The Labor Policy of the Free Society
3. The Basic Institution of the Free Society: Personal Freedom
The only freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.
—John Stuart Mill
The basic institution of the free society is personal freedom. It is both end and means, desired in itself and for the social results it brings. The great society provides for its members the environment in which their personal freedom is at a maximum. It is a great society partly for this reason and partly for the reason that with personal freedom at a maximum, general well-being and security are realized in an elevated degree; and they, in turn, make possible an ever-growing scope of real personal freedom.
The Freedom to Act
By personal freedom in society is meant, not the actual physical or mental area of accomplishment of any particular person, but the scope of activity open generally to all. One person’s natural endowment of will or talent or both may make possible for him activities and achievements not equally open to other, less well-endowed persons. Society can do nothing about this; cannot make a Shakespeare of a person who lacks the will and the talent to write supremely. Nevertheless it promotes human freedom if it permits no human agency to prevent any person from trying to write as well as he can.
Society can likewise not make a tool-and-die maker of a person who lacks the requisite will and capacity; yet once again, if it is interested in promoting maximum human freedom, it will prevent any person or organization from frustrating the desire of persons who wish to try to become tool-and-die makers. The job of the free society is thus, in part, one of preventing human restrictions upon personal freedom.
Universal personal freedom must tend to set each person into the position which best compromises both his own wishes and the wishes of all other members of the community. The desires of any given person may be a chaos. Within the same psyche may be mingled longings of the most outrageously conflicting character. The free society does not arbitrarily simplify or order this chaos. It does not even command an irrevocable election. A man may strive to be a ditch-digger, a tramp, a lawyer, and a poet—successively or simultaneously. He may work as a physician for years, and then study hard to prepare himself for the life of a machinist. His friends and enemies may counsel against such a switch; but, in a free society, no person or institution is given the power to prevent his election. Instead, a vastly more wise and just and sensitive and social method operates; and it operates without prejudice to any one concerned, leaving all free.
The physician is free to try to become a machinist. His friends and enemies are free to counsel him concerning the project. And all other members of the community are free to exercise their own choice in the matter. If the community needs machinists, and if the erstwhile physician is qualified to do such work, the switch may be accomplished in a free society with no fuss. Of course the community may, if it wishes, offer less remuneration for the work of machinists than it does for the work of physicians. But the community’s power to make such a decision in no way lessens the freedom of the physician. It merely represents the evaluation of the members of the community as to competing desiderata. Freedom would be diminished if some force external to the spontaneously expressed wishes of the members of the community in the free market should impose a scale of remuneration for machinists different from that which the community had decided upon.
The freedom of the physician remains unimpaired so long as no one—agency or person—may conclusively prevent him from attempting to make the change he contemplates. His freedom is not diminished by the fact that he will have to accept less remuneration for his work as a machinist—any more than it is diminished if by choosing one road he misses the beautiful scenery which lies along another road to the same destination. Every choice involves a sacrifice. When the members of society offer more compensation to physicians than they do to machinists, they are saying that the community’s desire for physicians is more pressing. The man who nevertheless chooses to become a machinist is in a sense refusing to cooperate with society, and he cannot complain if his refusal costs him something.
Societies less intelligently operated, less flexible, and less humane than the free society, might be tempted to force the person who is qualified to do various jobs into the position for which the demand is at the moment greatest. Members of a free society need never fear, however, that their community will suffer in virtue of this difference. For the man who is forced to remain a physician when he has the capacity and would prefer to engage in some other occupation is in a constant state of frustration. He is less effective in his work. He represents a weakness in the social structure. If he is only one of great numbers in the same psychological difficulty, as would probably be the case in societies which act so arbitrarily, the social structure becomes very shaky.
Freedom, Equality, and Taxation
All men are agreed today that the state should be concerned with the freedom of every person. This widely shared conviction has led in some cases to the identification of equality and freedom. Many say that it is idle to speak of general freedom where some persons are in a position of substantial material disadvantage. This attitude has created a certain amount of confusion concerning the role of the state in society; and it has led to the adoption of certain policies which must be examined here.
