Property, Freedom & Society

32 Risk, Uncertainty, and Economic Organization

Peter G. Klein

In a recent paper, “The Limits of Numerical Probability: Frank H. Knight and Ludwig von Mises and the Frequency Interpretation,” Hans-Hermann Hoppe explores Mises’s approach to probability and its implications for economic forecasting.1 Hoppe argues that Mises, like Frank Knight, subscribed to the “frequency interpretation” developed by Mises’s brother, Richard von Mises,2 along with others such as Ronald Fisher, Jerzy Neyman, and Egon Pearson. At first, this might seem surprising, as the frequency interpretation is usually contrasted with the “subjectivist” approach to probability advanced by de Finetti and, among economists, usually associated with Keynes.3 A thoroughgoing commitment to methodological subjectivism is, of course, a hallmark of the Austrian School. However, as Hoppe points out, Mises recognized two distinct kinds of probability, one applying to natural phenomena and another applying to human action. Just as Mises embraced “praxeology” in economics while endorsing the experimental method in the natural sciences, he thought a special kind of probability was relevant to economic decision-making, while accepting his brother’s frequency interpretation for other kinds.

This paper extends the discussion by drawing out implications for economic organization of Mises’s approach to probability, particularly regarding the entrepreneur’s role in guiding the economic process by establishing and dissolving firms, directing their operations, and organizing them to create and capture value. After a brief review of Hoppe’s interpretation of Knight and Mises, I summarize recent literature on the Knight-Mises approach to entrepreneurship and the firm, closing with some suggestions for future research.

KNIGHT, MISES, AND MISES ON PROBABILITY

Most economists are familiar with Knight’s distinction between “risk” and “uncertainty.” Risk refers to situations in which the outcome of an event is unknown, but the decision-maker knows the range of possible outcomes and the probabilities of each, such that anyone with the same information and beliefs would make the same prediction. Uncertainty, by contrast, characterizes situations in which the range of possible outcomes, let alone the relevant probabilities, is unknown. In this case the decision-maker cannot follow a formal decision rule but must rely on an intuitive understanding of the situation—what Knight calls “judgment”—to anticipate what may occur. Risk, in this sense, refers to “a quantity susceptible of measurement,” and not a “true” uncertainty that cannot be quantified.4 The essential function of the entrepreneur, in Knight’s system, is to exercise judgment, particularly in the context of purchasing factors of production.

Mises, in similar fashion, distinguished between “class probability” and “case probability.” The former describes situations in which an event may be classified as a unique element of a homogeneous class, the properties of which are known. No one can predict whether a particular house in a particular neighborhood will burn down this year, but insurance companies know how many similar houses in similar locations have burned in the past, and from this the likelihood of a particular house burning within a particular period can be estimated. Case probability applies to cases in which each event is unique, such that no general class probabilities can be defined.5 Here Mises, as argued by Hoppe, builds on his brother’s defense of “frequentism,” the idea that the probability of a particular event is the limit value of its relative frequency in a series of trials. In this understanding, probabilities can be defined only in cases in which repeated trials are feasible—i.e., in situations where each event can be meaningfully compared to other events in the same class. Moreover, and for this reason, probabilities can only be defined ex post, as learned through experience, and cannot exist a priori. Hence, Mises defines case probability, or uncertainty, as a case in which probabilities, in the frequentist sense, do not exist.6

Hoppe summarizes Knight’s and Mises’s views and argues persuasively that they are variants of Richard von Mises’s position.7 Hoppe also goes beyond Mises in explaining why human action, in Mises’s sense of purposeful behavior, cannot be made part of a homogenous class. “Without a specified collective and a (assumedly) full count of its individual members and their various attributes no numerical probability statement is possible (or is, if made, arbitrary).”8 Of course, as Hoppe notes, we can define such classes in a technical sense—me writing this chapter is an element of the class “economists writing book chapters”—but defining the class is not sufficient for applying class probability to an event. There must also be randomness, or what Richard von Mises calls “complete lawlessness,” within the class.9 And yet, this is not possible with human action:

