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A Theory of

Socialism and

Capitalism



Economics, Politics, and Ethics

Hans-Hermann Hoppe

Te Ludwig von Mises Institute’s Studies in Austrian Economics

Department o Economics University o Nevada, Las VegasKluwer Academic Publishers Boston/Dordrecht/London

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Hoppe, Hans-Hermann. A theory o socialism and capitalism : economics,politics, and ethics / by Hans-Hermann Hoppe.

p. cm. Includes index.

© 2010 by the Ludwig von Mises Institute and published under theCreative Commons Attribution License 3.0.

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ISBN: 978-1-933550-73-2



A Theory of

Socialism and

Capitalism

Hans-Hermann Hoppe



Acknowledgements

Tree institutions assisted me while I wrote this treatise. As aHeisenberg Scholar I enjoyed the most generous nancial supportrom the German Science Foundation (DFG) rom 1982 through1986. Te present study is the most recent work I completed dur-

ing this period. Additional support came rom the Johns HopkinsUniversity Bologna Center or Advanced International Studies,where I spent the academic year 1984-1985 as a Visiting Proes-sor. Te lectures delivered there provided the core o what is pre-sented here. Finally, during the academic year 1985/86, when my research took on its present orm and which I spent in New York City, I received the most unbureaucratic and cordial help rom theCenter or Libertarian Studies.

My deepest gratitude is to my teacher and riend Murray N.Rothbard. o his scholarly and personal example I owe more than Ican properly express. He read an earlier dra o the study and pro-

vided me with invaluable comments. Innumerous discussions withhim were a never ending source o inspiration and his enthusiasmwas a constant encouragement.

o these people and institutions I owe a sincere “thank you.”

5



Contents

Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . .9

Chapter 2: Property, Contract, Aggression,Capitalism, Socialism . . . . . . . . . . . . . . . . . 17

Chapter 3: Socialism Russian Style . . . . . . . . . . . . . . . . 31

Chapter 4: Socialism Social-democratic Style . . . . . . . . . 51

Chapter 5: Te Socialism o Conservatism . . . . . . . . . . . 79

Chapter 6: Te Socialism o Social Engineering . . . . . . . 113

Chapter 7: Te Ethical Justication o Capitalism andWhy Socialism Is Morally Indeensible . . . . . . 147

Chapter 8: Te Socio-psychological Foundations o Socialism or Te Teory o Te State . . . . . . . 169

Chapter 9: Capitalist Production andTe Problem o Monopoly . . . . . . . . . . . . . 195

Chapter 10: Capitalist Production andTe Problem o Public Goods . . . . . . . . . . . 219

Reerences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Index o Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

7



8 A Theory of Socialism and Capitalism



Hans-Hermann Hoppe 9

Chapter 1

Introduction

The ollowing study on the economics, politics and mor-als o socialism and capitalism is a systematic treatise onpolitical theory. Interdisciplinary in scope, it will discussthe central problems o political economy and political

philosophy: how to organize society so as to promote the produc-

tion o wealth and eradicate poverty, and how to arrange it so as tomake it a just social order.

But in doing this I will also constantly touch upon and illumi-nate social and political problems in the narrower, more commonsense o these terms. In act, it is one o the major goals o this trea-tise to develop and explain the conceptual and argumentative tools,economic and moral, needed to analyze and evaluate any kind o

empirical social or political system, to understand or appraise any process o social change, and to explain or interpret similarities aswell as dierences in the social structure o any two or more dier-ent societies.

At the end o the treatise it should be clear that only by meanso a theory, economic or moral, which is not itsel derived romexperience but rather starts rom a logically incontestable state-ment (which is something very dierent rom an “arbitrarily pos-tulated axiom”) and proceeds in a purely deductive way (perhapsusing some explicitly introduced empirical and empirically testable

9




assumption, in addition) to results which are themselves logically

unassailable (and thus require no empirical testing whatsoever),will it become possible to organize or interpret an otherwise cha-otic, overly complex array o unconnected, isolated acts or opin-

ions about social reality to orm a true, coherent economic ormoral conceptual system. Hopeully it will be demonstrated that

without such a theory, political economy and philosophy can beconsidered nothing other than groping in the dark, producing, at

best, arbitrary opinions on what might have caused this or that,

or what is better or worse than something else: opinions, that is,whose opposites can generally be deended as easily as the original

positions themselves (which is to say that they cannot be deendedin any strict sense at all!).

Specically, a theory o property and property rights will be

developed. It will be demonstrated that socialism, by no means aninvention o nineteenth century Marxism but much older, must be

conceptualized as an institutionalized intererence with or aggres-sion against private property and private property claims. Capi-

talism, on the other hand, is a social system based on the explicitrecognition o private property and o nonaggressive, contrac-

tual exchanges between private property owners. Implied in thisremark, as will become clear in the course o this treatise, is the

belie that there must then exist varying types and degrees o social-

ism and capitalism, i.e., varying degrees to which private property rights are respected or ignored. Societies are not simply capitalist or

socialist. Indeed, all existing societies are socialist to some extent.(Even the United States, certainly a society that is relatively more

capitalist than most others, is, as will become apparent, amazingly socialist and has gradually become more so over time.)

One goal then, is to demonstrate that the overall degree o

socialism, i.e., the overall degree o intererence with property rights that exists in a given country, explains its overall wealth. Te

more socialist a country, the more hampered will be the processo production o new and the upkeep o old, existing wealth, and




the poorer the country will remain or become.1 Te act that the

United States is, by and large, richer than Western Europe, andWest Germany much richer than East Germany can be explainedby their lesser degree o socialism, as can the act that Switzerlandis more prosperous than Austria, or that England, in the nineteenthcentury the richest country in the world, has now allen to what isaptly called an underdeveloping country.

But the concern here will not be exclusively with the overallwealth eects, nor with the economic side o the problem alone.For one thing, in analyzing dierent types o socialism or whichthere exist real, historical examples (examples which, to be sure,

very oen are not called socialism, but are given a more appeal-ing name2), it is important to explain why, and in what way, every

o avoid any misunderstanding rom the outset: the thesis presented here is thatany given society’s overall wealth will be relatively increased, i.e., will grow morethan it otherwise would, i the overall degree o socialism is decreased and vice versa.

Te United States, or instance, would improve their standards o living by adoptingmore capitalism (above the level that would be attained otherwise), and so wouldGermany, etc. It is a somewhat dierent task, though, to explain the relative posi-tion (as regards overall wealth) o dierent societies at any given time because then,o course, the “ceteris” are no longer necessarily “paribus,” while, o course, otherthings, in addition to an existing degree o socialism, undoubtedly aect a society’soverall wealth. A given society’s history, or instance, has a tremendous eect on itspresent wealth. Every society is rich or poor not only because o present but alsopast conditions; because o capital having been accumulated or destroyed in the pastby our athers and oreathers. So it can easily happen that a society which is pres-ently more capitalist can still be signicantly poorer than a more socialist one. And

the same, only seemingly paradoxical result can emerge because societies can (anddo) dier with respect to other ormerly or presently operating actors aecting theproduction o wealth. Tere can and do exist, or instance, dierences in the work ethic and/or in prevalent world-views and habits among societies and these can anddo account or divergencies (or similarities) in the production o wealth o societ-ies alike or dierent with respect to their present degree o socialism. Tus, the moststraightorward and best way to illustrate the validity o the thesis that the degree o socialism is inversely related to a society’s wealth in any comparative social analysis,would be to compare societies which, except or dierences in their degree o social-ism, are paribus with respect to their history and the present socio- psychologicalcharacteristics o their people, or are at least very similar, like, or instance, West andEast Germany: and here the predicted eect indeed shows in the most dramatic way,as will be dealt with in the ollowing. Incidentally, “socialism” in the United States is called “liberalism” and the social-ist, or social democrat there, who calls himsel “liberal” would generally detest beingcalled “socialist.”




intervention anywhere, big or small, here or there, produces a par-ticular disruptive eect on the social structure which a supercial,theoretically untrained observer, blinded by an immediate “pos-itive” consequence o a particular intervention, might not per-ceive. Yet this negative eect nonetheless exists, and with somedelay will cause problems at a dierent place in the social abricmore numerous or severe than the ones originally solved by theinitial act o intervening. Tus, or instance, highly visible positiveeects o socialist policies such as “cheap ood prices,” “low rents,”

“ree” this and “ree” that, are not just positive things hanging inmidair, unconnected to everything else, but rather are phenom-ena that have to be paid or somehow: by less and lower quality ood, by housing shortages, decay and slums, by queuing up andcorruption, and, urther, by lower living standards, reduced capi-tal-ormation, and/or increased capital consumption. And a muchless conspicuous but almost always “positively” mentioned act—a greater eeling o solidarity among the people, the greater value

attached to things like amily, relatives, or riends, which is oundto exist between, or instance, the East Germans as compared totheir more “individualistic,” egoistic West/German counterparts—is again not a simple, isolated, unanalyzable act. Such eelings arethe result o a social system o constant shortages and o continu-ally repressed opportunities to improve one’s situation by one’s ownmeans. In East Germany, in order to accomplish the most sim-ple routine tasks, such as a house repair which in other countriesrequires no more than a telephone call, you simply must rely moreheavily on “personal” relations (as compared to impersonal busi-ness relations); and where someone’s “public” lie is under constantobservation by “society,” you simply have to go private.

Analyzed in some detail are the particular disruptive eectsthat are produced: (1) by a traditional Marxist policy o nation-alizing or socializing the means o production, or rather, by the

expropriation o private owners o means o production; (2) by arevisionist, social-democratic policy o egalitarian income redistri-bution; (3) by a conservatively minded policy o attempting to pre-serve the status quo through economic and behavioral regulations




and price controls; and (4) by a technocratically minded system

o pragmatic, piecemeal social and economic engineering andintervention.

Tese policy types, which will be analyzed sequentially, arenot completely homogeneous and mutually exclusive. Each onecan be carried through to varying degrees, there are dierent wayso doing things under each o these categories o policy and thedierent policy schemes can be combined to a certain extent. Inact, every given society is a mixture o all o them as it is the resulto diverse political orces which have varied at dierent times instrength and inuence. Te reason or analyzing them separately (apart rom the obvious one that not all problems can be discussedat once) is that they constitute policy schemes associated withclearly distinguishable social groups, movements, parties, etc., andthat each policy scheme aects overall wealth in a somewhat di-erent way.

And socialism will by no means be analyzed solely rom aneconomic point o view. O course, socialism, especially its Marx-ist or so-called “scientic” brand, has always pretended to be aneconomically superior organization o society (apart rom all o its other alleged qualities) compared to the so-called “anarchy o production” o capitalism3. But socialism does not collapse onceit is demonstrated that in act the opposite is true and it brings

impoverishment, not wealth. Certainly, socialism loses much o itsattractiveness or most people once this is understood. However, itis denitely not at its argumentative end so long as it can claim—whatever its economic perormance may be—that it represents ahigher morality, that it is more just, that it has an ethically superioroundation.

Hopeully however, by a close analysis o the theory o prop-

erty implicit in the dierent versions o socialism, this treatise will

Recall the repeated pronouncements in the early days o Soviet-Russian commu-nism, up to the days o Khrushchev, that the capitalist world would soon be econom-ically surpassed!




make clear that nothing could be arther rom the truth. It will be

demonstrated that the property theory implicit in socialism doesnot normally pass even the rst decisive test (the necessary i notsucient condition) required o rules o human conduct whichclaim to be morally justied or justiable. Tis test, as ormulatedin the so-called golden rule or, similarly, in the Kantian categoricalimperative, requires that in order to be just, a rule must be a gen-eral one applicable to every single person in the same way. Te rulecannot speciy dierent rights or obligations or dierent catego-

ries o people (one or the red-headed, and one or others, or oneor women and a dierent one or men), as such a “particularistic”rule, naturally, could never, not even in principle, be accepted as aair rule by everyone. Particularistic rules, however, o the type “Ican hit you, but you are not allowed to hit me,” are, as will becomeclear in the course o this treatise, at the very base o all practicedorms o socialism. Not only economically but in the eld o mor-

als, too, socialism turns out to be an ill-conceived system o socialorganization. Again, in spite o its bad public reputation, it is capi-talism, a social system based squarely on the recognition o privateproperty and o contractual relations between owners o privateproperty, that wins outright. It will be demonstrated that the prop-erty theory implicit in capitalism not only passes the rst test o “universalization” but it turns out to be the logical precondition(die Bedingung der Moeglichkeit ) o any kind o argumentative

justication: Whoever argues in avor o anything , and in particu-lar in avor o certain norms as being air, must, implicitly at least,presuppose the validity o the property norms implicit in capital-ism. o deny their validity as norms o universal acceptability andargue in avor o socialism is thus sel-contradictory.

Te reconstruction o the morals o private property and itsethical justication then leads to a reevaluation o socialism and, as

it turns out, the institution o the state, depending as it does or its very existence on taxation and orced membership (citizenship), asthe very incorporation o socialist ideas on property. Without any solid economic or moral reasons or their existence, socialism and




the state are then reduced to and will be explained as phenomenao merely socio-psychological relevance.

Led by such considerations, the discussion nally returns toeconomics. Te concluding chapters deal with the constructive task o explaining the workings o a pure capitalist social order as themorally and economically required alternative to socialism. Morespecically, they will be devoted to an analysis o how a social sys-tem based on a private property ethics would come to grips withthe problem o monopoly and the production o so-called “pub-

lic goods,” and in particular with the production o security, i.e., o police and judicial services. It will be argued that, contrary to muchthat has been written in the economics literature on monopoly andpublic goods, neither problem exists or, i they did exist, would stillnot suce in any meaningul sense to prove any economic de-ciency in a pure market system. Rather, a capitalist order always,without exception and necessarily so, provides in the most ecient

way or the most urgent wants o voluntary consumers, includ-ing the areas o police and the courts. With this constructive task completed, the argument will have been brought ull circle, and thedemolition o the intellectual credibility o socialism, morally andeconomically, should be complete.




Chapter 2

Property, Contract, Aggression,Capitalism, Socialism

B

eore advancing to the more exciting ield o analyzingdiverse policy schemes rom the standpoint o economictheory and political philosophy, it is essential to introduceand explain the basic concepts used throughout the ol-

lowing study. Indeed, the concepts explained in this chapter—theconcepts o property, contract, aggression, capitalism and social-ism—are so basic, so undamental, that one cannot even avoidmaking use o them, i at times only implicitly. Unortunately,though, the very act that in analyzing any kind o human actionand/or any kind o interpersonal relationship one must make useo these concepts does not imply that everyone has a precise under-

standing o them. It seems instead to be the other way around.Because the concept o property, or instance, is so basic that

everyone seems to have some immediate understanding o it, mostpeople never think about it careully and can, as a consequence,produce at best a very vague denition. But starting rom impre-cisely stated or assumed denitions and building a complex net-work o thought upon them can lead only to intellectual disaster.For the original imprecisions and loopholes will then pervade anddistort everything derived rom them. o avoid this, the concept o property must rst be claried.

17




Next to the concept o action, property is the most basic cat-

egory in the social sciences. As a matter o act, all other conceptsto be introduced in this chapter—aggression, contract, capital-ism and socialism—are denable in terms o property: aggression being aggression against property, contract being a nonaggressiverelationship between property owners, socialism being an insti-tutionalized policy o aggression against property, and capitalism being an institutionalized policy o the recognition o property andcontractualism.

Let us start with an elucidation o the precondition necessary or the concept o property to emerge.4 For a concept o property to arise, there must be a scarcity o goods. Should there be no scar-city, and should all goods be so-called “ree goods” whose use by any one person or any one purpose would not in any way exclude(or interere with or restrict) its use by any other person or or any other purpose, then there would be no need or property. I, let us

say, due to some paradisiac superabundance o bananas, my pres-ent consumption o bananas does not in any way reduce my ownuture supply (possible consumption) o bananas, nor the pres-ent or the uture supply o bananas or any other person, then theassignment o property rights, here with respect to bananas, wouldbe superuous. o develop the concept o property, it is necessary or goods to be scarce, so that conicts over the use o these goodscan possibly arise. It is the unction o property rights to avoidsuch possible clashes over the use o scarce resources by assigningrights o exclusive ownership. Property is thus a normative con-cept: a concept designed to make a conict-ree interaction pos-sible by stipulating mutually binding rules o conduct (norms)regarding scarce resources.5 It does not need much comment to see

C. D. Hume, A reatise o Human Nature (ed. Selby-Bigge), Oxord, 1968, esp. 3,2, p.484; and, “Enquiry Concerning the Principles o Morals,” in: Hume, Enquiries (ed. Selby-Bigge), Oxord, 1970; c. also: L. Robbins, Political Economy: Past and Present , London, 1977, esp. pp. 29-33. Incidentally, the normative character o the concept o property also makes the su-cient precondition or its emergence as a concept clear: Besides scarcity “rationality o agents” must exist, i.e., the agents must be capable o communicating, discussing,




that there is indeed scarcity o goods, o all sorts o goods, every-

where, and the need or property rights is thus evident. As a mat-ter o act, even i we were to assume that we lived in the Gardeno Eden, where there was a superabundance o everything needednot only to sustain one’s lie but to indulge in every possible com-ort by simply stretching out one’s hand, the concept o property would necessarily have to evolve. For even under these “ideal” cir-cumstances, every person’s physical body would still be a scarceresource and thus the need or the establishment o property rules,

i.e., rules regarding people’s bodies, would exist. One is not used tothinking o one’s own body in terms o a scarce good, but in imag-ining the most ideal situation one could ever hope or, the Gardeno Eden, it becomes possible to realize that one’s body is indeed the prototype o a scarce good or the use o which property rights, i.e.,rights o exclusive ownership, somehow have to be established, inorder to avoid clashes.

As a matter o act, as long as a person acts,6

i.e., as long as aperson intentionally tries to change a state o aairs that is subjec-tively perceived and evaluated as less satisactory into a state thatappears more rewarding, this action necessarily involves a choiceregarding the use o this person’s body. And choosing, preerringone thing or state over another, evidently implies that not every-thing, not all possible pleasures or satisactions, can be had at oneand the same time, but rather that something considered less valu-

able must be given up in order to attain something else considered

arguing, and in particular, they must be able to engage in an argumentation o nor-mative problems. I there were no such capability o communication, normativeconcepts simply would not be o any use. We do not, or instance, try to avoid clashesover the use o a given scarce resource with, let us say, an elephant, by dening prop-erty rights, or we cannot argue with the elephant and hence arrive at an agreementon rights o ownership. Te avoidance o uture clashes in such a case is exclusively atechnical (as opposed to a normative) problem.

It should be noted that a person cannot intentionally not act, as even the attemptnot to act, i.e., one’s decision not to do anything and instead remain in some previ-ously occupied position or state would itsel qualiy as an action, thus rendering thisstatement aprioristically true, i.e., a statement that cannot be challenged by experi-ence, as anyone who would try to disprove it thereby would have to choose and puthis body willy-nilly to some specic use.




to be more valuable.7 Tus choosing always implies the incurrenceo costs: oregoing possible enjoyments because the means neededto attain them are scarce and are bound up in some alternative usewhich promises returns valued more highly than the opportunitiesoreited.8 Even in the Garden o Eden I could not simultaneously eat an apple, smoke a cigarette, have a drink, climb up a tree, reada book, build a house, play with my cat, drive a car, etc. I wouldhave to make choices and could do things only sequentially. Andthis would be so because there is only one body that I can use to do

these things and enjoy the satisaction derived rom doing them. Ido not have a superabundance o bodies which would allow me toenjoy all possible satisactions simultaneously, in one single bliss.And I would be restrained by scarcity in another respect as well: aslong as this scarce resource “body” is not indestructible and is notequipped with eternal health and energy, but rather is an organismwith only a limited lie span, time is scarce, too. Te time used upin pursuing goal A reduces the time le to pursue other goals. And

the longer it takes to reach a desired result, the higher the costsinvolved in waiting will be, and the higher the expected satisactionmust be in order to justiy these costs.

Tus, because o the scarcity o body and time, even in theGarden o Eden property regulations would have to be established.Without them, and assuming now that more than one personexists, that their range o action overlaps, and that there is no pre-

established harmony and synchronization o interests among thesepersons, conicts over the use o one’s own body would be unavoid-able. I might, or instance, want to use my body to enjoy drinking acup o tea, while someone else might want to start a love aair withit, thus preventing me rom having my tea and also reducing thetime le to pursue my own goals by means o this body. In order toavoid such possible clashes, rules o exclusive ownership must be

C. L. v. Mises, Human Action, Chicago, 1966, esp. part 1; M. N. Rothbard, Man,Economy and State, Los Angeles, 1970; also: L. Robbins, Nature and Signicance o Economic Science, London, 1935. On the concept o cost c. in particular, M. Buchanan, Cost and Choice, Chicago,1969; L.S.E. Essays on Cost (ed. Buchanan and Tirlby), Indianapolis, 1981.




ormulated. In act, so long as there is action, there is a necessity orthe establishment o property norms.

o keep things simple and ree o distracting details let uscontinue to assume, or another stretch o analysis, that we indeedinhabit a Garden o Eden, where exclusively one’s body, its stand-ing room, and time are scarce resources. What can the prototypeo a scarce good, a person’s body, tell us about property and its con-ceptual derivatives?