The fact that many societies have adopted the principle of discriminatory, steeply progressive, income taxation cannot alter the fact just stated. It merely reflects one of the graver mistakes which have been made in some relatively free societies. Discriminatory income taxation puts at a disadvantage those born poor who earn high incomes; but the people who propose and support such taxation do not intend thereby to put the productive poor at a disadvantage. As a rule, indeed, they aim by such policies to promote equality. The trouble with them is not so much bad faith or bad motives as simply bad thinking. They have tried to gain an unattainable objective by an inappropriate means.
Such being the natural consequence of steeply progressive income taxation, that device can scarcely be viewed accurately as one which promotes human freedom generally. The greater the activity of government, the smaller, inevitably, is the positive area of freedom open to the immense majority of people who are not members of the government. Furthermore, there is no basis for considering steeply progressive income taxation a means well-adapted to equalizing the opportunities between the children of the rich and the children of the poor. One way or another, the children of the well-to-do are going to be better off, materially, than the children of less well-to-do parents. Progressive taxation may to some degree reduce the disparity, but long before it has done that it will have worked results damaging to all, rich and poor alike. By hitting hardest the best servants of society—those who are currently the best earners—it tends to induce them to spend a good deal of their productive energies in tax-avoidance schemes, rather than in their socially precious productive activities. It is an open question whether steeply progressive tax rates really produce more revenue for government than they lose by virtue of the reduced productivity they encourage. Here one needs only reflect upon the time, effort, and talent which go into tax-avoidance schemes rather than into production, let alone the loss in productivity which taxing away funds otherwise destined for investment involves.
To the degree that high-income producers absolutely cannot avoid taxes, they have less to spend and invest. But the normal person does not, in such circumstances, deny advantages to his children. He sees to it that they get the best available in terms of toys, teachers, schools, and clothes. The reduction in income worked by steeply progressive taxation thus reflects itself primarily in reduced investment by the currently most productive members of society, not in reduced expenditure for personal and family consumption.
If continued seriously and effectively, steeply progressive income taxation must eventually mean smaller opportunities and less attractive incentives for everyone. No single measure would do more to promote productivity, employment, general well-being, and personal freedom in the United States than the abandonment of such taxation.
Many who now concede that discriminatory income taxation cannot be seriously regarded as a socially proper equalitarian device nevertheless contend that government functions cannot be adequately financed without relatively heavy taxation of those who earn the larger incomes. This contention is based upon two assumptions: first, that the “social welfare” functions of the state are indispensable, and second that high incomes must be virtually expropriated if tax revenues are to be adequate. Both assumptions are erroneous.
One of the purposes of this book is to demonstrate the mistake in the assumption that universally shared desires for personal welfare are best served by positive, compulsory state action. It has been emphasized herein that the greatest possible welfare of any community is the inevitable consequence when men are socially free to pursue their own interests in a peaceful, honest, and noncoercive way. Positive action by the state always reduces net social freedom and, therefore, net social productivity, because the government in a market economy can take action only with funds drawn from the persons who earned them.
If the state subsidizes farmers, it may increase production of the subsidized commodities: but only at the expense of the production which would have been evoked had the purchasing power been left with those who earned it and had those farmers encouraged by subsidies to produce unwanted commodities been induced to cooperate with the rest of society by getting into some line of production in which consumers were more interested. If the state sets up a Tennessee Valley Authority, it may accord a special benefit to persons in the area served by that agency, but only at the expense of the taxpayers of the country who were denied the power to spend at will the income which the state took away from them.