It is in connection with this randomness requirement where Ludwig von Mises (and presumably Knight) see insuperable difficulties in applying probability theory to human actions. True, formal-logically for every single action a corresponding collective can be defined. However, ontologically human actions (whether of individuals or groups) cannot be grouped in “true” collectives but must be conceived as unique events. Why? As Ludwig von Mises would presumably reply, the assumption that one knows nothing about any particular event except its membership in a known class is false in the case of human actions; or, as Richard von Mises would put it, in the case of human actions we know a “selection rule” the application of which leads to fundamental changes regarding the relative frequency (likelihood) of the attribute in question (thus ruling out the use of the probability calculus).10

Hoppe touches briefly upon, without treating in detail, the subjective approach to probability, in which a priori probabilities are treated simply as beliefs, rather than the outcome of some objective process of repeated trial and observation. Hoppe quotes Richard von Mises’s remark that subjectivists such as John Maynard Keynes fail to recognize “that if we know nothing about a thing, we cannot say anything about its probability.”11 Adds Mises: “The peculiar approach of the subjectivists lies in the fact that they consider ‘I presume that these cases are equally probable’ to be equivalent to ‘These cases are equally probable,’ since, for them, probability is only a subjective notion.”12 Subjective probability has become central in contemporary microeconomic theory, however, particularly with the rise of Bayesian approaches to decision-making. Agents acting under conditions of uncertainty are assumed to have prior beliefs—correct or incorrect—about the probabilities of various events. These prior beliefs are exogenous, they may be common to a group of agents or unique to a particular agent, and they may or may not correspond to objective probabilities (in the frequentist sense). The Bayesian approach focuses on the procedure by which agents update these prior beliefs based on new information, and this updating is assumed to take place according to a formal rule (i.e., according to Bayes’s law). Hence, the ex post probability, in such a problem, contains an “objective” element, even if it is a revision of a purely subjective prior belief.13

Langlois14 argues for a tight connection between subjectivism in the Austrian sense of value theory and subjective probability theory, arguing that probabilities should be interpreted as beliefs about information structures, rather than objective events.

[I]t is not meaningful to talk about “knowing” a probability or a probability distribution. A probability assessment reflects one’s state of information about an event; it is not something ontologically separate whose value can be determined objectively.15

What distinguishes case from class probability, according to Langlois, is the character of the decision-maker’s information about the event. Objective probabilities (in the frequentist sense) are simply special cases of subjective probabilities in which the decision-maker structures the problem in terms of classes of events. Entrepreneurship, in Langlois’s interpretation, can be described as the act of formalizing the decision problem. To use the language of decision theory, a non-entrepreneur (call him, following Kirzner, a Robbinsian maximizer) is presented with a decision tree, a set of outcomes, and the probabilities for each outcome, and simply uses backwards induction to solve the problem.16 The entrepreneur, as it were, re-draws the tree, by noticing a possible option or outcome that other agents failed to see. The key distinction, according to Langlois, is not whether the decision tree is populated with objective or subjective probabilities, but whether the tree itself is exogenous (Knightian risk) or endogenous (Knightian uncertainty).

Hoppe follows Richard von Mises in rejecting the subjectivist position (and obviously sees no contradiction between the frequentist approach to probability and the subjective theory of value). It is not clear exactly what is gained by redefining probabilities as “subjective with one information set” or “subjective with another information set.” As discussed in the next section, both Knight and Mises saw probability theory in economics as playing a particular role, namely allowing the theorist to distinguish situations in which prices are predictable, making profits and losses ephemeral, and situations in which prices can only be anticipated, using some form of Verstehen, by entrepreneurs. A subjectivist parameterization of Verstehen may be possible, without being useful.

UNCERTAINTY AND THE ENTREPRENEUR

Neither Knight nor Mises focused primarily on individual decision-making per se, but on the role of decision-making within the market system. “As economists,” Hoppe observes, Knight and Mises “come upon the subject of probability indirectly, in conjunction with the question concerning the source of entrepreneurial profits and losses.”17 Indeed, while Knight devotes a chapter of Risk, Uncertainty, and Profit to a detailed discussion of knowledge, reasoning, and learning, his main purpose is not to analyze the ontology of judgment, but to explain the practical workings of the market. Specifically, his purpose in developing his account of probability was to decompose business income into two constituent elements, interest and profit. Interest is a reward for forgoing present consumption, is determined by the relative time preferences of borrowers and lenders, and would exist even in a world of certainty. Profit, by contrast, is a reward for anticipating the uncertain future more accurately than others (e.g., purchasing factors of production at market prices below the eventual selling price of the product), and exists only in a world of “true” uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or losses based on the differences between factor prices paid and product prices received.

