide must be essential services (such as money, transport, utilities, and communication) and (2) the organization must have a monopoly.

Rationality traps are usually unintended. The authorities would rather avoid them, but they inescapably result from monetary interventions.

See also our previous works on this neglected topic, Hülsmann (2008, chap. 13) and Hülsmann (2013, chap. 10).

This is why a well-rounded education cannot just consist in mathematical training. It must be rooted first and foremost in the letters.

Hayek (1973, chap. 1, pp. 31ff.) argued that extreme forms of “constructivist rationalism” regularly lead to a revolt against reason. Voegelin ([1952] 1959, VI, 2) has similarly argued that the pursuit of fallacious constructions of reality (dreamworlds) in constructivist rationalism was a distinctive feature of neognosticism.

Toward the end of the nineteenth century, Carl Knies briefly commented on the relationship between the credit market and the rise of shareholder capitalism, yet without any reference to monetary interventionism. Knies (1879) highlighted the rise of a new type of leader who worked with “other people’s money” and who was not only important in business, but also in politics. These new leaders distinguished themselves by “a busy work energy, organizational talent, the ability to ‘command,’ perspicacity, a quick and unscrupulous will, and the ability to forecast future events” (p. 187). Knies then went on to stress that these men, precisely because they borrowed money in order to get rich quick, had contributed to “spreading that commercial (‘practical’) view of human life, according to which all things and services find their measure of value in what money they bring in, now or very soon” (p. 188).

General discussions of the impact of monetary policy on the labor market can be found in Hutt ([1930] 1954, [1939] 2011), Mises ([1949] 1998, chap. 21), Hazlitt (1960), Rothbard ([1962] 1993, pp. 522–28), Herbener (1992), Sennholz (1987), and Hülsmann (2013, chaps. 3–5).

By the same token, price-inflation also encourages the hoarding of nonmonetary goods. Shaw (1973) and McKinnon (1973) have studied this phenomenon in high-inflation African countries, but the principle also holds in low-inflation settings. This sort of hoarding goes hand in hand with negative real-income effects, both in the long run and in the short run (see Friedman 1969).