While even in a world with only one type o scarce resource allsorts o norms regulating exclusive ownership with respect to scarcemeans are conceivable in principle (or example, a rule such as “OnMondays I determine to which uses our bodies can be put, on ues-days you determine their use,” etc.), it is certain that not all o themwould in act have the same chance o being proposed and accepted.It then seems to be best to start one’s analysis with the property norm, which would most likely be accepted by the inhabitants o

Eden as the “natural position” regarding the assignment o rights o exclusive ownership in bodies. o be sure, at this stage o the argu-ment we are not yet concerned with ethics, with the problem o themoral justication o norms. Tus, while it can well be admittedrom the very outset that I am indeed going to argue later on that thenatural position is the only morally deendable one, and while I amalso convinced that it is the natural one because it is morally deend-able, at this stage, natural does not imply any moral connotation. Itis simply meant to be a socio-psychological category used to indicatethat this position would probably nd the most support in publicopinion.9 Indeed; its naturalness is reected by the very act that intalking about bodies, it is almost impossible to avoid using posses-sive (possession-indicating) expressions as well. A body is normally reerred to as a specic person’s body: my body, yours, his, etc. (and,

It is worth mentioning here that the validity o all o what ollows, o course, in noway depends on the correctness o the description o the natural position as “natu-ral.” Even i someone would only be willing to grant the so-called natural positionthe status o an arbitrary starting point, our analysis assumes validity. erms don’tmatter; what counts is what the natural position really is and implies as such. Te ol-lowing analyses are concerned exclusively with this problem.




incidentally, the same is done whenever one speaks o actions!); and

one does not have the slightest problem distinguishing what is mine,yours, etc.; clearly, in doing so, one is assigning property-titles anddistinguishing between proper owners o scarce resources.

What, then, is the natural position regarding property implicitin one’s natural way o speaking about bodies? Every person has theexclusive right o ownership o his body within the boundaries o itssurace. Every person can put his body to those uses that he thinksbest or his immediate or long-run interest, well-being, or satisaction,as long as he does not interere with another person’s rights to controlthe use o his/her respective body. Tis “ownership” o one’s own body implies one’s right to invite (agree to) another person’s doing some-thing with (to) one’s own body: my right to do with my body what-ever I want, that is, includes the right to ask and let someone else usemy body, love it, examine it, inject medicines or drugs into it, changeits physical appearance and even beat, damage, or kill it, i that should

be what I like and agree to. Interpersonal relationships o this sort areand will be called contractual exchanges. Tey are characterized by the act that an agreement on the use o scarce resources is reached,which is based on mutual respect and recognition o each and allo the exchanging partners’ domain o exclusive control over theirrespective bodies. By denition, such contractual exchanges, whilenot necessarily advantageous or each and all o the exchanging part-

ners in retrospect (I might not like my looks aerwards, even thoughthe surgeon did exactly what I told him to do to my ace), are always,and necessarily so, mutually advantageous or every participant exante, otherwise the exchange simply would not take place.

I, on the other hand, an action is perormed that uninvit-edly invades or changes the physical integrity o another person’sbody and puts this body to a use that is not to this very person’sown liking, this action, according to the natural position regardingproperty, is called aggression.10 It would be aggression i a person

0 Note again that the term “aggression” is used here without evaluative connota-tions. Only later in this treatise will I demonstrate that aggression as dened above




tried to satisy his sexual or sadistic desires by raping or beating

another person’s body without having this person’s explicit con-sent. And it would be aggression as well, i a person were physi-cally stopped rom perorming certain actions with his body whichmight not be to someone else’s liking , such as wearing pink socksor curly hair, or getting drunk every day, or irst sleeping andthen philosophizing instead o doing it the other way around, butwhich, i indeed perormed, would not in itsel cause a change inthe physical integrity o any other person’s body.11 By denition,

then, an aggressive act always and necessarily implies that a per-son, by perorming it, increases his/her satisaction at the expenseo a decrease in the satisaction o another person.

What is the underlying rationale o this natural positionregarding property? At the bottom o the natural property theory lies the idea o basing the assignment o an exclusive ownershipright on the existence o an objective, intersubjectively ascertainable

link between owner and the property owned and, mutatis mutan-dis, o calling all property claims that can only invoke purely subjective evidence in their avor aggressive. While I can cite in avor o my property claim regarding my body the objective act that I wasthe body’s rst occupant—its rst user—anyone else who claims tohave the right to control this body can cite nothing o the sort. Noone could call my body a product o his will, as I could claim it to bethe product o mine; such a claim to the right to determine the use

o the scarce resource “my body” would be a claim o nonusers, o

is indeed morally indeensible. Names are empty; what alone is important is what itreally is that is called aggression. When I discuss the problem o moral justication in Chapter 7, I will return to theimportance o the distinction just made o aggression as an invasion o the physical integrity o someone and, on the other hand, an invasion o the integrity o some-one’s value system, which is not classied as aggression. Here it suces to notice thatit is some sort o technical necessity or any theory o property (not just the natural

position described here) that the delimitation o the property rights o one personagainst those o another be ormulated in physical, objective, intersubjectively ascer-tainable terms. Otherwise it would be impossible or an actor to determine ex antei any particular action o his were an aggression or not, and so the social unction o property norms (any property norms), i.e., to make a conict—ree interaction pos-sible, could not be ullled simply or technical reasons.




nonproducers, and would be based exclusively on subjective opin-

ion, i.e., on a merely verbal declaration that things should be thisor that way. O course, such verbal claims could (and very likely always will) point to certain acts, too (“I am bigger, I am smarter,I am poorer or I am very special, etc.!”), and could thereby try tolegitimize themselves. But acts such as these do not (and cannot)establish any objective link between a given scarce resource andany particular person(s). Everyone’s ownership o every particu-lar resource can equally well be established or excluded on such

grounds. It is such property claims, derived rom thin air, withpurely verbal links between owners and things owned, which,according to the natural theory o property, are called aggressive.As compared with this, my property claim regarding my body canpoint to a determinate natural link; and it can do so because my body has been produced , and everything produced (as contrastedwith things “given”), logically, has a determinate connection withsome denite individual producer(s); it has been produced by me.

o avoid any misunderstanding, ‘to produce” is not to say “to createout o nothing” (aer all, my body is also a naturally given thing);it means to change a naturally given thing according to a plan, totransorm nature. It is also not to say “to transorm each and every part o it” (aer all, my body has lots o parts with respect to whichI never did anything!); it means instead to transorm a thing within(including/excluding) borders, or, even more precisely, to produce

borderlines or things. And nally, “to produce” also is not to say that the process o production must go on indenitely (aer all, Iam sleeping sometimes, and my body is certainly not a product o my actions right then]), it simply means that it was produced inthe past and can be recognized as such. It is such property claims,then, which can be derived rom past, embordering productiveeorts and which can be tied to specic individuals as producers,which recalled “natural” or “nonaggressive.”12

It is worth mentioning that the ownership right stemming rom production ndsits natural limitation only when, as in the case o children, the thing produced is itsel another actor- producer. According to the natural theory o property, a child, onceborn, is just as much the owner o his own body as anyone else. Hence, not only can




Te ideas o capitalism and socialism should be almost clearat this point. But beore leaving the Garden o Eden once and orall, a look at the consequences o the introduction o elements o aggressively ounded ownership into paradise should be taken, asthis will help elucidate, purely and simply, the central economicand social problem o every type o real socialism, i.e., o social-ism in a world o all-around scarcity, the detailed analysis o whichthen is the concern o the ollowing chapters.

Even in the land o milk and honey, people evidently could

choose dierent liestyles, set dierent goals or themselves, havedierent standards as to what kind o personality they want todevelop and what achievements to strive or. rue, one wouldnot need to work in order to make a living as there would be asuperabundance o everything. But, put drastically, one could stillchoose to become a drunk or a philosopher, which is to say, moretechnically, one could choose to put one’s body to uses that would

be more or less immediately rewarding rom the point o view o the acting person, or one could put one’s body to such uses whichwould only bear ruit in a more or less distant uture. Decisionso the aore-mentioned type might be called “consumption deci-sions.” Decisions, on the other hand, to put one’s body to a use thatonly pays later, i.e., choices induced by some reward or satisac-tion anticipated in a more or less distant uture requiring the actorto overcome disutility o waiting (time is scarce!), might be called

“investment” decisions—decisions, that is, to invest in “humancapital,” in the capital embodied in one’s own physical body.13

a child expect not to be physically aggressed against but as the owner o his body achild has the right, in particular, to abandon his parents once he is physically able torun away rom them and say “no” to their possible attempts to recapture him. Parentsonly have special rights regarding their child—stemming rom their unique status asthe child’s producers—insoar as they (and no one else) can rightully claim to be thechild’s trustee as long as the child is physically unable to run away and say “no.”

On the disutility o work and waiting c. the theory o time-preerence as espousedby L. v. Mises, Human Action, Chicago, 1966, chapters 5, 18, 21 ; the same, Social-ism, Indianapolis, 1981, chapter 8;

M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, chapters 6, 9; also:E.v. Boehm-Bawerk, Kapital und Kapitalzins. Positive Teory des Kapitals, Meisen-heim, 1967; F. Fetter, Capital, Interest and Rent , Kansas City, 1976.




Now assume that aggressively ounded ownership is introduced.

Whereas beore every person was the exclusive owner o his body and could decide on his own whether to become a drunk or a phi-losopher, now a system is established in which a person’s right todetermine how to use his body is curtailed or completely elimi-nated, and instead, this right is partly or ully delegated to anotherperson who is not naturally linked to the respective body as its pro-ducer. What would be the consequence o this? Te abolition o private ownership o one’s body can be ar-reaching: the nonpro-

ducers can have the right to determine all o the uses o “my” body all o the time, or their right to do so can be restricted with respectto time and/or domains, and these restrictions again can be exible(with the nonproducers having the right to change the restrictivedenitions according to their own taste) or xed once and or all,and so the eects can, o course, be more or less drastic! But what-ever the degree, socialization o ownership always, and necessarily so, produces two types o eects. Te rst eect, “economic” in the

narrower sense o the term, is a reduction in the amount o invest-ment in human capital as dened above. Te natural owner o abody cannot help but make decisions regarding that body as longas he does not commit suicide and decides to stay alive, howeverrestricted his ownership rights might be. But since he can no lon-ger decide on his own, undisturbed by others, to what uses to puthis body, the value attached to it by him is now lower; the wanted

satisaction, the psychic income, that is to say, which he can deriverom his body by putting it to certain uses is reduced because therange o options available to him has been limited. But then, withevery action necessarily implying costs (as explained above), andwith a given inclination to overcome costs in exchange or expectedrewards or prots, the natural owner is aced with a situation inwhich the costs o action must be reduced in order to bring themback in line with the reduced expected income. In the Garden o

On a critical assessment o the term “human capital,” in particular o the absurdtreatment that this concept has had at the hands o some Chicago-economists (nota-bly G. Becker, Human Capital , New York, 1975), c. A. Rubner, Te Tree Sacred Cows o Economics, New York, 1970.




Eden, there is only one way le to do this: by shortening the wait-ing time, reducing the disutility o waiting, and choosing a courseo action that promises earlier returns. Tus, the introduction o aggressively ounded ownership leads to a tendency to reduceinvestment decisions and avors consumption decisions. Put dras-tically, it leads to a tendency to turn philosophers into drunks. Tistendency is permanent and more pronounced when the threat o intervention with the natural owner’s rights is permanent, and itis less so to the degree that the threat is restricted to certain times

or domains. In any case, though, the rate o investment in humancapital is lower than it would be with the right o exclusive controlo natural owners over their bodies being untouched and absolute.

Te second eect might be called social. Te introduction o elements o aggressively ounded ownership implies a change inthe social structure, a change in the composition o society withrespect to personality or character types. Abandoning the natural

theory o property evidently implies a redistribution o income.Te psychic income o persons in their capacity as users o their“own” natural body, as persons expressing themselves in this body and deriving satisaction rom doing so, is reduced at the expense o an increase in the psychic income o persons in their capacity asinvaders o other peoples’ bodies. It has become relatively more di-cult and costly to derive satisaction rom using one’s body with-out invading that o others, and relatively less dicult and costly

to gain satisaction by using other peoples’ bodies or one’s ownpurposes. Tis act alone does not imply any social change, butonce a single empirical assumption is made, it does: Assuming thatthe desire to gain satisaction at the expense o a loss in satisac-tion available to others by instrumentalizing another person’s body exists as a human desire, that it may not be instilled in everybody and to the same extent, but that it exists in some people sometimesto some degree and so conceivably can be suppressed or encour-

aged and avored by some given institutional arrangement, conse-quences are imminent. And surely, this assumption is true. Ten,the redistribution o chances or income acquisition must result inmore people using aggression to gain personal satisaction and/or




more people becoming more aggressive, i.e., shiing increasingly

rom nonaggressive to aggressive roles, and slowly changing theirpersonality as a consequence o this; and this change in the charac-ter structure, in the moral composition o society, in turn leads toanother reduction in the level o investment in human capital.

In short, with these two eects we have already pinpointed themost undamental reasons or socialism’s being an economically inerior system o property arrangements. Indeed, both eects willreappear again and again in the course o the ollowing analyses o socialist policy schemes. All that is le now is to explain the naturaltheory o property as regards the real world o all around scarcity,or this is the point o departure or all orms o real socialism.

Notwithstanding some evident dierences between bodiesand all other scarce resources, all conceptual distinctions can bemade and applied again without diculties: Unlike bodies, whichare never “unowned” but always have a natural owner, all otherscarce resources can indeed be unowned. Tis is the case as longas they remain in their natural state, unused by anyone. Tey only become someone’s property once they are treated as scarce means,that is, as soon as they are occupied in some objective borders andput to some specic use by someone. Tis act o acquiring previ-ously unowned resources is called “original appropriation.”14 Onceunowned resources are appropriated it becomes an aggression to

uninvitedly change their physical characteristics or to restrict theowner’s range o uses to which he can put these resources, as longas a particular use does not aect the physical characteristics o anyone else’s property—just as in the case o bodies. Only in thecourse o a contractual relationship, i.e., when the natural owner o a scarce means explicitly agrees, is it possible or someone else toutilize and change previously acquired things. And only i the orig-inal or previous owner deliberately transers his property title tosomeone else, either in exchange or something or as a ree gi, can

On the theory o original appropriation c. J. Locke, wo reatises o Government (ed. Laslett), Cambridge, 1960, esp. 2,




this other person himsel become the owner o such things. Unlike

bodies, though, which or the same “natural” reason can never beunowned and also can never be parted with by the natural ownercompletely but only be “lent out” as long as the owners’ agreementlasts, naturally all other scarce resources can be “alienated” and aproperty title or them can be relinquished once and or all.15

A social system based on this natural position regarding theassignment o property rights is, and will rom now on be called pure capitalist. And since its ideas can also be discerned as thedominating ideas o private law, i.e., o the norms regulating rela-tions between private persons, it might also be termed a pureprivate law system.16 Tis system is based on the idea that to benonaggressive, claims to property must be backed by the “objec-tive” act o an act o original appropriation, o previous ownership,or by a mutually benecial contractual relationship. Tis relation-ship can either be a deliberate cooperation between property own-

ers or the deliberate transer o property titles rom one owner toanother. I this system is altered and instead a policy is institutedthat assigns rights o exclusive control over scarce means, howeverpartial, to persons or groups o persons that can point neither toan act o previous usership o the things concerned, nor to a con-tractual relation with some previous user-owner, then this will becalled (partial) socialism.

It will be the task o the next our chapters to explain how di-erent ways o deviating rom a pure capitalist system, dierentways o redistributing property titles away rom natural owners o things (i.e., rom people who have put some particular resources

On the distinction, owing naturally rom the unique character o a person’s body as contrasted with all other scarce goods, between “inalienable” and “alienable” prop-erty titles c. W. Evers, “oward a Reormation o a Law o Contracts,” in: Journal o Libertarian Studies, 1977. Te superimposition o public on private law has tainted and compromised thelatter to some extent everywhere. Nonetheless, it is not dicult to disentangle exist-ing private law systems and nd what is here called the natural position as constitut-ing its central elements—a act which once again underlines the “naturalness” o thisproperty theory. C. also Chapter 8, n. 13.




to a specic use and so are naturally linked to them, and onto peo-ple who have not yet done anything with the resources but whohave simply made a verbal, declarative claim regarding them) low-ers investment and increases consumption, and in addition causesa change in the composition o the population by avoring nonpro-ductive over productive people.




Chapter 3

Socialism Russian Style

We have dened socialism as an institutionalized pol-

icy o redistribution o property titles. More pre-

cisely, it is a transer o property titles rom people

who have actually put scarce means to some use or

who have acquired them contractually rom persons who have

done so previously onto persons who have neither done anythingwith the things in question nor acquired them contractually. For a

highly unrealistic world—the Garden o Eden—I then pointed out

the socio-economic consequences o such a system o assigning

property rights were then pointed out: a reduction o investment in

human capital and increased incentives or the evolution o non-

productive personality types.

I now want to enlarge and concretize this analysis o socialism

and its socio-economic impact by looking at dierent though equally

typical versions o socialism. In this chapter I will concentrate on the

analysis o what most people have come to view as “socialism par

excellence” (i not the only type o socialism there is), this proba-

bly being the most appropriate starting point or any discussion o

socialism. Tis “socialism par excellence” is a social system in which

the means o production, that is, the scarce resources used to pro-

duce consumption goods, are “nationalized” or “socialized.”

33




As regards the motivational orces pushing socialization

schemes, they are avowedly egalitarian. Once you allow privateproperty in the means o production, you allow dierences. I I

own resource A, then you do not own it, and our relationship to

this resource is thus dierent. By abolishing private ownership

everyone’s position vis à vis means o production is equalized

with one stroke, or so it seems. Everyone becomes co-owner o

everything, reecting everyone’s equal standing as human beings.

And the economic rationale o such a scheme is that it is suppos-edly more ecient. o the untrained observer unamiliar with the

action-coordinating unction o prices, capitalism as based on pri-

vate ownership o means o production simply appears chaotic. It

seems to be a wasteul system characterized by duplicating eorts,

ruinous competition, and the absence o concerted, coordinated

action. As Marxists call it depreciatively, it is an “anarchy o pro-

duction.” Only when collective ownership is substituted or privatedoes it seemingly become possible to eliminate this waste by imple-

menting a single, comprehensive, coordinated production plan.

to which societies may dier. Russian style socialism is what has been termed by M.Weber an “ideal type.” It “is arrived at through the one-sided intensication o one orseveral aspects and through integration into an immanently consistent conceptualrepresentation o a multiplicity o scattered and discrete individual phenomena” (M.Weber, Gesammelte Ausaetze zur Wissenschaslehre, uebingen, 1922, p.191). Butto stress the abstract character o the concept by no means implies any deciency in it. On the contrary, it is the very purpose o constructing ideal types to bring outthose eatures which the acting individuals themselves regard as constituting rel-evant resemblances or dierences in meaning, and to disregard those which they themselves consider to be o little or no importance in understanding either one’sown or another person’s actions. More specically, describing Russian style socialismon the level o abstraction chosen here and developing a typology o various orms o socialism later on should be understood as the attempt to reconstruct those concep-tual distinctions which people use to attach themselves ideologically to various polit-ical parties or social movements, hence enabling an understanding o the ideological

orces that in act shape present-day societies. On ideal types as prerequisites or his-torico-sociologic al research c. L. v. Mises, Epistemological Problems o Economics,New York, 1981, esp. pp.75; the same, Human Action, Chicago, 1966, esp. pp.59.On the methodology o “meaning reconstruction” o empirical social research c. H.H. Hoppe, Kritik der kausalwissenschalichen Sozialorschung, Opladen, 1983,chapter 3, esp. pp.33.




More important, though, than motivation and promises iswhat a socialization o means o production really amounts to.19 Te property rules that are adopted under a socialization policy and which constitute the basic legal principles o countries like Rus-sia are characterized by two complementary eatures. First, nobody owns the socialized means o production; they are “socially” owned,which is to say precisely: no person, or no group o persons, or alltaken together is allowed to either acquire them or sell them andkeep the receipts rom their sale privately. Teir use is determined

by people not in the role o an owner but o a caretaker o things.And secondly, no person or group o persons or all taken togetheris allowed to engage newly in private investment and create newprivate means o production. Tey can neither invest by transorm-ing the existing, nonproductively used resources into productiveones, by original saving, by pooling resources with other people,nor by a mixture o these techniques. Investment can only be doneby caretakers o things, never or private prot, always on behal o

the community o caretakers with whom the possible prots rominvestments would have to be shared.20

What does it mean to have such a caretaker economy? What,in particular, does it imply to change rom an economy built on thenatural theory o property to a socialized one? In passing, two obser-

vations should be made, which will already throw some light onthe above-mentioned socialist promises o equality and eciency.