Mises, likewise, makes uncertainty central to his theory of profit and loss, a cornerstone of his well-known critique of economic planning under socialism. Mises begins with the marginal productivity theory of distribution developed by his Austrian predecessors. In the marginal productivity theory, laborers earn wages, capitalists earn interest, and owners of specific factors earn rents. Any excess (deficit) of a firm’s realized receipts over these factor payments constitutes profit (loss). Profit and loss, therefore, are returns to entrepreneurship. In a hypothetical equilibrium without uncertainty (what Mises calls the “evenly rotating economy”), capitalists would still earn interest, as a reward for lending, but there would be no profit or loss.

Entrepreneurs, in Mises’s understanding of the market, make their production plans based on the current prices of factors of production and the anticipated future prices of consumer goods. What Mises calls “economic calculation” is the comparison of these anticipated future receipts with present outlays, all expressed in common monetary units. Under socialism, the absence of factor markets and the consequent lack of factor prices, renders economic calculation—and hence rational economic planning—impossible. Mises’s point is that a socialist economy may assign individuals to be workers, managers, technicians, inventors, and the like, but it cannot, by definition, have entrepreneurs, because there are no money profits and losses. Entrepreneurship, and not labor or management or technological expertise, is the crucial element of the market economy. As Mises puts it: directors of socialist enterprises may be allowed to “play market,” to make capital investment decisions as if they were allocating scarce capital across activities in an economizing way, but entrepreneurs cannot be asked to “play speculation and investment.”18 Without entrepreneurship, a complex, dynamic economy cannot allocate resources to their highest valued use.

Why can’t a central planning board mimic the operations of entrepreneurs? The key, for Mises, is that entrepreneurial appraisement is not a mechanical process of computing expected values using known probabilities, but a kind of Verstehen that cannot be formally modeled using decision theory. The entrepreneur, Mises writes, “is a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits.”19 The entrepreneur relies on his “specific anticipative understanding of the conditions of the uncertain future,” an understanding that “defies any rules and systematization.”

This concept of the entrepreneurial function is difficult to reconcile with the optimization framework of neoclassical economics. In this framework, either decision-making is “rational,” meaning that it can be represented by formal decision rules, or it is purely random. T. W. Schultz poses the problem this way:

[I]t is not sufficient to treat entrepreneurs solely as economic agents who only collect windfalls and bear losses that are unanticipated. If this is all they do, the much vaunted free enterprise system merely distributes in some unspecified manner the windfalls and losses that come as surprises. If entrepreneurship has some economic value it must perform a useful function which is constrained by scarcity, which implies that there is a supply and a demand for their services.20

The key to understanding this passage is to recognize Schultz’s rejection, following Friedman and Savage, of Knightian uncertainty.21 If all uncertainty can be parameterized in terms of (possibly subjective) probabilities, then decision-making in the absence of such probabilities must be random. Any valuable kind of decision-making must be modelable, must have a marginal revenue product, and must be determined by supply and demand. For Knight, however, decision-making in the absence of a formal decision rule or model (i.e., judgment) is not random, it is simply not modelable. It does not have a supply curve, because it is a residual or controlling factor that is inextricably linked with resource ownership. As discussed above, it is a kind of understanding, or Verstehen, that defies formal explanation but is rare and valuable. In short, without the concept of Knightian uncertainty, Knight’s idea of entrepreneurial judgment makes little sense.

Nor is judgment simply luck.22 To be sure, one could imagine a model in which entrepreneurs are systematically biased, as in Busenitz and Barney23—individuals become owner-entrepreneurs because they overestimate their own ability to anticipate future prices—and the supply of entrepreneurs is sufficiently large that at least a few guess correctly, and earn profits. In such an economy there would be entrepreneurs, firms, profits, and losses, and profit (under uncertainty) would be distinct from interest. However, as Mises emphasizes, some individuals are more adept than others, over time, at anticipating future market conditions, and these individuals tend to acquire more resources while those whose forecasting skills are poor tend to exit the market.24 Indeed, for Mises, the entrepreneurial selection mechanism in which unsuccessful entrepreneurs—those who systematically overbid for factors, relative to eventual consumer demands—are eliminated from the market is the critical “market process” of capitalism.25

