Abundance, Generosity, and the State

INTRODUCTION

Society is based on the division of labor. Each man produces some good or service in excess of his own needs. Each man seeks to exchange or sell that surplus. Each man acts in order to be paid.

This fact has always been a source of irritation and disagreement. In antiquity, menial work was for slaves and other subordinates. Free men did not labor.They did not seek to be paid. They were active within their families and as citizens. They sat in the senate and they went to war. But free Greeks and free Romans were not supposed to work in order to earn their living, and much less so with the intention of earning money.

This rigid moral code put a lid on economic development. It precluded the participation of the best-trained men in the commercial division of labor and created a permanent conflict between political and economic elites. It made the preservation and growth of wealth dependent on slavery. While it facilitated the concentration of wealth in the hands of the political elite and their business allies, this code discouraged the accumulation of capital and thus condemned the masses of the population to permanent misery, short lives, and dependence. At the same time, anti-market morals did not eliminate or dampen greed, avarice, and envy but simply channeled them into different areas. Although these characteristics remained in the market, they found their strongest expression in the political process.

Ancient political systems were plagued by deep-seated corruption. The powerful used their political influence to secure revenue for themselves and their friends. The ruling class used all the “tools” that we know from modern politics, including taxation, prohibition, market regulation, deception, manipulation of the masses, and the artificial expansion of the money supply. Just as in our own day, these interventions were used to redistribute wealth from the bottom and the middle of the political food chain to the top, and they were used to stifle current and potential rivals. As time went on, the politics of the ancient world became more and more interventionist.

Concurrently, political power was also being used to conquer and plunder foreign countries. The Roman Empire could thrive as long as the internal expansion of power did not hamper the external one. When the economy fell into paralysis and shambles, as it increasingly did after the end of the second century, Roman military power began to stall and, eventually, to drop behind that of its neighbors. The empire fell because it had not come to grips with the moral requirements of a market economy.

Western civilization then had another run, albeit under very different auspices. From the ruins of Rome, the West rose again under the guidance of the Christian faith (Seipel 1907; Belloc 1912; Stark 2015). The Catholic Church glorified gratuitous suffering out of love for others or for a good cause, just as Jesus Christ had died on the cross for his friends and for all of humanity. Accordingly, the church also taught that labor was praiseworthy. Working was a way to lead a good life, even a holy life. Manual labor and menial work were no longer despised. Quite to the contrary, Saint Paul instructed the faithful, “If any man will not work, neither let him eat” (2 Thes 3:10). This radical inversion of traditional values also extended into commercial activity. Christians preached that it was right and just not only to labor, but also to labor in order to be paid. Church teaching provided moral legitimacy not only to monetary exchange, but also to profits and even to interest. The basic moral code, the foundation of all social and political relations, was overhauled. This cultural revolution was spearheaded by Benedictine monks and Scholasticism, and eventually sustained by the hierarchy of the church (Keller 1912; Sombart 1913, chap. 19; Stark 1997; Woods [2005] 2015).

The consequences were deep and wide. Medieval Europe experienced unheard-of development that eventually led to a cultural and economic renaissance. The eleventh, twelfth, and thirteenth centuries featured a panoply of groundbreaking technological innovations and artistic achievements. As Jacques Barzun put it:

During the 1,000 years before 1500 a new civilization grew from beginnings that were uncommonly difficult. The breakup of the Roman empire in the 5C had left a few towns and many isolated settlements to fend for themselves against outer anarchy. But the Middle Ages, as the plural indicates, were several ages. Their varied achievements include creating institutions, reforming others (more than once), and—according to some—showing the world two renaissances before the one that has monopolized the name. The latest view is that instead of two such flowerings, there was only one great one, from 1050 to 1250. (Barzun 2000, p. 225; see also Gimpel 1975; Pernoud 2014; Grant 1996, 2001; Harris and Grigsby 2007)

The renaissance of the High Middle Ages was blasted by the Great Plague, the Hundred Years’ War, and a concomitant political repression. But it resumed all the more boldly in the sixteenth century and accelerated in the second half of the eighteenth century. By the eighteenth century, the new science of economics had reinforced this movement. The medieval Scholastics did not imagine that per capita production could steadily and sustainably rise for all individuals and all nations at the same time. But the economists knew this to be possible, and Adam Smith brilliantly summarized and presented the principal mechanisms that were at work. He taught that savings and capital accumulation were the source of the wealth of all nations and that monetary revenues steered the division of labor.

A century later, the economists of the Austrian School demonstrated that these insights held true in particular for the revenues earned by the owners of monetary capital. Profits and interest steer the intertemporal allocation of savings and thus the division of labor.

In the light of economics, the exchange of goods and services no longer appeared to be a zero-sum game. Money prices and monetary revenues suddenly looked like elements of a grand mechanism that—like an invisible hand—steered people toward peaceful cooperation within the context of a rational economic order.

A MATTER OF BALANCE

This new understanding of the market went along with certain exaggerations. Some writers believed the market process to be a panacea for all human suffering. Some considered prices to be infallible road signs. Entrepreneurs just had to follow the orders of the market—they just had to seek profits—to do what is best, not just for themselves, but for all of humanity. Milton Friedman (1970), one of the greatest twentieth-century champions of economic liberty, embodied this tendency. His most famous newspaper article had the telling title “The Social Responsibility of Business Is to Increase Its Profits.”

Another exaggeration was even more momentous; namely, a one-sided analytical focus on market exchange as a mechanism for organizing the division of labor. The Industrial Revolution did not just feature an increase in production and wealth, but also saw a parallel increase in the importance of market exchanges. It was only natural—and largely correct—to see a causal connection here. Within certain limits, growing markets tend to entail greater production and therefore greater wealth.But the temptation was to exaggerate the importance of this relationship, and this is exactly what happened. In particular, the increasing appreciation of the market-driven division of labor went hand in hand with a neglect, or outright denigration, of gratuitous goods as causes of wealth creation. Gifts and other gratuitous goods seemed to be mere ways to distribute given wealth. They were sterile (if not nefarious) as far as the creation of wealth was concerned. Smith ([1776] 1994, bk. 1, chap. 3) argued that the growth of the economy was (exclusively) driven by the growth of markets, or, in his own terms, that “the division of labour is limited by the extent of the market.”Even beggars, while ultimately dependent on gifts, obtained what they needed “by treaty, by barter, and by purchase.”