Declaring everybody a co-owner o everything solves the problemo dierences in ownership only nominally. It does not solve thereal underlying problem: dierences in the power to control. In aneconomy based on private ownership, the owner determines whatshould be done with the means o production. In a socialized econ-omy this can no longer happen, as there is no such owner. None-theless, the problem o determining what should be done with the

For the ollowing c. in particular L. v. Mises, Socialism, Indianapolis, 1981.0 O course, this complete outlawing o private investment, as stated under (2) only applies strictly to a ully socialized economy. I next to a socialized part o the econ-omy a private part also exists, then private investment would only become curtailedand hampered to the degree to which the economy is socialized.




means o production still exists and must be solved somehow, pro-

vided there is no prestabilized and presynchronized harmony o interests among all o the people (in which case no problems whatso-ever would exist anymore), but rather some degree o disagreement.Only one view as to what should be done can in act prevail and oth-ers must mutatis mutandis be excluded. But then again there mustbe inequalities between people: someone’s or some groups’ opinionmust win over that o others. Te dierence between a private prop-erty economy and a socialized one is only how whose will prevails in

cases o disagreement is to be determined. In capitalism there mustbe somebody who controls, and others who do not, and hence realdierences among people exist, but the issue o whose opinion pre-

vails is resolved by original appropriation and contract. In socialism,too, real dierences between controllers and noncontrollers must,o necessity, exist; only in the case o socialism, the position o thosewhose opinion wins is not determined by previous usership or con-

tract, but by political means.21

Tis dierence is certainly a highly important one, and our discussion will return to it later in this chapterand again in later chapters, but here it suces to say that—contrary to socialism’s egalitarian promises—it is not a dierence between anonegalitarian and an egalitarian system as regards power o control.

Te second observation is intimately connected with the rstand concerns socialism’s allegedly superior coordinating capabil-

ities. Again closer inspection reveals that the dierence is merely illusory, created only by semantics: to say that an economy o private owners is supplanted by a nationalized one creates the impres-sion that instead o a multitude o decision-making units, all o asudden there is only one such unit. In act, nothing has changed atall. Tere are as many individuals with as many dierent interestsas beore. Just as much as capitalism then, socialism has to nd asolution to the problem o determining how to coordinate the uses

Te related, crucial dierence between capitalism and socialism is that under theormer, the voluntary actions o consumers ultimately determine the structure andprocess o production, whereas it is the producer-caretakers who do so under social-ism. C. in particular Chapter 9 below.




o dierent means o production, given the act o diering views

among people on how this should be accomplished. Te dierencebetween capitalism and socialism is again one o how coordina-tion is achieved, and not between chaos and coordination, as thesocialist semantic insinuates. Instead o simply letting individualsdo what they want, capitalism coordinates actions by constrainingpeople to respect previous user-ownership. Socialism, on the otherhand, instead o letting people do whatever pleases them, coordi-nates individual plans by superimposing on one person’s or group

o persons’ plan that o another disagreeing person or group regard-less o prior ownership and mutual exchange agreements.22 It hardly deserves comment that this dierence, too, is o the utmost impor-tance. But it is not, as Marxist socialism would like us to believe, adierence between social planning and no planning at all; on thecontrary, as soon as the coordinating mechanisms o socialism andcapitalism are brought into the open and reconstructed, socialism’sclaim to greater eciency immediately begins to lose much o itscredibility, and the opposite thesis appears to be more convincing.

How well-ounded this thesis indeed is, and exactly why it isthat capitalism’s, and not socialism’s, coordinating mechanism provesto be economically superior will become clear when one turns away rom apparent dierences and concentrates on real ones instead, andlooks at the redistribution o property titles, and hence o income,which is implied in giving up capitalism in avor o a caretaker econ-

omy, as characterized above. From the standpoint o the natural the-ory o property—the oundation o capitalism—the adoption o thebasic principles o a caretaker economy means that property titlesare redistributed away rom actual producers and users o means o production, and away rom those who have acquired these means by mutual consent rom previous users, to a community o caretakers

Writes Mises, “Te essential mark o socialism is that one will alone acts. It isimmaterial whose will it is. Te director may be anointed king or a dictator, rulingby virtue o his charisma, he may be a Fuehrer or a board o Fuehrers appointedby the vote o the people. Te main thing is that the employment o all actors o production is directed by one agency only’ (L. v. Mises, Human Action, Chicago,1966, p.695).




in which, at the very best, every person remains the caretaker o the

things he previously owned. But even in this case each previous userand each contractor would be hurt, as he could no longer sell themeans o production and keep the receipt rom the sale privately,nor could he privately appropriate the prot rom using them theway they are used, and hence the value o the means o production

or him would all. Mutatis mutandis, every nonuser and noncon-tractor o these means o production would be avored by being pro-moted to the rank o caretaker o them, with at least partial say over

resources which he had previously neither used nor contracted touse, and his income would rise.

In addition to this redistributive scheme there is another one,implied by the prohibition o newly created private capital or by thedegree o hampering (dependent as it is on the size o the social-ized part o the economy) under which this process must now takeplace: a redistribution away rom people who have orgone possible

consumption and instead saved up unds in order to employ themproductively, i.e., or the purpose o producing uture consumptiongoods, and who now can no longer do so or who now have eweroptions available, toward nonsavers, who in adopting the redistri-bution scheme, gain a say, however partial, over the saver’s unds.

Te socio-economic consequences o a policy o socializationare essentially implied in these ormulations. But beore taking a

more detailed look at them, it might be worthwhile to review andclariy the central eatures o the real world in which this socializa-tion scheme would purportedly take place. It should be recalledthat one is dealing with a changing world; that man, in addition,can learn with respect to this world and so does not necessarily know today what he will know at a later point in time; that thereis a scarcity o a multitude o goods and that accordingly man ispressed by a multitude o needs, not all o which he can satisy at

the same time and/or without sacricing the satisaction o otherneeds; because o this, man must choose and order his needs in ascale o preerences according to the rank o urgency that they haveor him; also, more specically, that neither the process o original




appropriation o resources perceived as scarce, nor the process o

production o new and the upkeep o old means o production,nor the process o contracting, is costless or man; that all o theseactivities cost at the very least time, which could be spent other-wise, e.g., or leisure activities; and in addition one should not or-get that one is dealing with a world characterized by the division o labor, which is to say that one is not talking about a world o sel-sucient producers, but one in which production is carried out ora market o independent consumers.

With this in mind, then, what are the eects o socializingthe means o production? o begin with, what are the “economic”consequences, in the colloquial sense o the term? Tere are threeintimately related eects.23 First—and this is the immediate gen-eral eect o all types o socialism—there is a relative drop in therate o investment, the rate o capital ormation. Since “socializa-tion” avors the nonuser, the nonproducer, and the noncontractor

o means o production and, mutatis mutandis, raises the costs orusers, producers, and contractors, there will be ewer people actingin the latter roles. Tere will be less original appropriation o natu-ral resources whose scarcity is realized, there will be less productiono new and less upkeep o old actors o production, and there willbe less contracting. For all o these activities involve costs and thecosts o perorming them have been raised, and there are alterna-tive courses o action, such as leisure-consumption activities, which

at the same time have become relatively less costly, and thus moreopen and available to actors. Along the same line, because every-one’s investment outlets have dried up as it is no longer permis-sible to convert private savings into private investment, or becausethe outlets have been limited to the extent to which the economy issocialized, there will thereore be less saving and more consuming,less work and more leisure. Aer all, you cannot become a capitalistany longer, or your possibility o becoming one has been restricted,and so there is at least one reason less to save! Needless to say, the

C. L. v. Mises, Socialism, Indianapolis, 1981, esp. part 2; also Human Action, Chi-cago, 1966, esp. Chapters 25, 26.




result o this will be a reduced output o exchangeable goods and a

lowering o the living standard in terms o such goods. And sincethese lowered living standards are orced upon people and are notthe natural choice o consumers who deliberately change their rela-tive evaluation o leisure and exchangeable goods as the result o work, i.e., since it is experienced as an unwanted impoverishment,a tendency will evolve to compensate or such losses by goingunderground, by moonlighting and creating black markets.

Secondly, a policy o the socialization o means o productionwill result in a wasteul use o such means, i.e., in use which at bestsatises second-rate needs and at worst, satises no needs at all butexclusively increases costs.24 Te reason or this is the existenceand unavoidability o change! Once it is admitted that there canbe change in consumer demand, change in technological knowl-edge, and change in the natural environment in which the pro-cess o production has to take place—and all o this indeed takes

place constantly and unceasingly—then it must also be admittedthat there is a constant and never-ending need to reorganize andreshufe the whole structure o social production. Tere is alwaysa need to withdraw old investments rom some lines o productionand, together with new ones, pour them into other lines, thus mak-ing certain productive establishments, certain branches, or evencertain sectors o the economy shrink and others expand. Nowassume—and this is precisely what is done under a socializationscheme—that it is either completely illegal or extremely dicult tosell the collectively owned means o production into private hands.Tis process o reorganizing the structure o production will then—even i it does not stop altogether—at least be seriously hampered!Te reason is basically a simple one, but still o the utmost impor-tance. Because the means o production either cannot be sold, orselling them is made very dicult or the selling caretaker or the

private buyer or both, no market prices or the means o production

On the ollowing c. also F. A. Hayek (ed.), Collectivist Economic Planning,London, 1935; Journal o Libertarian Studies 5, 1, 1981 (An Economic Critique o Socialism).




exist, or the ormation o such prices is hindered and made more

costly. But then the caretaker-producer o the socialized means o production can no longer correctly establish the actual monetary costs involved in using the resources or in making any changes inthe production structure. Nor can he compare these costs with hisexpected monetary income rom sales. In not being permitted totake any oers rom other private individuals who might see analternative way o using some given means o production, or inbeing restricted rom taking such oers, the caretaker simply does

not know what he is missing, what the oregone opportunities are,and is not able to correctly assess the monetary costs o withhold-ing the resources. He cannot discover whether his way o usingthem or changing their use is worth the result in terms o mone-tary returns, or whether the costs involved are actually higher thanthe returns and so cause an absolute drop in the value o the outputo consumer goods. Nor can he establish whether his way o pro-ducing or consumer demand is indeed the most ecient way (ascompared with conceivable alternative ways) o satisying the mosturgent consumer needs, or i less urgent needs are being satisedat the expense o neglecting more urgent ones, thus causing at leasta relative drop in the value o the goods produced. Without beingable to resort unrestrictedly to the means o economic calculation,there is simply no way o knowing. O course one could go aheadand try to do one’s best. Tat might even be successul sometimes,

though one would have no way o assuring onesel that it is. But,in any case, the larger the consumer market is which one has toserve, and the more the knowledge regarding preerences o dier-ent groups o consumers, special circumstances o historical timeand geographical space, and possibilities o technology is dispersedamong dierent individuals, the more likely it is that one will gowrong. A misallocation o means o production, with wastes andshortages as the two sides o the same coin, must ensue. In ham-

pering and o course even more so, in making it outright illegal orprivate entrepreneurs to bid away means o production rom care-takers, a system o socialized production prevents opportunitiesor improvement rom being taken up to the ull extent they are




perceived. Again, it hardly needs to be pointed out that this, too,

contributes to impoverishment.

25

Tirdly, socializing the means o production causes relativeimpoverishment, i.e., a drop in the general standard o living, by leading to an over-utilization o the given actors o production.Te reason or this, again, lies in the peculiar position o a care-taker as compared with that o a private owner. A private ownerwho has the right to sell the actors o production and keep themoney receipts privately will, because o this, try to avoid any increase in production which occurs at the expense o the valueo the capital employed. His objective is to maximize the value o the products produced plus that o the resources used in produc-ing them because he owns both o them. Tus he will stop produc-ing when the value o the marginal product produced is lower thanthe depreciation o the capital used to produce it. Accordingly, hewill, or instance, reduce the depreciation costs involved in produc-

ing, and instead engage in increased conservation, i he anticipatesuture price rises or the products produced and vice versa. Tesituation o the caretaker, i.e., the incentive structure which he isacing, is quite dierent in this respect. Because he cannot sell themeans o production, his incentive to not produce, and thereby uti-lize the capital employed, at the expense o an excessive reductionin capital value is, i not completely gone, then at least relatively reduced. rue, since the caretaker in a socialized economy also can-

not privately appropriate the receipts rom the sale o products, butmust hand them over to the community o caretakers at large tobe used at their discretion, his incentive to produce and sell prod-ucts at all is relatively weakened as well. It is precisely this act thatexplains the lower rate o capital ormation. But as long as the care-taker works and produces at all, his interest in gaining an incomeevidently exists, even i it cannot be used or purposes o privatecapital ormation, but only or private consumption and/or thecreation o private, nonproductively used wealth. Te caretaker’s

On the ree market as the necessary prerequisite or economic calculation andrational resource allocation c. also Chapters 9, 10 below.




inability to sell the means o production, then, implies that theincentive to increase his private income at the expense o capital

value is raised. Accordingly, to the extent that he sees his incomedependent on the output o products produced (the salary paid tohim by the community o caretakers might be dependent on this!),his incentive will be raised to increase this output at the expenseo capital. Furthermore, since the actual caretaker, insoar as he isnot identical with the community o caretakers, can never be com-pletely and permanently supervised and thus can derive income

rom using the means o production or private purposes (i.e., theproduction o privately used, non- or black-marketed goods) hewill be encouraged to increase this output at the expense o capi-tal value to the extent that he sees his income dependent on suchprivate production. In any case, capital consumption and overuseo existing capital will occur; and increased capital consumptiononce more implies relative impoverishment, since the productiono uture exchange goods will, as a consequence, be reduced.

While implied in this analysis o the threeold economicconsequences o socializing the means o production—reducedinvestment, misallocation, and overutilization, all o which leadto reduced living standards—in order to reach a ull understand-ing o Russian-type societies it is interesting and indeed important to point out specically that the above analysis also applies to theproductive actor o labor. With respect to labor, too, socialization

implies lowered investment, misallocation, and overutilization.First, since the owners o labor actors can no longer become sel-employed, or since the opportunity to do so is restricted, on thewhole there will be less investment in human capital. Second, sincethe owners o labor actors can no longer sell their labor servicesto the highest bidder (or to the extent to which the economy issocialized, separate bidders having independent control over spe-cic complementary actors o production, including the money

needed to pay labor, and who take up opportunities and risks inde-pendently, on their own account, are no longer allowed to exist!)the monetary cost o using a given labor actor, or o combiningit with complementary actors, can no longer be established, and




hence all sorts o misallocations o labor will ensue. And third,

since the owners o labor actors in a socialized economy own atbest only part o the proceeds rom their labor while the remainderbelongs to the community o caretakers, there will be an increasedincentive or these caretakers to supplement their private incomeat the expense o losses in the capital value embodied in the labor-ers, so that an overutilization o labor will result.26

Last, but certainly not least, a policy o the socialization o the means o production aects the character structure o society,the importance o which can hardly be exaggerated. As has beenpointed out repeatedly, adopting Russian-type socialism insteado capitalism based on the natural theory o property implies giv-ing a relative advantage to nonusers, nonproducers, and noncon-tractors as regards property titles o the means o production andthe income that can be derived rom using o these means. I peo-ple have an interest in stabilizing and, i possible, increasing their

income and they can shi relatively easily rom the role o a user-producer or contractor into that o a nonuser, nonproducer, ornoncontractor—assumptions, to be sure, whose validity can hardly be disputed—then, responding to the shi in the incentive struc-ture aected by socialization, people will increasingly engage innonproductive and noncontractual activities and, as time goeson, their personalities will be changed. A ormer ability to per-ceive and to anticipate situations o scarcity, to take up productiveopportunities, to be aware o technological possibilities, to antici-pate changes in demand, to develop marketing strategies and todetect chances or mutually advantageous exchanges, in short: theability to initiate, to work and to respond to other people’s needs,will be diminished, i not completely extinguished. People will

Incidentally, this proves that a socialized economy will be even less productive

than a slave economy. In a slave economy, which o course also suers rom a rela-tively lower incentive to work on the part o the slaves, the slaveholder, who can sellthe slave and capture his market value privately, would not have a comparable inter-est in extracting rom his slave an amount o work which reduces the slave’s valuebelow the value o his marginal product. For a caretaker o labor no such disincen-tive exists. C. also G. Reisman, Government Against the Economy, New York, 1979.




have become dierent persons, with dierent skills, who, should

the policy suddenly be changed and capitalism reintroduced, couldnot go back to their ormer selves immediately and rekindle theirold productive spirit, even i they wanted to. Tey will simply haveorgotten how to do it and will have to relearn, slowly, with highpsychic costs involved, just as it involved high costs or them tosuppress their productive skills in the rst place. But this is only hal the picture o the social consequences o socialization. It canbe completed by recalling the above ndings regarding capitalism’s

and socialism’s apparent dierences. Tis will bring out the otherside o the personality change caused by socializing, complement-ing the just mentioned loss in productive capacity. Te act mustbe recalled that socialism, too, must solve the problem o who isto control and coordinate various means o production. Contrary to capitalism’s solution to this problem, though, in socialism theassignment o dierent positions in the production structure todierent people is a political matter, i.e., a matter accomplishedirrespective o considerations o previous user-ownership and theexistence o contractual, mutually agreeable exchange, but ratherby superimposing one person’s will upon that o another (disagree-ing) one. Evidently, a person’s position in the production structurehas an immediate eect on his income, be it in terms o exchange-able goods, psychic income, status, and the like. Accordingly, aspeople want to improve their income and want to move into more

highly evaluated positions in the hierarchy o caretakers, they increasingly have to use their political talents. It becomes irrel-evant, or is at least o reduced importance, to be a more ecientproducer or contractor in order to rise in the hierarchy o incomerecipients. Instead, it is increasingly important to have the peculiarskills o a politician, i.e., a person who through persuasion, dema-goguery and intrigue, through promises, bribes, and threats, man-ages to assemble public support or his own position. Depending

on the intensity o the desire or higher incomes, people will haveto spend less time developing their productive skills and more timecultivating political talents. And since dierent people have dier-ing degrees o productive and political talents, dierent people will




rise to the top now, so that one nds increasing numbers o poli-

ticians everywhere in the hierarchical order o caretakers. All theway to the very top there will be people incompetent to do the jobthey are supposed to do. It is no hindrance in a caretaker’s careeror him to be dumb, indolent, inecient, and uncaring, as long ashe commands superior political skills, and accordingly people likethis will be taking care o the means o production everywhere.27

A look at Russia and other East-bloc countries in which a pol-icy o socialization o means o production has been carried out toa considerable degree can help illustrate the truth o the above con-clusions. Even a supercial acquaintance with these countries su-ces to see the validity o the rst and main conclusion. Te generalstandard o living in the East-bloc countries, though admittedly di-erent rom country to country (a dierence that itsel would haveto be explained by the degree o strictness with which the social-ization scheme was and presently is carried through in practice),

is clearly much lower than that in the so-called capitalist countrieso the West. (Tis is true even though the degree to which Westerncountries are socialized, though diering rom country to country,is itsel quite considerable and normally very much underestimatedas will become clear in later chapters.) Tough the theory does notand cannot make a precise prediction o how drastic the impover-ishment eect o a socialization policy will be, except that it will bea noticeable one, it is certainly worth mentioning that when almost

complete socialization was rst put into eect in immediate post-World War I Russia, this experience cost literally millions o lives,and it required a marked change in policy, the New Economic Pol-icy (NEP), merely a ew years later in 1921, reintroducing elementso private ownership, to moderate these disastrous eects to lev-els that would prove tolerable.28 Indeed, repeated changes in policy

C. H. H. Hoppe, Eigentum, Anarchie und Staat, Opladen, 1987, esp. Chapter 5, 3.2. o be sure, Russia was a poor country to begin with, with little accumulated capi-tal to be drawn on and consumed in an “emergency.” On the socio-economic history o Soviet Russia c. B. Brutzkus, Economic Planning in Soviet Russia, London, 1935;also, e.g., A. Nove, Economic History o the USSR, Harmondsworth, 1969; also S.Wellisz, Te Economies o the Soviet Bloc, New York, 1964.




made Russia go through a similar experience more than once. Sim-

ilar, though somewhat less drastic, results rom a policy o social-ization were experienced in all o the East European countries aerWorld War II. Tere, too, moderate privatization o small arming,the cras, or small businesses had to be permitted repeatedly inorder to prevent outright economic breakdowns.29 Nonetheless, inspite o such reorms, which incidentally prove the point that con-trary to socialist propaganda it is private and not social ownershipthat improves economic perormance, and in spite o the act that

moonlighting, illegal productive activities, bartering, and black market trade are ubiquitous phenomena in all o these countries,

just as the theory would lead one to expect, and that this under-ground economy takes up part o the slack and helps to improvethings, the standard o living in the East-bloc countries is lamen-tably low. All sorts o basic consumer goods are entirely lacking, inar too short supply or o extremely poor quality.30

Te case o West and East Germany is particularly instruc-tive. Here, history provides us with an example that comes as closeto that o a controlled social experiment as one could probably hope to get. A quite homogeneous population, with very muchthe same history, culture, character structure, work ethics, dividedaer Hitler-Germany’s deeat in World War II. In West Germany,more because o lucky circumstances than the pressure o publicopinion, a remarkably ree market economy was adopted, the pre-

vious system o all-around price controls abolished in one stroke,and almost complete reedom o movement, trade, and occupationintroduced.31 In East Germany, on the other hand, under Soviet

On the economic system o the Soviet-dominated East bloc c. . Rakowska-Harmstone (ed)., Communism in Eastern Europe, Bloomington, 1984; H. H.Hohmann, M. Kaser, and K. Talheim (eds.), Te New Economic Systems o East-ern Europe, London, 1975; C.M. Cipolla (ed.), Economic History o Europe. Con-temporary Economies, vol 2, Glasgow, 1976.

