31. The Demand for Money and the Time-Structure of Production

31 The Demand for Money and the Time-Structure of Production

Jörg Guido Hülsmann

Hans-Hermann Hoppe is famous for his ground-breaking studies on the epistemology of the social sciences, on the ethics of capitalism, and on democracy. But he also made original and important contributions in various other fields, such as monetary economics.1 Money and banking were actually our shared research interest may years ago, when I first got in touch with him. It is therefore appropriate to offer an essay on this topic to my dear friend Hans, a great mentor and a magnificent source of inspiration.

I. INTRODUCTION

The classical economists rejected the notion that the supply of and demand for money had any systematic impact on aggregate wealth. According to Adam Smith, the true factors determining economic growth were the division of labor and capital accumulation—real, not monetary factors. Austrian economists have always cherished and held onto these central insights, yet they have nuanced them in several respects. Most notably, Menger and Böhm-Bawerk have introduced the time dimension into the theory of capital, showing among other things the classical wage fund theory to be inaccurate in important respects.2 Similarly, Mises stressed that money is not neutral. While the supply of money and the demand for money have no systematic impact on aggregate growth, these forces do affect the distribution and allocation of resources. They shape the type and relative quantities of goods being produced. In short, they determine the structure, though not the level of production.3

The purpose of present paper is to analyze the impact of the demand for money on the pure rate of interest, and thus on the time structure of production. Conventional Austrian monetary theory holds that while the supply of money does have a systematic impact on the rate of interest, the demand for money does not. The latter is so-to-say “time-neutral.” We will criticize this contention and proceed as follows: after a reminder of some basic concepts (section II), we will briefly restate the traditional Austrian analysis of the time dimension of the money relation (section III), and then offer a critique, stressing that the demand for money is not time-neutral in the case of natural money, whereas it is in the case of fiat money (section IV). Finally we shall discuss some implications of our findings (section V).

II. THE DEMAND FOR MONEY

Definition

The demand for money can be defined either as the demand for monetary payments (flow), or as the demand for cash balances (stock). As far as the determination of the price level is concerned, both definitions lead to the same result. We will work with the second definition (money demand concerns cash balances) because it highlights the crucial fact that money renders its services not only at the moment when it is used in spending, but also during the entire period when it is being held or “hoarded.” Money is the most marketable commodity. Thus cash balances, even while they are not being spent, provide liquidity services to their owners.

Cash balances are demanded for the liquidity services they provide. They are demanded for their purchasing power. The only exception is the merely nominal demand for money by collectors. The latter are not interested in the purchasing power of the bank notes and coins they collect. They are only interested in the notes and coins per se—that is why we call them collectors. But true money users do not demand mere nominal cash balances, but real cash balances. They demand a certain purchasing power.4

The Demand for Money and the Price Level

Standard demand and supply analysis shows that any increase of demand entails an increase of the price of the good in question. This price increase is not contingent (accidental), but systematic (necessary), which is what we mean when we assert that the increase of demand causes the price increase. Now in the case of money, its “price” can be defined as the total array of goods and services that can be exchanged for one unit of money.5 In other words, the price of money is the purchasing power of a money unit. If the demand for money increases, therefore, the purchasing power of money tends to increase beyond the level it would otherwise have reached, which means that the general level of money prices will tend to decrease. Inversely, when the demand for money diminishes, the purchasing power of money will tend to fall below the level it would otherwise have reached, or, which is the same thing, the general level of money prices will tend to increase.

The Demand for Money and the Pure Rate of Interest

The question now is whether there is a systematic relationship between money demand, on the one hand, and the pure rate of interest (PRI) on the other hand. The latter can be defined as the pure return on investment as it would exist in general inter-temporal equilibrium or, equivalently, as the pure exchange rate between present goods (money and consumers’ goods) and future goods (producers’ goods and financial titles).6 It follows that the demand for money could be said to affect the PRI only under one condition, namely, if it had a systematically different impact on present goods than on future goods. For example, if increases in the demand for money tended to reduce sales revenues more than cost expensiture, then there would be a negative relationship between the demand for money and interest rates (as held in standard Keynesian analysis).

III. THE TIME DIMENSION OF THE MONEY RELATION
IN CONVENTIONAL THEORY

The time dimension of the “money relation”—of the demand for and supply of money—has been neglected in contemporary economic analysis. Only the Austrian economists found it worthy of any systematic consideration. Conventional Austrian monetary theory holds that while the supply of money does have a systematic impact on the rate of interest, the demand for money does not.

The Time Dimension of the Money Supply

Mises and the Austrian literature after him focused on the supply side. Mises analysed in particular the impact of increases of the money supply on the time structure of production, distinguishing between systematic effects and non-systematic (accidental) effects.

On the one hand, increases of the money supply systematically provoke artificial reductions of the interest rate—“artificial” because they do not result from a lower time preference of the market participants, but from (unanticipated) increases of the money supply. Such artificial reductions of the interest rate entail inter-temporal misallocations of resources and, therefore, business cycles.7

On the other hand, increases of the money supply may also affect the interest rate without entailing misallocations, namely, to the extent that they modify the distribution of income and wealth. The increased money supply benefits the early users of the new money at the expense of the later users. Thus if the early users have a lower time preference than the later ones, then the average or social time preference will fall, thus entailing a reduction of the interest rate. Similarly, if the early users of the new money have a higher time preference than the later ones, then the average time preference will rise, thus provoking a higher rate of interest.