ENTREPRENEURIAL JUDGMENT AND THE FIRM

In a series of papers, Nicolai Foss and I have used the Knight-Mises concept of the entrepreneur to explain important aspects of economic organization.26 We start with Knight’s view that entrepreneurship represents judgment that cannot be assessed in terms of its marginal product and which, accordingly, cannot be paid a wage.27 In other words, there is no market for the judgment that entrepreneurs rely on, and therefore exercising judgment requires the person with judgment to start a firm. Of course, judgmental decision makers can hire consultants, forecasters, technical experts, and so on. However, in doing so they are exercising their own entrepreneurial judgment.28 Judgment thus implies asset ownership, for judgmental decision-making is ultimately decision-making about the employment of resources. The entrepreneur’s role, then, is to arrange or organize the capital goods he owns. As Lachmann puts it: “We are living in a world of unexpected change; hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.”29

This approach to the firm combines Knight’s concept of judgment with the Austrian notion of capital heterogeneity. Foss, Foss, Klein, and Klein operationalize capital heterogeneity by incorporating Barzel’s idea that capital goods are distinguished by their attributes.30 Attributes are characteristics, functions, or possible uses of assets, as perceived by an entrepreneur. Assets are heterogeneous to the extent that they have different, and different levels of, valued attributes. Attributes may also vary over time, even for a particular asset. Given Knightian uncertainty or Misesian case probability, attributes do not exist objectively, but subjectively, the minds of profit-seeking entrepreneurs who put these assets to use in various lines of production. Consequently, attributes are manifested in production decisions and realized only ex post, after profits and losses materialize.

Entrepreneurs who seek to create or discover new attributes of capital assets will want ownership titles to the relevant assets, both for speculative reasons and for reasons of economizing on transaction costs. These arguments provide room for entrepreneurship that goes beyond deploying a superior combination of capital assets with “given” attributes, acquiring the relevant assets, and deploying these to producing for a market: Entrepreneurship may also be a matter of experimenting with capital assets in an attempt to discover new valued attributes, either by trying out new combinations through the acquisition of or merger with another firm or by trying out new combinations of assets already under the control of the entrepreneur. The entrepreneur’s success in experimenting with assets in this manner depends not only on his ability to anticipate future prices and market conditions, but also on internal and external transaction costs, the entrepreneur’s control over the relevant assets, how much of the expected return from experimental activity he can hope to appropriate, and so on. Moreover, these latter factors are key determinants of economic organization in modern theories of the firm, which suggests that there may be fruitful complementarities between the theory of economic organization and Austrian theories of capital heterogeneity and entrepreneurship.

Foss, Foss, Klein, and Klein show how this approach provides new insights into the emergence, boundaries, and internal organization of the firm.31 Firms exist not only to economize on transaction costs, but also as a means for the exercise of entrepreneurial judgment, and as a low-cost mechanism for entrepreneurs to experiment with various combinations of heterogeneous capital goods. Changes in firm boundaries can likewise be understood as the result of processes of entrepreneurial experimentation. And internal organization can be interpreted as the means by which the entrepreneur delegates particular decision rights to subordinates who exercise a form of “derived” judgment on his behalf.32

CONCLUSION

Uncertainty, in Knight’s and Mises’s sense, is thus fundamental to understanding not only the profit-and-loss system, and the market’s process of allocating productive resources to their highest-valued users, but also the economic nature of the business firm itself. Unfortunately, contemporary neoclassical economics tends to reject both the distinction between case and class probability and the entrepreneur. If there is no “true” uncertainty, then profits are the result of monopoly power or random error. If any firm can do what any other firm does, if all firms are always on their production possibility frontiers, and if firms always make optimal choices of inputs, then there is little for the entrepreneur to do.

Fortunately, the modern entrepreneurship literature has begun to recognize the need for a more sophisticated treatment of uncertainty (along with other cognitive issues—see the discussion in Alvarez and Barney33), and concepts of resource heterogeneity are common in to the resource- and knowledge-based views of the firm, transaction-cost economics, and the real-options approach to the firm. Far from rehashing old controversies, the reexamination of Mises’s and Knight’s views on uncertainty in Hoppe’s paper provides fresh insight into the entrepreneur, the firm, and the market process.

