Power & Market

Among the several misgivings non-anarcho-capitalist people might have with anarcho-capitalism, there is the issue of public goods. Public goods, in fact, are supposed to be those goods which free markets cannot efficiently supply and allocate because of two properties: non-rivalry, i.e., the fact that A’s consumption of (public) good X does not impair B’s consumption of it; and non-excludability, i.e., the fact that A, the owner of (public) good X, cannot prevent B from enjoying it as well.

So, the argument goes, public goods supposedly need to be produced by governments; otherwise, they would be underproduced or overused—that is, free markets would fail to deliver optimal (i.e., desired) quantity and allocation. However, even setting aside historical instances of private provision of alleged public goods,1 it is the theory itself—as well as the alleged necessity for their governmental production—that relies on shaky and fallacious premises, as I will briefly summarize.

First, consider that a truly non-rivalrous good is not even an economic good itself: nobody, indeed, would face the need to economize it. In fact, if both A and B can consume (public) good X without reducing the satisfaction each one of them can derive from it, then X is no longer a scarce means that must be allocated efficiently—i.e., it is no longer an object of economic choice and action. On the contrary, X could be considered a “natural condition of human welfare".2 But, if X is so abundant that neither conflicts nor tradeoffs would arise when both A and B are eager to employ it, then A and B need not worry about any potential underproduction, squandering, or misallocation of X itself. Indeed, X will always be available to A and B for whatever purpose they might need it.

That said, moreover, oftentimes so-called public goods—when scrutinized more carefully—actually feature rivalry: hence, conflicts and tradeoffs are bound to arise when it comes to their employment. Therefore, governments themselves, while allocating such goods, must be guided by some principle. Since such a principle is not (by definition) the free-market price mechanism blamed by public-goods theorists, then governmental production and allocation of public goods would require some ethical principle justifying it—that is, some justification for coerced exchange between subjects and governments, i.e., taxation and government expenditures.3 However, such an ad hoc ethical principle would be outside the realm of value-free economic theory.

Second, what about non-excludability? Here, the anarcho-capitalist answer is straightforward: governments cannot introduce coercive mechanisms preventing the depletion of (rivalrous) non-excludable goods.4 In fact, on what ground could bureaucrats maintain that depleting a scarce resource today is worse than doing so tomorrow—or in one year, in one century, etc.? Of course, they could not do so on the economic-theoretical ground.5 Why? There are two main reasons.

Reason number one: economics does not allow aggregating individual utilities into a social welfare function (utilities are, in fact, unmeasurable, and you cannot perform on them such mathematical operations as additions, averages, etc.). Hence, aprioristic assessments about the social (dis)utility of consuming a (scarce) non-excludable resource today as opposed to tomorrow—or of having a (scarce) non-excludable resource consumed by a group of people rather than a different one—cannot be performed on an economic-theoretical ground.

Reason number two: economics does not allow interpersonally comparing the utility of one person (who, say, is depleting the scarce resource today) with the utility of another one (who, say, is not eligible to deplete the resource today, and hence would be depleting it tomorrow). Thus, economics has nothing to say about the distribution of a (rivalrous) non-excludable resource among individuals—i.e., economists cannot know whether (public) good X is desired more eagerly by A or B, and thus have nothing to say about which one among A or B should be entitled to consume it.

Therefore, again, since public-goods theorists maintain that the free-market price mechanism is not suitable for allocating (scarce) non-excludable resources, then some sort of ethical justification for governmental coercive provision would be required. However, again, this moves us beyond the scope of value-free economic theory. Economic theory, in fact, cannot proffer value-judgements about the allocation, production, consumption, etc., of scarce resources—this being, instead, the realm of ethics and aesthetics.6 Economics can, at most, show the most efficient arrangement to achieve the desired allocation of resources and satisfaction of (given) ends.