However, these distribution effects are not systematic. The early users of the new money do not necessarily have a lower or higher time preference than the later users. The increased money supply might therefore result in a lower interest rate; but it might just as well result in a higher interest rate, or not affect the interest rate at all.8

Analogous conceptions prevail in the case of changes of the demand for money.

The Time Dimension of the Demand for Money

Mises dealt with the time dimension of the demand for money only incidentally. Still a clear case can be made that in his eyes changes of the demand for money does not have a systematic impact on the time structure of production. An increased demand for money (cash hoarding) merely entails a tendency for the prices of all goods to fall, but this event “does not require an adjustment of production activities”—it “merely alters the money items to be used in monetary calculation.”9 Changes in money demand can affect the interest rate only to the extent that they have an impact on the distribution of income and wealth. But, again, such distribution effects may work out one way or another—their impact “depends on the specific data of each case.”10

Rothbard analyses this question in much more detail and comes to the same conclusion. He states that a “man may allocate his money to consumption, investment, or addition to his cash balance” and proceeds to show that, in the light of this distinction, the demand for money is time-neutral. Changes in the demand for money do not systematically affect time preference, and thus do not determine the PRI. Let us quote him here at length:

His time preferences govern the proportion which an individual devotes to present and to future goods, i.e., to consumption and to investment. Now suppose a man’s demand-for-money schedule increases, and he therefore decides to allocate a proportion of his money income to increasing his cash balance. There is no reason to suppose that this increase affects the consumption/investment proportion at all. It could, but if so, it would mean a change in his time preference schedule as well as in his demand for money.

If the demand for money increases, there is no reason why a change in the demand for money should affect the interest rate one iota. There is no necessity at all for an increase in the demand for money to raise the interest rate, or a decline to lower it—no more than the opposite. In fact, there is no causal connection between the two; one is determined by the valuations for money, and the other by valuations for time preference.

. . . An increased demand for money, then, tends to lower prices all around without changing time preference or the pure rate of interest Thus, suppose total social income is 100, with 70 allocated to investment and 30 to consumption. The demand for money increases, so that people decide to hoard a total of 20. Expenditure will now be 80 instead of 100, 20 being added to cash balances. Income in the next period will be only 80, since expenditures in one period result in the identical income to be allocated to the next period. If time preferences remain the same, then the proportion of investment to consumption in the society will remain roughly the same, i.e., 56 invested and 24 consumed. Prices and nominal money values and incomes fall all along the line, and we are left with the same capital structure, the same real income, the same interest rate, etc. The only things that have changed are nominal prices, which have fallen, and the proportion of total cash balances to money income, which has increased. . . .11

He concludes:

The only necessary result, then, of a change in the demand-for-money schedule is precisely a change in the same direction of the proportion of total cash balances to total money income and in the real value of cash balances. Given the stock of money, an increased scramble for cash will simply lower money incomes until the desired increase in real cash balances has been attained.12

However, the conscientious Rothbard did not fail to remark that this conclusion stood on somewhat shaky grounds. In an endnote he wrote:

Strictly, the ceteris paribus condition will tend to be violated. An increased demand for money tends to lower money prices and will therefore lower money costs for gold mining. This will stimulate gold mining production until the interest return on mining is again the same as in other industries. Thus the increased demand for money will also call forth new money to meet the demand.13

This observation will be the starting point for our following discussion.

IV. THE TIME DIMENSION OF THE DEMAND
FOR MONEY RECONSIDERED

The Demand for Commodity Money is Not Time-Neutral

Rothbard is correct in pointing out that changes in the demand for money do not have any systematic direct implications for the relative spending on consumers’ goods and on the corresponding producers’ goods. But as he admits, they do have implications for the return on investment (ROI) of money production, at any rate in the case of commodity monies such as silver or gold. An increased demand for silver will increase the ROI of silver production, because the factors of production needed to produce a given amount of silver now tend to become available at lower silver prices. This in turn will modify the spending on all other goods. In particular, capital will move from other industries into the silver industry, prompting the ROI of silver production to fall and the ROI of all other industries to rise, until the ROI of all lines of business is equal. Thus there will be a new PRI that is higher than the PRI that prevailed before the increase of the demand for money was priced into the market.

In other words, there is a positive causal relationship between the demand for commodity money and the PRI. The demand for commodity money is not time-neutral. Increases of the demand for commodity money tend to increase the PRI. Decreases of the demand for commodity money tend to decrease it.14

This relationship holds not only during a period of adjustment, during which more silver is being produced according to the higher demand. It also holds in final equilibrium, because the wear and tear increases along with the greater silver supply. The silver production will be increased permanently, and thus the PRI will also permanently be higher than it otherwise would have been.

The time structure of production will tend to be modified accordingly. A higher demand for money creates incentives to shorten the structure and to make it thicker than it otherwise would have been. And a lower demand for money will tend to lengthen the structure and make it thinner than otherwise. In short, the demand for money does affect the time structure of production.

The same effects hold in the case of temporary increases of the demand for money, as it is often the case at the onset and in the middle of the deflationary bust phase of the business cycle, when market participants seek to sell their non-monetary assets at a discount (thus the increase of the PRI), but a discount that is lower than the one they expect for the near future. In such cases the increase of the demand for money lasts only until the price structure has been adjusted to its new (lower) final equilibrium level.15

The Demand for Fiat Money Tends to Be Time-Neutral

Things are very different in the case of fiat money. The characteristic feature of fiat money is that the demand for it is at least partially determined by violations of property rights, in particular by monopoly or legal-tender laws. As a consequence, the producer of fiat money is able to choose for his product an inexpensive physical support, such as paper or electronic data.