A net loss accrues to society in both cases because state subsidies are always—and have to be—contrary to the will of the consumers. The political process never allows the people to register their choice in such matters as these. In the only popular referendum ever submitted to the people in regard to farm prices (that is, the referendum of the free market), the consumers unequivocally let their wishes be known. Had the consumers themselves been willing to pay higher prices for farm products, the government subsidies would not have been demanded. Had the people been willing to provide service below cost to the persons specially benefited by such governmentally owned and operated agencies as the TVA, it would not have been necessary to force them to do so through the coercive device of taxation.
Only the inherently inadequate political process accounts for the continuation of the subsidy programs of governments. No citizen has ever been given the political opportunity to vote directly and unequivocally on the question of whether there should be farm subsidies, uncomplicated by the simultaneous existence of numerous other planks in the platforms of the political parties. If the citizens of this nation were given such an opportunity, there can be no doubt that the program would be rejected. Let the party in power submit the “farm issue” to the voters one day in the form of an unequivocal referendum which reveals its costs.
It is a safe general rule that whenever the state engages in activities of the kind under discussion—tariffs are perhaps the best example of all—it harms the general welfare in order to accord benefits to a specially privileged few. The state may conceivably take such action, at rare intervals, on the assumption that it is serving the general welfare. More often the essential motivation is political advantage; everyone knows, for example, that the two great parties are continually worried about the “farmer vote,” and that one of these parties tends to induce the other to agree to subsidize the farmers. But always social productivity suffers.
When a society has done all it can to insure personal freedom and to promote production, it has done a great deal for the children of the poor; and it has done so without penalizing or impairing the freedom of anyone else—a fact of immense importance when one considers that the good, free society cannot exist where some persons are penalized or restricted solely for the advantage of other persons. Such a society will have wealth and productivity enough to permit leisure to all its children and to spare the human and physical resources for teachers and schools. It will not need to make ostentatious plans, promises, and boasts about “free education” (nothing is gratis in this world); the government, the single human agency of compulsion in a free society, will not need to take property from one person or class in order to subsidize another.
On the other hand, if the society is not free, well run, and prosperous, all the paper promises in the world will fail to bring the children of the poor to a point where they will even think about improving their bad condition, let alone actually do so. Study the Constitution of Italy, and then walk for a day among the towns clustered around ancient Pompeii. The Constitution of Italy guarantees every child an education, every person employment with income sufficient to insure “human dignity.” These promises are unknown to the people who live in the towns inland from the beautiful Bay of Naples; and if they were known they would be regarded as meaningless, as indeed they are. Italy lacks the means of providing an education for all its children, and in consequence the children of the poor are strangers to the concept of human dignity, as well as strangers to soap, water, and the most elementary education. In such circumstances the great concept of society as, in the words of von Humboldt, the mechanism for promoting “human development in its richest diversity,” blares forth as an ugly, blatant mockery. Let those who deplore the alleged “materialism” of the United States reconsider the relationship between material productivity and the dignity of man.
If Italy and other societies similarly depressed wish to improve their position, they must provide incentives for, and erase the restrictions upon, their ablest and most astute producers of material goods, instead of permitting freedom and power only to the agents of the state. In Italy all mineral resources are owned by the state; it is no wonder, therefore, that petroleum has been discovered there only recently, and then only by United States capitalists. The freedom and authority of businessmen are severely circumscribed in Italy, except in the case of businesses monopolized by the state; and it is not surprising, therefore, that private initiative is at a minimum. In Italy there is no real mobility of labor, and powerful labor unions insist upon this restriction. That this beautiful land, teeming with able, hardworking people, should be languishing, may be deplorable; but for one who understands the principles of social welfare, it is not mysterious. One needs to understand here that the wealth of businessmen is not gained at the expense of consumers or of workers. Businessmen do not force people to buy from or work for them. They offer goods and services and employment. Their wealth depends upon the attractiveness of the things they offer. Taking a narrow, vindictive attitude toward the wealth of businessmen is the best way possible to frustrate the operation of the principles of social welfare.