Moreover, oftentimes so-called public goods are actually both rivalrous and excludable;7 hence, they can be homesteaded according to Lockean-Rothbardian ethics—i.e., the first one employing (or better: fencing) them is to become their owner. Thus, there is no need for entrusting governments with public goods’ production: the free market, once a just ethical system of assigning property rights is in place, can do that more efficiently—via the price mechanism.

Third, as we already hinted, even if such a thing as pure public goods were to exist, this would not suffice to establish the case for their governmental—i.e., coercive—production.8 In fact, governments can produce public goods only if financed via taxation. But then, what gives governments the right to take away resources from citizens—i.e., taxes—in order to produce public goods? There are, indeed, at least two issues with such an ethical stance legitimizing governmental provision of public goods.

Problem number one: government, in order to produce and allocate public goods, would invade—via taxation—the legitimately acquired property of its subjects. In fact, if I can no longer enjoy my property to the extent I deem fit—but rather government is to barge in, take it away from me, and employ it as it wish—then government becomes (against my consent) the true owner of the resource. But this would be a prima facie theft—and, unless we want to advance an ethics legitimizing theft, aggression, and invasion, we must recognize this option as deeply unethical.

Problem number two: what if the (public) goods that government is supplying are not goods at all for some taxpayer—being “bads” instead? That is, what if government is forcing its subjects to consume goods they actually abhor?9 For instance, I hate watching TV: were government to tax me in order to finance public provision of TV programs, then I would be dissatisfied twice—the first time being deprived of a share of my income, the second time being subjected to junk TV programs.

Fourth, and last: any coerced exchange is always suboptimal with respect to a free one. In fact, why do people (freely) exchange? They do so because they know they are psychically profiting from it. If A performs an exchange with B, then we can conclude that both A and B are happier (after the exchange) than they were beforehand—i.e., they revealed their preference for such a free exchange through their action. But things are totally different when governments are involved in coercively supplying—via taxation—public goods. As Hoppe wrote,10

“the value of the public goods is relatively lower than that of the competing private goods because if one had left the choice to the consumers (and had not forced one alternative upon them), they evidently would have preferred spending their money differently (otherwise no force would have been necessary)”.

Conclusion

Public-goods theory is no compelling argument against anarcho-capitalism. Public goods are, oftentimes, resources that are rivalrous; when they are not, they nonetheless can be oftentimes produced on the free market—and be rendered excludable applying the standard libertarian homesteading principle. Moreover, it is impossible to ethically justify governmental production of public goods—unless we consider as legitimate both theft and coerced dissatisfaction of consumers. Lastly, consumers would always prefer at least one private good—acquired via uncoerced free exchange—over any conceivable governmental public good—produced via coerced taxation.

• 1. On private production of alleged public goods, see Rothbard, Economic Controversies, 2011, Ch. 24: “The Myth of Neutral Taxation”, pp. 470-73, originally published in 1981.
• 2. Cf. Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 3-5, 1033.
• 3. For a theoretical, comprehensive analysis of coerced exchanges between governments and subjects, i.e., binary intervention, see Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 907-61, 1149-1292.
• 4. On economics and public-goods theory when it comes to non-excludable, depletable resources (e.g., environment), see Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 1036-37, 1124. On how an anarcho-capitalist society would handle seemingly non-excludable resources and prevent negative externalities (e.g., air pollution), see Rothbard, Economic Controversies, 2011, Ch. 20: “Law, Property Rights, and Air Pollution”, originally published in 1982.
• 5. Cf. Rothbard, Economic Controversies, 2011, Ch. 17: “Toward a Reconstruction of Utility and Welfare Economics”, pp. 310-12, 313-14, originally published in 1956.
• 6. Cf. Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 74-75.
• 7. On supposed public goods (e.g., law, courts, and police) actually turning out to be standard private, free-market producible goods, see: Osterfeld, Anarchism and the Public Goods Issue: Law, Courts, and the Police, 1989; and Hoppe, Fallacies of the Public Goods Theory and the Production of Security, 1989.
• 8. Cf. Hoppe, The Economics and Ethics of Private Property, 2006 (1993), Ch. 1: “Fallacies of the Public Goods Theory and the Production of Security”, pp. 11-13, originally published in 1989.
• 9. Cf. Rothbard, Economic Controversies, 2011, Ch. 24: “The Myth of Neutral Taxation”, pp. 465-66, originally published in 1981.
• 10. Hoppe, The Economics and Ethics of Private Property, 2006 (1993), Ch. 1: “Fallacies of the Public Goods Theory and the Production of Security”, p. 14, originally published in 1989.