Smith was admittedly an extreme case. The words “gratuitous” and “gift” can each be found exactly once in The Wealth of Nations.While he acknowledged that all revenues result from human labor and from nonhuman natural resources—they are the “annual produce of the land and labour”—the value of these revenues, or wealth, springs from human labor alone. In Smith’s conception, wealth is the power to purchase labor services ([1776] 1994, p. 34).What this means is that gratuitous benefits are by definition excluded from economic analysis à la Smith. Wealth cannot possibly spring from the gratuitous gifts of nature nor from the side effects of human action. Wealth is joined at the hip to duly compensated labor.

This has remained true, by and large, to the present day. The general tendency in economics has been to leave gratuitous benefits as much as possible out of the picture when it comes to explaining the causes and consequences of wealth. Even some of the very distinguished economists who have contributed valuable insights to the economics of gratuitous goods have emphasized that the study of these goods is simply not the economist’s business.

It is, however, impossible to take gratuitous goods completely out of the economic picture. Their presence is such an undeniable fact that they willy-nilly have to be referred to somehow, if only implicitly. The general tendency, therefore, has been to obfuscate them. For example, when present-day economists talk about “consumer surplus,” they thereby acknowledge that market exchange may convey gratuitous goods yet without using the word “gratuitous” or any similar expression.

The one-sided analytical focus on markets led most economists to believe that any growth of markets is always and everywhere conducive to a sustainable increase in aggregate output. As they had it, the trade-off between market and nonmarket activities concerned the proper balance between production and consumption. It did not seem to concern production as such. The latter could always receive a shot in the arm from expanding markets.

The best-known expression of this point of view in our day is Keynesian macroeconomics. According to John Maynard Keynes and his followers, virtually any increase in the size of markets, especially of labor markets, is beneficial. Insufficient aggregate demand puts a cap on the exchange of goods and services and, therefore, on the division of labor. Fortunately, the government has various tools, most notably the printing press, to prop up aggregate demand. It can create markets where there would be none without government intervention. It can increase the size of markets beyond the level they would reach in an unhampered economy.

The one-sided analytical focus on markets paved the way for two-pronged interventionist economic policies. On the one hand, government interventions were called for in order to create or extend markets. On the other hand, regulations and the welfare state were used to repair or alleviate the excesses that resulted from the inflation of markets. Although these interventions moved in opposite directions, they fed upon each other. The artificial promotion of markets created corruption, indifference, and irresponsibility. It widened the gap between rich and poor; and it alienated rich from poor, young from old, wage earners from capitalists. Such problems served to justify government “social” policies and control of business, both of which in turn reinforced the problems of corruption, indifference, and irresponsibility.

The one-sided focus on the benefits of markets also led to various reactions in economic thought that were just as one sided and ill fated. Some who saw the flaws of bloated market systems believed it was possible and expedient to get rid of markets altogether. Some believed that free societies were naturally prone to materialism and that nonmarket activities could not thrive without support from the state. Some believed that nonmarket activities were incompatible with capitalism. In short, one intervention entailed the next, and one theoretical one-sidedness entailed many others.

The only way out of these tiring and destructive spirals is to establish a proper balance, first and foremost on the cognitive level, so that the right balance may also be found in practice. Finding the right balance does not mean reinventing the wheel. It is true that much of what passes as economic science today is wrongheaded. But the science exists. It is merely incomplete and disorderly. To establish a balance, it is necessary to reflect on the relations between market and nonmarket activities. In order to understand the scope and limits of the economic goods that are exchanged on the market, it is necessary to study the scope and limits of the economic goods that come free. The purpose of the present book is to do this in a systematic way.

Gratuitous goods and services play a central role in a free economy. They not only affect the distribution of incomes but are also a driving force of production and the division of labor, of saving and investment. They do not just exist side by side with market exchanges. Rather, they infuse the market itself, and they thrive and perish along with it. There is a proper balance between gratuitous goods and goods that have to be paid for. This balance is not rigid and one-dimensional. It varies in the course of time, under the impact of changing cultural, political, and economic circumstances. It tends to be established when people are free to act within their property rights. If such freedom of action is curtailed by the force of the state, equilibrium cannot be reached and gratuitous goods and services take a hit. They suffer when markets are inflated. But they suffer no less when markets are suppressed.

These are the central ideas that will be developed in this book.

SELECTIVE LITERATURE REVIEW

We have already mentioned that Smith was especially adamant in portraying labor as the exclusive source of economic goods, specifically of the value of these goods. Nature herself was in Smith’s eyes not the proverbial corn of abundance, but a zealous maid who “worked” and “laboured” hand in hand with man.Without much exaggeration it may be said that the economic theory of gratuitous goods had reached an early nadir in The Wealth of Nations. Things could only improve from here. As Jean-Baptiste Say ([1803] 1861, p. 71) pointed out, Smith had inverted the position of the physiocrats.The latter had argued that human labor never created any net value. Only nature did, and she did so gratuitously.

Say himself considered that labor and nature were the ultimate causes of wealth.Ironically, although he had excluded gratuitous goods from the field of political economy, he in fact did study these goods’ relation to value, prices, and revenues, albeit in a rather incidental manner, as we shall see. Say also discussed the merits of gratuitous money production and gratuitous civil service, especially public administration and public schools.

Say and David Ricardo paved the way for Frédéric Bastiat, who a generation later studied these relations much more systematically and generalized them into a new philosophy of “social harmonies.” We will discuss his ideas in more detail in chapter 6. More than any other economist before him, Bastiat studied the role of gratuitous goods within society and the economy. He saw these goods as being at the very heart and foundation of the material abundance that spontaneously resulted from a social order based on private-property rights. Catherine Gbedolo (2015, chap. 1) rightly called him the father of the economics of gratuitous goods.