Paper money and electronic money are fiat moneys par excellence because (1) their marginal cost of production is close to zero and (2) they need to be imposed on the market lest they would have no circulation at all, whereas other types of money such as the precious metals do not need fiat backing to be used at all. Typically, therefore, fiat money is being produced monopolistically and the producer enjoys complete discretion in maximizing his profits through time according to his inter-temporal value scales.16

Now here the causal mechanism that in the case of commodity monies links up the demand for money with the PRI vanishes. An increased demand for money will have next to no impact on the costs of fiat money and thus on the profitability of producing it. It will therefore not attract additional resources and thus increase the ROI in other industries. The long-run PRI is not modified–the demand for fiat money tends to be time-neutral.

Moreover, in the case of temporary increases of the demand for money, their tendency to increase the price level can be offset, without technical or commercial limitations, by a corresponding increase of the money supply, thus preventing the necessity to sell assets at a discount. As is well known, this is not a mere theoretical possibility. Present-day fiat money producers—the central banks—pursue a policy of price level stabilisation, and they vigorously fight any form of price deflation. Thus we may say that, under the present-day fiat money regimes, any increases of the demand for money are actually causing corresponding increases of the money supply. It is true that such increases of the money supply will create a tendency for the price level to increase, thus entailing sooner or later a price premium within the gross rate of interest. But the crucial point is that the PRI need not increase. It follows that, even in the case of temporary increases of the demand for money, fiat money tends to have different consequences than commodity money.

Misleading Distinction between Money and Present Goods

Thus we see that the traditional Austrian position, according to which the demand for money is time-neutral, only applies to the case of fiat money. It does not apply to the case of commodity money. Why did the Austrians, and Mises and Rothbard in particular, overlook this fact? The main reason seems to be that they define money without reference to its physical characteristics. They see money as a particular “disembodied” class of goods that is therefore not subject to the laws ruling the time market. Changes in the demand for money do not affect time preference schedules because the latter concern only non-monetary goods (“real goods”), namely, consumer goods and producer goods. By contrast, money is a good in a class of its own.

Mises follows the German economist Carl Knies in classifying all economic goods into three mutually exclusive categories: consumers’ goods, producers’ goods, and media of exchange.17 The pure interest rate is the inter-temporal exchange rate between present goods (consumer goods) and future goods (producer goods). The demand for money does not affect this exchange rate at all. As we have seen, this contention is correct in the case of fiat money. Here the marginal costs of producing paper money are virtually zero, and thus investment spending on money production does not depend at all on changes of demand. It follows that changes in the demand for paper money do not have any a priori impact on the proportion between consumption and investment, and thus on inter-temporal value-scales and the interest rate. But as we have seen as well, things are different in the case of commodity money.

Astonishingly, this fact has also been overlooked by Murray Rothbard. In chapter 11 of Man, Economy, and State, he modifies the analysis of present and future goods stated in earlier chapters, to take account of the impact of money hoarding.18 Rothbard now abandons his previous classification of all goods into exactly two classes (present and future goods). Like Knies and Mises, he now champions the three-tier distinction between consumers’ goods, producers’ goods, and cash balances.

Clearly, a good case can be made that money is neither a consumers’ good, nor a producers’ good. However, for the determination of the PRI this is beside the point. Here the only relevant distinction is between present goods and future goods. Money could be said to be time neutral only if it fell into a third class of goods that would be neither present goods nor future goods. However, Rothbard does not deliver any demonstration to this effect, but simply asserts that money falls into a class of its own—an assertion that moreover contradicts his own previous emphasis that money is “the present good par excellence.”19

As soon as it is admitted that money is a present good, though not a consumers’ good, the impact of the demand for money on relative spending between present goods and future goods is obvious. Let us recall Rothbard’s argument, quoted above:

If money is a present good, then condition (a) does not imply any change inter-temporal value scales, but simply a different composition of present goods in one’s portfolio. It follows that hoarding (a rise in the demand for money) in this case leaves the PRI unaffected, while in all other cases—conditions (b) and (c) it implies an increased PRI.

V. SOME IMPLICATIONS OF THE TIME-DIMENSION
OF THE DEMAND FOR MONEY

The demand for commodity money is not time-neutral, but positively related to the pure rate of interest. By contrast, the demand for fiat money tends to be time-neutral. These results of our analysis seem to imply that fiat money, despite its manifold known shortcomings, conveys definite advantages over commodity money, in particular, in facilitating economic growth.21 Let us therefore briefly discuss some of these implications.

First of all we should point out that our foregoing analysis of the comparative impact of the demand for money on the PRI conveys no information about its quantitative impact. Considering that the long-run demand for money represents just a small fraction of aggregate wealth, and that it varies only marginally, it is very well possible that the long-run quantitative impact of changes in the demand for money on the PRI be negligible after all. On the other hand, there is scant empirical evidence about the behaviour of savers under a pure commodity-money standard. If and to the extent that saving occurs to a significant extent in the form of money hoarding, the quantitative impact on the PRI could increase accordingly.

It is obvious that such money-induced changes of the PRI can be highly useful, especially if we consider the reasons of a changing aggregate demand for money. Acting persons typically have an increased demand for money when they are concerned about looming deteriorations of the general economic and political environment. For example, they might expect troubles on the financial markets, or bad economic policy decisions such as tax hikes. Increased cash hoarding provides a partial protection against such events. Most importantly, the resulting increase of the PRI creates incentives to adjust the structure of production to the perceived riskier environment. More roundabout (and therefore riskier) investment projects will tend to be abandoned, while shorter investment projects will be encouraged. This helps preserving the all-important aggregate capital stock. Inversely, a reduced demand for money, which typically reflects a brighter outlook of the general economic and political environment, will induce a lengthening of the structure of production to the detriment of shorter (less physically productive) investment projects.