 

                             

Peter G. Klein (pklein@missouri.edu) is Associate Professor in the Division of Applied Social Sciences at the University of Missouri, Adjunct Professor at the Norwegian School of Economics and Business Administration, and a Senior Fellow of the Ludwig von Mises Institute.

34Hans-Hermann Hoppe, “The Limits of Numerical Probability: Frank H. Knight and Ludwig von Mises and the Frequency Interpretation,” Quarterly Journal of Austrian Economics 10, no. 1 (2007): 1–20.

35Richard von Mises, Probability, Statistics and Truth (New York: Dover Publications, 1957 [1939]).

36Bruno de Finetti, “Foresight: Its Logical Laws, Its Subjective Sources,” in H.E. Kyburg and H.E. Smokler, eds., Studies in Subjective Probability (New York: Wiley, 1964 [1937]); John Maynard Keynes, A Treatise on Probability (London: Macmillan, 1921).

37Frank H. Knight, Risk, Uncertainty, and Profit (New York: August M. Kelley, 1921), p. 26.

38O’Driscoll and Rizzo adopt the terms “typical events” and “unique events” to get at this distinction. See Gerald P. O’Driscoll, Jr., and Mario J. Rizzo, The Economics of Time and Ignorance (Oxford: Basil Blackwell, 1985).

39Hence the use of the term “case probability” is misleading; what Mises really means is “case non-probability,” or perhaps “case judgments without probabilities.” Confusingly, Mises also argues elsewhere that “[o]nly preoccupation with the mathematical treatment could result in the prejudice that probability always means frequency” (Mises, Human Action, p. 107). Van den Hauwe argues, in contrast to Hoppe, that Mises’s position is in some ways closer to Keynes’s. See Ludwig Van den Hauwe, “John Maynard Keynes and Ludwig von Mises on Probability,” MPRA Paper No. 6965 (2007); Hoppe, “Limits of Numerical Probability”; and Keynes, A Treatise on Probability.

40Hoppe, “Limits of Numerical Probability.” One might also include Shackle’s notion of “self-destructive, non-seriable” decisions. See G.L.S. Schackle, Decision, Order, and Time in Human Affairs (Cambridge: Cambridge University Press, 1961).

41Hoppe, “Limits of Numerical Probability,” p. 10.

42Richard von Mises, Probability, Statistics, and Truth, p. 24.

43Hoppe, “Limits of Numerical Probability,” p. 11.

44Richard von Mises, Probability, Statistics, and Truth, p. 75.

45Ibid., p. 76.

46Bayesian updating can also be applied to objective prior probabilities, presumably to give guidance to the decision-maker in cases where repeated trials to determine the new ex post probability are not possible. The “Monty Hall paradox” is a classic example.

47Richard N. Langlois, “Subjective Probability and Subjective Economics,” C.V. Starr Center for Applied Economics Research Report #82-09, Faculty of Arts and Science, New York University (1982).

48Langlois, “Subjective Probability and Subjective Economics,” p. 8.

49Israel M. Kirzner, Competition and Entrepreneurship (Chicago and London: University of Chicago Press, 1973).

50Hoppe, “Limits of Numerical Probability,” p. 4. See also James Buchanan and Alberto Di Pierro, “Cognition, Choice, and Entrepreneurship,” Southern Economic Journal 46, no. 3 (1980): 693–701.

51Ludwig von Mises, Human Action: A Treatise on Economics, Scholars Edition (Auburn, Ala.: Ludwig von Mises Institute, 2001 [1949]), p. 705.

52Ibid., p. 585.

53T. W. Schultz, “Investment in Entrepreneurial Ability,” Scandinavian Journal of Economics 82, no. 4 (1980): 437–48, esp. pp. 437–38.

54Milton Friedman and Leonard Savage, “Utility Analysis of Choices Involving Risk,” Journal of Political Economy 56, no. 4 (1948): 279–304.

55Kirznerian alertness is compared to luck in Harold Demsetz, “The Neglect of the Entrepreneur,” in Joshua Ronen, ed. Entrepreneurship (Lexington: Lexington Press, 1983), pp. 271–80.