The marginalist revolution of the 1870s then brought about a setback in the study of gratuitous goods. The word “gratuitous”— though prominent in Say’s work and central in the writings of Bastiat—was not used even once in Carl Menger’s Principles of Economics nor in Léon Walras’s Elements of Pure Economics. The subject was equally neglected by Vilfredo Pareto, Friedrich von Wieser, and all the other pioneers of the new economic approach.

Let us look at the principal British authors in a little more detail to illustrate this point. In Stanley Jevons’s Theory of Political Economy, the word “gratuitous” is used exactly once, when the author mentions the gratuitous fruits of nature, though he takes care to clarify that these fruits are “almost gratuitous” ( Jevons 1871, p. 182). Like Smith, Jevons did not believe nature’s goods to be genuinely gratuitous at all, and we shall see later that he was also adamantly opposed to all organizations that provided relief and other gratuitous services. Reading Smith and Jevons, two eminent British economists separated by a century, one may get the distinct impression that the studious neglect, and even denigration, of gratuitous economic goods has been a characteristic of the British tradition of political economy.

Things improved somewhat with Alfred Marshall, who, in line with the Continental authors, recognized and emphasized the importance of the “free gifts of nature”—an expression he used eighteen times in his Principles of Economics and which designated the income derived from the free goods of nature (see Marshall [1890] 1920, p. 74). Marshall stated that the River Thames, a free gift of nature, had contributed more to English wealth than all canals combined, and maybe more than all the railroads of the country (p. 59). Marshall also emphasized that market exchange may have incidental positive repercussions for outsiders. Yet in this context, he shunned any use of the word “gratuitous” and its variants.The gratuitous benefits that the activity of one person creates for other persons are in Marshall’s idiom “external economies,” or, in today’s jargon, “positive external effects.”

Marshall’s disciple Arthur Cecil Pigou then fell back into the traditional habit of British economists, making no reference to gratuitous goods and services, as far as the ordinary operation of a market economy was concerned, at any rate. In his celebrated Economics of Welfare, he elaborated the Marshallian concept of external economies. But like Marshall, Pigou carefully avoided in this context any use of the word “gratuitous” and its variants. When dealing with the market economy in general, he barely mentioned the gifts of nature (Pigou [1920] 1932, p. 28). By contrast, Pigou explored with loving care the various welfare-enhancing policies that governments could pursue by handing out taxpayer money (pp. 722ff.), a subject that we will discuss in some detail in chapter 10.

The bottom line is that the new marginalist approach was not a boon for the economics of gratuitous goods, as it could have been and as it should have been, but a deplorable setback after what Bastiat and others had already achieved in the mid-1800s.

Now, there are straightforward reasons that might account for this failure. The marginalist approach was a decisive breakthrough in price theory. Two subsequent generations of economists were absorbed in the task of assimilating the implications of price theory and applying it to various fields of market analysis, such as factor pricing, money, business cycle analysis, and international trade.

This initial focus on market phenomena was reinforced by a simultaneous attempt to introduce mathematical modeling into economics. Such modeling was greatly facilitated by the hypothesis that market participants are driven exclusively by the desire for monetary gain (the homo oeconomicus hypothesis). It was also facilitated by the exclusive focus on hypothetical equilibrium situations, in which costs are equal to price, as well as by the postulate that all economic goods are either exchanged or transferred as gifts. But it was precisely this sort of modeling which created a tension between the model and observed reality. It was this modeling which hampered the conceptualization of gratuitous goods, and of market and nonmarket behavior, under one theoretical roof.

The focus of mathematical reasoning is invariably on the quantitative dimensions of any problem. In economics, this focus has deflected attention away from the study of subjective value, intentions, and other factors in human action that do not have a numerical dimension. Unfortunately, with the increasing adoption of mathematical reasoning to the exclusion of any other, the intellectual horizon and the toolbox of economic thinking have been dramatically curtailed. Today, the training of doctoral students in economics typically revolves around the production and interpretation of quantitative data. All other issues pertaining to the economic analysis of reality are, at best, dealt with in secondary courses. As a rule, these issues are relegated to other disciplines, such as philosophy, sociology, anthropology, and law.

It goes without saying that this trend is particularly pernicious with regard to our present topic. It is indeed impossible to properly deal with the economics of gratuitous goods without some basic notion of subjective value, property law, the theory of social acts, and the epistemology of the social sciences, to name just a few analytical tools. The analysis of donations also crucially relies on the distinction between final and efficient causes, a distinction that would have been familiar to all scholars of the nineteenth and even of the early twentieth century, but which is almost completely ignored by present-day economists.

One notable exception to the mathematical transformation and conceptual impoverishment of economics was the Austrian School, which largely preserved the traditional realist approach to economic science. Menger and his disciples rejected mathematical modeling of human action out of principle. They could therefore dispense with the haphazard assumptions about human behavior that were so convenient, if not necessary, for the construction of mathematical models.

The writings of Menger’s disciple Ludwig von Mises paved the way for the integration of nonmarket behavior into a general theory of human action, which Mises called praxeology. In Misesian thought, there was still a focus on the economics of markets, but this focus was now part and parcel of a more general conception. Mises’s theory contained most of the elements needed to restore the much-needed balance between market and nonmarket activity that we referred to earlier. It is true that he did not work out a theory of gratuitous goods. However, Mises provided a general framework for such a theory, as well as several important elements, most notably an analysis of gratuitous-credit policies, of profits and losses, and of the social role of creative geniuses. He also developed the classical economists’ theory of interventionism, especially monetary interventionism, which is of fundamental importance to understanding the impact of public policies on gratuitous goods, as we will see. The present book is squarely built on the foundations that Mises established seventy years ago. We will show that the Misesian realist framework is a suitable foundation for a general theory of the nature, forms, causes, and consequences of gratuitous goods.