However, as we have seen, this mechanism for the protection of the capital stock only exists in the case of commodity money. In the case of fiat money, there are no similar incentives to adjust the structure of production, neither for switching it over to “safe mode” under the impact of an increased demand for money, nor in the opposite sense when the demand for money diminishes. It follows that fiat money regimes tend to waist more capital than commodity money regimes. Growth rates and living standards therefore would tend to be lower under fiat money than under commodity money.

Similarly, we should stress again the beneficial role of short-run variations of the PRI, resulting from increases of the demand for commodity money, in speeding up the adjustment of the structure of production after a boom phase, or in reaction to a looming crisis resulting from war, government interventionism, or natural disasters. These adjustments would not take place as quickly and automatically under a fiat money regime, as discussed above. It follows that, far from being advantageous from a macroeconomic point of view, the tendency to offset the impact of the demand for money on the PRI is actually another one of fiat money’s major shortcomings.

Finally, as we have shown in a recent contribution, there is no systematic relationship between the aggregate volume of savings-investment and the PRI.22 It follows that the demand for money, too, is not related to the aggregate level of savings-investment. Given individual inter-temporal value scales, it follows by logical necessity that both the demand and the supply of present goods are exclusively determined by those value scales, and that the latter are therefore the unique cause of the PRI. A higher demand for money not only implies an increased demand for present goods on the time market, but also a reduced supply. Therefore, the only necessary consequence of higher demand for money is for the PRI to increase. But there is no systematic impact on the volume of the market (aggregate savings exchanged for aggregate future goods). Depending on the (contingent) elasticity of supply and demand on the time market, the new final equilibrium might involve a somewhat larger volume of aggregate saving, but it might just as well, and with equal likelihood, involve a somewhat reduced volume of aggregate saving. Similarly, a lowering of the demand for money has only one necessary implication, namely, a reduction of the interest rate. Yet it has no systematic impact on aggregate saving, and thus on aggregate investment.

VI. CONCLUSION

In the present contribution we have shown that the demand for commodity money is not time-neutral. It affects the pure rate of interest and, therefore, the time-structure of production. By contrast, the demand for fiat money tends to be time-neutral—in other words, it tends not to affect the time structure of production. We have argued that this basic difference further bolsters the traditional Austrian case for commodity money and against fiat money. Indeed, the demand for commodity money is a very basic way for the unsophisticated citizen to bring the structure of production in line with his assessment of the macroeconomic environment. Fiat money takes this power out of his hands. The consequence is a greater tendency for capital to be wasted.

Jörg Guido Hülsmann (jgh@guidohulsmann.com) is Professor of Economics at the University of Angers, France; a Senior Fellow with the Ludwig von Mises Institute; and the author of Mises: The Last Knight of Liberalism (2007) and The Ethics of Money Production (2008). He would like to thank Nikolay Gertchev for comments on a previous version of the present paper.

23See in particular Hoppe, “Banking, Nation States and International Politics. A Sociological Reconstruction of the Present Monetary Order,” The Economics and Ethics of Private Property (Boston: Kluwer, 1993), chap. 3, pp. 61–92; idem, “How is Fiat Money Possible?—or, The Devolution of Money and Credit,” Review of Austrian Economics 7, no. 2 (1994); idem with Jörg Guido Hülsmann and Walter Block, “Against Fiduciary Media,” Quarterly Journal of Austrian Economics 1, no. 1 (1998): 1–50.

24See Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871); Eugen von Böhm-Bawerk, Positive Theory of Capital (1959 [1921]); see also W.S. Jevons, Theory of Political Economy (1871).

25See Ludwig von Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980 [1924]), chap. 19; idem, Human Action (Auburn, Ala.: Ludwig von Mises Institute, 1998), chaps. 17–20. It goes without saying that the demand for and the supply of money concern cash balances; they do not concern short-term loans made on the so-called “money market” (see ibid., p. 400).

26For a detailed discussion of the factors determining the demand for money, including a thorough critique of the Keynesian approach, see Rothbard, Man, Economy, and State, pp. 671–98. See also Philipp Bagus, “The Quality of Money” (Working paper, Universidad Rey Juan Carlos, 2008).

27See Rothbard, Man, Economy, and State, pp. 204f.

28See ibid., p. 299.

29See Mises, Human Action, chap. 20.

30See ibid., pp. 545–47.

31Ibid., p. 519.

32Ibid., p. 417.

33Rothbard, Man, Economy, and State, pp. 678f.

34Ibid., p. 679. Similarly, he states a few pages later:

A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged. Condition (a) will bring about a fall in the rate of interest; condition (b) a rise in the rate of interest, and condition (c) will leave the rate of interest unchanged. Thus hoarding may reflect either a rise, a fall, or no change in the rate of interest, depending on whether time preferences have concomitantly risen, fallen, or remained the same. (Ibid., p. 690)

35Ibid., p. 916, endnote 10.

36One could raise the question whether increases of the demand for money, because they entail a reduction of the price level and thus a corresponding wealth effect for money owners, did not actually reduce the PRI. Some Austrian economists such as Hoppe (Democracy—The God that Failed, p. 2) hold that increased wealth tends to lower time preference schedules. It seems to follow that an increased demand for money tends to diminish time preference schedules and thus implies a reduction of the PRI. However, the connection between wealth and time preference schedules does not hold a priori, but is a historically contingent relationship, as Barnett and Block have argued in “The Relationship between Wealth or Income and Time Preference is Empirical, Not Apodictic: A Critique of Rothbard and Hoppe,” Review of Austrian Economics 19 (2006).