0 On everyday lie in Russia c., e.g., H. Smith, Te Russians, New York, 1983; D.K.Willis, Klass. How Russians Really Live, New York, 1985; S. Pejovich, Lie in theSoviet Union, Dallas, 1979; M. Miller, Rise o the Russian Consumer, London, 1965. C. L. Erhard, the initiator and major political exponent o post-war economicpolicy, Prosperity through Competition, New York, 1958; and Te Economics o




Russian dominance, socialization o the means o production, i.e.,

an expropriation o the previous private owners, was implemented.wo dierent institutional rameworks, two dierent incentivestructures have thus been applied to the same population. Te di-erence in the results is impressive.32 While both countries do wellin their respective blocs, West Germany has the highest standardo living among the major West-European nations and East Ger-many prides itsel in being the most well-o country in the Eastbloc, the standard o living in the West is so much higher and has

become relatively more so over time, that despite the transer o considerable amounts o money rom West to East by governmentas well as private citizens and increasingly socialist policies in theWest, the visitor going rom West to East is simply stunned as heenters an almost completely dierent, impoverished world. As amatter o act, while all o the East-European countries are plaguedby the emigration problem o people wanting to leave or the moreprosperous capitalist West with its increased opportunities, and

while they all have gradually established tighter border controls,thus turning these countries into sort o gigantic prisoner camps inorder to prevent this outow, the case o Germany is a most strik-ing one. With language dierences, traditionally the most severenatural barrier or emigrants, nonexistent, the dierence in living

Success, London, 1968. For theoreticians o the German “soziale Marktwirtscha”c. W. Eucken, Grundsaetze der Wirtschaspolitik , Hamburg, 1967; W. Roepke, A

Humane Economy, Chicago, 1960; the same, Economics o a Free Society, Chicago,1963. For a critique o the West German economic policy as insuciently capital-ist and ridden with inconsistencies which would lead to increasingly socialist inter-

ventions in the course o time c. the prophetic observations by L. v. Mises, HumanAction, Chicago, 1966, p.723. For comparative studies on the two Germanys c. E. Jesse (ed.), BRD und DDR,Berlin, 1982; H. v. Hamel (ed.), BRD-DDR. Die Wirtschassysteme, Muenchen,1983; also K. halheim, Die wirtschatliche Entwicklung der beiden Staaten inDeutschland, Opladen, 1978.

An honest but naive empirically minded comparative study which illustrates that

at best, economic statistics has very little to do with reality as perceived by actingpersons is P. R. Gregory and R.C. Stuart, Comparative Economic Systems, Boston,1985, Chapter 13 (East and West Germany). For a valuable critique o economic sta-tistics c. O. Morgenstern, National Income Statistics: A Critique o Macroeconomic

Aggregation, San Francisco, 1979. For an even more undamental criticism c. L. v.Mises, Teory o Money and Credit , Irvington, 1971, part II, Chapter 5.




standards between the two Germanys proved to be so great and

emigration rom East to West took on such proportions, that in1961 the socialist regime in East Germany, in a last desperate step,nally had to close its borders to the West completely. o keep thepopulation in, it had to build a system the likes o which the worldhad never seen o walls, barbed wire, electried ences, mine elds,automatic shooting devices, watchtowers, etc., almost 900 mileslong, or the sole purpose o preventing its people rom runningaway rom the consequences o Russian-type socialism.

Besides exempliying the main point, the case o the two Ger-manys, because o its experimental-like character, proves particu-larly helpul in illustrating the truth o the rest o the theoretically derived conclusions. Looking at comparable social positions,almost nowhere in West Germany will one nd people working aslittle, as slowly, or as negligently (while the working hours, higherin the East, are o course regulated!) as their East German counter-

parts. Not, to be sure, because o any alleged dierences in mental-ity or work ethics, as those are very much the same historically, butbecause the incentive to work is considerably reduced by a policy scheme that eectively closes all or most outlets or private invest-ment. Eective work in East Germany is most likely to be ound inthe underground economy. And in response to the various disin-centives to work, and in particular to work in the “ocially” con-

trolled economy, there is also a tendency among East Germans towithdraw rom public lie and to stress the importance o privacy,the amily, relatives, and personal riends and connections, signi-cantly exceeding what is seen in the West.33

here is also ample evidence o misallocation, just as thetheory would lead one to expect. While the phenomenon o productive actors that are not used (at least not continuously)but are simply inactive because complementary actors are lack-ing can o course be observed in the West, in the East (and again,

On lie in East Germany c. E. Windmoeller and . Hoepker, Leben in der DDR,Hamburg, 1976.




in the German case certainly not because o dierences in orga-

nizational talents) it is observed everywhere as a permanent ea-ture o lie. And while it is normally quite dicult in the West, andrequires special entrepreneurial talent to point out changes in theuse o certain means o production that would result in an over-all improvement in the output o consumer goods, this is relatively easy in the East-bloc countries. Almost everyone working in EastGermany knows many ways to put the means o production tomore urgent uses than ones that are currently being used, where

they are evidently wasted and cause shortages o other, more heav-ily demanded goods. But since they are not able to bid them away and must instead go through tedious political procedures to initi-ate any changes, nothing much can be or indeed is done.

Experience also corroborates what has been said about theother side o the coin: the overutilization o publicly owned meanso production. In West Germany such public goods also exist,

and as would be expected, they are in relatively bad shape. Butin East Germany, and no dierently or in act even worse in theother Soviet-dominated countries, where all actors o produc-tion are socially owned, insuciently maintained, deteriorating,unrepaired, rusting, even simply vandalized production actors,machinery, and buildings are truly rampant. Further, the ecology crisis is much more dramatic in the East, in spite o the relatively underdeveloped state o the general economy, than in the West—

and all this is not, as the case o Germany proves clearly enough,because there are dierences in people’s “natural” inclination tocare and to be careul.

Finally, as regards the theoretically predicted changes in thesocial and personality structure, complaints about superiors are,o course, quite a common phenomenon everywhere. But in thecountries o Russian-type socialism, where the assignment o posi-

tions in the hierarchy o caretakers is and must be entirely a political aair, such complaints about downright incompetent, unqualied,and ridiculous superiors are, even i not more loudly voiced, mostrequent, most severe, and best-ounded, and decent people are




most oen driven to despair or cynicism as a consequence. Andsince a ew people rom East Germany still go to West Germany at an age where they are still members o the labor orce, some asescapees but more requently because a sort o ransom has beenpaid or them, sucient material also exists to illustrate the con-clusion that in the long run a socialized economy will reduce peo-ple’s productive capacities. Among those going to the West thereis a signicant number who led quite normal productive lives inthe East but who, despite the absence o any linguistic and cultural

barriers, prove to be incapable o, or have the greatest diculties,adapting to Western society with its increased demand or produc-tive and competitive skills and spirits.




Chapter 4

Socialism Social-democratic Style

In the last chapter I analyzed the orthodox Marxist version

o socialism—socialism Russian-style, as it was called—and

explained its eects on the process o production and the social

moral structure. I went on to point out that the theoretically

oreseen consequences o relative impoverishment proved to be so

powerul that in act a policy o socializing the means o produc-tion could never actually be carried through to its logical end the

socialization o all production actors, without causing an immedi-

ate economic disaster. Indeed, sooner or later all actual realizations

o Marxist socialism have had to reintroduce elements o private

ownership in the means o production in order to overcome or

prevent maniest bankruptcy. Even moderate “market” socialism,

however, cannot prevent a relative impoverishment o the popula-tion, i the idea o socialized production is not abandoned entirely,

once and or all.

Much more so than any theoretical argument, it has been

the disappointing experience with Russian-type socialism which

has led to a constant decline in the popularity o orthodox Marx-

ist socialism and has spurred the emergence and development o

modern social-democratic socialism, which will be the concern

o this chapter. Both types o socialism, to be sure, derive rom

55




the same ideological sources.34 Both are egalitarian in motiva-

tion, at least in theory,

35

and both have essentially the same ulti-mate goal: the abolishment o capitalism as a social system basedon private ownership and the establishment o a new society, char-acterized by brotherly solidarity and the eradication o scarcity; asociety in which everyone is paid “according to his needs.” Fromthe very beginnings o the socialist movement in the mid-nine-teenth century, though, there have been conicting ideas on themethods best suited or achieving these goals. While generally

there was agreement on the necessity o socializing the means o production, there were always diverging opinions on how to pro-ceed. On the one hand, within the socialist movement there werethe advocates o a revolutionary course o action. Tey propagatedthe violent overthrow o the existing governments, the completeexpropriation o all capitalists in one stroke, and the temporary (i.e., until scarcity would indeed, as promised, be eradicated) dicta-

torship o the proletariat, i.e., o those who were not capitalists butwho had to sell their labor services, in order to stabilize the neworder. On the other hand there were the reormists who advocateda gradualist approach. Tey reasoned that with the enlargement o the ranchise, and ultimately with a system o universal surage,socialism’s victory could be attained through democratic, parlia-mentary action. Tis would be so because capitalism, according tocommon socialist doctrine, would bring about a tendency towards

the proletarization o society, i.e., a tendency or ewer people tobe sel-employed and more to become employees instead. And inaccordance with common socialist belies, this tendency would inturn produce an increasingly uniorm proletarian class conscious-ness which then would lead to a swelling voter turnout or thesocialist party. And, so they reasoned, as this strategy was muchmore in line with public opinion (more appealing to the mostly

peaceully-minded workers and at the same time less rightening C. L. Kolakowski, Main Currents o Marxism, 3 vols., Oxord, 1978; also W. Leon-hard, Sovietideologie heute. Die politischen Lehren, Frankurt/M., 1963. C. note 49 below on the assessment o the somewhat dierent practice.




to the capitalists), by adopting it, socialism’s ultimate success would

only become more assured.Both o these orces co-existed within the socialist move-

ment, though their relationship was at times quite strained, until

the Bolshevik Revolution o October, 1917 in Russia. In practice,

the socialist movement generally took the reormist path, while in

the eld o ideological debate the revolutionaries dominated.36 Te

Russian events changed this. With Lenin in the lead, or the rst

time the revolutionary socialists realized their program and thesocialist movement as a whole had to take a stand vis à vis the Rus-

sian experiment. As a consequence, the socialist movement split

into two branches with two separate parties: a communist party

either more or less in avor o the Russian events, and a socialist or

social-democratic party with reservations, or against them. Still,

the split was not over the issue o socialization; both were in avor

o that. It was an open split over the issue o revolutionary vs. dem-ocratic parliamentary change. Faced with the actual experience o

the Russian revolution—the violence, the bloodshed, the practice

o uncontrolled expropriation, the act that thousands o new lead-

ers, very oen o questionable reputation or simply shady, ine-

rior characters, were being swept to the political helm—the social

democrats, in their attempt to gain public support, elt they had to

abandon their revolutionary image and become, not only in prac-

tice but in theory as well, a decidedly reormist, democratic party.

And even some o the communist parties o the West, dedicated

as they were to a theory o revolutionary change, but just as much

in need o public support, elt they had to nd some ault, at least,

with the peculiar Bolshevik way o implementing the revolution.

Tey, too, increasingly thought it necessary to play the reormist,

democratic game, i only in practice.

C. E. Bernstein, Die Voraussetzungen des Sozialismus und die Augaben derSozialdemokratie, Bonn, 1975, as a major expositor o the reormist-revisionistcourse; K. Kautsky, Bernstein und das sozialdemokratische Programm, Bonn, 1976,as exponent o the Marxist orthodoxy.




However, this was only the irst step in the transormationo the socialist movement eected by the experience o the Rus-sian revolution. Te next step, as indicated, was orced upon it by the dim experience with Soviet Russia’s economic perormance.Regardless o their diering views on the desirability o revolution-ary changes and equally unamiliar with or unable or unwilling tograsp abstract economic reasoning, socialists and communists alikecould still, during a sort o honeymoon period which they elt thenew experiment deserved, entertain the most illusory hopes about

the economic achievements o a policy o socialization. But thisperiod could not last orever, and the acts had to be aced and theresults evaluated aer some time had elapsed. For every decently neutral observer o things, and later or every alert visitor and trav-eler, it became evident that socialism Russian-style did not meanmore but rather less wealth and that it was a system above all, thatin having to allow even small niches o private capital ormation,had in act already admitted its own economic ineriority, i only

implicitly. As this experience became more widely known, andin particular when aer World War II the Soviet experiment wasrepeated in the East European countries, producing the very samedim results and thus disproving the thesis that the Soviet mess wasonly due to a special Asian mentality o the people, in their race orpublic support the socialist, i.e., the social-democratic and com-munist, parties o the West were orced to modiy their programsurther. he communists now saw various laws in the Russianimplementation o the socialization program as well, and increas-ingly toyed with the idea o more decentralized planning and deci-sion-making and o partial socialization, i.e., socialization only o major rms and industries, although they never entirely aban-doned the idea o socialized production.37 Te socialist or social-democratic parties, on the other hand, less sympathetic rom thebeginning towards the Russian model o socialism and through

their decidedly reormist-democratic policy already inclined to

On the idea o a “market-socialism” c. one o its leading representatives, O. Lange,“On the Economic Teory o Socialism,” in M. I. Goldman (ed.), Comparative Eco-nomic Systems, New York, 1971.




accept compromises such as partial socialization, had to make a

urther adaptive move. Tese parties, in response to the Russianand East European experiences, increasingly gave up the notion o socialized production altogether and instead put more and moreemphasis on the idea o income taxation and equalization, and, inanother move, on equalization o opportunity, as being the truecornerstones o socialism.

While this shi rom Russian-type socialism towards a social-democratic one took place, and still is taking place in all Westernsocieties, it was not equally strong everywhere. Roughly speak-ing and only looking at Europe, the displacement o the old by the new kind o socialism has been more pronounced, the moreimmediate and direct the experience with Russian-type socialismor the population in which the socialist and/or communist par-ties had to nd supporters and voters. O all the major countries,in West Germany, where the contact with this type o socialism is

the most direct, where millions o people still have ample oppor-tunities to see with their own eyes the mischie that has been doneto the people in East Germany, this displacement was the mostcomplete. Here, in 1959, the social democrats adopted (or ratherwere orced by public opinion to adopt) a new party program inwhich all obvious traces o a Marxist past were conspicuously absent, that rather explicitly mentioned the importance o privateownership and markets, that talked about socialization only as amere possibility, and that instead heavily stressed the importanceo redistributive measures. Here, the protagonists o a policy o socialization o the means o production within the social-demo-cratic party have been considerably outnumbered ever since; andhere the communist parties, even when they are only in avor o peaceul and partial socialization, have been reduced to insigni-cance.38 In countries urther removed rom the iron curtain, like

France, Italy, Spain, and also Great Britain, this change has been

On the ideology o the German Social Democrats c. . Meyer (ed.),Demokratischer Sozialismus, Muenchen, 1980; G. Schwan (ed.), DemokratischerSozialismus uer Industriegesellschaen, Frankurt/M., 1979.




less dramatic. Nonetheless, it is sae to say that today only social-

democratic socialism, as represented most typically by the Germansocial-democrats, can claim widespread popularity in the West. Asa matter o act, due partly to the inuence o the Socialist Interna-tional—the association o socialist and social-democratic parties—social-democratic socialism can now be said to be one o the mostwidespread ideologies o our age, increasingly shaping the politicalprograms and actual policies not only o explicitly socialist parties,and to a lesser degree those o the western communists, but also o

groups and parties who would not even in their most ar-etcheddreams call themselves socialists, like the east coast “liberal” Dem-ocrats in the United States.39 And in the eld o international pol-itics the ideas o social-democratic socialism, in particular o aredistributive approach towards these-called North-South conict,have almost become something like the ocial position among all“well-inormed” and “well-intentioned” men; a consensus extend-ing ar beyond those who think o themselves as socialists.40

What are the central eatures o socialism social-demo-cratic-style? Tere are basically two characteristics. First, in pos-itive contradistinction to the traditional Marxist-style socialism,social-democratic socialism does not outlaw private ownership inthe means o production and it even accepts the idea o all meanso production being privately owned—with the exception only o education, trac and communication, central banking, and the

Indicators or the social-democratization o the socialist movement are the rise o the socialist party and the corresponding decline o the orthodox communist party in France; the emergence o a social-democratic party as a rival to the more orthodoxlabour party in Great Britain; the moderation o the communists in Italy as the only remaining powerul communist party in Western Europe toward an increasingly social-democratic policy; and the growth o the socialist-social-democratic partiesin Spain and Portugal under Gonzales and Soares, both with close ties to the Ger-man SPD. Furthermore, the socialist parties o Scandinavia, which traditionally hadclosely ollowed the German path and which later provided sae haven to a numbero prominent socialists during the Nazi persecution (most notably W. Brandt and B.Kreisky), have long given credence to the revisionist belies.0 On the social-democratic position regarding the North-South conict c. North-South: A Programme or Survival, Independent Commission on InternationalDevelopment Issues (Chair: W. Brandt), 1980.




police and courts. In principle, everyone has the right to privately

appropriate and own means o production, to sell, buy, or newly produce them, to give them away as a present, or to rent them outto someone else under a contractual arrangement. But secondly,no owner o means o production rightully owns all o the incomethat can be derived rom the usage o his means o production andno owner is le to decide how much o the total income rom pro-duction to allocate to consumption and investment. Instead, part o the income rom production rightully belongs to society, has to be

handed over to it, and is then, according to ideas o egalitarianismor distributive justice, redistributed to its individual members. Fur-thermore, though the respective income-shares that go to the pro-ducer and to society might be xed at any given point in time, theshare that rightully belongs to the producer is in principle exibleand the determination o its size, as well as that o society’s share, isnot up to the producer, but rightully belongs to society.41

Seen rom the point o view o the natural theory o prop-erty—the theory underlying capitalism—the adoption o theserules implies that the rights o the natural owner have been aggres-sively invaded. According to this theory o property, it should berecalled, the user-owner o the means o production can do what-ever he wants with them; and whatever the outcome o his usage, itis his own private income, which he can use again as he pleases, aslong as he does not change the physical integrity o someone else’s

property and exclusively relies on contractual exchanges. From thestandpoint o the natural theory o property, there are not two sep-arate processes—the production o income and then, aer incomeis produced, its distribution. here is only one process: in pro-ducing income it is automatically distributed; the producer is theowner. As compared with this, socialism social-democratic style

Note again that this characterization o social-democratic socialism has the statuso an “ideal type” (c. Chapter 3, n. 2). It is not to be taken as a description o the pol-icy or ideology o any actual party. Rather, it should be understood as the attempt toreconstruct what has become the essence o modern social-democratic style social-ism, underlying a much more diverse reality o programs and policies o various par-ties or movements o dierent names as the ideologically uniying core.




advocates the partial expropriation o the natural owner by redis-

tributing part o the income rom production to people who, what-ever their merits otherwise, denitely did not produce the incomein question and denitely did not have any contractual claims to it,and who, in addition, have the right to determine unilaterally, i.e.,without having to wait or the aected producer’s consent, how arthis partial expropriation can go.

It should be clear rom this description that, contrary to theimpression which socialism social-democratic style is intended togenerate among the public, the dierence between both types o socialism is not o a categorical nature. Rather, it is only a mattero degree. Certainly, the rst mentioned rule seems to inauguratea undamental dierence in that it allows private ownership. Butthen the second rule in principle allows the expropriation o all o the producer’s income rom production and thus reduces his own-ership right to a purely nominal one. O course, social-democratic

socialism does not have to go as ar as reducing private owner-ship to one in name only. And admittedly, as the income-share thatthe producer is orced to hand over to society can in act be quitemoderate, this, in practice, can make a tremendous dierence asregards economic perormance. But still, it must be realized thatrom the standpoint o the nonproducing ellowmen, the degreeo expropriation o private producers’ income is a matter o expe-diency, which suces to reduce the dierence between both types

o socialism—Russian and social-democratic style—once and orall to a dierence only o degree. It should be apparent what thisimportant act implies or a producer. It means that however lowthe presently xed degree o expropriation might be, his produc-tive eorts take place under the ever-present threat that in theuture the income-share which must be handed over to society willbe raised unilaterally. It does not need much comment to see how

this increases the risk, or the cost o producing, and hence lowersthe rate o investment.