Despite its prominence, the Austrian School has always been a minority movement within twentieth-century economic science. The majority was committed to the positivistic modeling that we just mentioned. It was inevitable that the mainstream movement would be criticized for its analytical shortcomings and that other disciplines would emerge which sought to cover those aspects of human action that did not make it into the models. With respect to gratuitous goods, the most formidable challenge came initially from outside of economics.

In 1923–24, the French anthropologist and sociologist Marcel Mauss presented a study of gifts in primitive societies. He extrapolated his findings into a number of general contentions about gifts and their role relative to markets. He contended that, strictly speaking, there is no such thing as a pure gift at all. And neither is there something like a pure contractual exchange between consenting individuals. In the real world, he argued, all social relations are based on reciprocity, but the respective obligations cannot be final and conclusive. They are partially determined by the exchange partners but are mostly regulated by overarching customs and social conventions. Every individual act of exchange is part of a social network of claims and obligations. Therefore, exchange can never finally fulfill obligations, but always takes place within the framework of an unfinished and unfinishable reciprocity. We will discuss these ideas in chapter 4.

Mauss’s book had a great impact on subsequent generations of anthropologists and sociologists.Like Mauss and like Émile Durkheim (Mauss’s father-in-law), most of these writers sought to develop a theory of human action in deliberate opposition to economics. This ill-fated attempt was motivated most notably by the reluctance to accept the political (pro–free market) implications of economics.

The paradigmatic example of this strand of the literature is Marshall Sahlins’s brilliant 1974 book Stone Age Economics. With a sleight of hand à la Rousseau the author claims that scarcity is not a universal condition of human life but rather has become widespread and important only in recent times: “The market-industrial system institutes scarcity, in a manner completely unparalleled and to a degree nowhere else approximated” (Sahlins [1974] 2017, p. 4, emphasis added). By contrast, in the age of hunters and gatherers, there reigned a “pristine affluence” (pp. 27, 38). Humans benefited from an abundance of animals, vegetation, and materials that just lay around them, “free for anyone to take,” such as “stone, bone, wood, [and] skin” (p. 10). Our primitive ancestors were bathing in abundance because their consumption was moderate and not artificially stimulated by advertisements and competition for wealth and power (cf. pp. 76, 103, 121, and passim).

These are fantastic claims. The evidence continues to show that stone age communities were not blissful paradises of abundance, leisure, and generosity. They were permanently engulfed in wars, were habitually starving, and helplessly suffered from disease and high infant mortality.

Other authors, while not denying the problem of scarcity, have set out to construct a new economics by synthesizing Mauss’s teachings and traditional economic science, yet without endorsing the free-market political conclusions of standard economics. An interesting and representative case in point is François Perroux (1960, 1963, 1981).

In his Économie et Société (1960), Perroux brushes aside economic analysis à la Henry Hazlitt (p. 5) and Ludwig von Mises (p. 9) and sets out to rebuild the discipline on a new interpretation of Adam Smith, John Stuart Mill, Karl Marx, and Léon Walras. In Perroux’s eyes, the cardinal sin of conventional economics is to focus too unilaterally on the single paradigm of perfect market exchange, that is, on the hypothetical exchange of equivalent values. However, real-world markets are not of this sort. The traded goods never have the same value and therefore one person always gains at the expense of another. In other words, market failures abound. Moreover, there is no correction mechanism inherent to the free market. The market is an invasive institution (“une institution envahissante,” p. 130) that tends to spread and amplify the problems resulting from its own internal shortcomings and contradictions. A solution must therefore come from outside of the market. Perroux argues it should come in the form of coercion and gifts. However, he considers that both have been completely neglected in standard economic theory and policy. He therefore sets out to re-emphasize their role and proceeds to study gifts by closely following the Maussian approach (pp. 156–76 and passim).

Perroux’s book still serves as a lesson on how not to construct a theory of gratuitous goods, both in substance and in style. Perroux’s cardinal flaw was to try to replace economics root and branch with an eclectic amalgamation of insights, models, and hypotheses derived from different (and often incompatible) theoretical frameworks. Among the authors who did not make it into this conceptual hotchpotch were his countrymen Say and Bastiat, who could have taught him a thing or two about gratuitous goods. Perroux wrongly chided economics in general for its emphasis on methodological individualism, and he conflated the integration of gratuitous goods into economics with the introduction of methodological holism (collectivism). He despised the works of mainstream economists, but just like them, Perroux confused economic analysis with modeling exercises. Like Pareto, Marshall, and Wieser, he spuriously distinguished economic motivations from noneconomic motivations. And he did not show the slightest awareness of the particular problems raised by government interventionism.

Another writer who famously combined Mauss’s conception of gifts with poor economics was Richard Titmuss, the godfather of the British National Health Service (see Hughes 1991, p. 18). In distinct contrast to Perroux, Titmuss never received any formal training in economics whatsoever. He was an autodidact working on problems of social administration and social policy. In his book The Gift Relationship: From Human Blood to Social Policy (1970), he categorically opposed blood markets of any kind. Blood just had to be provided in the form of blood donations.

Titmuss’s argument was largely based on a comparison of the US health system (where about a third of all blood donors were paid) with the health system in England and Wales, which entirely relied on unpaid volunteers. He presented three main arguments.

First, “a private market in blood entails much greater risks to the recipient of disease, chronic disability and death” (Titmuss 1970, p. 157). Titmuss highlighted various problems in the US blood market. Most notably, he showed that during blood shortages, which prompted rising blood prices, the additional supplies which came to the market were systematically of a lower quality than the older blood stocks. He concluded that a purely gift-based system of blood provision was preferable to a market-based system. Paid blood donors tended to be “more reluctant and less likely to reveal a full medical history and to provide information about recent contacts with infectious disease, recent inoculations, and about their diets, drinking and drug habits that would disqualify them as donors” (p. 151). Secondly, he contended that the market-based system “represses the expression of altruism, erodes the sense of community, lowers scientific standards, limits both personal and professional freedoms,” and “places immense social costs on those least able to bear them—the poor, the sick and the inept” (pp. 245–46). And thirdly, even if a market for blood was introduced only in some regions, it would create problems for other regions by depleting their supplies.