37This temporary impact of the demand for money on the PRI has been stressed by Rothbard, see Man, Economy, and State, pp. 692, 864f.

38See Hülsmann, The Ethics of Money Production (Auburn, Ala.: Ludwig von Mises Institute, 2008), chap. 1, sections 5 and 6; idem, Logik der Währungskonkurrenz (Essen: Management Akademie Verlag, 1996).

39See Mises, Theory of Money and Credit, pp. 96–102; Knies, Geld und Credit (2nd ed., Berlin: Weidmann, 1885), vol. 1, pp. 20ff. Mises argued (1) that money is not always “needed” in production processes. “There is no need for money either in the isolated household or in the socialized community. Nowhere can we discover a good of the first order of which we could say that the use of money was a necessary condition of its production” (p. 99). Furthermore, he contended (2) that money is not useful from an aggregate point of view. Whereas changes in the supply of consumers’ goods or producers’ goods make “mankind” poorer respectively richer, the “same cannot be said of the loss or gain of money” (p. 101).

Both arguments are weak. In Socialism (1922) and Human Action (1949), Mises stressed that only a monetary economy allowed for a complex and roundabout division of labour. Clearly, therefore, money is needed for most production projects. Similarly, the contention that the money supply has no positive or negative welfare implication for “mankind,” even if true, has no scientific foundation whatever as long as we are unable to compare the subjective value judgments of different individuals.

40See Rothbard, Man, Economy, and State, p. 678. Previously he had identified hoarding as one of the sources of “the money that [capitalists] save and invest”—the other two sources being selling receipts from present production and money production (see ibid., p. 351). This classification begs the question whether money hoards are not in fact one of the forms in which one can save and invest one’s capital.

41Rothbard, Man, Economy, and State, p. 320. Rothbard’s definition of present goods stresses the act of consumption (destruction). It would be more appropriate to define a present good as one that needs no further physical transformation to render the services for which it is ultimately desired. Money in one’s cash balances no longer needs any physical transformation to be used, but is not destroyed through this use.

42Ibid., p. 690.

43For analysis of the economics, social and cultural consequences of paper money (respectively of electronic money), see Hülsmann, The Ethics of Money Production, chaps. 12 and 13.

44See Jörg Guido Hülsmann, “Time Preference and Investment Expenditure,” Procesos de Mercado 5, no. 2 (2008): 13–33.