With this statement a rst step in the analysis that ollows hasalready been taken. What are the economic, in the colloquial sense




o the term, consequences o adopting a system o social-demo-

cratic socialism? Aer what has just been said, it is probably no lon-ger altogether surprising to hear that at least as regards the generaldirection o the eects, they are quite similar to those o traditionalMarxist-type socialism. Still, to the extent that social-democraticsocialism settles or partial expropriation and the redistribution o producer incomes, some o the impoverishment eects that resultrom a policy o ully socializing means o production can be cir-cumvented. Since these resources can still be bought and sold, the

problem most typical o a caretaker economy—that no marketprices or means o production exist and hence neither monetary calculation nor accounting are possible, with ensuing misalloca-tions and the waste o scarce resources in usages that are at best o only secondary importance—is avoided. In addition, the problemo overutilization is at least reduced. Also, since private investmentand capital ormation is still possible to the extent that some por-tion o income rom production is le with the producer to use at

his discretion, under socialism social-democratic style there is arelatively higher incentive to work, to save, and to invest.

Nonetheless, by no means can all impoverishment eects beavoided. Socialism social-democratic style, however good it mightlook in comparison with Russian-type socialism, still necessar-ily leads to a reduction in investment and thus in uture wealthas compared with that under capitalism.42 By taking part o the

income rom production away rom the owner-producer, howeversmall that part may be, and giving it to people who did not pro-duce the income in question, the costs o production (which arenever zero, as producing, appropriating, contractings always imply at least the use o time, which could be used otherwise, or lei-sure, consumption, or underground work, or instance) rise, and,mutatis mutandis, the costs o nonproducing and/or undergroundproduction all, however slightly. As a consequence there will berelatively less production and investment, even though, or reasons

On the ollowing c. L. v. Mises, Socialism, Indianapolis, 1981, esp. part V; HumanAction, Chicago, 1966, esp. part 6.




to be discussed shortly, the absolute level o production and wealthmight still rise. here will be relatively more leisure, more con-sumption, and more moonlighting, and hence, all in all, relativeimpoverishment. And this tendency will be more pronounced thehigher the income rom production that is redistributed, and themore imminent the likelihood that it will be raised in the uture by unilateral, noncontractual societal decision.

For a long time by ar the most popular idea or implement-ing the general policy goal o social-democratic socialism was to

redistribute monetary in come by means o income taxation ora general sales tax levied on producers. A look at this particulartechnique shall urther clariy our point and avoid some requently encountered misunderstandings and misconceptions about thegeneral eect o relative impoverishment. What is the economiceect o introducing income or sales taxation where there hasbeen none beore, or o raising an existing level o taxation to a

new height?

43

In answering this, I will urther ignore the complica-tions that result rom the dierent possible ways o redistributingtax money to dierent individuals or groups o individuals—theseshall be discussed later in this chapter. Here we will only take intoaccount the general act, true by denition or all redistributive sys-tems, that any redistribution o tax money is a transer rom mone-tary income producers and contractual money recipients to peoplein their capacity as nonproducers and nonrecipients o contractual

money incomes. Introducing or raising taxation thus implies thatmonetary income owing rom production is reduced or the pro-ducer and increased or people in their roles as nonproducers andnoncontractors. Tis changes the relative costs o production ormonetary return versus nonproduction and production or non-monetary returns. Accordingly, insoar as this change is perceivedby people, they will increasingly resort to leisurely consumptionand/or production or the purpose o barter, simultaneously reduc-

ing their productive eorts undertaken or monetary rewards. Inany case, the output o goods to be purchased with money will

C. M. N. Rothbard, Power and Market, Kansas City, 1977.




all, which is to say the purchasing power o money decreases, and

hence the general standard o living will decline.Against this reasoning it is sometimes argued that it has been

requently observed empirically that a rise in the level o taxationwas actually accompanied by a rise (not a all) in the gross nationalproduct (GNP), and that the above reasoning, however plausible,must thus be considered empirically invalid. Tis alleged counter-argument exhibits a simple misunderstanding: a conusion betweenabsolute and relative reduction. In the above analysis the conclu-sion is reached that the eect o higher taxes is a relative reductionin production or monetary returns; a reduction, that is, as com-pared with the level o production that would have been attainedhad the degree o taxation not been altered. It does not say or imply anything with respect to the absolute level o output produced. As amatter o act, absolute growth o GNP is not only compatible withour analysis but can be seen as a perectly normal phenomenon

to the extent that advances in productivity are possible and actu-ally take place. I it has become possible, through improvement inthe technology o production, to produce a higher output with anidentical input (in terms o costs), or a physically identical outputwith a reduced input, then the coincidence o increased taxationand increased output is anything but surprising. But, to be sure,this does not at all aect the validity o what has been stated aboutrelative impoverishment resulting rom taxation.

Another objection that enjoys some popularity is that raisingtaxes leads to a reduction in monetary income, and that this reduc-tion raises the marginal utility o money as compared with otherorms o income (like leisure) and thus, instead o lowering it, actu-ally helps to increase the tendency to work or monetary return.Tis observation, to be sure, is perectly true. But it is a misconcep-tion to believe that it does anything to invalidate the relative impov-

erishment thesis. First o all, in order to get the ull picture it shouldbe noted that through taxation, not only the monetary income orsome people (the producers) is reduced but simultaneously mon-etary income or other people (nonproducers) is increased, and or




these people the marginal utility o money and hence their inclina-

tion to work or monetary return would be reduced. But this is by no means all that need be said, as this might still leave the impres-sion that taxation simply does not aect the output o exchange-able goods at all—since it will reduce the marginal utility o money income or some and increase it or others, with both eects cancel-ling each other out. But this impression would be wrong. As a mat-ter o act, this would be a denial o what has been assumed at theoutset: that a tax hike, i.e., a higher monetary contribution orced

upon disapproving income producers, has actually taken placeand has been perceived as such—and would hence involve a logi-cal contradiction. Intuitively, the aw in the belie that taxation is“neutral” as regards output becomes apparent as soon as the argu-ment is carried to its ultimate extreme. It would then amount to thestatement that even complete expropriation o all o the producers’monetary income and the transer o it to a group o nonproduc-ers would not make any dierence, since the increased laziness o the nonproducers resulting rom this redistribution would be ully compensated by an increased workaholism on the part o the pro-ducers (which is certainly absurd). What is overlooked in this sorto reasoning is that the introduction o taxation or the rise in any given level o taxation does not only imply avoring nonproduc-ers at the expense o producers, it also simultaneously changes, orproducers and nonproducers o monetary income alike, the cost

attached to dierent methods o achieving an (increasing) mon-etary income. For it is now relatively less costly to attain additionalmonetary in come through nonproductive means, i.e., not throughactually producing more goods but by participating in the processo noncontractual acquisitions o goods already produced. Even i producers are indeed more intent upon attaining additional money as a consequence o a higher tax, they will increasingly do so notby intensiying their productive eorts but rather through exploit-

ative methods. Tis explains why taxation is not, and never can be,neutral. With (increased) taxation a dierent legal incentive struc-ture is institutionalized: one that changes the relative costs o pro-duction or monetary income versus nonproduction, including




nonproduction or leisurely purposes and nonproduction or mon-etary return, and also versus production or nonmonetary return(barter). And i such a dierent incentive structure is applied toone and the same population, then, and necessarily so, a decreasein the output o goods produced or monetary return must result.44

While income and sales taxation are the most common tech-niques, they do not exhaust social-democratic socialism’s repertoireo redistributive methods. No matter how the taxes are redistrib-uted to the individuals composing a given society, no matter, or

instance, to what extent monetary in come is equalized, since theseindividuals can and do lead dierent liestyles and since they allo-cate dierent portions o the monetary income assigned to themto consumption or to the ormation o nonproductively used pri-

vate wealth, sooner or later signicant dierences between peoplewill again emerge, i not with respect to their monetary income,then with respect to private wealth. And not surprisingly, these di-

erences will steadily become more pronounced i a purely con-tractual inheritance law exists. Hence, social-democratic socialism,motivated as it is by egalitarian zeal, includes private wealth inits policy schemes and imposes a tax on it, too, and in particularimposes an inheritance tax in order to satisy the popular outcry over “unearned riches” alling upon heirs.

Economically, these measures immediately reduce the amounto private wealth ormation. As the enjoyment o private wealth ismade relatively more costly by the tax, less wealth will be newly cre-ated, increased consumption will ensue—including that o existingstocks o nonproductively used riches—and the overall standard o living, which o course also depends on the comorts derived romprivate wealth, will sink.

Similar conclusions about impoverishment eects are reachedwhen the third major eld o tax policies—that o “natural assets”—

In addition, it should not be overlooked that even i it led to increased work by those taxed, a higher degree o taxation would in any case reduce the amount o lei-sure available to them and thereby reduce their standard o living. C. M.N. Roth-bard, Power and Market, Kansas City, 1977, pp. 95.




is analyzed. For reasons to be discussed below, this eld, next to the

two traditional elds o monetary income and private wealth taxa-tion, has gained more prominence over time under the heading o opportunity equalization. It did not take much to discover that aperson’s position in lie does not depend exclusively on monetary income or the wealth o nonproductively used goods. Tere areother things that are important in lie and which bring additionalincome, even though it may not be in the orm o money or otherexchange goods: a nice amily, an education, health, good looks,

etc. I will call these nonexchangeable goods rom which (psychic)income can be derived “natural assets.” Redistributive socialism,led by egalitarian ideals, is also irritated by existing dierences insuch assets, and tries, i not to eradicate, then at least to moderatethem. But these assets, being nonexchangeable goods, cannot beeasily expropriated and the proceeds then redistributed. It is alsonot very practical, to say the least, to achieve this goal by directly reducing the nonmonetary income rom natural assets o higher

income people to the level o lower income people by, or instance,ruining the health o the healthy and so making them equal to thesick, or by smashing the good-looking people’s aces to make themlook like their less ortunate bad-looking ellows.45 Tus, the com-mon method social-democratic socialism advocates in order tocreate “equality o opportunity” is taxation o natural assets. Tosepeople who are thought to receive a relatively higher nonmonetary

income rom some asset, like health, are subject to an additionaltax, to be paid in money. Tis tax is then redistributed to those peo-ple whose respective income is relatively low to help compensatethem or this act. An additional tax, or instance, is levied on thehealthy to help the unhealthy pay their doctor bills, or on the good-looking to help the ugly pay or plastic surgery or to buy themselvesa drink so that they can orget about their lot. Te economic con-sequences o such redistributive schemes should be clear. Insoar

A ctional account o the implementation o such a policy, supervised by “Teunceasing vigilance o agents o the United States Handicapper General” has beengiven by K. Vonnegut in “Harrison Bergeron,” in: K. Vonnegut, Welcome to theMonkey House, New York, 1970.




as the psychic income, represented by health, or instance, requires

some productive, time and cost-consuming eort, and as peoplecan, in principle, shi rom productive roles into nonproductive

ones, or channel their productive eorts into dierent, non- or less

heavily taxed lines o nonexchangeable or exchangeable goods pro-

duction, they will do so because o the increased costs involved in

the production o personal health. Te overall production o the

wealth in question will all, the general standard o health, that

is, will be reduced. And even with truly natural assets, like intel-

ligence, about which people can admittedly do little or nothing,

consequences o the same kind will result, though only with a time

lag o one generation. Realizing that it has become relatively more

costly to be intelligent and less so to be nonintelligent, and want-

ing as much income (o all sorts) as possible or one’s ospring, the

incentive or intelligent people to produce ospring has been low-

ered and or nonintelligent ones raised. Given the laws o genet-

ics, the result will be a population that is all in all less intelligent.And besides, in any case o taxation o natural assets, true or the

example o health as well as or that o intelligence, because mon-

etary income is taxed, a tendency similar to the one resulting rom

income taxation will set in, i.e., a tendency to reduce one’s eorts

or monetary return and instead increasingly engage in productive

activity or nonmonetary return or in all sorts o nonproductive

enterprises. And, o course, all this once again reduces the generalstandard o living.

But this is still not all that has to be said about the conse-

quences o socialism social-democratic-style, as it will also have

remote yet nonetheless highly important eects on the social-

moral structure o society, which will become visible when one

considers the long-term eects o introducing redistributive poli-

cies. It probably no longer comes as a surprise that in this regard,too, the dierence between Russian-type socialism and socialism

social-democratic style, while highly interesting in some details, is

not o a principal kind.




increased or ull control exists only as society’s not yet actualized

right, making only or a potential threat hanging over the headso private producers. But living with the threat o being ully taxedrather than actually being so taxed explains an interesting eatureo social-democratic socialism as regards the general develop-ment toward increasingly politicalized characters. It explains why under a system o social-democratic socialism the sort o political-ization is dierent rom that under Russian-type socialism. Underthe latter, time and eort is spent nonproductively, discussing how

to distribute the socially owned income; under the ormer, to besure, this is also done, but time and eort are also used or politicalquarrels over the issue o how large or small the socially adminis-tered income-shares should actually be. Under a system o social-ized means o production where this issue is settled once and orall, there is then relatively more withdrawal rom public lie, res-ignation, and cynicism to be observed. Social-democratic social-ism, on the other hand, where the question is still open, and where

producers and nonproducers alike can still entertain some hopeo improving their position by decreasing or increasing taxation,has less o such privatization and, instead, more oen has peopleactively engaged in political agitation either in avor o increasingsociety’s control o privately produced incomes, or against it.46

With the general similarity as well as this specic dierencebetween both types o socialism explained, the task remains o

presenting a brie analysis o some modiying orces inuencingthe general development toward unproductive politicalized per-sonalities. Tese are eected by diering approaches to the desir-able pattern o income distribution. Russian and social-democraticsocialism alike are aced with the question o how to distributeincome that happens to be socially controlled. For Russian-typesocialism it is a matter o what salaries to pay to individuals whohave been assigned to various positions in the caretaker economy.For redistributive socialism it is the question o how much tax to

On the phenomenon o politicalization c. also K. S. empleton (ed.), Te Politi-calization o Society, Indianapolis, 1977.




allocate to whom. While there are in principle innumerable ways to

do this, the egalitarian philosophy o both kinds o socialism eec-tively reduces the available options to three general types.47 Te rst

one is the method o more or less equalizing everybody’s monetary

income (and possibly also private, nonproductively used wealth).

eachers, doctors, construction workers and miners, actory man-

agers and cleaning ladies all earn pretty much the same salary, or

the dierence between them is at least considerably reduced.48 It

does not need much comment to realize that this approach reduces

the incentive to work most drastically, or it no longer makes much

On the concern o orthodox and social-democratic socialism or equality c. S.Lukes, “Socialism and Equality,” in: L. Kolakowski and S. Hampshire (eds.), TeSocialist Idea, New York, 1974; also B. Williams, “Te Idea o Equality,” in P. Laslettand W. G. Runciman (eds.), Philosophy, Politics, and Society, 2nd series, Oxord,1962. For a critique o the socialist concept o equality c. M. N. Rothbard, “Freedom,Inequality, Primitivism and the Division o Labor,” in K. S. empleton (ed.), TePoliticalization o Society, Indianapolis, 1977; and Egalitarianism as a Revolt Against

Nature, (title essay), Washington, 1974; H. Schoeck, Envy, New York, 1966; and 1stLeistung unanstaendig? Osnabrueck, 1971; A. Flew, Te Politics o Procrustes, Lon-don, 1980; and Sociology, Equality and Education, New York, 1976. raditionally, this approach has been avored, at least in theory, by orthodoxMarxist socialism—in line with Marx’ amous dictum in his “Critique o the GothaProgramme,” (K. Marx, Selected Works, vol. 2, London, 1942, p.566), ‘rom eachaccording to his ability, to each according to his needs.” Economic reality, however,has orced the Russian-style countries to make considerable concessions in prac-tice. Generally speaking, an eort has indeed been made to equalize the (assumedly highly visible) monetary income or various occupations, but in order to keep theeconomy going, considerable dierence in (assumedly less visible) nonmonetary rewards (such as special privileges regarding travel, education, housing, shopping,etc.) have had to be introduced.

Surveying the literature, P. Gregory and R. Stuart (Comparative Economic Sys-tems, Boston, 1985), state: “… earnings are more equally distributed in EasternEurope, Yugoslavia and the Soviet Union than in the United States. For the USSR,this appears to be a relatively new phenomenon, or as late as 1957, Soviet earningswere more unequal than the United States.” However, in Soviet-style countries “a rela-tively larger volume o resources … is provided on an extra market bases …” (p.502).In conclusion: “Income is distributed more unequally in the capitalist countries inwhich the state plays a relatively minor redistributive role … (United States, Italy,

Canada). Yet even where the state plays a major redistributive role (United King-dom, Sweden), the distribution o incomes appears to be slightly more unequal thanin the planned socialist countries (Hungary, Czechoslovakia, Bulgaria). Te SovietUnion in 1966 appears to have a less egalitarian distribution o income than its EastEuropean counterparts” (p.504). C. also, F. Parkin, Class Inequality and PoliticalOrder, New York, 1971, esp. Chapter 6.




dierence—salary-wise—i one works diligently all day or ools

around most o the time. Hence, disutility o labor being a act o lie, people will increasingly ool around, with the average incomethat everyone seems to be guaranteed constantly alling, in rela-tive terms. Tus, this approach relatively strengthens the tendency toward withdrawal, disillusionment, cynicism, and mutatis mutan-dis, contributes to a relative reduction in the general atmosphereo politicalization. Te second approach has the more moderateaim o guaranteeing a minimum income which, though normally

somehow linked to average income, alls well below it.49 Tis, too,reduces the incentive to work, since, to the extent that they are only marginal income producers with incomes rom production only slightly above the minimum, people will now be more inclined toreduce or even stop their work, enjoy leisure instead, and settle orthe minimum income. Tus more people than otherwise will allbelow the minimum line, or more people than otherwise will keepor acquire those characteristics on whose existence payment o

minimum salaries is bound, and as a consequence, again, the aver-age income to which the minimum salary is linked will all belowthe level that it otherwise would have reached. But, o course, theincentive to work is reduced to a smaller degree under the secondthan the rst scheme. On the other hand, the second approach willlead to a relatively higher degree o active politicalization (and lesso resigned withdrawal), because, unlike average income, which

can be objectively ascertained, the level at which the minimum

Tis approach is traditionally most typical or social-democratic socialism. Inrecent years it has been given much publicized support—rom the side o the eco-nomics proession—by M. Friedman with his proposal or a “negative income tax”(Friedman, Capitalism and Freedom, Chicago, 1962, Chapter 12); and by J. Rawls—rom the philosophical side—with his “dierence principle” (Rawls, A Teory o Justice, Cambridge, 1971, pp. 60, 75, 83). Accordingly, both authors have receivedmuch attention rom social-democratic party intellectuals. Generally, Friedman wasonly ound “guilty” o not wanting to set the minimum income high enough—but

then, he had no principled criterion or setting it at any specic point anyway. Rawls,who wants to coerce the “most advantaged person” into letting the “least advantagedone” share in his ortune whenever he happens to improve his own position, was attimes even ound to have gone too ar with his egalitarianism. C. G. Schwan, Sozi-alismus in der Demokratie. Teorie eine konsequent sozialdemokratischen Politik,Stuttgart, 1982, Chapter 3. D.




income is xed is a completely subjective, arbitrary aair, which is

thus particularly prone to becoming a permanent political issue.Undoubtedly, the highest degree o active politicalization is

reached when the third distributional approach is chosen. Its goal,gaining more and more prominence or social democracy, is toachieve equality o opportunity.50 he idea is to create, throughredistributional measures, a situation in which everyone’s chanceo achieving any possible (income) position in lie is equal—

very much as in a lottery where each ticket has the same chanceo being a winner or a loser—and, in addition, to have a correc-tive mechanism which helps rectiy situations o “undeserved badluck” (whatever that may be) which might occur in the course o the ongoing game o chance. aken literally, o course, this idea isabsurd: there is no way o equalizing the opportunity o someoneliving in the Alps and someone residing at the seaside. In addi-tion, it seems quite clear that the idea o a corrective mechanism

is simply incompatible with the lottery idea. Yet it is precisely thishigh degree o vagueness and conusion which contributes to thepopular appeal o this concept. What constitutes an opportunity,what makes an opportunity dierent or the same, worse or better,how much and what kind o compensation is needed to equalizeopportunities which admittedly cannot be equalized in physicalterms (as in the Alps/seaside example), what is undeserved badluck and what a rectication, are all completely subjective matters.

Tey are dependent on subjective evaluations, changing as they do,and there is then—i one indeed applies the equality o opportu-nity concept—an unlimited reservoir o all sorts o distributionaldemands, or all sorts o reasons and or all sorts o people. Tis isso, in particular, because equalizing opportunity is compatible withdemands or dierences in monetary income or private wealth. A

0

A representative example o social-democratically inclined research on equality o opportunity, in particular regarding education, is C. Jencks, and others, Inequality,London, 1973; the increasing prominence o the idea o equalizing opportunity alsoexplains the ood o sociological studies on “quality o lie” and “social indicators”that has appeared since the late 1960s. C., or instance, A. Szalai and F. Andrews(eds.), Te Quality o Lie, London, 1980.




and B might have the same income and might both be equally rich,but A might be black, or a woman, or have bad eyesight, or be aresident o exas, or may have ten children, or no husband, or beover 65, whereas B might be none o these but something else, andhence A might argue that his opportunities to attain everythingpossible in lie are dierent, or rather worse, than B’s, and that heshould somehow be compensated or this, thus making their mon-etary incomes, which were the same beore, now dierent. And B,o course, could argue in exactly the same way by simply revers-

ing the implied evaluation o opportunities. As a consequence, anunheard o degree o politicalization will ensue. Everything seemsair now, and producers and nonproducers alike, the ormer ordeensive and the latter or aggressive purposes, will be driveninto spending more and more time in the role o raising, destroy-ing, and countering distributional demands. And to be sure, thisactivity, like the engagement in leisurely activities, is not only non-productive but in clear contrast to the role o enjoying leisure,

implies spending time or the very purpose o actually disruptingthe undisturbed enjoyment o wealth produced, as well as its newproduction.