However, Titmuss’s argument was riddled with flaws (see Arrow [1972] 1975; Shearmur 2001). For example, he blithely assumed that blood buyers would never differentiate between better and worse blood, for if they did, the different blood qualities would be reflected in different prices, and blood of insufficient quality would find no purchaser at all. He did not anticipate that the process of selecting blood donors might become politically contentious, by requiring the donors to “divulge what is normally private information (regarding drug-taking and sexual practices), information that touches on social identity, not just individual medical history” (Steiner 2003, p. 151). He also failed to anticipate the increasing need for blood products (especially plasma and its derivatives) which can be preserved for longer periods than the blood itself. All of his thoughts revolved around the static scenario of blood transfusion needs. He did not imagine how new technologies might revolutionize the demand for and supply of blood and how markets could help those who had to deal with these changes. Last but not least, Richard Titmuss failed to properly assess the risks of a purely donations-based blood supply, and he completely failed to study the pitfalls of his preferred statist solution of entrusting public bureaucracies with managing blood banks and selecting blood donors.

Some of Titmuss’s arguments merit careful consideration. For example, it is true that the development of blood markets would likely change the motivations of former donors and it is also true that changes of this sort are likely to become culturally entrenched. However, acknowledging such facts is not tantamount to condemning blood markets and endorsing health socialism. The Gift Relationship failed to make a solid case for the latter, not least of all because it was not rooted in a solid theory of gifts.

Similar fallacies have bedeviled many other works which (without relying on Mauss) tried to bring gratuitous goods into the purview of economic analysis.One example is Bernhard Laum’s (1960) book on the “giving economy” (Schenkende Wirtschaft). The author describes the role of gifts in the human economy, as well as the historical transformation of that role from the Middle Ages to the present day. He argues that in the medieval economy, giving held center stage. Only in modern times has giving been relegated to a secondary position, behind production and exchange. This transformation does not meet with Laum’s approval. He deems it to be regress rather than progress.

So far, so good. The trouble is that Laum does not explain why this transformation took place. Neither does he explain why the greater prevalence of gift giving in the Middle Ages should be considered preferable to the modern situation. But without understanding the driving forces behind a historical process, there can be no true understanding of it, nor is it possible to come to any viable practical conclusions.

Let us illustrate this problem with one of Laum’s central contentions. He argues that sharing a meal with guests is the archetypical form of economic activity. In the Middle Ages, it still held center stage and was celebrated with public or semipublic banquets, but it gradually faded into the background. In other words, the economy was formerly consumption centered and gift centered, and this shaped the very meaning of economic activity.By contrast, today, production and exchange predominate.

Now, let us grant for the sake of argument that Laum has correctly stated the facts. This still leads us nowhere because he does not tell us anything about the underlying causes. Why was the medieval economy in Europe more consumption centered than the modern one?

Laum insinuates that the medieval period was defined by a joyful and altruistic mindset, whereas today’s mentality is obnoxious and stingy because thinking and acting revolve around production and exchange. However, this is clearly not the whole story. The lavish banquets of the Middle Ages brought together rather small groups of affluent and powerful persons (and their servants) whereas the peasant population was often starving. Moreover, sumptuous meals were an outgrowth of medieval political organization (see Hüllmann 1805, pp. 88ff.). The provinces were ruled by delegation from suzerains to vassals. Such delegation could be revoked; therefore, the position of the vassals was fragile. When their suzerain paid them a visit, they were obliged to host him, and they had a strong interest in doing it well. Kings and military leaders often showed up with a considerable following (and troops) and expected to have full access to all the resources of the land, including food and drink. Their consumption was usually excessive, as they tried to squeeze the maximum material benefits out of these short stints. They could not expect to take much money, as monetary exchange was still in its infancy. They therefore helped themselves to food and drink as much as possible. To protect the vassals against the potentially ruinous consequences, the exact supplies to be surrendered to a travelling suzerain, as well as the quality and quantity of dishes and drink to be served at the banquets, were eventually regulated.

In other words, the great banquets of the Middle Ages must not be misinterpreted as emanations of sociability and altruism. They were not even business meals. They were part and parcel of vassals’ tribute to the overlord. These meals were a mortal threat to the working population. Their disappearance after the Renaissance brought great relief.

Let us now turn back to those writings which were most helpful for our study of the economics of gratuitous goods. We have been able to rely on philosophers like Saint Thomas Aquinas, Edmund Husserl, Martin Heidegger, Jacques Derrida, and Jean-Luc Marion. They studied the nature of giving and givenness and thereby contributed to this analysis, which is more strongly focused on the causes and consequences of economic goods. But one philosopher, Josef Pieper, was a major source of inspiration for the present work. We have benefitted not only from his well-known studies on the virtues, but also, especially, from his short monograph on the nature and social role of leisure and sacrifice, which he published right after World War II under the title Muße und Kult (Leisure, the Basis of Culture). Our economic theory of donations is built on the foundations that Pieper laid out in this work.

We have already mentioned that the theories of Bastiat and of the Austrian School are foundational for the economics of gratuitous goods. Next to them, Kenneth Boulding deserves another place of honor. In distinct contrast to Laum, Titmuss, and many others, Boulding provides a genuinely economic analysis of gratuitous goods in his short monograph on the economic role of transfers—or grants, as he also called them. It is quite close in structure to our present volume. The Economy of Love and Fear: A Preface to Grant Economics distinguishes between voluntary and forced transfers (Boulding 1973, p. 3). The former are typical emanations of “love,” whereas the latter result from “fear.” In the light of this distinction, Boulding goes on to cover all major elements of the economic analysis of gratuitous goods. Most notably, he tackles the crucial issue of unintentional gratuitousness, an issue that is prominent in the works of Bastiat, though Boulding does not make reference to this illustrious predecessor.