The common thread that connects failed societies, from Weimar Germany to the Soviet Union, is an almost pathological insistence on denying reality. Weimar Germany denied that masses of printed money would destroy civilized society. The Soviet Union insisted that Soviet Man would emerge spontaneously from the ashes of capitalist society. Weimar Germany spawned Nazi Germany. Nazi Germany was completely destroyed, both physically and politically, by the World War II Allies. Mercifully, the Soviet Union simply collapsed after seventy years of consuming capital to achieve the phantom of the classless society. Today both Nazi Germany and the Soviet Union are synonymous with tyranny and failure. Both nations murdered millions. Both nations no longer exist. True, Germany exists as does Russia, but I contend that both are new nations. Neither is perfect, but neither claims a political heritage to the nation that preceded it.

Pathological policy errors flowed inexorably from a skewed view of reality in both Nazi Germany and the Soviet Union. Once this view of reality was deemed to be above criticism, its champions adopted increasingly tyrannical policies. Nazi Germany's Aryan Supremacy racial theories seemingly justified the murder of the handicapped, Gypsies, those of alternative sexual orientation, Jews, and Slavs. In the name of birthing a new Soviet Man, the Soviet Union murdered anyone who stood in the way of its program to confiscate all businesses, including small farms. When businesses and farms failed, there was no soul searching as to root causes that might lie in Marxism itself. No, the problem had to be saboteurs within society. Reality, you see, was what the Soviet Union's Politburo said it was. As the vanguard of the proletariat, the Politburo stood outside society and saw its flaws. Those who disagreed were blind to this insight and had to be eliminated.

Chasing the Phantoms of Alternative Reality

Today the West especially is adopting policies that flow from alternative realities that, frankly, do not exist. Here I list just a few:

1. Catastrophic global warming/climate change is caused by man and must be stopped. I prefer to qualify the term "global warming/climate change" by the adjective "catastrophic". Is the world warming? Who knows? Is the climate changing? Probably. But neither global warming nor climate change is "catastrophic". Yet it has become almost an article of faith that the earth is on the precipice of an environmental catastrophe, requiring ever more radical handicaps on our freedoms and the economy.

2. White privilege in the US is responsible for crimes against minorities and disparities in wealth. This critical race theory has spawned witch hunts for secret and shadowy white supremacist groups especially in the military, which has empowered investigators to find evidence of these groups and root them out. It will be imperative that these investigators actually uncover such groups, whether they exist or not. Critical race theory is the old Marxist class struggle theory in new clothes. The Marxist class struggle theory postulated that we all are born into a class and cannot escape its prejudices. But notice that the Marxist and now the Race theorists consider that they themselves are not susceptible to the prejudices in which all the rest of us are trapped. Very convenient, eh?

3. Covid-19 is an existential threat to human life on earth. Constitutionally guaranteed human rights may be violated with impunity. Who gets to decide all this? Why, elected officials and government bureaucrats, of course.

4. Modern Monetary Theory (MMT) explains that government need not moderate its spending. Government can always manufacture more money in order to fund new programs and pay its debts . More government spending can always prevent a drop in aggregate demand. Government debt is irrelevant, because "we owe it to ourselves". MMT gave government elected officials exactly what they always wanted--carte blanche to spend, spend, and spend some more and not worry about justifying or prioritizing spending. As Keynes actually said, pay people to dig holes in the ground and pay others to fill them back up. What could possibly go wrong?