1Professors Hoppe’s publications, including links to translations and a detailed bibliography, are available at his website, www.hanshoppe.com.
2“Hans-Hermann Hoppe: Potret Intelektual Anti-Intelektual” [“Interview with Hans-Hermann Hoppe, an Anti-Intellectual Intellectual”], interview by Sukasah Syahdan, Akal dan Kehendak (Indonesia) (Apr. 28, 2008) (English translation available at www.hanshoppe.com/publications).
3“Principles of the Property and Freedom Society,” available at www.propertyandfreedom.org (quoting the Opening Declaration from the Inaugural Meeting: Bodrum, Turkey, May 2006).
4Idem, Democracy.
5Idem, “Government and the Private Production of Defense,” in idem, ed., The Myth of National Defense: Essays on the Theory and History of Security Production (Auburn, Ala.: Ludwig von Mises Institute, 2003).
6On immigration, see Hans-Hermann Hoppe, “The Case for Free Trade and Restricted Immigration,” Journal of Libertarian Studies 13, no. 2 (Summer 1998): 221–33; idem, “Natural Order, the State, and the Immigration Problem,” Journal of Libertarian Studies 16, no. 1 (Winter 2002): 75–97.
7Idem, “On Time Preference, Government, and the Process of De-Civilization,” p. 24, n. 25.
8Cf. Hoppe’s discussion of Robert Nozick’s “disparate or loosely jointed arguments, conjectures, puzzles, counterexamples, experiments, paradoxes, surprising turns, startling twists, intellectual flashes, and philosophical razzle-dazzle,” in “Murray N. Rothbard and the Ethics of Liberty,” Introduction to Murray N. Rothbard, The Ethics of Liberty, 2nd ed. (New York and London: New York University Press, 1998), pp. xxiv.
9Stephan Kinsella & Jeffrey Tucker, “The Ordeal of Hoppe,” The Free Market 26, no. 4 (April 2005).
10Ibid., p. 71; and Hans-Hermann Hoppe, Eigentum, Anarchie und Staat: Studien zur Theorie des Kapitalismus (Opladen: Westdeutscher Verlag, 1987).
11Hoppe, Democracy, p. 74; and Hans-Hermann Hoppe, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy (Boston: Kluwer, 1993).
12Hoppe, Democracy, p. 71.
13Domenico Losurdo, Nietzsche il Ribelle Aristocratico: Biografia Intelettualle e Bilancio Critico (Turin: Bollati Boringhieri, 2002).
14Hans-Hermann Hoppe, Der Gott, der keiner ist, Robert Grözinger, trans. (Waltrop & Leipzig: Manuscriptum Verlagsbuchhandlung, 2003), pp. 7–8 (English translation from Hans-Hermann Hoppe, “Demokratie. Der Gott, Der Keiner Ist,” LewRockwell.com (December 5, 2003)). See also similar comments in Hoppe, Democracy, pp. x–xi; and xxiii, noting that “both Mises and Rothbard had a soft spot for democracy and tended to view the transition from monarchy to democracy as progress.”
15Caspar von Schrenck-Notzing, Charakterwäsche: Die Politik der amerikanischen Umerziehung in Deutschland (Graz: Ares Verlag, 2004); and Ernst von Salomon, Der Fragebogen, seventeenth ed. (Rowohlt Taschenbuch Verlag, 2007).
16Stephan Kinsella, “The Undeniable Morality of Capitalism [review essay of Hoppe’s The Economics and Ethics of Private Property (1993)],” St. Mary’s Law Journal 25 (1994), p. 1434.
17Hans-Hermann Hoppe, “Reflections on the Origin and the Stability of the State,” LewRockwell.com (June 23, 2008).
18Alan Pendleton Grimes, American Political Thought (New York: Holt, 1960), p. 283.
19Michael Vorenberg, Final Freedom: The Civil War, the Abolition of Slavery, and the Thirteenth Amendment (Cambridge: Cambridge University Press, 2001), p. 64.
20Merle Curti, The Roots of American Loyalty (New York: Columbia University Press, 1946), p. 175.
21Karl Marx to Friedrich Engels, October 29th–November 17th, 1862, in Karl Marx on America and the Civil War, Saul K. Padover, ed. (New York, McGraw-Hill, 1972), p. 263.
22James A. Rawley, The Politics of Union: Northern Politics during the Civil War (Lincoln: University of Nebraska Press, 1980), p. 184.
23Eventually, Hoppe turned into a full-blown Austrian when, in the early 1980s, he went to the United States on a prestigious Heisenberg fellowship. This time his research project concerned political philosophy, but it was again squarely built on Austrian economics. In 1986, he became Rothbard’s colleague at the University of Nevada, Las Vegas (UNLV), where he would teach for the next 21 years. After Rothbard’s untimely death in 1995, Professor Hoppe assumed a place of uncontested leadership among Austro-libertarian scholars, becoming the editor of the Journal of Libertarian Studies, a co-editor of the Review of Austrian Economics, and then a co-editor of the Quarterly Journal of Austrian Economics. Professor Hoppe, now Professor Emeritus of Economics at UNLV and Distinguished Fellow with the Ludwig von Mises Institute, also serves on on the editorial board of Libertarian Papers. In addition to authoring numerous scholarly articles, his important books include Handeln und Erkennen (1976), Kritik der Kausalwissenschaftlichen Sozialforschung (1983), Eigentum, Anarchie, und Staat (1987), A Theory of Socialism and Capitalism (1989), The Economics and Ethics of Private Property (1993, enlarged 2nd edition 2006), Democracy—The God that Failed (2001), and The Myth of National Defense (editor, 2003). His works have been translated into at least 21 languages, not counting English.
24Among Professor Hoppe’s many achievements we should stress in particular his brilliant critique of positivist methodology as applied to the social sciences, a new praxeological approach to political philosophy, an encompassing comparative analysis of socialism and capitalism, and a theory of secession as a means of political reform. Most importantly, in his book Democracy—The God that Failed, Professor Hoppe has delivered a profound critique of democracy, as well as an original reinterpretation of Western history in the twentieth century, both of which have stirred international debate in academia and among the wider public. Other influential works from his pen have dealt with the role of migrations within a free society, and with the role of public intellectuals in political transformation processes. Moreover, he has excelled as an historian of thought and made path-breaking contributions to other areas such as monopoly theory; the theory of public goods; the sociology of taxation; the positive methodology of the social sciences; the theory of risk; the production of security; the transformation of formerly socialist countries; and the evolution of monetary institutions and their impact on international relations. And Professor Hoppe’s work is ongoing: he is currently working on a major book project that will restate and elaborate on his previous work in the fields of epistemology and ethics—more generally, the nature of human rationality. The goal of the book is to provide “a systematic and interdisciplinary reconstruction of human history (pre-history, hunter-gatherer societies, agricultural societies, industrial societies).”
25for justly acquired private property, freedom of contract, freedom of association—which logically implies the right to not associate with, or to discriminate against—anyone in one’s personal and business relations—and unconditional free trade. It condemns imperialism and militarism and their fomenters, and champions peace. It rejects positivism, relativism, and egalitarianism in any form, whether of “outcome” or “opportunity,” and it has an outspoken distaste for politics and politicians.
26There are also many other fields where Hans Hoppe has pushed the limits of political and economic science. Monarchy is not as bad as democracy, he argues. This was and still is unacceptable to many intellectuals, and most people have followed the lead of the intellectuals because they have had no good arguments to the contrary. A simple reference to the “strong hand” of a dictator was not only politically incorrect and old fashioned, but also contrary to the goals and the image of society most people actually have. Hoppe provides a clear explanation to sort through this intellectual mess. The absence of democracy in public decision-making does not necessarily mean dictatorship and the most terrible exploitation of the people. On the contrary: democracy is the system which leads to dictatorship, exploitation of others, ignorance, and vulgarity.
