Foundations of the Market Price System

Imagine, if you will, a community without a government—a stateless society—in which no group has the legitimate power to coerce other individuals or interfere into peaceful, voluntary exchange. In other words, imagine a world without taxation, without conscription, without government regulation of prices, rents and wages, without government regulation of production and trade, without government redistribution of income and wealth, and so on. In this imaginary world let us raise the basic question: “How can a person get by?” That is, how can a person acquire the material goods and services that he or she wants—the goods that enable a person to survive and prosper?

I. How Individuals Get By

The simplest way to answer the question “How can a person get by?” is to imagine each of us is a Robinson Crusoe, that is, an isolated person living and working alone in the bosom of nature. For Crusoe it is obvious that his ability to enjoy the world’s goods—to consume its fruits, vegetables, grains and other goods made from its resources—depends primarily on his own productive efforts. Clearly, Crusoe’s fortunes depend on his own efforts and ingenuity in exploiting the resources of nature; he cannot depend on anyone else but himself—there is no one else from whom he could beg, borrow, or steal in time of need. If he ever falls upon bad times, for reasons of poor health or bad weather, he would have no one but himself to depend on.

How Crusoe Gets By

Initially, of course, Crusoe could get by simply by scavenging the resources of nature—gathering wild fruit and grain, hunting wild animals, catching fish. To increase his productivity as a scavenger, he would have to create and use simple or crude hand-made tools and weapons. After a while, having exhausted the resources of a given locale, he would have to move on to search for new fruitful locales. If he ever runs out of exploitable locales or decides to give up his migrations and settle down in a given locale, he would have to learn how to cultivate artificially what nature produces naturally.

Thus, for Crusoe it is clear that as scavenger, hunter, or farmer, he can get by only through his own work or productive efforts. Now, how does this imaginary Crusoe model apply to the real world—a world in which people live not as isolated individuals but as members of society in which multitudes of individuals cooperate in production and trade in one way or another? How does a person get by in the context of society? How would Crusoe himself get by if, in his migrations, he stumbles upon a strange community? How would Crusoe’s options be affected? Would he still have to rely purely on his own labor? What alternatives would he have to working and producing for himself the goods he wants? What if, for some reason, he couldn’t work or didn’t want to work?

Getting By In Society

Initially, of course, Crusoe in society could continue to work out of habit ingrained during his existence in isolation. However, in society he would discover opportunities to specialize—to concentrate on the production of a single product or service—rather than pursue his Jack-of-al1-trades role of the past, when he himself had to produce the many different things he wanted. Now he finds he can concentrate on being only a farmer, a carpenter, builder, or fisherman, and live as well as, if not better than, formerly in his days of isolation when he was a Jack-of-all-trades. (The advantages of living and working in the social economy, based on specialization and the division of labor, are detailed in Chapter III).

In time, however, Crusoe would begin to discover that his new social existence as a member of society affords him new opportunities of getting by—opportunities that were not available to him in his days of isolation. For one thing, he would observe that some people, in times of personal distress or enhanced need, were able to get by through begging for handouts or charity from others, or by receiving gifts or inheritances. Still others, he would notice, were able to get by through borrowing money from money-lenders or banks. And finally, he would also discover that some people were getting by on theft—by forcibly taking from others. Most important of all, Crusoe would realize that all these new opportunities to get by, through begging, borrowing, and stealing, were all the consequence of the fact that, in society, a person is no longer a “Crusoe,” having to get by purely on his own resources.

Beg, Borrow or Steal

This brings us back to the original question: “How can a person get by”? In the case of isolated Crusoe it is clear that the only ultimate principle of getting by is the principle of work and production. In isolation, Crusoe has no one else but himself to depend on to make the things he wants—whether he is in health and strength or whether he is in distress and weakness. But in society it is a very different matter: the individual can at times resort to other ways of getting by, such as receiving gifts or handouts, borrowing money or other goods, or stealing from others. Obviously, none of these recourses are available to Crusoe living in isolation. Such are the advantages of living in society: it becomes possible to depend on others in order to get by.