Champions of the above denials of reality refuse to discuss whether their view of reality is accurate. All are articles of faith and cannot be questioned. In fact, to question them is considered to be an admission of ignorance, guilt, or perfidy. One wants to destroy Mother Earth, enslave minorities, kill innocent people, and prevent all in society from enjoying unlimited prosperity. It's the old straw man fallacy on steroids. Furthermore, resources will be expended to pursue these phantoms, and more resources will be expended to protect oneself from being caught in a witch hunt. Society will live in fear--fear of global warming, fear of being branded a racist, fear of contracting a dread disease. Unfortunately, what society does not fear is that our lifetime's savings will be wiped out by inflation made possible by MMT.

The Basics of Reality

Contrast these phantoms with the pragmatic basics of sound economics: namely, that in order to prosper man must face the reality of human existence—primarily scarcity and uncertainty. People's preferences must be accepted at face value. Man acts. This is an irrefutable axiom in that to deny it is to confirm its validity. His action is rational in the sense that he believes that his action will improve his condition. He understands cause and effect. He performs one act at a time. He performs the most important act first; in other words, he ranks his actions in order of importance. Performing an act means that he must sacrifice the execution of others until later; in other words, acting means giving up some other preference, at least until some later time. Man's ordinal ranking of preferences means that the cost of an action is determined by what he eschews until later. No two men have the identical ordinal ranking of preferences; plus, the preferences cannot be assigned a cardinal value in order to compare one man's preferences with another. Man discovers the concept of comparative advantage and adopts the division of labor in order to accomplish more. Through the market process, man adopts a universal medium of exchange (money) in order to break the tyranny of direct barter. Now man can indirectly exchange his specialized production for a universal medium of exchange in order to obtain his real wants. Man invents government as a specialized service in order to protect his person and his property at a lower cost. He invents law in order to adjudicate inevitable disputes.

All this is reality. Peaceful exchange requires social cooperation, which brings about peace and prosperity among men everywhere. As advice columnist Ann Landers used to say, Wake up and smell the coffee!

Failure is a misnomer if we are referring to the human action involved in an entrepreneurial pursuit. A commonly held, although misleading notion, is that entrepreneurs often fail within the first few years in the marketplace. Often, I wonder why and how it happens that entrepreneurs fail only after a few years in the market if they envisioned a profitable opportunity where none had existed beforehand and was visually unapparent to others. In a non-metaphorical sense, let us think about this: Entrepreneurs discover and invest in producing and distributing goods for those who demand them the most, thereby creating downward pressures on consumer prices via their purposive action.

With that said, why is it that at one point, the entrepreneur discovers effectual ways to satisfy consumer demands, and only within a few years is the entrepreneur reported to have failed? I do not buy this one bit, and I believe this belief is all wrong. Here is why: Firms measure “success” or "failure" via profit and loss. How do we measure the entrepreneur's contributions? One way we might measure the entrepreneurial function is by their compounding effect on future developments for human flourishing.

Instead of, as some might think, that entrepreneurs quit too soon, the reality is that entrepreneurs are often negatively affected by distortions and interventions in the marketplace. Not to mention, entrepreneurs are subject to the ongoing competition between existing and emerging institutions.

Does Entrepreneurial Success Rest on Personal Characteristics?

Some have said that entrepreneurs do not pick the right people for their team, their purposes are directed toward the wrong endeavor, and somehow, they lack commitment, persistence, and all the rest. I do not buy it. We must look at the effects of various institutional changes, distortions, and interventions, that play such a significant role in the assumed failure of nascent or incumbent entrepreneurs.

It boggles the mind how failure is attributed in many cases only to entrepreneurs' characteristics instead of the distortions and interventions placed in their way that obstruct the signals that are widely used to make decisions. Institutions like money and price act as entrepreneurial signals that reflect the known knowledge needed to produce and distribute consumer goods and services, particularly those economic goods valued most by market participants who consume and are satisfied by them.