The poor and the untalented, like the rich and the talented, sometimes have children who are abnormally indolent or stupid, or both. As for abnormal indolence in the child of rich parents, one should note that while the child has an advantage, it is an advantage provided him by the wealth of his parents. Those who find it disagreeable that a lazy wastrel should have as much wealth as they have, or more, must remember that they probably had nothing to do with the accumulation of that wealth, and that the public was well served by the men who made fortunes; and they may take comfort from the fact that if the heir is absolutely indolent, he will not have his money very long. There is no reason to feel any more deeply for the poor and indolent than one feels for the rich and indolent.
In many countries large estates are heavily taxed at the death of the owner. This extreme form of expropriation is said to be justified by the social interest in equality. But the fact is, of course, as in the case of steeply progressive income taxation, that the heavy taxation of inheritances has had no appreciable effect on inequality.
Thus far it seems that in the United States of today the very rich are in an even more disparate position than ever. Fewer people, relatively, seem to be able to live on a gracious or luxurious level. But the relatively few who still can, stand out the more; while, owing to income and estate taxation, large numbers of people are less well off than they would otherwise be. This does not mean that equality has been promoted in any desirable way; it means only that everybody is somewhat worse off, except the very rich who have literally more money than they know what to do with, and who enjoy fantastic incomes merely from tax-exempt bonds.
As the great social scientist Mises has pointed out, discriminatory taxation actually entrenches the already rich and powerful against the currently able, who are prevented, by taxation, from ever building up enough capital to challenge the established powers:
Today taxes often absorb the greater part of the newcomer’s “excessive” profits. He cannot accumulate capital; he cannot expand his own business; he will never become big business and a match for the vested interests. The old firms do not need to fear his competition; they are sheltered by the tax collector. . . . It is true, the income tax prevents them, too, from accumulating new capital. But what is more important for them is that it prevents the dangerous newcomer from accumulating any capital. They are virtually privileged by the tax system. In this sense progressive taxation checks economic progress and makes for rigidity.
Perhaps the most significant effect of heavy estate taxation has been to create all sorts of complicated devices designed to reduce the amount of estates subject to death taxes. Although inheritance taxes do bring in a certain amount of governmental revenue, it is simply absurd to think of that revenue as being in any way effective to reduce inequalities as between the children of the rich and the children of the less rich. Even where not completely wasted by unwise and inefficient governmental action, the income from expropriatory estate taxation is neither used for erasing inequalities nor adequate, in any realistic sense, for achieving that objective. If all estates exceeding twenty-five thousand dollars were completely expropriated by the state and redistributed among families of less wealth, no one would be any richer. But some people would be much worse off, as would the society itself on the whole.
There may be more charitable foundations in existence today than there would have been in the absence of heavy inheritance taxation; they are one of the acknowledged techniques of avoiding such taxation. But whether or not the rich give more now to such charitable uses than they did prior to heavy taxation on incomes and estates is doubtful. Most people who think about the matter are of the opinion that private universities and private charities of all kinds have been harmed more than they have been helped by discriminatory taxation.
It is indeed a fact that literally no one in the United States has ever suggested a complete leveling of incomes and properties; the equalitarian function of taxation, everyone knows, is a mischievous thing which remains a part of our policy only because we have never permitted free rein to its disastrous potentialities. About the only good thing that can be said concerning estate taxation is that in many instances its greatest impact can be avoided through various types of legal devices. Like steeply progressive income taxation, discriminatory estate taxation, if rigorously and effectively enforced over long periods as some college professors keep advocating, could help to destroy the free society.
It seems evident by now that governments do not promote either freedom or equality through taxation. More is lost than gained. Governments never use wealth as efficiently and economically as do the private persons immediately responsible for the creation of such wealth. There is an explanation of this fact, more cogent than charges of bribery and corruption as inherent attributes of bureaucratic activity. The explanation is that governments will not and cannot permit themselves to be subjected to the rigorous laws of the free market, the laws which make short shrift of inefficiency and waste and which carry the command of the people concerning what is to be produced.