Thus, at first glance, it seems that the answer to our original question—that a person must work and produce in order to get by—no longer applies when a person lives in society. But this would be a rash conclusion based on the fallacy of composition: the notion that what is true for the individual would also be true for society as a whole.

Fallacy of Composition

It is true that, in society, some people can occasionally resort to the principle of beg, borrow, or steal in order to get by. But in no way can a society as a whole—each and every one of us—resort to the principle of beg, borrow, or steal at all times, without anyone engaging in production. That is, it should be self-evident that, unless some people do the work that yields useful goods and services, it is impossible for anyone else to do any begging, borrowing, or stealing!

This truism can be easily spelled out. Someone must have produced the goods and wealth that others are able to receive as personal gifts, charity, or donations. Even the sons or daughters who inherit a fortune from rich parents—and therefore do not have to work the rest of their lives—are merely the benefactors of wealth produced by their parents or ancestors. Similarly in the case of borrowing. Borrowing is possible only as long as there are lenders who themselves must have worked and saved to accumulate the funds they lend to borrowers. The only thing different here is that the borrower will also have to work in order to pay back his loan.

Work, Production and Exchange

The same reasoning applies to the principle of getting by on stealing. Clearly there is no future for the thief or robber if there are no victims to steal from—that is, if there are no goods or wealth produced by others which he can covet and forcibly seize from their productive and rightful owners. Indeed, in all of these cases—in receiving gifts, borrowing, and stealing—the great extent to which people have utilized these resources is eloquent testimony to the great amount of income and wealth that others have produced and made available for charity and lending (fortunately) as well as for theft and robbery (unfortunately).

Economics therefore concludes that the only basic principle by which a community or society can get by is the principle of productive work. The more economically productive is a community, the more it is able to sustain those individuals who occasionally resort to the principle of beg, borrow, or steal.

Related to the principle of production, however, is the principle of free and voluntary exchange which is characteristically relevant to the social economy, in contrast to the isolated-man Crusoe economy. As we will see in Chapters III and IV, production in the modern social economy involves a highly developed system of specialization and division of labor, on the one hand, and free trade and exchange, on the other hand. In the present context it is correct to say that, in the social economy, free and voluntary exchange is as important a way of getting by as is production. This principle of getting by on production and voluntary exchange has been dubbed by the German sociologist Franz Oppenheimer as the economic means.

Digression on Theft and Counterfeiting

Before we proceed, let us clarify some questions that might have occurred to the reader. The above analysis may give the impression that stealing itself involves no “work.” Strictly speaking, we should have used only the word “production” and avoided the word “work,” which we used loosely and interchangeably with the word “production.” In economics, production refers specifically to the creation of useful goods and services, whereas work is used in the more general sense of “activity.” (See Chapter IV for more details on production.) By these definitions, the thief clearly engages in work but in no sense is he an economically productive agent—the creator of the goods he has stolen.

Nor is the person who gets by as a counterfeiter of money in any sense a productive agent. To be sure, there is no little work involved in counterfeiting Uncle Sam’s crisp greenbacks, but in no way can such creation be regarded the same as creating the bread, cloth, or machinery that arise from “productive” activities. Furthermore, counterfeiting cannot serve as a universal principle of getting by: if all of us worked at creating and passing out phoney money, and no one worked at producing the goods and services to be purchased with this money, there would be nothing to buy with the phoney money and hence no point to counterfeiting in the first place.

Indeed, what makes counterfeiting sensible and successful is the ability to carry off the deception involved—to make producers and retailers unaware of the counterfeit nature of the money received and therefore deceive them into believing that all dollars in circulation are exactly alike in legitimacy. That is, if sellers of goods and services knew in advance that money was counterfeit, they would refuse to accept it.

II. How Does Government Get By?

Let us now leave our imaginary stateless society—a world without government—and see what difference the existence of government makes, at least as far as economic production and exchange are concerned. Admittedly, a full-length detailed analysis of government and its role in the economy transcends the scope of this introductory book. Instead, we will confine our analysis to essentials. Since these essentials are relatively few and well-known, we can proceed to analyze the role of government in the economy within the same fundamental framework that we used in the preceding discussion.