56Lowell W. Busenitz and Jay B. Barney, “Differences between Entrepreneurs and Managers in Large Organizations: Biases and Heuristics in Strategic Decision-Making,” Journal of Business Venturing 12, no. 1 (1997): 9–30.

57Ludwig von Mises, “Profit and Loss,” in Mises, Planning for Freedom (South-Holland, Ill.: Libertarian Press, 1952), pp. 108–50.

58Peter G. Klein, “The Mundane Economics of the Austrian School,” Quarterly Journal of Austrian Economics 11, nos. 3–4 (2008): 165–87.

59Nicolai J. Foss and Peter G. Klein, “Entrepreneurship and the Economic Theory of the Firm: Any Gains from Trade?” in Rashjree Agarwal, Sharon A. Alvarez and Olaf Sorenson, eds., Handbook of Entrepreneurship Research: Disciplinary Perspectives (Dordrecht: Springer, 2005); Kirsten Foss, Nicolai J. Foss and Peter G. Klein, “Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization,” Organization Studies 28, no. 12 (2007): 1893–1912; Kirsten Foss, Nicolai J. Foss, Peter G. Klein and Sandra K. Klein, “The Entrepreneurial Organization of Heterogeneous Capital,” Journal of Management Studies 44, no. 7 (2007): 1165–86; Peter G. Klein, “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” Strategic Entrepreneurship Journal 2, no. 3 (2008): 175–90.

60Knight, Risk, Uncertainty and Profit, p. 311.

61In the terminology of Foss et al., “Original and Derived Judgment,” the entrepreneur-owner exercises “original” judgment, while hired employees, to whom the owner delegates particular decision rights, exercise “derived” judgment as agents of the owner. This implies that top corporate managers, whose day-to-day decisions drive the organization of corporate resources, are acting only as “proxy-entrepreneurs,” except to the extent that they themselves are part owners through equity holdings.

62Ludwig M. Lachmann, Capital and Its Structure (Kansas City: Sheed, Andrews and McMeel, 1956), p. 16. Lachmann does not require the entrepreneur to own the assets he recombines; see Foss et al., “Entrepreneurial Organization of Heterogeneous Capital,” for a more detailed argument that ownership, as residual rights of control, is a necessary part of this entrepreneurial function.

63 Foss et al., “Entrepreneurial Organization of Heterogeneous Capital”; Yoram Barzel, Economic Analysis of Property Rights (Cambridge: Cambridge University Press, 1997).

64Ibid.

65Ibid.

66Sharon Alvarez and Jay B. Barney, “Discovery and Creation: Alternative Theories of Entrepreneurial Action,” Strategic Entrepreneurship Journal 1, nos. 1–2 (2007), pp. 11–26.