Boulding’s analysis goes beyond the gratuitous provision of economic goods. Not all grants are unconditional gifts. His decision to focus on grants seems to have been at least partially inspired by a concern with connecting his theoretical discussion to the available statistical material (Boulding 1973, p. 2). Neither does Boulding take sufficient care to study the conditions under which gratuitous goods emerge or the forms that they can take. Most importantly, he does not examine in any systematic way the impact of government interventionism on the provision of gratuitous goods. However, despite these limitations, Boulding’s book is a helpful source on which we will rely repeatedly in the following pages.

Another strand of literature that has served us well concerns the economic analysis of the welfare state or, more generally speaking, the economics of forced transfers. Next to the very abundant literature on gifts, there are many valuable economic discussions of the welfare state, written by both its proponents and opponents: Beveridge, Pigou, Jouvenel, Mises, Rothbard, Seldon, Cogan, Bartholomew, Dalrymple, Habermann, and Rhonheimer. We will refer to these writings in part three.

However, the motivation for writing the present book did not come from Boulding or Pieper. Neither did it come from Say, Bastiat, Mises, Laum, or Perroux, even though I have long been familiar with their writings, which have proved to be very useful. Rather, my inspiration came from Pope Benedict XVI’s encyclical Caritas in veritate (Love in truth), published in 2009. Here the Holy Father drew attention to what he calls “the principle of gratuitousness.” He argued that this principle manifests itself in the divine gifts of love and truth, without which human life and authentic fraternity are strictly impossible. Benedict suggested that the principle of gratuitousness also determines economic life and would shape it much more thoroughly than at present if it were allowed to develop unhampered. And he called all people of goodwill “to demonstrate, in thinking and behaviour, . . . that in commercial relationships the principle of gratuitousness and the logic of gift as an expression of fraternity can and must find their place within normal economic activity” (2009, sec. 36).

When Caritas in veritate was published, the present author did not take the challenge. He was busy with other projects and did what professors often do in such cases: he handed the job over to a doctoral student. As a consequence, Catherine Gbedolo (2015) set out to explore these neglected grounds. In her dissertation, she revisited the history of French and German economic thought and discussed the works of Bastiat, Proudhon, Mauss, Laum, Perroux, and other forerunners in the field and outlined an economic approach to the study of gratuitous goods, building on the best elements in the works of her predecessors. The present work develops and extends the general logic of Gbedolo’s approach and covers the English literature on our subject in greater detail.

CARITAS IN VERITATE

It is appropriate to give a short presentation of Caritas in veritate. It is similarly appropriate to warn the reader that throughout this book, and especially in part one, we shall make frequent references to biblical sources and theological ideas. The purpose of these allusions is not to claim their authority, but to show how the narrow economic point of view may fit within the broader conceptions of Christian theology and philosophy. It is our response, however imperfect, to Benedict’s challenge.

Benedict XVI points out that without love, man is unable to embrace nature, other human beings, and himself and that without truth, the forces of nature cannot be tamed and individual and social conflicts cannot be solved. The ability to love and to recognize the truth is inborn, yet neither results from human choice. Truth and love cannot be decreed, nor can they be produced. Truth comes to us without being so directed. It comes in the form of insight, invention, and intuition. Similarly, love for God and for our fellow men is the result of neither human action nor human design. We cannot produce that love within us by an act of sheer will; we must receive it gratuitously from our divine creator.

The principle of gratuitousness, which we encounter first and foremost in the divine gifts of truth and love, also manifests itself in the material world. Gratuitousness does not only concern spiritual, eternal, and supreme goods such as love, hope, faith, and truth. It also concerns economic goods. Economic life is in many respects based on gratuitous services; therefore, an economy is only truly flourishing and truly human if it does not hamper this gratuitousness but allows it to fully develop.

Caritas in veritate develops the principle of gratuitousness in some detail. As far as the principle’s spiritual dimension is concerned, the encyclical’s message is strong and clear. While remaining intriguing and suggestive, Caritas in veritate ceases to convince as soon as the Holy Father tries to apply the principle of gratuitousness in the material sphere, and especially in the scarcity-infused economic world.

We find statements such as the following:

Space also needs to be created within the market for economic activity carried out by subjects who freely choose to act according to principles other than those of pure profit, without sacrificing the production of economic value in the process. (Benedict XVI 2009, sec. 37)

Benedict XVI elaborates:

What is needed, therefore, is a market that permits the free operation, in conditions of equal opportunity, of enterprises in pursuit of different institutional ends. Alongside profit-oriented private enterprise and the various types of public enterprise, there must be room for commercial entities based on mutualist principles and pursuing social ends to take root and express themselves. It is from their reciprocal encounter in the marketplace that one may expect hybrid forms of commercial behaviour to emerge, and hence an attentiveness to ways of civilizing the economy. Charity in truth, in this case, requires that shape and structure be given to those types of economic initiative which, without rejecting profit, aim at a higher goal than the mere logic of the exchange of equivalents, of profit as an end in itself. (2009, sec. 38)

In the eyes of a professional economist, these statements are vague and partly mistaken. It is vague to speak of “spaces for economic activities,” “economic values,” and “hybrid forms of commercial behaviour.” It is mistaken to believe that the market is particularly beneficial if entrepreneurs and their firms operate under “equal opportunity” (especially if this refers to some sort of material equality, rather than equality before the law) and that markets tend toward, or aim at, the exchange of equivalents.

It would be tempting to give a line-by-line commentary on the economic content of the encyclical. But this would be a sterile exercise. An encyclical is not a scientific paper. Its objective is not to compete with economists, sociologists, physicists, historians, or physicians as far as the explication of the material mechanisms of our world is concerned. The basic aim of Caritas in veritate is to call for reflection and for action in regard to the principle of gratuitousness. There are many open questions around the manifestations of this principle in the material world. What is the precise nature of gratuitousness? What are its forms? What are its causes and consequences? What is its scope today, what could it be, what should it be? On these questions, the pope has weighed in with the authority of his divine office. He has opened a debate, but not closed it. He has called for action, yet without providing a blueprint. He has posed a challenge to the scientific community and to practical people.