But not only is increased politicalization stimulated (aboveand beyond the level implied by socialism generally) by promotingthe idea o equalizing opportunity. Tere is once more, and this isperhaps one o the most interesting eatures o new social-demo-

cratic-socialism as compared with its traditional Marxist orm, anew and dierent character to the kind o politicalization impliedby it. Under any policy o distribution, there must be people whosupport and promote it. And normally, though not exclusively so, this is done by those who prot most rom it. Tus, under asystem o income and wealth-equalization and also under that o a minimum income policy, it is mainly the “have-nots” who arethe supporters o the politicalization o social lie. Given the act

that on the average they happen to be those with relatively lowerintellectual, in particular verbal capabilities, this makes or poli-tics which appears to lack much intellectual sophistication, tosay the least. Put more bluntly, politics tends to be outright dull,




dumb, and appalling, even to a considerable number o the have-nots themselves. On the other hand, in adopting the idea o equal-izing opportunity, dierences in monetary income and wealth arenot only allowed to exist but even become quite pronounced, pro-

vided that this is justiable by some underlying discrepancies inthe opportunity structure or which the ormer dierences helpcompensate. Now in this sort o politics the haves can participate,too. As a matter o act, being the ones who on the average com-mand superior verbal skills, and the task o dening opportuni-

ties as better or worse being essentially one o persuasive rhetoricalpowers, this is exactly their sort o game. Tus the haves will nowbecome the dominant orce in sustaining the process o political-ization. Increasingly it will be people rom their ranks that moveto the top o the socialist party organization, and accordingly theappearance and rhetoric o socialist politics will take on a dier-ent shape, becoming more and more intellectualized, changing itsappeal and attracting a new class o supporters.

With this I have reached the stage in the analysis o social-democratic socialism where only a ew remarks and observationsare needed which will help illustrate the validity o the above theo-retical considerations. Tough it does not at all aect the validity o the conclusions reached above, depending as they do exclusively on the truth o the premises and the correctness o the deductions,there unortunately exists no nearly perect, quasi-experimen-

tal case to illustrate the workings o social-democratic socialismas compared with capitalism, as there was in the case o East andWest Germany regarding Russian-type socialism. Illustrating thepoint would involve a comparison o maniestly dierent societieswhere the ceteris are clearly not paribus, and thus it would no lon-ger be possible to neatly match certain causes with certain eects.Oen, experiments in social-democratic socialism simply have notlasted long enough, or have been interrupted repeatedly by policies

that could not denitely be classied as social-democratic social-ism. Or else rom the very beginning, they have been mixed withsuch dierent—and even inconsistent—policies as a result o polit-ical compromising, that in reality dierent causes and eects are so




entangled that no striking illustrative evidence can be produced or

any thesis o some degree o specicity. Te task o disentanglingcauses and eects then becomes a genuinely theoretical one again,lacking the peculiar persuasiveness that characterizes experimen-tally produced evidence.

Nonetheless some evidence exists, i only o a more dubiousquality. First, on the level o highly global observations, the gen-eral thesis about relative impoverishment brought about by redis-tributive socialism is illustrated by the act that the standard o living is relatively higher and has become more so over time in theUnited States o America than in Western Europe, or, more spe-cically, than in the countries o the European Community (EC).Both regions are roughly comparable with respect to populationsize, ethnic and cultural diversity, tradition and heritage, and alsowith respect to natural endowments, but the United States is com-paratively more capitalist and Europe more socialist. Every neu-

tral observer will hardly ail to notice this point, as indicated alsoby such global measures as state expenditure as percent o GNP,which is roughly 35 percent in the United States as compared toabout 50 percent or more in Western Europe. It also ts into thepicture that the European countries (in particular Great Britain)exhibited more impressive rates o economic growth in the nine-teenth century, which has been described repeatedly by historiansas the period o classical liberalism, than in the twentieth, which,

in contrast, has been termed that o socialism and statism. In thesame way the validity o the theory is illustrated by the act thatWestern Europe has been increasingly surpassed in rates o eco-nomic growth by some o the Paciic countries, such as Japan,Hong Kong, Singapore, and Malaysia; and that the latter, in adopt-ing a relatively more capitalist course, have meanwhile achieved amuch higher standard o living than socialistically inclined coun-

tries which started at about the same time with roughly the samebasis o economic development, such as India.

Coming then to more speciic observations, there are therecent experiences o Portugal, where in 1974 the autocratic Salazar




created new ones, and signicantly increased spending on all sorts

o so-called “public goods, “thereby allegedly equalizing opportu-nities and enhancing the overall “quality o lie.” By resorting to aKeynesian policy o decit spending and unanticipated ination,the eects o raising the socially guaranteed minimum provisionsor nonproducers at the expense o more heavily taxed producerscould be delayed or a ew years (the motto o the economic policy o ormer West German Chancellor Helmut Schmidt was “rather5% ination than 5% unemployment”). Tey were only to become

more drastic somewhat later, however, as unanticipated inationand credit expansion had created and prolonged the over- or rathermalinvestment typical o a boom. As a result, not only was theremuch more than 5 percent ination, but unemployment also rosesteadily and approached 10 percent; the growth o GNP becameslower and slower until it actually ell in absolute terms during thelast ew years o the period. Instead o being an expanding econ-

omy, the absolute number o people employed decreased; moreand more pressure was generated on oreign workers to leave thecountry and the immigration barriers were simultaneously raisedto ever higher levels. All o this happened while the importance o the underground economy grew steadily.

But these were only the more evident eects o a narrowly dened economic kind. Tere were other eects o a dierent sort,

which were actually o more lasting importance. With the newsocialist-liberal government the idea o equalizing opportunity came to the ideological oreront. And as has been predicted theo-retically, it was in particular the ocial spreading o the idea mehr Demokratie wagen (“risk more Democracy”)—initially one o themost popular slogans o the new (Willy Brandt) era—that led to adegree o politicalization unheard o beore. All sorts o demandswere raised in the name o equality o opportunity; and there was

hardly any sphere o lie, rom childhood to old age, rom leisure towork conditions, that was not examined intensely or possible dier-ences that it oered to dierent people with regard to opportunitiesdened as relevant. Not surprisingly, such opportunities and such




dierences were ound constantly,52 and, accordingly, the realm o politics seemed to expand almost daily. “Tere is no question that isnot a political one” could be heard more and more oen. In order tostay ahead o this development the parties in power had to change,too. In particular the Social Democrats, traditionally a blue-collarworkers’ party, had to develop a new image. With the idea o equal-izing opportunity gaining ground, it increasingly became, as couldbe predicted, the party o the (verbal) intelligentsia, o social scien-tists and o teachers. And this “new” party, almost as i to prove the

point that a process o politicalization will be sustained mainly by those who can prot rom its distributional schemes and that the

job o dening opportunities is essentially arbitrary and a matter o rhetorical power, then made it one o its central concerns to chan-nel the most diverse political energies set in motion into the eld o equalizing, above all, educational opportunities. In particular, they “equalized” the opportunities or a high school and university edu-cation, by oering the respective services not only ree o charge

but by literally paying large groups o students to take advantageo them. Tis not only increased the demand or educators, teach-ers, and social scientists, whose payment naturally had to comerom taxes. It also amounted, somewhat ironically or a social-ist party which argued that equalizing educational opportunitieswould imply an income transer rom the rich to the poor, in eectto a subsidy paid to the more intelligent at the expense o a comple-

mentary income reduction or the less intelligent, and, to the extentthat there are higher numbers o intelligent people among the mid-dle and upper social classes than among the lower, a subsidy to thehaves paid by the have-nots.53 As a result o this process o politi-calization led by increased numbers o tax-paid educators gaininginuence over increased numbers o students, there emerged (ascould be predicted) a change in the mentality o the people. It wasincreasingly considered completely normal to satisy all sorts o

C. as a representative example, W. Zap (ed.), Lebensbedingungen in der Bundes-republik, Frankurt/M., 1978. C. on this A. Alchian, “Te Economic and Social Impact o Free uition” in: A.Alchian, Economic Forces at Work, Indianapolis, 1977.




demands through political means, and to claim all sorts o allegedrights against other supposedly better-situated people and theirproperty; and or a whole generation o people raised during thisperiod, it became less and less natural to think o improving one’slot by productive eort or by contracting. Tus, when the actualeconomic crisis, necessitated by the redistributionist policy, arose,the people were less equipped than ever to overcome it, becauseover time the same policy had weakened precisely those skillsand talents which were now most urgently required. Revealingly

enough, when the socialist-liberal government was ousted in 1982,mainly because o its obviously miserable economic perormance, itwas still the prevalent opinion that the crisis should be resolved notby eliminating the causes, i.e., the swollen minimum provisions ornonproducers or noncontractors, but rather by another redistribu-tive measure: by orcibly equalizing the available work—time oremployed and unemployed people. And in line with this spirit thenew conservative-liberal government in act did no more than slow

down the rate o growth o taxation.




Chapter 5

Te Socialism o Conservatism

In the two preceding chapters the orms o socialism mostcommonly known and identied as such, and that are indeedderived rom basically the same ideological sources were dis-cussed: socialism Russian-style, as most conspicuously rep-

resented by the communist countries o the East bloc; and

social-democratic socialism, with its most typical representatives inthe socialist and social-democratic parties o Western Europe, andto a lesser extent in the “liberals” o the United States. Te property rules underlying their policy schemes were analyzed, and the ideapresented that one can apply the property principles o Russian orsocial-democratic socialism in varying degrees: one can socialize allmeans o production or just a ew, and one can tax away and redis-tribute almost all income, and almost all types o income, or one

can do this with just a small portion o only a ew types o income.But, as was demonstrated by theoretical means and, less stringently,through some illustrative empirical evidence, as long as one adheresto these principles at all and does not once and or all abandon thenotion o ownership rights belonging to nonproducers (nonusers)and noncontractors, relative impoverishment must be the result.

Tis chapter will show that the same is true o conservatism,because it, too, is a orm o socialism. Conservatism also producesimpoverishment, and all the more so, the more resolutely it isapplied. But beore going into a systematic and detailed economic

83




analysis o the peculiar ways in which conservatism produces this

eect, it would be appropriate to take a short look at history, inorder to better understand why conservatism indeed is socialism,and how it is related to the two egalitarian orms o socialism dis-cussed previously.

Roughly speaking, beore the eighteenth century in Europeand throughout the world, a social system o “eudalism” or “abso-lutism,” which was in act eudalism on a grander scale, existed.54 In abstract terms, the social order o eudalism was characterizedby a regional overlord who claimed ownership o some territory,including all o its resources and goods, and quite oen also o allo the men placed upon it, without having originally appropriatedthem himsel through use or work, and without having a contrac-tual claim to them. On the contrary, the territory, or better, the

various parts o it and the goods standing on it, had been actively occupied, used, and produced by dierent people beore (the “nat-

ural owners”). Te ownership claims o the eudal lords were thusderived rom thin air. Hence, the practice, based on these allegedownership rights, o renting land and other production actors outto the natural owners in return or goods and services unilaterally xed by the overlord, had to be enorced against the will o thesenatural owners, by brutal orce and armed violence, with the helpo a noble caste o military men who were rewarded by the over-

lord or their services by being allowed to participate and share inhis exploitative methods and proceeds. For the common man subject to this order, lie meant tyranny, exploitation, economic stag-nation, poverty, starvation, and despair.55

As might be expected, there was resistance to this system.Interestingly enough though (rom a present-day perspective), it

On the ollowing c. in particular M. N. Rothbard’s brilliant essay ‘Le and Right:Te Prospects or Liberty’ in the same, Egalitarianism as a Revolt Against Nature,Washington, 1974. On the social structure o eudalism c. M. Bloch, Feudal Society, Chicago, 1961; P.Anderson, Passages rom Antiquity to Feudalism, London, 1974; R. Hilton (ed.), Teransition rom Feudalism to Capitalism, London, 1978.




was not the peasant population who suered most rom the exist-ing order, but the merchants and traders who became the leadingopponents o the eudal system. Buying at a lower price in one placeand traveling and selling at a higher price in a dierent place, asthey did, made their subordination to any one eudal lord relatively weak. Tey were essentially a class o “international” men, crossingthe borders o various eudal territories constantly. As such, in orderto do business they required a stable, internationally valid legal sys-tem: a system o rules, valid regardless o time and place, dening

property and contract, which would acilitate the evolution o theinstitutions o credit, banking and insurance essential to any large-scale trading business. Naturally, this caused riction between themerchants and the eudal lords as representatives o various arbi-trary, regional, legal systems. Te merchants became eudalism’soutcasts, permanently threatened and harassed by the noble mili-tary caste attempting to bring them under their control.56

In order to escape this threat the merchants were orcedto organize themselves and help establish small ortiied trad-ing places at the very ringes o the centers o eudal power. Asplaces o partial exterritoriality and at least partial reedom, they soon attracted growing numbers o the peasantry running away rom eudal exploitation and economic misery, and they grew intosmall towns, ostering the development o cras and productiveenterprises which could not have emerged in the surroundings o

exploitation and legal instability characteristic o the eudal orderitsel. Tis process was more pronounced where the eudal pow-ers were relatively weak and where power was dispersed among agreat number o oen very minor, rival eudal lords. It was in thecities o northern Italy, the cities o the Hanseatic league, and thoseo Flanders that the spirit o capitalism rst blossomed, and com-merce and production reached their highest levels.57

C. H. Pirenne, Medieval Cities. Teir Origins and the Revival o rade, Princ-eton, 1974, Chapter 5, esp. pp. 126; also c. M. It is worth stressing that contrary to what various nationalist historians havetaught, the revival o trade and industry was caused by the weakness o central states,by the essentially anarchistic character o the eudal system. Tis insight has been




But this partial emancipation rom the restrictions and the

stagnation o eudalism was only temporary, and was ollowed by reaction and decline. Tis was due in part to internal weaknesses

in the movement o the new merchant class itsel. Still too much

ingrained in the minds o men was the eudal way o thinking in

terms o dierent ranks assigned to people, o subordination and

power, and o order having to be imposed upon men through

coercion. Hence, in the newly emerging commercial centers a new

set o noncontractual regulations and restrictions—now o “bour-geois” origin—was soon established, guilds that restrained ree

competition were ormed, and a new merchant oligarchy arose.58

More important, though, or this reactionary process was yet

another act. In their endeavor to ree themselves rom the exploit-

ative interventions o the various eudal lords, the merchants had

to look or natural allies. Understandably enough, they ound such

allies among those rom the class o eudal lords who, though com-paratively more powerul than their noble ellows, had the centers

o their power at a relatively greater distance rom the commercial

towns seeking assistance. In aligning themselves with the merchant

class, they sought to extend their power beyond its present range

emphasized by J. Baechler in Te Origins o Capitalism, New York, 1976, esp. Chap-ter 7. He writes: “Te constant expansion o the market, both in extensiveness and in

intensity, was the result o an absence o a political order extending over the wholeo Western Europe.” (p.73) “Te expansion o capitalism owes its origin and raisond’eetre to political anarchy … . Collectivism and State management have only suc-ceeded in school text-books (look, or example, at the constantly avourable judge-ment they give to Colbertism).” (p.77) “All power tends toward the absolute. I it isnot absolute, this is because some kind o limitations have come into play … thosein positions o power at the centre ceaselessly tried to erode these limitations. Tey never succeeded, and or a reason that also seems to me to be tied to the interna-tional system: a limitation o power to act externally and the constant threat o or-eign assault (the two characteristics o a multi-polar system) imply that power is alsolimited internally and must rely on autonomous centres o decision making and somay use them only sparingly.” (p.78)

On the role o ecological and reproductive pressures or the emergence o capital-ism c. M. Harris, Cannibals and Kings, New York, 1978, Chapter 14. C. on this the rather enthusiastic account given by H. Pirenne, Medieval Cities,Princeton, 1974, pp.208.




at the expense o other, minor lords.59 In order to achieve this goal

they rst granted certain exemptions rom the “normal” obliga-tions alling upon the subjects o eudal rule to the rising urbancenters, thus assuring their existence as places o partial reedom,and oered protection rom the neighboring eudal powers. But assoon as the coalition had succeeded in its joint attempt to weakenthe local lords and the merchant towns’ “oreign” eudal ally hadthereby become established as a real power outside o its own tra-ditional territory, it moved ahead and established itsel as a eudal

super power, i.e., as a monarchy, with a king who superimposed hisown exploitative rules onto those o the already existing eudal sys-tem. Absolutism had been born; and as this was nothing but eu-dalism on a larger scale, economic decline again set in, the townsdisintegrated, and stagnation and misery returned.60

It was not until the late seventeenth and early eighteenth cen-turies, then, that eudalism came under truly heavy attack. his

time the attack was more severe, because it was no longer simply the attempt o practical men—the merchants—to secure sphereso relative reedom in order to do their practical business. It wasincreasingly an ideological battle ought against eudalism. Intel-lectual reection on the causes o the rise and decline o commerceand industry that had been experienced, and a more intensive study o Roman and in particular o Natural Law, which had both beenrediscovered in the course o the merchants’ struggle to develop

an international merchant law and justiy it against the compet-ing claims o eudal law, had led to a sounder understanding o the concept o liberty, and o liberty as a prerequisite to economic

On this coalition c. H. Pirenne, Medieval Cities, Princeton, 1974. “Te clear inter-est o the monarchy was to support the adversaries o high eudalism. Naturally, helpwas given whenever it was possible to do so without becoming obligated to thesemiddle classes who in arising against their lords ought, to all intents and purposes,in the interests o royal prerogatives. o accept the king as arbitrator o their quarrelwas, or the parties in conict, to recognize his sovereignty … It was impossible thatroyalty should not take count o this and seize every chance to show its goodwill tothe communes which, without intending to do so, labored so useully in its behal”(p.179-80; c. also pp.227).0 C. P. Anderson, Lineages o Absolutism, London, 1974.




prosperity.61 As these ideas, culminating in such works as J. Locke’s

“wo reatises on Government,” 1688, and A. Smith’s “Wealth o Nations,” 1776, spread and occupied the minds o a steadily expand-ing circle o people, the old order lost its legitimacy. Te old way o thinking in terms o eudal bonds gradually gave way to the idea o a contractual society. Finally, as outward expressions o this changedstate o aairs in public opinion, the Glorious Revolution o 1688 inEngland, the American Revolution o 1776, and the French Revo-lution o 1789 came along; and nothing was the same aer these

revolutions had occurred. Tey proved, once and or all, that theold order was not invincible, and they sparked new hope or urtherprogress on the road toward reedom and prosperity.

Liberalism, as the ideological movement that had broughtabout these earth-shattering events came to be called, emergedrom these revolutions stronger than ever and became or some-what more than hal a century the dominating ideological orce

in Western Europe. It was the party o reedom and o privateproperty acquired through occupation and contract, assigning tothe state merely the role o enorcer o these natural rules.62 Withremnants o the eudal system still in eect everywhere, howevershaken in their ideological oundation, it was the party represent-ing an increasingly liberalized, deregulated, contractualized society,internally and externally, i.e., regarding domestic as well as oreignaairs and relations. And as under the pressure o liberal ideas theEuropean societies became increasingly ree o eudal restrictions,it also became the party o the Industrial Revolution, which wascaused and stimulated by this very process o liberalization. Eco-nomic development set in at a pace never beore experienced by mankind. Industry and commerce ourished, and capital orma-tion and accumulation reached new heights. While the standardo living did not rise immediately or everyone, it became possible

C. L. igar and M. Levy, Law and the Rise o Capitalism, New York, 1977.

C. L. v. Mises, Liberalismus, Jena, 1929; also E. K. Bramsted and K. J. Melhuish(eds.), Western Liberalism, London, 1978.




to support a growing number o people—people, that is, who only

a ew years beore, under eudalism, would have died o starvationbecause o the lack o economic wealth, and who could now survive. In addition, with population growth leveling o below thegrowth rate o capital, now everyone could realistically entertainthe hope o rising living standards being just around the corner.63

It is against this background o history (somewhat stream-lined, o course, as it has just been presented) that the phenom-enon o conservatism as a orm o socialism and its relation to thetwo versions o socialism originating in Marxism must be seen andunderstood. All orms o socialism are ideological responses to thechallenge posed by the advance o liberalism; but their stand takenagainst liberalism and eudalism—the old order that liberalism hadhelped to destroy—diers considerably. Te advance o liberalismhad stimulated social change at a pace, to an extent, and in varia-tions unheard o beore. Te liberalization o society meant that

increasingly only those people could keep a given social positiononce acquired who could do so by producing most eciently orthe most urgent wants o voluntary consumers with as little costas possible, and by relying exclusively on contractual relationshipswith respect to the hiring o actors o production and, in particu-lar, o labor. Empires upheld solely by orce were crumbling underthis pressure. And as consumer demand to which the productionstructure now increasingly had to adapt (and not vice versa) was

changing constantly, and the upspring o new enterprises becameincreasingly less regulated (insoar as it was the result o orig-inal appropriation and/or contract), no one’s relative position inthe hierarchy o income and wealth was secure anymore. Instead,upward and downward social mobility increased signicantly, orneither particular actor-owners nor owners o particular laborservices were any longer immune to respective changes in demand.