Thus we can start with our basic simple question: How do governments get by? How do elected politicians and appointed government officials secure the “public” goods and services that they provide the citizens? How do they obtain the resources required to provide the public with education, defense, police, welfare, and other services? If we apply the same framework of analysis that was applied above to Crusoe and other individuals, it is not difficult to come up with pertinent answers.

Legal Monopoly of Coercion

First and foremost, governments throughout history have all had the same unique privilege: the legal monopoly power to exercize physical force or coercion over the individual. Under this monopoly privilege of coercive powers, governments have been able to implement systems of taxation, conscription, expropriation, and eminent domain as prime means of obtaining command over resources and wealth. Although under these monopoly powers governments also exercize controls over production and trade (by means of quotas, licensing, and prohibitions) and redistribute income and wealth by taxation and subsidies (transfer payments), it is primarily the power to tax, conscript, and expropriate that has enabled governments to get by.

The legal power to coerce citizens in these ways is truly a monopoly privilege that has been arrogated by all governments and denied to the individual. In society, no private individual can legally acquire goods or wealth from others except by voluntary exchange of goods produced by him or received by him as a gift or in a prior exchange transaction. That is, it would be illegal (criminal) for a person to directly seize another person’s property by force, against his voluntary consent. Not so in the case of governments: they can do legally what, for the individual, would be illegal (criminal). Specifically and to the point, governments can command resources for disposal by means of such forcible actions as taxation, conscription, and expropriation. And Franz Oppenheimer gave a name to this special way of getting by: he called it the political means, in contrast to the “economic means” of free production and exchange. For Oppenheimer, the economic means and the political means have been the only basic principles of getting by in all of human history.1

Political Means vs. Economic Means

All of this brings us to a crucial question: Is it possible for society to survive and prosper purely by the governmental principle of political means? Clearly, the answer is, “No.” Governments can get by only by forcibly appropriating the resources and productivity provided by the social economy under the principle of economic means. All the tax powers in the world would not enable any government to exist if there were no private income and wealth to tax away—income and wealth earned through the economic means of production and exchange. The conclusion is obvious: as a principle of getting by, the economic means is prior, and therefore superior, to the principle of political means.

A brief digression. The reader may have noticed an important omission in our catalog of political means. Governments today get by not only by taxation but also by deficit financing—by borrowing from the public and the banks in order to finance expenditures in excess of tax revenues. Clearly such deficit financing has become a hallmark of advanced countries throughout the world—a basic method of getting by for government. Nevertheless, government’s ability to borrow from the public and banks in order to finance deficits is vitally related to its power to tax. On the one hand, government can borrow from lenders only so long as it is able to pay them interest on the securities (debt) it sells them. On the other hand, government is able to pay interest on its debt simply by taxing the public to finance these interest payments. It follows, therefore, that government’s ability to finance deficits is vitally dependent on its power to tax.

III. Conclusion

The purpose of this chapter has been primarily introductory. The basic conclusion is that man must work and produce in order to create the goods and services that can satisfy his wants. In essence, however, there is nothing novel here; we knew this at the very start. Nevertheless, the discussion has cleared away some underbrush that enables us to get to the ultimately basic question in economics: Why does man have to work and produce in the first place? Why can’t man find the things he wants ready-made, without having to produce them? The answer to this central question is the subject of the next chapter on scarcity, the basic economic problem.

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2Franz Oppenheimer, The State (New York: Free Life Editions, 1975).

• 1See Thomas Sowell, Knowledge and Decisions (New York: Basic Books, Inc., 1980) for an elaborate analysis of how—despite the complex structures and environments of the modern division of labor—the free society and its market-price system generate, transmit, and apply “authentic” knowledge in the realms of economics, law, and politics. For an earlier treatment, see Friedrich A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960).
• 2Add to this the obfuscations, deliberate or inadvertent, of those messianic types who would deliver us from all our travails by imposing their illusions, myths and Utopian visions on the rest of us—and it follows that the task of discerning and explaining the true nature of economic existence becomes so much more difficult,