• 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).
• 4Hans-Hermann Hoppe, A Theory of Socialism and Capitalism: Economics, Politics, and Ethics (Boston: Kluwer Academic Publishers, 1989), chs. 2 & 7; idem, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 2006 [1993]), chs. 11–13, 15, and “Appendix: Four Critical Replies.”
• 5Idem, Democracy.
• 6Idem, “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).
• 7On 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.
• 8Idem, “On Time Preference, Government, and the Process of De-Civilization,” p. 24, n. 25.
• 9Cf. 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.
• 10Stephan Kinsella & Jeffrey Tucker, “The Ordeal of Hoppe,” The Free Market 26, no. 4 (April 2005).
• 11Ibid., p. 71; and Hans-Hermann Hoppe, Eigentum, Anarchie und Staat: Studien zur Theorie des Kapitalismus (Opladen: Westdeutscher Verlag, 1987).
• 12Hoppe, Democracy, p. 74; and Hans-Hermann Hoppe, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy (Boston: Kluwer, 1993).
• 13Hoppe, Democracy, p. 71.
• 14Domenico Losurdo, Nietzsche il Ribelle Aristocratico: Biografia Intelettualle e Bilancio Critico (Turin: Bollati Boringhieri, 2002).
• 15Hans-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.”
• 16Caspar 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).
• 17Stephan 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.
• 18Hans-Hermann Hoppe, “Reflections on the Origin and the Stability of the State,” LewRockwell.com (June 23, 2008).
• 19Alan Pendleton Grimes, American Political Thought (New York: Holt, 1960), p. 283.
• 20Michael Vorenberg, Final Freedom: The Civil War, the Abolition of Slavery, and the Thirteenth Amendment (Cambridge: Cambridge University Press, 2001), p. 64.
• 21Merle Curti, The Roots of American Loyalty (New York: Columbia University Press, 1946), p. 175.
• 22Karl 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.
• 23James A. Rawley, The Politics of Union: Northern Politics during the Civil War (Lincoln: University of Nebraska Press, 1980), p. 184.
• 24Abraham Lincoln to H.L. Pierce et al. (April 6th 1859), Collected Works, vol. II, p. 375.
• 25Just as an example, in the late Nineteenth century John W. Burgess offered a definition of sovereignty as an “original, absolute, unlimited, universal power over the individual subject and over all associations of subjects,” and of “the State . . . [as] the source of all titles to land and of all powers over it,” John W. Burgess, Political Science and Comparative Constitutional Law (Boston-London: Ginn, 1891), vol. I, pp. 47, 52.
• 26Fries, “Staatstheorie and the New American Science of Politics,” p. 403.
• 27Benjamin Zipursky, “Pragmatic Conceptualism,” Legal Theory 6, no. 4 (December 2000): 462.
• 28Ibid., pp. 462–23.
• 29Anthony T. Kronman, “Wealth Maximization as a Normative Principle,” Journal of Legal Studies 9, no. 2 (March 1980): 240. Despite the fact that conclusions of Kronman and Austrians in this particular normative question coincide, we shall, for the sake of fairness, not forget that his approach to criticism of Posner is heavily influenced by the neoclassical notion of economics. Kronman, for example, uses utils and without hesitation engages in an interpersonal comparison of utility. Walter Block once rightly raised this objection in his reply to Kronman. See Walter Block, “Alienability, Inalienability, Paternalism, and the Law: Reply to Kronman,” American Journal of Criminal Law 28, no. 3 (Summer 2001): 351–71.
• 30Richard A. Posner, “Utilitarianism, Economics, and Legal Theory,” Journal of Legal Studies 8, no. 1 (1979): 119.
• 31Posner, “Efficiency Norm,” p. 500.
• 32Posner, “Utilitarianism, Economics, and Legal Theory,” p. 125.
• 33Dworkin, “Is Wealth a Value?,” p. 208. Dworkin indeed asserts that under present conditions, it would be for most people today “impossible to repurchase the right to their labor, because the value of that labor represents more than half of their present wealth.” Ibid., p. 209.
• 34Eventually, 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.
• 35Among 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).”
• 36for 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.
• 37Hoppe’s axiom of private property is also of crucial importance. If you debate about ethical issues, it means that you presuppose your own right, as well as the right of other people, to debate the issue. This acceptance implies that you do respect the rights of others people involved in the debate to control their own bodies. And the conclusion is crucial: if you even begin debating what is right and what is wrong, it means that you already have acknowledged that private property is necessary and inescapable for any moral judgment. This applies even to those who try to argue against private property. The ethical ground for private property has never been so strong and deep before.
• 38There 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.
• 39The 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.
• 40Immigration, democracy, regulation—so many bad ideas abound concerning all of these issues, and Hoppe addresses them so well in his writings and speeches.
• 41Hans 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.
• 42Hans 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.
• 43Courage 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.
• 44Significantly, 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.”
• 45Significantly, 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.”
• 46A 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.
• 47Two 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.
• 48“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.
• 49It 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.
• 50His 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.”
• 51The 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.
• 52Lieber’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.”
• 53Lieber’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.”
• 54During 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.
• 55In 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.
• 56The 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.