27The private provision of security is another topic which has benefitted from Hoppe’s insights. Every decent person often feels that the police are actually not providing adequate protection. But what is the alternative? Better this than nothing, or so many of those unsatisfied with government tend to conclude. An army of intellectuals is ready to help them reach this conclusion. Hoppe provides sound arguments and explains the economics of the private production of defense. No serious scholar can ignore Hoppe’s important arguments. Those who claim that there will be no security without government are simply mistaken. Now, you can direct them to Hans Hoppe’s works.
28Immigration, democracy, regulation—so many bad ideas abound concerning all of these issues, and Hoppe addresses them so well in his writings and speeches.
29Hans knows how to present an argument in a way which is very understandable, even to a man of average intellectual capacities. His examples are sometimes so unexpected and direct that they really help or even force you to rethink what you have thought about the world before. It appears very natural for him, for example, to put a footnote in a book with a short explanation why public slavery is even worse than private slavery. It does not mean that Hans tries to be simple. He is just very straightforward. He does not hesitate to criticize even free-market advocates who are not consistent in their argumentation. If you say something absurd or make flawed arguments, he usually will not hide the fact from you. Perhaps for this reason, some people even seem to be intimidated by Hans Hoppe. Understandably, it is not always pleasant to have your arguments smashed in public.
30Hans does not present himself as a big scholar. On the contrary, his ambition is not very great when he speaks about the role of the scholar (including himself) in society. It is not his ambition to invent some completely new theory or find a terra incognito. On the contrary, Hoppe claims that the role of a decent scholar is, first of all, to preserve what is already found, explained, and discovered. Not to waste the knowledge of the mankind, but to preserve and explain it in modern language to new generations, is to him an already ambitious task. He does it perfectly. Contrary to many of those who are happy with their ambitious and often fallacious new theories, or with “philosophical razzle-dazzle,” he is always stressing the role of his teachers and predecessors, Rothbard and Mises.
31Courage is another thing which goes well with Hans Hoppe’s name. Political correctness is not a good principle to hold to when you are looking for the truth, and while many people pay lip service to the importance of truth, not everyone will defend it even when his own career and name are at stake. But when liberty and the truth are at the stake, Hans Hoppe will never give up. The well-known controversy surrounding an example given about the different time preferences among different groups of people perfectly illustrates this courage.
32Significantly, Hans does not hold back in criticizing monarchies for doing in a quite primitive way what democratic administrations have succeeded in accomplishing with less fallout, which is monopolizing power. Like democrats, kings tried to marginalize their opposition by declaring all political authority to be a prerogative of the centralized state. Monarchical sovereignty was a prelude to democratic sovereignty, and it was based the same “original sin,” “the monopolization of the function of judge and peacemaker.” The best form of authority for Hans is, in fact, “the natural order,” one that is “[t]he natural outcome of the voluntary transactions between various private property owners” and which is “decidedly nonegalitarian, hierarchical, and elitist.” Any effort to bring this about in our democratic, late modernity is hailed as a positive step: “Thus, in addition to advocating the abdication of democracy, it is now of central strategic importance that at the same time ideological support be given to all decentralizing or even secessionist social forces.”
33Significantly, Hans does not hold back in criticizing monarchies for doing in a quite primitive way what democratic administrations have succeeded in accomplishing with less fallout, which is monopolizing power. Like democrats, kings tried to marginalize their opposition by declaring all political authority to be a prerogative of the centralized state. Monarchical sovereignty was a prelude to democratic sovereignty, and it was based the same “original sin,” “the monopolization of the function of judge and peacemaker.” The best form of authority for Hans is, in fact, “the natural order,” one that is “[t]he natural outcome of the voluntary transactions between various private property owners” and which is “decidedly nonegalitarian, hierarchical, and elitist.” Any effort to bring this about in our democratic, late modernity is hailed as a positive step: “Thus, in addition to advocating the abdication of democracy, it is now of central strategic importance that at the same time ideological support be given to all decentralizing or even secessionist social forces.”
34A question that might be raised is whether the generality of humankind would endorse the tendencies that Hans is promoting. Would democratic populations (who have ceased to be citoyens (citizens) or Staatsbürger in any meaningful sense) really want to live in the decentralized, elitist society that Hans recommends, one in which a “natural elite” possess “natural authority,” and, because of “selective mating” and the “laws of civil and genetic inheritance,” these “positions of natural authority are more likely than not passed on within a few noble families.” Why would the majority want to acknowledge these “authority persons,” who presumably would arbitrate conflicts on the basis of the social deference that others extend to them? It is hard to see why most people would accept such arrangements, as opposed to a democracy, in which the promise is made and often fulfilled of redistributing goods to the voters. The question is not whether the democratic state robs from Peter to pay Paul (it obviously does that!) but whether Hans’s “natural order” offers most people what they want. The answer is an emphatic “no” and therefore this order (which looks a bit like Friedrich Hayek’s conception of “spontaneous order”) depends for its realization on the possibility of “decentralization and secession.” Absent such a possibility, this order is in no way feasible.
35Two other observations may be appropriate for understanding more fully the libertarianism of the Right that Hans exemplifies. One, this libertarianism is a recognizable subspecies of what the Italian Marxist Domenico Losurdo calls “aristocratic radicalism,” which he explores in voluminous works on Friedrich Nietzsche (1844–1901). According to Losurdo, Nietzsche’s “critique of modernity” is based on his opposition to the leveling tendencies that he perceives in democracy and socialism. It was therefore perfectly consistent for Nietzsche to praise aristocratic societies, including the Indian caste system, and to advocate liberty in the Western world of his time. That is because the state, as Nietzsche understood it, was becoming an instrument of equalization; and its attack on property relations would belong to a larger effort to remove all social and gender distinctions. Nietzsche, as Losurdo points out, also disliked Christianity, because he thought the “slave morality” that pervaded this religion and the culture it nurtured rendered them ineffective against the Left. He therefore broke with classical conservatives, who had viewed established religions as bulwarks against revolution. From Nietzsche’s perspective, Christianity and the Left were related worldviews, and only a new aristocratic order, one that had shed its Christian past, could save civilization from the unfolding of the egalitarian ideal, going from democracy into socialism and feminism.