The first major publication in response to this challenge was John Mueller’s Redeeming Economics: Rediscovering the Missing Element (2010). Mueller admires Smith, Mises, and Gary Becker. He does not criticize them for what they have done, but for what they have failed to do. He contends that their shortcomings are endemic to modern economics, which Mueller calls “post-Scholastic” economics, and can be repaired by reverting to the writings of Saint Augustine and Saint Thomas Aquinas.

Mueller walks the reader through his vision of the history of economic thought, from Aristotle to the church fathers and the Scholastics to classical and neoclassical economists. Mueller claims that starting with Smith, economists have one-sidedly focused on problems related to production and exchange and have neglected to develop a proper theory of consumption and distribution, one that includes gifts. By bringing the insights of the Scholastics back into the picture, however, this deficiency can be amended in the form of a new paradigm that he calls neo-Scholastic economics. Mueller then sets out to apply his theoretical conceptions to the household economy (marriage, child-rearing, spending patterns) and to economic policy issues (protectionism, government failure, unemployment, and inflation).

Redeeming Economics contains valuable insights and conjectures that are relevant for a theory of gratuitous goods. For example, Mueller underscores Saint Augustine’s contention that the ultimate objective of all human action is the love of persons, not of things. He also correctly points out that “no school of modern economics, including the Austrian School, has an adequate theory of personal gifts” (Mueller 2010, p. 142).But Redeeming Economics does not provide such a theory, either, nor a theory of gratuitous goods, much less pave the way for a fundamental reorientation or reform of economics. The book’s basic flaw is to go after the wrong target. PostScholastic economics does not suffer from a neglect of the theories of consumption and distribution. It is true that these parts of economics are less prominent today than they once were. But they continue to play an important role.Claiming otherwise eerily resembles the blatantly false Marxist claim that “bourgeois” economics could not cope with the productive function of consumption.Neither is it true that the introduction of an “adequate theory of personal gifts” requires an overhaul of the realist approach of the Austrian School, as Mueller claims. The absence of such a theory is a deficiency of omission rather than of incompatibility.

Mueller went after the wrong target, but then which target is the right one? Caritas in veritate highlights a number of issues that deserve to be thought through. Rather than explaining or criticizing the encyclical, we shall therefore build on some of its most intriguing contentions, which promise to enrich economic analysis because they can be fruitfully combined with certain elements that have already proven their fruitfulness in other areas of economics. In particular, we intend to study the ramifications of the fact that it is impossible to create a market for gratuitousness and equally impossible to establish “attitudes of gratuitousness” by the law (see Benedict XVI 2009, sec. 39). This idea will lead us most notably to identify the act of donation as an economic category of its own.

Moreover, we shall elaborate on the idea that the principle of gratuitousness can be present in normal economic activity, and especially in commercial activity (sec. 36). We shall demonstrate that normal economic activity is infused with various side-effect goods that benefit other people without the slightest compensation. And this also holds true for the market process. Saving, hoarding, investments, and commercially driven research and development of new products create significant unintended benefits for third parties. And precisely because they are unintended, or spontaneous, they are typically unrecognized. In the words of Benedict XVI (2009, sec. 34):

Charity in truth places man before the astonishing experience of gift. Gratuitousness is present in our lives in many different forms, which often go unrecognized because of a purely consumerist and utilitarian view of life.

OUTLINE

In response to Benedict XVI’s challenge we shall set out to develop a general theory of gratuitous goods and to integrate it into the overall edifice of economic science.

This book is divided into three parts. In part one, we present the foundations of this theory of gratuitous goods, relying not only on the economics literature, but also on philosophical, sociological, anthropological, and theological sources. We will also study the causes and consequences of gratuitous goods, insofar as these relate to the ultimate purpose of donations, which is to make other people better off or to do some good deed for its own sake.

In part two, we turn to the proper economics of gratuitous goods. We will examine how gratuitous goods result from voluntary human action unhampered by any institutionalized coercion. We will first deal with the economics of donations and, in particular, with the interrelations between donations and market exchanges. This will be followed by an analysis of how unhampered human action, both within and outside the market economy, generates beneficial side effects. We will also discuss why such side effects—and with them gratuitous goods in general—have been underappreciated and neglected in the economics literature.

In part three, we will bring our analysis full circle by dropping the assumption that property rights are fully respected. This will allow us to examine the impact of government interventions on gratuitous goods—on how they are generated, in which quantities and forms, and to whose benefit. Here we shall revisit conventional topics such as the theory of public goods and the theory of the welfare state. We shall also discuss philanthro-capitalism, NGOs, and other issues related to civil society. But our special emphasis will be on highlighting the consequences of monetary interventionism, a crucial problem that has been almost completely neglected in the literature on gratuitous goods.

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A characteristic expression of this worldview is Plato’s distinction between the (free) philosopher and the (menial) laborer or artisan, the banausos (see Plato, Theaitetos 175 d–e).

See Jhering (1893, pp. 105–15). The author argues that Roman mores were undermined by the immigration of destitute Greek scholars and intellectuals, who established the practice of remuneration for artistic and intellectual work.

At the onset of the twentieth century, Veblen ([1899] 1934, p. 36) observed that the old moral code, which denigrated labor and commercial activity, had survived through Christian times right into the heyday of capitalism: this “tradition has never died out. On the contrary, with the advance of social differentiation it has acquired the axiomatic force due to ancient and unquestioned prescription.”

Carl Menger (1871, chap. 4, sec. 2) studied the limits of markets from a microeconomic point of view and also took due notice of the influence of “exchange costs,” or transaction costs, as they are called today (pp. 170–71). One limitation of the purely microeconomic approach is that it takes property rights, and the rules governing the acquisition of property, as given. But such rules are liable to change under the impact of government interventions, which may repress markets but also inflate them. We will discuss this important issue in part three.

Similarly, in his Lectures on Justice, Police, Revenue and Arms, Smith ([1763] 1896, p. 172) asserts that “the division of labour must be proportioned to the extent of commerce.”

Let us quote this famous passage at some more length: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provides him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old clothes which another bestows upon him he exchanges for other old clothes which suit him better, or for lodging, or for food, or for money, with which he can buy either food, clothes, or lodging, as he has occasion” (Smith [1776] 1994, p. 15).