Tey were no longer guaranteed stable prices or a stable income.

64

C. F. A. Hayek (ed.), Capitalism and the Historians, Chicago, 1963. On the social dynamics o capitalism as well as the resentment caused by it c. D. Mc.C. Wright, Democracy and Progress, New York, 1948; and Capitalism, New York, 1951.




Old Marxist and new social-democratic socialism are the

egalitarian, progressive answers to this challenge o change, uncer-tainty, and mobility. Like liberalism, they hail the destruction o eudalism and the advance o capitalism. Tey realize that it wascapitalism that reed people rom exploitative eudal bonds andproduced enormous improvements in the economy; and they understand that capitalism, and the development o the productiveorces brought about by it, was a necessary and positive evolution-ary step on the way toward socialism. Socialism, as they conceive

it, shares the same goals with liberalism: reedom and prosper-ity. But socialism supposedly improves on the achievements o liberalism by supplanting capitalism—the anarchy o productiono private competitors which causes the just-mentioned change,mobility, uncertainty, and unrest in the social abric—at its high-est stage o development by a rationally planned and coordinatedeconomy which prevents insecurities derived rom this change

rom being elt at an individual level. Unortunately, o course,as the last two chapters have suciently demonstrated, this is arather conused idea. It is precisely by making individuals insen-sitive to change through redistributional measures that the incen-tive to adapt quickly to any uture change is taken away, and hencethe value, in terms o consumer evaluations, o the output pro-duced will all. And it is precisely because one plan is substitutedor many seemingly uncoordinated ones that individual reedom

is reduced and, mutatis mutandis, government by one man overanother increased.

Conservatism, on the other hand, is the anti-egalitarian, reac-tionary answer to the dynamic changes set in motion by a liber-alized society: It is anti-liberal and, rather than recognizing theachievements o liberalism, tends to idealize and gloriy the oldsystem o eudalism as orderly and stable.65 As a postrevolutionary

In spite o their generally progressive attitude, the socialist le is not entirely reeo such conservative glorications o the eudal past, either. In their contempt or the“alienation” o the producer rom his product, which o course is the normal conse-quence o any market system based on division o labor, they have requently pre-




phenomenon, it does not necessarily and outrightly advocate a

return to the prerevolutionary status quo ante and accepts cer-tain changes, however regretully, as irreversible. But it is hardly rufed when old eudal powers that had lost all or parts o theirestates to the natural owners in the course o the liberalization pro-cess are restored to their old position, and it denitely and openly propagates the conservation o the status quo, i.e., the given highly unequal distribution o property, wealth, and income. Its idea is tostop or slow down the permanent changes and mobility processes

brought about by liberalism and capitalism as completely as pos-sible and, instead, to recreate an orderly and stable social system inwhich everyone remains securely in the position that the past hadassigned to him.66

In order to do so, conservatism must, and indeed does, advo-cate the legitimacy o noncontractual means in the acquisitionand retention o property and income derived rom it, since it

was precisely the exclusive reliance on contractual relations thatcaused the very permanence o changes in the relative distributiono income and wealth. Just as eudalism allowed the acquisitionand upholding o property and wealth by orce, so conservatismignores whether or not people have acquired or retain their givenincome-and wealth-position through original appropriation andcontract. Instead, conservatism deems it appropriate and legitimateor a class o once-established owners to have the right to stop any

social change that it considers a threat to their relative position inthe social hierarchy o income and wealth, even i the various indi-

vidual owner-users o various production actors did not contractinto any such agreement. Conservatism, then, must be addressedas the ideological heir o eudalism. And as eudalism must bedescribed as aristocratic socialism (which should be clear enough

sented the economically sel-sucient eudal manor as a cozy, wholesome socialmodel. C., or instance, K. Polanyi, Te Great ransormation, New York, 1944. C. R. Nisbet, “Conservatism,” in: R. Nisbet and . Bottomore, History o Socio-logical Analysis, New York, 1978; also G. K. Kaltenbrunner (ed.), Rekonstruktiondes Konservatismus, Bern, 1978; on the relationship between liberalism and conser-

vatism c. F. A. Hayek, Te Constitution o Liberty, Chicago, 1960 (Postscript).




rom its above characterization), so must conservatism be consid-

ered as the socialism o the bourgeois establishment. Liberalism, towhich both the egalitarian and the conservative versions o social-ism are ideological responses, reached the height o its inuencearound the mid-nineteenth century. Probably its very last gloriousachievements were the repeal o the Corn Laws in England in 1846,accomplished by R. Cobden, J. Bright and the anti-corn law league,and the 1848 revolutions o continental Europe. Ten, because o internal weaknesses and inconsistencies in the ideology o liberal-

ism,67 the diversions and the divisiveness which the various nationstates’ imperialist adventures had brought about, and last but notleast because o the appeal that the dierent versions o socialismwith their various promises o security and stability had and stillhave or the public’s widespread distaste or dynamic change andmobility,68 liberalism’s decline set in. Socialism increasingly sup-planted it as a dominating ideological orce, thereby reversingthe process o liberalization and once again imposing more andmore noncontractual elements on society.69 At dierent times andplaces, dierent types o socialism ound support in public opin-ion to varying degrees, so that today traces o all o them can beound to coexist in dierent degrees everywhere and to compoundtheir respective impoverishment eects on the process o produc-tion, the upkeep o wealth and the ormation o character. But it is

On the inconsistencies o liberalism c. Chapter 10, n. 21. Normally, peoples’ attitudes toward change are ambivalent: on the one hand, intheir role as consumers people see change as a positive phenomenon since it bringsabout a greater variety o choice. On the other hand, in their role as producers peopletend to embrace the ideal o stability, as this would save them rom the need to con-tinually adapt their productive eorts to changed circumstances. It is, then, largely intheir capacity as producers that people lend support to the various socialist stabiliza-tion schemes and promises, only to thereby harm themselves as consumers. WritesD. Mc. C. Wright in Democracy and Progress, New York, 1948, p.81: “From reedomand science came rapid growth and change. From rapid growth and change cameinsecurity. From insecurity came demands which ended growth and change. Endinggrowth and change ended science and reedom.” On liberalism, its decline, and the rise o socialism c. A. V. Dicey, Lectures on theRelation Between Law and Public Opinion in England during the Nineteenth Cen-tury, London, 1914; W. H. Greenlea, Te British Political radition, 2 vols., London,1983.




the inuence o conservative socialism, in particular, that must be

stressed, especially because it is very oen overlooked or underesti-mated. I today the societies o Western Europe can be described as

socialist, this is due much more to the inuence o the socialism o

conservatism than to that o egalitarian ideas. It is the peculiar way

in which conservatism exerts its inuence, though, that explains

why this is oen not recognized. Conservatism not only shapes the

social structure by enacting policy; especially in societies like the

European ones where the eudal past has never been completely

shaken o but where a great number o eudal remnants survived

even the peak o liberalism. An ideology such as conservatism also

exerts its inuence, very inconspicuously, by simply maintaining

the status quo and letting things continue to be done according to

age-old traditions. What then are the specically conservative ele-

ments in present-day societies, and how do they produce relative

impoverishment?. With this question, we turn to the systematic

analysis o conservatism and its economic and socio-economiceects. An abstract characterization o the property rules under-

lying conservatism and a description o these rules in terms o the

natural theory o property shall again be the starting point. Tere

are two such rules. First, conservative socialism, like social-dem-

ocratic socialism, does not outlaw private property. Quite to the

contrary: everything—all actors o production and all o the non-

productively used wealth—can in principle be privately owned,sold, bought, rented out, with the exception again only o such

areas as education, trac and communication, central banking,

and security production. But then secondly, no owner owns all o

his property and all o the income that can be derived rom its utili-

zation. Rather, part o this belongs to the society o present owners

and income recipients, and society has the right to allocate pres-

ent and uture produced income and wealth to its individual mem-bers in such a way that the old, relative distribution o income and

wealth is preserved. And it is also society’s right to determine how

large or small the income and wealth-share that is so administered




should be, and what exactly is needed to preserve a given income

and wealth-distribution.

70

From the perspective o the natural theory o property, theproperty arrangement o conservatism again implies an aggressionagainst the rights o natural owners. Natural owners o things cando whatever they wish with them, as long as they do not uninvit-edly change the physical integrity o someone else’s property. Tisimplies, in particular, their right to change their property or to put itto dierent uses in order to adapt to anticipated changes in demand

and so preserve or possibly enhance its value; and it also gives themthe right to reap privately the benets o increased property valuesthat stem rom unanticipated changes in demand—rom changes,that is, that were lucky or them, but which they did not oresee oreectuate. But at the same time, since according to the principles o the natural theory o property every natural owner is only protectedagainst physical invasion and the noncontractual acquisition and

transer o property titles, it also implies that everyone constantly and permanently runs the risk that through changes in demand oractions which other owners perorm with their property, property

0 I might again mention that the characterization o conservatism, too, has the sta-tus o an ideal-type (c. Chapter 3, n. 2; Chapter 4, n. 8). It is the attempt to recon-struct those ideas which people either consciously or unconsciously accept or rejectin attaching or detaching themselves to or rom certain social policies or move-ments. Te idea o a conservative policy as described here and in the ollowing canalso be said to be a air reconstruction o the underlying, uniying ideological orceo what is indeed labeled “conservative” in Europe. However, the term “conservative”is used dierently in the United States. Here, quite requently, everyone who is not ale-liberal-(social)-democrat is labeled a conservative. As compared with this termi-nology, our usage o the term conservative is much narrower, but also much more inline with ideological reality. Labeling everything that is not “liberal” (in the Ameri-can sense) “conservative” glosses over the undamental ideological dierences that—despite some partial agreement regarding their opposition to “liberalism”—exist inthe United States between libertarians, as advocates o a pure capitalist order basedon the natural theory o property, and conservatives proper, who, rom W. Buckley to I. Kristol, nominally hail the institution o private property, only to disregard pri-

vate owners’ rights whenever it is deemed necessary in order to protect establishedeconomic and political powers rom eroding in the process o peaceul competi-tion. And in the eld o oreign aairs they exhibit the same disrespect or privateproperty rights through their advocacy o a policy o aggressive interventionism. Onthe polar dierence between libertarianism and conservatism c. G. W. Carey (ed.),Freedom and Virtue. Te Conservative/Libertarian Debate, Lanham, 1984.




values will all below their given level. According to this theory,however, no one owns the value o his property and hence no one,at any time, has the right to preserve and restore his property val-ues. As compared with this, conservatism aims precisely at such apreservation or restoration o values and their relative distribution.But this is only possible, o course, i a redistribution in the assign-ment o property titles takes place. Since no one’s property valuesdepend exclusively on one’s own actions perormed with one’s ownproperty, but also, and inescapably so, on other peoples’ actions

perormed with scarce means under their own control (and beyondthat o another’s), in order to preserve given property values some-one—some single person or some group o persons—would haveto rightully own all scarce means (ar beyond those that are actu-ally controlled or used by this person or group o persons). Further-more, this group must literally own all persons’ bodies, since theuse that a person makes o his body can also inuence (increase ordecrease) existing property values. Tus, in order to realize the goal

o conservatism, a redistribution o property titles must occur away rom people as user-owners o scarce resources onto people who,whatever their merits as past producers, did not presently use orcontractually acquire those things whose utilization had led to thechange in the given distribution o values.

With this understood, the rst conclusion regarding the gen-eral economic eect o conservatism lies at hand: with the natural

owners o things ully or partially expropriated to the advantage o nonusers, nonproducers and noncontractors, conservatism elimi-nates or reduces the ormer’s incentive to do something about the

value o existing property and to adapt to changes in demand. Teincentives to be aware o and to anticipate changes in demand, toquickly adjust existing property and to use it in a manner consistentwith such changed circumstances, to increase productive eorts,and to save and invest are reduced, as the possible gains rom such

behavior can no longer be privately appropriated but will be social-ized. Mutatis mutandis, the incentive is increased to do nothing inorder to avoid the permanent risk o one’s property values allingbelow their present level, as the possible losses rom such behavior




no longer have to be privately appropriated, but will also be social-

ized. Tus, since all these activities—the avoidance o risk, aware-ness, adaptability, work, and saving—are costly and require theuse o time and possibly other scarce resources which at the sametime could be used in alternative ways (or leisure and consump-tion, or instance), there will be ewer o the ormer activities andmore o the latter, and as a consequence the general standard o living will all. Hence, one would have to conclude that the conser-

vative goal o preserving existing values and existing distributions

o values among dierent individuals can only be accomplished atthe expense o a general, relative drop in the overall value o newly produced and old, maintained goods, i.e., reduced social wealth.

It has probably become apparent by now that rom the pointo view o economic analysis, there is a striking similarity betweenthe socialism o conservatism and social-democratic socialism. Bothorms o socialism involve a redistribution o property titles away

rom producers/contractors onto nonproducers/noncontractors, andboth thereby separate the processes o producing and contractingrom that o the actual acquisition o income and wealth. In doing this,both make the acquisition o income and wealth a political aair—anaair, that is, in the course o which one (group o) person(s) imposesits will regarding the use o scarce means onto the will o other, recal-citrant people; both versions o socialism, though in principle claim-ing ull ownership o all o the income and wealth produced on behal

o nonproducers, allow their programs to be implemented in a grad-ual ashion and carried through to varying degrees; and both, as aconsequence o all this, must, to the extent that the respective policy isindeed enacted, lead to relative impoverishment.

he dierence between conservatism and what has beentermed social-democratic socialism lies exclusively in the actthat they appeal to dierent people or to dierent sentiments in

the same people in that they preer a dierent way in which theincome and wealth extracted noncontractually rom produc-ers is then redistributed to nonproducers. Redistributive social-ism assigns income and wealth to nonproducers regardless o their




past achievements as owners o wealth and income recipients, oreven tries to eradicate existing dierences. Conservatism, on theother hand, allocates income to nonproducers in accordance withtheir past, unequal income and wealth-position and aims at sta-bilizing the existing income distribution and existing income di-erentials.71 Te dierence is thus merely one o social-psychology:in avoring dierent patterns o distribution, they grant privilegesto dierent groups o nonproducers. Redistributive socialism par-ticularly avors the have-nots among nonproducers, and especially

disadvantages the haves among the producers; and, accordingly, ittends to nd its supporters mostly among the ormer and its ene-mies among the latter. Conservatism grants special advantages tothe haves among the group o nonproducers and particularly dam-ages the interests o the have-nots among productive people; andso it tends to nd its supporters mainly in the ranks o the ormerand spreads despair, hopelessness, and resentment among the lat-ter group o people.

But although it is true that both systems o socialism are very much alike rom an economic point o view, the dierence betweenthem with respect to their socio-psychological basis still has animpact on their respective economics. o be sure, this impact doesnot aect the general impoverishment eects resulting rom theexpropriation o producers (as explained above), which they bothhave in common. Instead, it inluences the choices that social-

democratic socialism on the one hand and conservatism on theother make among the speciic instruments or techniques avail-able or reaching their respective distributional goals. Social-demo-cratic socialism’s avorite technique is that o taxation, as describedand analyzed in the preceding chapter. Conservatism can use this

D. Mc. C. Wright (Capitalism, New York, 1951, p.198) correctly describes thatboth—le-liberalism, or rather social democracy, and conservatism—imply a par-

tial expropriation o producers/contractors. He then misinterprets the dierence,though, when he sees it as a disagreement over the question o how ar this expro-priation should go. In act, there is disagreement about this among social-democratsand conservatives. Both groups have their “radicals” and “moderates.” What makesthem social-democrats or conservatives is a dierent idea about which groups are tobe avored at the expense o others.




instrument, too, o course; and indeed it must make use o it to

some extent, i only to nance the enorcement o its policies. Buttaxation is not its preerred technique, and the explanation or thisis to be ound in the social-psychology o conservatism. Dedicatedto the preservation o a status quo o unequal positions o income,wealth, and status, taxation is simply too progressive an instrumentor reaching conservative goals. o resort to taxation means that onelets changes in the distribution o wealth and income happen rst,and only then, aer they have come into existence, does one rec-

tiy things again and restore the old order. However, to proceed inthis way not only causes bad eelings, particularly among those whothrough their own eorts have actually improved their relative posi-tion rst and are then cut back again. But also, by letting progressoccur and then trying to undo it, conservatism weakens its own jus-tication, i.e., its reasoning that a given distribution o income andwealth is legitimate because it is the one which has always been ineect. Hence, conservatism preers that changes do not occur in the

rst place, and it preers to use policy measures that promise to do just this, or rather, promise to help make such changes less apparent.

Tere are three such general types o policy measures: price-controls, regulations, and behavior controls, all o which, to besure, are socialistic measures, as is taxation, but all o which, inter-estingly enough, have generally been as neglected in attempts toassess the overall degree o socialism in dierent societies, as the

importance o taxation in this regard has been overrated.72 I willdiscuss these specic conservative policy schemes in turn.

Note the interesting relationship between our sociological typology o social-ist policies and the logical typology o market interventions as developed by M. N.Rothbard. Rothbard (Power and Market, Kansas City, 1977, pp. 10) distinguishesbetween “autistic intervention” where ‘the intervener may command an individualsubject to do or not to do certain things when these actions directly involve the indi-

vidual’s person or property a/one … (i.e.) when exchange is not involved”; “binary

intervention” where ‘the intervener may enorce a coerced exchange between theindividual subject and himsel ’; and ‘triangular intervention” where ‘the intervenermay either compel or prohibit an exchange between a pair o subjects” (p. 10). Interms o this distinction, the characteristic mark o conservatism then is its preer-ence or “triangular intervention”—and as will be seen later in this Chapter, “autisticintervention” insoar as autistic actions also have natural repercussions on the pat-




Any change in (relative) prices evidently causes changes in the

relative position o the people supplying the respective goods orservices. Hence, in order to x their position it would seem that allthat need be done is x prices—this is the conservative rationaleor introducing price controls. o check the validity o this conclu-sion the economic eects o price-xings need to be examined.73 o begin with, it is assumed that a selective price control or oneproduct or one group o products has been enacted and that thecurrent market price has been decreed as the price above or below

which the product may not to be sold. Now, as long as the xedprice is identical to the market price, the price control will simply be ineective. Te peculiar eects o price-xing can only comeabout once this identity no longer exists. And as any price-xingdoes not eliminate the causes that would have brought about pricechanges, but simply decrees that no attention be paid to them, thisoccurs as soon as there are any changes in demand, or whatever

reason, or the product in question. I the demand increases (andprices, not being controlled, would go up as well) then the xedprice turns into an eective maximum price, i.e., a price abovewhich it is illegal to sell. I the demand decreases (and prices, with-out controls, would all), then the xed price becomes an eectiveminimum price, i.e., a price below which it becomes illegal to sell.74

tern o inter-individual exchanges—or such interventions are uniquely suited, in

accordance with the social psychology o conservatism, to helping “reeze” a givenpattern o social exchanges. As compared with this, egalitarian socialism, in line withits described “progressive” psychology, exhibits a preerence or ”binary interven-tions” (taxation). Note, however, that the actual policies o socialist and social-demo-cratic parties do not always coincide precisely with our ideal-typical description o socialism social-democratic style. While they generally do, the socialist parties—most notably under the inuence o labor unions—have also adopted typically con-servative policies to a certain extent and are by no means totally opposed to any ormo triangular intervention. C. on the ollowing M. N. Rothbard, Power and Market, Kansas City, 1977,pp.24. While in order to stabilize social positions, price-reezing is needed and price-reezing can result in maximum or minimum prices, conservatives distinctly avorminimum price controls to the extent that it is commonly considered even moreurgent that one’s absolute—rather than one’s relative—wealth position be preventedrom eroding.




Te consequence o imposing o a maximum price is an excess

demand or the goods supplied. Not everyone willing to buy at thexed price can do so. And this shortage will last as long as pricesare not allowed to rise with the increased demand, and hence, nopossibility exists or the producers (who assumedly had already been producing up to the point at which marginal costs, i.e., thecost o producing the last unit o the product concerned, equaledmarginal revenue) to direct additional resources into the spe-cic line o production, thus increasing output without incurring

losses. Queues, rationing, avoritism, under-the-table payments,and black markets will become permanent eatures o lie. And theshortages and other side eects which they bring along will evenincrease, as excess demand or the price-controlled goods will spillover to all other noncontrolled goods (in particular, o course, tosubstitutes), increase their (relative) prices, and thereby create anadditional incentive to shi resources rom controlled into non-controlled lines o production.