36“Politically incorrect” is what the rulers and in particular the victors among the rulers proclaim. The great victor of the 20th century, in particular as far as Germany is concerned, is the USA. Hence, the USA has determined the “correct” interpretation especially of recent history. Defeated Germany was not only occupied, but also reeducated. Germany’s schools and universities, under almost complete government control, and the governmentally licensed mass media, have proclaimed to this day the official American view of history and in particular of the 20th century as a triumph of good over evil.
37It is hard to ignore the likely connection between Hans’s detestation of the “State” in all of its modern manifestations and the use of postwar public administration in West Germany, perhaps even more than in the Communist East, to humiliate his nation. His sense of what was done to “reeducate” defeated Germans after the War, which is documented in detail in Caspar von Schrenk-Notzing’s Charakterwäsche: Die Politik der amerikanischen Umerziehung in Deutschland, has left Hans understandably skeptical about the modern democratic project. His relation as a student to Jürgen Habermas, the German thinker and publicist who more than anyone else in his country has called for a rejection of a German national identity and for the creation of a new “constitutional patriotism,” based on supposedly universal democratic values, may explain even more about Hans’s intellectual odyssey.
38His study at the Johann Wolfgang Goethe University with Habermas and Karl-Otto Apel was time well spent, however, as it shaped Hoppe as a first class social scientist and helped him to put forth an “argumentation ethics” defense of individual rights, based in part on the discourse ethics theories of the Frankfurt School. His intellectual independence prevented him from accepting his mentors’ apology for socialism and their anti-capitalist mentality. As one reviewer noted, “Hoppe believes his former teacher Habermas’s discourse-ethics theories, while correct at core, are applied incorrectly by Habermas to yield a socialistic ethic; Hoppe feels that Habermas’s theories, if correctly applied (as Hoppe himself does), yield the libertarian non-aggression norm.”
39The first and foremost task of the intellectual anti-intellectuals, then, is to counter this dogmatic slumber of the masses by offering a precise definition of the state, as I have done at the outset, and then to ask if there is not something truly remarkable, odd, strange, awkward, ridiculous, indeed ludicrous about an institution such as this. I am confident that such simple, definitional work will produce some serious doubt regarding an institution that one previously had been taken for granted.
40Lieber’s doctrine is “a prophetic conception,” according to Vernon Parrington, based on “the principle of an evolving state that draws all lesser sovereignties into its orbit by the law of attraction.” Parrington was well aware of the importance of Francis Lieber, who “provided a philosophical background” to the legal theory of Joseph Story. “Under the combined legal and philosophical attack the compact theory found its philosophical breastworks leveled, its natural rights theory undermined, and its commanding position effectively turned.” Alan Grimes places Lieber at the transition between “the constitutional and legal approach to an understanding of the nature of the American Union, and the rise of the organic concept of the nation.” The importance of the German professor in shaping the ideas which Lincoln exploited fully has been noticed by other historians. Lieber “had indeed argued before the war that the original Constitution was insufficient to the needs of the nation . . . in the 1830s and 1840s, he had gained prominence, North and South, by attacking the idea of a fixed Constitution.” A staunch advocate of federal growth, he thought “that federal power should expand slowly and organically—and thus constitutionally—as the nation grew. . . . He believed that the war would solidify the Union and thus fulfill his dream, nurtured during his school years in Germany, of living in a modern nation-state.” Later on, during the war Lieber became very popular, wrote dozens of articles and pamphlets in order “to popularize his distinctive brand of nationalism.” In practice, “[h]is many public statements used the South’s insurrection to justify an expansion of federal power beyond what the Constitution expressly sanctioned.”
41Lieber’s doctrine is “a prophetic conception,” according to Vernon Parrington, based on “the principle of an evolving state that draws all lesser sovereignties into its orbit by the law of attraction.” Parrington was well aware of the importance of Francis Lieber, who “provided a philosophical background” to the legal theory of Joseph Story. “Under the combined legal and philosophical attack the compact theory found its philosophical breastworks leveled, its natural rights theory undermined, and its commanding position effectively turned.” Alan Grimes places Lieber at the transition between “the constitutional and legal approach to an understanding of the nature of the American Union, and the rise of the organic concept of the nation.” The importance of the German professor in shaping the ideas which Lincoln exploited fully has been noticed by other historians. Lieber “had indeed argued before the war that the original Constitution was insufficient to the needs of the nation . . . in the 1830s and 1840s, he had gained prominence, North and South, by attacking the idea of a fixed Constitution.” A staunch advocate of federal growth, he thought “that federal power should expand slowly and organically—and thus constitutionally—as the nation grew. . . . He believed that the war would solidify the Union and thus fulfill his dream, nurtured during his school years in Germany, of living in a modern nation-state.” Later on, during the war Lieber became very popular, wrote dozens of articles and pamphlets in order “to popularize his distinctive brand of nationalism.” In practice, “[h]is many public statements used the South’s insurrection to justify an expansion of federal power beyond what the Constitution expressly sanctioned.”
42During and after the Civil War, Northern intellectuals developed the incipient organic theory, which at first did not reach the rank and file even in the North. In the Old World the organic theory was likewise serving the integral type of nationalism that had largely replaced the older, humanitarian variety of the early nineteenth century.
43In the words of Karl Marx, the Civil War was a “world-transforming . . . revolutionary movement.” Dating from the year 1862, this must be considered as one of his few correct prophecies, albeit an easy one.
44The Supreme Court, under Chase . . . upheld the constitutionality of the Legal Tender Act. Before the end of Reconstruction, Greenbackers were clamoring for more paper money. Few citizens before the war had contributed directly to the treasury. By the war’s close everyone and everything was taxed.

Property, Freedom & Society