These mentions concern the gratuitous distribution of corn in the Roman Empire (Smith [1776] 1994, p. 151) and the gift to an heir in a succession (p. 362). Similarly, there is not a single use of either word in Smith’s Theory of Moral Sentiments, and there are only three incidental references to gratuitousness (the gratuitous execution of contracts of commission, the obligation in Canon Law to perform gratuitous promises, and gratuitous coinage) in his Lectures on Justice, Police, Revenue and Arms (Smith [1763] 1896, p. 133 and p. 201, fn 2).

The core concept of the “annual produce of the land and labour” is first mentioned on p. lxii. For the distinction between that annual produce and its value, see pp. 368 and 376.

See for example Wicksteed ([1910] 1933, p. 160). In the words of Jean-Baptiste Say: “The expression Political Economy is best suited to designate the science discussed in the present book, insofar as it is not the investigation of natural wealth, or that which nature supplies us with gratuitously and without limitation, but of social wealth exclusively, which is founded on exchange and property, both of which are social institutions” (Say [1803] 1861, p. 2n). Unless otherwise noted in the list of references, all translations of French and German are our own.

“In agriculture too nature labours along with man; and though her labour costs no expence, its produce has its value, as well as that of the most expensive workmen. Planting and tillage frequently regulate more than they animate the active fertility of nature; and after all their labour, a great part of the work always remains to be done by her” (Smith [1776] 1994, pp. 393–94, our emphases). The idea that all good things somehow spring from work and the systematic refusal to make any reference to the contribution of gratuitous factors, even in rather obvious cases, can also be found in other authors of the late eighteenth century. Josef Pieper ([1948] 1995, pp. 23–24) observed that Immanuel Kant assimilated all intellectual activity to “work.”

The opening sentence of The Wealth of Nations reads: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations” (Smith [1776] 1994, p. lix).

So did Ricardo ([1817] 2004, p. 76). In Pigou ([1920] 1932, p. 28), there is one coy mention of “Nature’s gifts” arguing that the latter could be exploited wastefully to satisfy present (rather than future) needs.

Marshall ([1890] 1920, p. 524) used the word “gratuitously” only when expressly excluding gratuitous services from the national dividend. So did Pigou ([1920] 1932, pp. 33–34, 40).

More so than in the work of Mises, the idea of a proper balance between market and nonmarket activities was central in the writings of Wilhelm Röpke. He also understood that an inflationary monetary system is the most nefarious cause of the disruption, and ultimately the destruction, of the natural economic order. In this respect he is an important predecessor to our own work. However, Röpke’s understanding of economics was superficial and often flawed. Most notably, he endorsed the fallacious equivalence postulate (see chapter 7), which prevented him from coming to an adequate understanding of the nature, origins, and effects of gratuitous goods.

See in particular Lévy-Strauss ([1949] 1969) and Gregory (1982). The latter points out that Morgan’s (1877) study of kinship was an important forerunner of this literature.

He claimed, rather grotesquely, that he had brought the analysis of coercion (contrainte) into economic analysis. The truth is that the study of coercion has always held center stage in economics. Perroux’s originality consists in bloating the definition of coercion. The meaning he attaches to this term covers not only violations of property rights, or threats of such violations, but just about any act that displeases somebody and, in fact, any obstacles to human action, including the physical characteristics of nature. For a critique of Perroux’s theory see Hülsmann (1993).

On the spectacular failure of the French health authorities in the early 1980s in dealing with donations of contaminated blood, see Morelle (1996).

Gbedolo (2015, pp. 78–132) provides a good overview of the French-language literature.

Laum points out that the German word Wirtschaft still designates both the economy and a gastronomical establishment. Similarly, the verb schenken (to make a gift) has a derivative, einschenken, which means to pour a beverage into a glass.

Josef Pieper ([1948] 1995). Legal analysis has also produced most helpful results, especially Jean-Jacques Dupeyrou’s (1955) doctoral dissertation, which laid the foundation for a comprehensive classification of gratuitous acts. However, Dupeyroux’s analysis suffers from an exaggerated opposition to what he calls the subjectivist approach. This leads him to distinguish gratuitous and payable acts on the basis of the equivalent-value criterion (see chapter 7 for a discussion of the problems of this criterion).

Similarly, Hodgson (1988, p. 161) claimed that “the utilitarian model of ‘rational economic man’ cannot capture the nature and function of the commitment to moral values, nor the complexities of the ‘gift’ relationships that is typical in this sphere.”

The theory of consumption is central to the work of Jean-Baptiste Say, whom Mueller (2010, pp. 71–72) mentions only in passing and only to assert, wrongly, that Say had no impact on the subsequent development of economic thought. The interrelations between consumption and production—namely, the productive functions of consumption—have held center stage in the modern theory of capital (see Jevons 1871, chap. 7; Böhm-Bawerk [1889] 1891; Menger 1888; Strigl [1934] 2000), as well as in the Austrian theory of the business cycle (see Mises [1912] 1980, chap. 19).

See Gregory (1982, pp. 103–7), who refers to Marx (1857, p. 89) and Sraffa (1960, appendix D). Like Mueller, Gregory and Sraffa have blithely disregarded the countervailing evidence.

Also notice that there is no such thing as Scholastic economics. The church fathers and the medieval theologians commented on various issues that are today the subject of economic science. But only one of them (Nicolas Oresme, with his Treatise on the Alteration of Money) produced anything resembling a systematic analysis of an economic problem. Similarly, Mueller’s reading of the history of classical and neoclassical economics is highly selective and misleading. He heavily focuses on the Anglo-Saxon tradition (Smith, Ricardo, Mill, Marshall, and Keynes) and more or less completely neglects Continental economists, especially Say and Bastiat. Mueller also plays down the importance of the Austrian School, even though its approach, in tune with Scholastic realism, would have been a very appropriate starting point for his own enterprise of building economic analysis on the foundations laid by the Scholastics.