Even the thought of an entrepreneur's failure is somehow self-inflicted is utter nonsense. Who would discover a profitable opportunity only to fail at it knowingly? Moreover, the same people who attribute failure to the entrepreneur have the antidote for fixing their failures.

The Public Service Provided by Entrepreneurs

It is no doubt true that sometimes entrepreneurial projects do not cut the mustard. However, according to Murray Rothbard, no one else knows their market and the workings of their market better than the entrepreneur. Therefore, there must be some external factors creating situations conducive to failure. As we have seen, commentary about entrepreneurial failures seems to face inward – failure is the entrepreneurs' fault – of course. I beg to differ. Firms may fail, but in at least one sense, entrepreneurs do not. Entrepreneurs shape our future only by adding to the entrepreneurial stock of knowledge. The steamboat, airplane, vehicles, ice manufacturing, light bulbs, umbrellas, pens, food and food processing, digital apps, just technology, in general, are all outcomes of an accumulation of knowledge from previous entrepreneurs that took place over decades and in some cases even centuries.

How does one respond when a friend, colleague, professor, or one of the most decorated economists on the planet, claim they don’t foresee and inflationary problem? Janet Yellen, US Treasury Secretary claims, as reported by Reuters:

I don't think there's going to be an inflationary problem. But if there is the Fed will be counted on to address them.

Henry Hazlitt dedicated an entire book on inflation, opening with the sentence:

No subject is so much discussed today — or so little understood — as inflation.

That was nearly 60 years ago! Going back to Mises, it was addressed, yet ignored for over a century!

The problem starts with trying to gauge your interlocutor's understanding of “inflation.” There’s the commonly accepted idea of inflation being a general “increase in prices,” but inflation originally signified the act of increasing the supply of money and credit, then during the last century this became less widely used. Now, the act of increasing the money supply by even several trillions of dollars a year is considered routine policy; what was once dubbed inflation is now called stimulus.

Should they remain fixated on the idea that inflation means price increases measured by the CPI, steer them in the direction of illustrating various problems with inflation calculations. These problems have been cited for several generations and even in my recent article Inflation: The Art of Moving Goal Posts. By understanding how inflation data is compiled, what’s omitted, what’s included, and the immeasurability of the idea itself helps cast doubt on the mainstream narrative.

But if inflation calculations are inherently flawed, are there other ways to convey that society already has an “inflationary problem” at hand?

Looking at median sales prices of homes in America, we see prices have steadily risen, save for the previous recession where prices declined. Interesting how housing prices have sharply increased during this recession; we can only speculate as to how much this is caused through central bank intervention.

You can also point to continual all-time highs in the stock market, the rise of crypto currencies, and the burgeoning NFT market, all occurring when our future has never looked so uncertain, in the face of the money supply, national debt, and stimulus reaching unheard of levels.

Unfortunately, the unaffordability of life through increase in asset prices and associated debt level don’t matter much to inflationists. It’s the general price increase in necessities such as gasoline and toilet paper which matters most.

Should all else fail, and the inflationary problem remains unnoticed, try pointing to a country like Venezuela, noting how their money supply has risen on an upward trajectory. It’s unlikely anyone could deny that “maybe,” the cause of their hyperinflation and currency collapse was a result of a dramatic explosion to their money supply, M2 now standing at 1 Quadrillion VEF! (The chart below is in millions).

Strange days indeed. And the task of discussing problems with inflation persists. Often difficult to prove until it’s too late, two different definitions of inflation create complexity and having assets excluded from already faulty inflation calculations doesn’t help. Being told by experts that inflation isn’t yet a problem makes the public’s understanding of the topic difficult to grasp. All the while, the commonly accepted method of national default is by way of printing a currency into oblivion, suffering the consequences of default through hyperinflation.

While dinner table economic talk may work with those whom you keep close company, not many of those who desire a free market appear to keep company with those deciding the narrative for the entire planet. What can be said to someone like Yellen or the Fed who gets paid to seemingly ignore the basic history and principles of inflation? Unfortunately, if it won’t come from you, then we can only hope Congress will do the right thing…