• 57In the end, it was the presidency of Lincoln—the very statesman who said “the principles of Jefferson are the definitions and axioms of free society”—that wrote finis to those very same principles and ended the American experiment in limited government and self-government. One of the major consequences of the metaconstitutional theory of the Union as an end in itself (and of equating its dissolution with a “moral catastrophe”) embraced by Abraham Lincoln was that of making American political thought more receptive to European theories. America proceeded towards a “normalization” of sorts, growing ever more similar to Europe. And this process of “convergence” was to reach its peak during the last century. Lincoln “normalized” America, thus opening the door for the Americanization of the world.
• 58In the end, it was the presidency of Lincoln—the very statesman who said “the principles of Jefferson are the definitions and axioms of free society”—that wrote finis to those very same principles and ended the American experiment in limited government and self-government. One of the major consequences of the metaconstitutional theory of the Union as an end in itself (and of equating its dissolution with a “moral catastrophe”) embraced by Abraham Lincoln was that of making American political thought more receptive to European theories. America proceeded towards a “normalization” of sorts, growing ever more similar to Europe. And this process of “convergence” was to reach its peak during the last century. Lincoln “normalized” America, thus opening the door for the Americanization of the world.
• 59In conclusion, we must turn again to the American Staatstheorie professors. It is true that their dominance in the profession faded after World War I, and their ultimate failure might be linked to the fact that they were “unable to apply the German idea of the state to the American Political tradition.” But this is true only from a purely theoretical perspective. Abraham Lincoln was not engaging in such a complex pursuit. He did not have to render the two traditions compatible, but rather to burn the bridges with the old American notion of “liberty vs. government.” In addition, he did not have to win any sophisticated scholarly dispute, as he had better weapons than continental authorities on the subject of liberty and the State. It was his army that, in fact made every citizen, North and South of the Potomac, appreciate the notion that there was an identity of interest between the individual and the State (by now understood as the Nation).
• 60Austrians like Hoppe are not alone in this particular criticism of L&E. Benjamin Zipursky, a representative of so called “pragmatic conceptualism,” challenges the theory of economic analysis of tort law. According to him, tort law is, in essence, “backward-looking.” If we turn to the factory example, the right way of looking at the situation is to investigate the past, determine the structure of rights that was in place before the pollution, describe the actions of both plaintiff and defendant and, on this basis, decide who is to be held liable. On the other hand, the economic (Posnerian) approach is “forward looking;” the initial distribution of rights is of no importance—“where liability should lie ultimately depends on an answer to a question about the future, not about the past.” This, unfortunately, leads us to the conclusion that, for L&E what is right and what is wrong are merely contingent. A just legal system can hardly be based on the contingent notions of right and wrong.
• 61Austrians like Hoppe are not alone in this particular criticism of L&E. Benjamin Zipursky, a representative of so called “pragmatic conceptualism,” challenges the theory of economic analysis of tort law. According to him, tort law is, in essence, “backward-looking.” If we turn to the factory example, the right way of looking at the situation is to investigate the past, determine the structure of rights that was in place before the pollution, describe the actions of both plaintiff and defendant and, on this basis, decide who is to be held liable. On the other hand, the economic (Posnerian) approach is “forward looking;” the initial distribution of rights is of no importance—“where liability should lie ultimately depends on an answer to a question about the future, not about the past.” This, unfortunately, leads us to the conclusion that, for L&E what is right and what is wrong are merely contingent. A just legal system can hardly be based on the contingent notions of right and wrong.
• 62The principle of wealth maximization necessarily favors those who already have money, or the resources with which to earn it, and are therefore able to pay more than others to have a new legal rule defined in the way that is favorable to them.
• 63A less welcome implication of the wealth-maximization approach is that people who are very poor . . . count only if they are part of the utility function of somebody who has wealth.
• 64According to Posner, not only property rights to chattels are to be instrumentally distributed according to the wealth maximization principle. Posner seeks to present a universal, normative benchmark for allocation of all sorts of rights, including the self-ownership of one’s own labor. In other words, the issue of initial assignment of property rights is considered, since it is “the starting point for a market system.” The fact that people own their own lives and labor is, according to Posner, explicable by the wealth maximization principle itself; assignment of these rights to “natural owners” is a result of calculus. States Posner:
• 65This is the economic reason for giving a worker the right to sell his labor and a woman the right to determine her sexual partners. If assigned randomly to strangers these rights would generally (not invariably) be repurchased by the worker and the woman respectively.
• 66Dworkin challenges this assertion by pointing out that we cannot simply assume, as Posner does, the rights to be repurchased by their natural owners. These people must be willing and able to pay for them what the random possessors of the right would demand on the market. But all this necessarily depends on the initial assignment of rights itself. The reasoning is, again, circular. As Ian Shapiro notes, the example assumes “exactly what Posner has to establish if his theory is to make any sense.”