Imposing a minimum price, i.e., a price above the potentialmarket price below which sales become illegal, mutatis mutandisproduces an excess o supply over demand. Tere will be a surpluso goods produced that simply cannot nd buyers. And again: thissurplus will continue as long as prices are not allowed to drop alongwith the reduced demand or the product in question. Milk andwine lakes, butter and grain mountains, to cite just a ew examples,

will develop and grow; and as the storage bins ll up it will becomenecessary to repeatedly destroy the surplus production (or, as analternative, to pay the producers not to produce the surplus any-more). Surplus production will even become aggravated as the arti-cially high price attracts an even higher investment o resources inthis particular eld, which then will be lacking in other productionlines where there is actually a greater need or them (in terms o

consumer demand), and where, as a consequence, product priceswill rise.

Maximum or minimum prices—in either case price controlswill result in relative impoverishment. In any event they will lead




to a situation in which there are too many (in terms o consumer

demand) resources bound up in production lines o reducedimportance and not enough are available in lines o increased rel-evance. Production actors can no longer be allocated so that themost urgent wants are satised rst, the next urgent ones second,etc., or, more precisely, so that the production o any one product isnot extended above (or reduced below) the level at which the util-ity o the marginal product alls below (or remains above) the mar-ginal utility o any other product. Rather, the imposition o price

controls means that less urgent wants are satised at the expenseo reduced satisaction o more urgent wants. And this is to say nothing else than that the standard o living will be reduced. Tatpeople waste their time scrambling or goods because they are inarticially low supply or that goods are thrown away because they are held in articially high supply are only the two most conspicu-ous symptoms o this reduced social wealth.

But this is not all. he preceding analysis also reveals thatconservatism cannot even reach its goal o distributional stability by means o partial price control. With only partially controlledprices, disruptions in the existing income and wealth position stillmust occur, as producers in uncontrolled lines o production, orin lines o production with minimum product prices are avoredat the expense o those in controlled lines, or lines with maximumproduct prices. Hence there will continue to be an incentive or

individual producers to shi rom one line o production into a di-erent, more protable one, with the consequence that dierencesin the entrepreneurial alertness and ability to oresee and imple-ment such protable shis will arise and result in disruptions o the established order. Conservatism then, i it is indeed uncompro-mising in its commitment to the preservation o the status quo, isdriven to constantly enlargening the circle o goods subject to pricecontrols and actually cannot stop short o complete price controlsor price-reezing.75 Only i the prices o all goods and services, o

o be sure, conservatives are by no means always actually willing to go quite asar. But they recurringly do so—the last time in the United States being during the




capital and o consumer goods alike, are rozen at some given level,

and the production process is thus completely separated romdemand—instead o disconnecting production and demand atonly a ew points or sectors as under partial price control—doesit seem possible to preserve an existing distributional order in ull.Not surprisingly, though, the price that has to be paid or such ull-blown conservatism is even higher than that o only partial pricecontrols.76 With all-around price control, private ownership o means o production is in act abolished. Tere can still be private

owners in name, but the right to determine the use o their prop-erty and to engage in any contractual exchange that is deemed ben-ecial is lost completely. Te immediate consequence o this silentexpropriation o producers then will be a reduction in saving andinvesting and, mutatis mutandis, an increase in consumption. Asone can no longer charge or the ruits o one’s labor what the mar-ket will bear, there is simply less o a reason to work. And in addi-tion, as prices are xed—independent o the value that consumers

attach to the products in question—there is also less o a reason tobe concerned about the quality o the particular type o work orproduct that one still happens to perorm or produce, and hencethe quality o each and every product will all.

But even more important than this is the impoverishment thatresults rom the allocational chaos created by universal price con-trols. While all product prices, including those o all cost actors

and, in particular, o labor are rozen, the demand or the variousproducts still changes constantly. Without price controls, priceswould ollow the direction o this change and thereby create anincentive to constantly move out o less valued lines o productioninto more valued ones. Under universal price controls this mecha-nism is completely destroyed. Should the demand or a product

Nixon presidency. Moreover, conservatives have always exhibited a more or lessopen admiration or the great uniying social spirit brought about by a war-economy which is typically characterized precisely by ull-scale price controls. C. G. Reisman, Government Against the Economy, New York, 1979. For anapologetic treatment o price-controls c. J. K. Galbraith, A Teory o Price Control,Cambridge, 1952.




increase, a shortage will develop as prices are not allowed to rise,and hence, because the protability o producing the particularproduct has not been altered, no additional production actors willbe attracted. As a consequence, excess demand, le unsatised, willspill over to other products, increasing the demand or them abovethe level that otherwise would have been established. But hereagain, prices are not allowed to rise with the increased demand,and again a shortage will develop. And so the process o shiingdemand rom most urgently wanted products to products o sec-

ondary importance, and rom there to products o still lesser rel-evance, since again not everyone’s attempt to buy at the controlledprice can be satised, must go on and on. Finally, since there are noalternatives available and the paper money that people still have tospend has a lower intrinsic value than even the least valuable prod-uct available or sale, excess demand will spill over to products orwhich demand had originally declined. Hence, even in those lineso production where a surplus had emerged as the consequence o

declining demand but where prices had not been allowed to allaccordingly, sales again will pick up as a consequence o unsatiseddemand elsewhere in the economy; in spite o the articially highxed price surpluses will become saleable; and, with protability thus restored, an outow o capital will be prevented even here.

he imposition o all-around price controls means thatthe system o production has become completely independent

o the preerences o consumers or whose satisaction produc-tion is actually undertaken. Te producers can produce anythingand the consumers have no choice but to buy it, whatever it is.Accordingly, any change in the production structure that is madeor ordered to be made without the help oered by reely oatingprices is nothing but a groping in the dark, replacing one arbitrary array o goods oered by another equally arbitrary one. Tere issimply no connection anymore between the production structure

and the structure o demand. On the level o consumer experiencethis means, as has been described by G. Reisman, “… loodingpeople with shirts, while making them go bareoot, or inundatingthem with shoes while making them go shirtless; o giving them




enormous quantities o writing paper, but no pens or ink, or vice versa; … indeed o giving them any absurd combination o goods.”But, o course, “… merely giving consumers unbalanced combina-tions o goods is itsel equivalent to a major decline in production,or it represents just as much o a loss in human well-being.”77 Testandard o living does not simply depend on some total physicaloutput o production; it depends much more on the proper distri-bution or proportioning o the various specic production actorsin producing a well-balanced composition o a variety o consumer

goods. Universal price controls, as the ‘ultima ratio’ o conserva-tism, prevent such a well-proportioned composition rom beingbrought about. Order and stability are only seemingly created; intruth they are a means o creating allocational chaos and arbitrari-ness, and thereby drastically reduce the general standard o living.

In addition, and this leads to the discussion o the second spe-cically conservative policy instrument, i.e., regulations, even i

prices are controlled all-around this can only saeguard an exist-ing order o income and wealth distribution i it is unrealistically assumed that products as well as their producers are “stationary.”Changes in the existing order cannot be ruled out, though, i thereare new and dierent products produced, new technologies orproducing products are developed, or additional producers springup. All o this would lead to disruptions in the existing order, asthe old products, technologies, and producers, subject as they are

to price controls, would then have to compete with new and di-erent products and services (which, since they are new, cannot have been price-controlled), and they would probably lose someo their established income-share to the newcomers in the courseo this competition. o compensate or such disruptions, conser-

vatism could once again make use o the instrument o taxation,and indeed to some extent it does. But to let innovations occur rstwithout hindrance and to then tax the gains away rom the innova-

tors and restore the old order is, as was explained, too progressivean instrument or a policy o conservatism. Conservatism preers

G. Reisman, Government Against the Economy, New York, 1979, p.141.




regulations as a means o preventing or slowing down innovationsand the social changes that they bring about.

Te most drastic way o regulating the system o productionwould be simply to outlaw any innovation. Such a policy, it shouldbe noted, has its adherents among those who complain about oth-ers’ consumerism, i.e., about the act that today there are already “all too many” goods and services on the market, and who wish toreeze or even reduce this present diversity; and also, or slightly di-erent reasons, among those who want to reeze present production

technology out o the ear that technological innovations, as labor-saving devices, would “destroy” (existing) jobs. Nonetheless, anoutright prohibition o all innovative change has hardly ever beenseriously attempted—perhaps with the recent exception o the PolPot regime—because o a lack o support in public opinion whichcould not be convinced that such a policy would not be extremely costly in terms o welare losses. Quite popular, though, has been

an only slightly more moderate approach: While no change isruled out in principle, any innovation must be ocially approved(approved, that is, by people other than the innovator himsel)beore it can be implemented. Tis way, conservatism argues, it isassured that innovations are indeed socially acceptable, that prog-ress is gradual, that it can be introduced simultaneously by all pro-ducers, and that everyone can share in its advantages. Compulsory,i.e., government-enorced, cartels are the most popular means or

achieving this eect. By requiring all producers, or all producerso one industry, to become members o one supervisory organiza-tion—the cartel—it becomes possible to avoid the all-too-visibleexcess supply brought about by minimum price controls—throughthe imposition o production quotas. Moreover, the disruptionscaused by any innovative measure can then be centrally monitoredand moderated. But while this approach has been gaining groundconstantly in Europe and to a somewhat lesser degree in the United

States, and while certain sectors o the economy are indeed already subject to very similar controls, the most popular and most re-quently used conservative-socialist regulatory instrument is stillthat o establishing predened standards or predened categories




o products or producers to which all innovations must conorm.

hese regulations lay down the kind o qualiications a per sonmust ulill (other than the “normal” ones o being the rightulowner o things and o not damaging the physical integrity o otherpeoples’ property through one’s own actions) in order to have theright to establish himsel as a producer o some sort; or they stipu-late the kinds o tests (as regards, or instance, materials, appear-ance, or measurements) a product o a given type must undergobeore being newly allowed on the market; or they prescribe de-

nite checks that any technological improvement must pass in orderto become a newly approbated method o production. With suchregulatory means innovations can neither be completely ruled out,nor can it be altogether avoided that some changes might even bequite surprising. But as the predened standards to which changeshave to conorm must o necessity be “conservative,” i.e., ormu-lated in terms o existing products, producers, or technologies, they

serve the purpose o conservatism in that they will indeed at leastslow down the speed o innovative changes and the range o pos-sible surprises.

In any case, all these types o regulations, the rst mentionedones more and the latter less, will lead to a reduction in the generalstandard o living.78 An innovation, to be sure, can only be success-ul, and thus allow the innovator to disrupt the existing order o

income and wealth distribution, i it is indeed more highly valuedby the consumers than the competing old products. Te imposi-tion o regulations, however, implies a redistribution o property titles away rom the innovators and onto the established produc-ers, products, and technologies. Hence, in ully or partially social-izing possible income and wealth gains stemming rom innovativechanges in the process o production and mutatis mutandis by ully or partially socializing the possible losses rom not innovating, the

On the politics and economics o regulation c. G. Stigler, Te Citizen and theState. Essays on Regulation, Chicago, 1975; M. N. Rothbard, Power and Market,Kansas City, 1977, Chapter 3.3; on licenses c. also M. Friedman, Capitalism andFreedom, Chicago, 1962, Chapter 9.




process o innovation will be slowed down, there will be ewer

innovators and innovations, and instead, a strengthened tendency will emerge to settle or the way things are. his means noth-ing else than that the process o increasing consumer satisactionby producing more highly evaluated goods and services in moreecient, cost-saving ways is brought to a standstill, or is at leasthampered. Tus, even i in a somewhat dierent way than pricecontrols, regulations will make the production structure all outo line with demand, too. And while this might help saeguard an

existing distribution o wealth, it must once again be paid or by a general decline in the overall wealth that is incorporated in this

very same production structure.

Finally, the third specically conservative policy instrument isbehavioral controls. Price controls and regulations reeze the supply side o an economic system and thereby separate it rom demand.But this does not preclude changes in demand rom coming into

existence; it only makes the supply side irresponsive to it. And so itcan still happen that discrepancies not only emerge, but that they also become appallingly apparent as such. Behavioral controls arepolicy measures designed to control the demand side. Tey aimat the prevention or retardation o changes in demand in order tomake the irresponsiveness o the supply side less visible, thereby completing the task o conservatism: the preservation o an exist-ing order rom disruptive changes o any kind.

Price controls and regulations on one side, and behavioralcontrols on the other are thus the two complementary parts o aconservative policy. And o these two complementary sides o con-servatism, it might well be argued that it is the side o behavioralcontrols that is the most distinctive eature o a conservative policy.Tough the dierent orms o socialism avor dierent categories o nonproductive and noninnovative people at the expense o dier-

ent categories o potential producers and innovators, just as muchas any other variant o socialism conservatism tends to produceless productive, less innovative people, orcing them to increaseconsumption or channel their productive and innovative energies




into black markets. But o all the orms o socialism, it is only con-servatism which as part o its program intereres directly with con-sumption and noncommercial exchanges. (All other orms, to besure, have their eect on consumption, too, insoar as they lead toa reduction in the standard o living; but unlike conservatism, they leave the consumer pretty much alone with whatever is le or himto consume.) Conservatism not only cripples the development o one’s productive talents; under the name “paternalism” it also wantsto reeze the behavior o people in their roles as isolated consum-

ers or as exchange partners in noncommercial orms o exchanges,thereby stiing or suppressing one’s talent to develop a consumerliestyle that best satises one’s recreational needs, too.

Any change in the pattern o consumer behavior has its eco-nomic side eects. (I I let my hair grow longer this aects the bar-bers and the scissors industry; i more people divorce this aectslawyers and the housing market; i I start smoking marijuana this

has consequences not only or the use o agricultural land but alsoor the ice cream industry, etc.; and above all, all such behavior dis-equilibrates the existing value system o whoever happens to eelaected by it.) Any change could thus appear to be a disruptive ele-ment vis à visa conservative production structure, conservatism, inprinciple, would have to consider all actions—the whole liestyleo people in their roles as individual consumers or noncommercialexchangers as proper objects o behavioral controls. Full-blown

conservatism would amount to the establishment o a social sys-tem in which everything except the traditional way o behaving(which is explicitly allowed) is outlawed. In practice, conservatismcould never go quite this ar, as there are costs connected with con-trols and as it would normally have to reckon with rising resistancein the public opinion. “Normal” conservatism, then, is character-ized instead by smaller or greater numbers o speciic laws andprohibitions which outlaw and punish various orms o nonaggres-

sive behavior o isolated consumers, or o people engaging in non-commercial exchanges—o actions, that is to say, which i indeedperormed, would neither change the physical integrity o anyoneelse’s property, nor violate anyone’s right to reuse any exchange




that does not seem advantageous, but which would rather (only)

disrupt the established “paternal” order o social values.Once again the eect o such a policy o behavioral controls

is, in any case, relative impoverishment. Trough the imposition o such controls not only is one group o people hurt by the act thatthey are no longer allowed to perorm certain nonaggressive ormso behavior but another group benets rom these controls in thatthey no longer have to tolerate such disliked orms o behavior.More specically, the losers in this redistribution o property rightsare the user-producers o the things whose consumption is nowhampered, and those who gain are nonusers/nonproducers o theconsumer goods in question. Tus, a new and dierent incentivestructure regarding production or nonproduction is establishedand applied to a given population. Te production o consumergoods has been made more costly since their value has allen as aconsequence o the imposition o controls regarding their use, and,

mutatis mutandis, the acquisition o consumer satisaction throughnonproductive, noncontractual means has been made relatively less costly. As a consequence, there will be less production, lesssaving and investing, and a greater tendency instead to gain sat-isaction at the expense o others through political, i.e., aggressive,methods. And, in particular, insoar as the restrictions imposed by behavioral controls concern the use that a person can make o hisown body, the consequence will be a lowered value attached to it

and, accordingly, a reduced investment in human capital.

With this we have reached the end o the theoretical analysiso conservatism as a special orm o socialism. Once again, in orderto round out the discussion a ew remarks which might help illus-trate the validity o the above conclusions shall be made. As in thediscussion o social-democratic socialism, these illustrative obser-

vations should be read with some precautions: rst, the validity o

the conclusions reached in this chapter has been, can, and must beestablished independent o experience. And second, as ar as expe-rience and empirical evidence are concerned, there are unortu-nately no examples o societies that could be studied or the eects




o conservatism as compared to the other variants o socialism

and capitalism. Tere is no quasi-experimental case study whichalone could provide one with what is normally considered “strik-ing” evidence. Reality is rather such that all sorts o policy mea-sures—conservative, social-democratic, Marxist-socialist, and alsocapitalist-liberal—are so mixed and combined, that their respec-tive eects cannot usually be neatly matched with denite causes,but must be disentangled and matched once more by purely theo-retical means.

With this in mind, though, something might well be saidabout the actual perormance o conservatism in history. Oncemore, the dierence in the living standards between the UnitedStates and the countries o Western Europe (taken together) per-mits an observation that its the theoretical picture. Surely, asmentioned in the previous chapter, Europe has more redistribu-tive socialism—as indicated roughly by the overall degree o tax-

ation—than the United States, and is poorer because o this. Butmore striking still is the dierence that exists between the twowith respect to the degree o conservatism.79 Europe has a eudalpast that is noticeable to this very day, in particular in the ormo numerous regulations that restrict trade and hamper entry and prohibitions o nonaggressive actions, whereas the UnitedStates is remarkably ree o this past. Connected with this is theact that or long periods during the nineteenth and twentieth

centuries, Europe had been shaped by policies o more or lessexplicitly conservative parties rather than by any other politicalideology, whereas a genuinely conservative party never existedin the United States. Indeed, even the socialist parties o West-ern Europe were inected to a notable extent by conservatism, inparticular under the infuence o the labor unions, and imposednumerous conservative-socialist elements (regulations and pricecontrols, that is) on the European societies during their peri-ods o infuence (while they admittedly helped abolish some o

C. also B. Badie and P. Birnbaum, Te Sociology o the State, Chicago, 1983, esp.pp.107.




the conservative behavioral controls). In any case then, given

that Europe is more socialist than the United States and its liv-ing standards are relatively lower, this is due less to the greaterinfuence o social-democratic socialism in Europe and more tothe infuence o the socialism o conservatism—as indicated notso much by its higher overall degrees o taxation, but rather by the signicantly higher numbers o price controls, regulations,and behavioral controls in Europe. I should hasten to add thatthe United States is not richer than it actually is and no longer

exhibits its nineteenth century economic vigor not only becausethey adopted more and more o redistributive socialism’s policiesover time, but more so because they, too, increasingly ell prey tothe conservative ideology o wanting to protect a status quo o income and wealth distribution rom competition, and in par-ticular the position o the haves among existing producers, by means o regulations and price controls.80

On even a more global level, another observation ts the the-oretically derived picture o conservatism causing impoverish-ment. For outside the so-called Western world, the only countriesthat match the miserable economic perormance o the outrightly Marxist-socialist regimes are precisely those societies in LatinAmerica and Asia that have never seriously broken with theireudal past. In these societies, vast parts o the economy are even

now almost completely exempt rom the sphere and the pressureo reedom and competition and are instead locked in their tradi-tional position by regulatory means, enorced, as it were, by out-right aggression.

On the level o more speciic observations the data alsoclearly indicate what the theory would lead one to expect. Return-ing to Western Europe, there can be little doubt that o the majorEuropean countries, Italy and France are the most conservative,especially i compared with the northern nations which, as ar as

0 C. on this R. Radosh and M. N. Rothbard (eds.), A New History o Leviathan,New York, 1972.




socialism is concerned, have been leaning more toward its redis-

tributive version.

81

While the level o taxation in Italy and France(state expenditure as part o GNP) is not higher than elsewherein Europe, these two countries clearly exhibit more conservative-socialist elements than can be ound anywhere else. Both Italy andFrance are studded with literally thousands o price controls andregulations, making it highly doubtul that there is any sector intheir economies that can be called “ree” with some justication. Asa consequence (and as could have been predicted), the standard o

living in both countries is signicantly lower than that o northernEurope, as anyone who is not traveling exclusively in resort townscannot ail to notice. In both countries, to be sure, one objective o conservatism seems to have been reached: the dierences betweenthe haves and the have-nots have been well-preserved—one willhardly ind as extreme income and wealth dierentials in WestGermany or the United States as in Italy or France—but the priceis a relative drop in social wealth. As a matter o act, this drop is sosignicant that the standard o living or the lower and lower-mid-dle class in both countries is at best only a bit higher than that inthe more liberalized countries o the East bloc. And the southernprovinces o Italy, in particular, where even more regulations havebeen piled on top o those valid everywhere in the country, have

just barely le the camp o the third world nations.

Finally, as a last example that illustrates the impoverishmentcaused by conservative policies, the experience with national-socialism in Germany and to a lesser degree with Italian as-cism should be mentioned. It is oen not understood that bothwere conservative-socialist movements.82 It is as such, i.e., asmovements directed against the change and the social disrup-tions brought about by the dynamic orces o a ree economy,that they—other than Marxist-socialist movements—could nd

C. Badie and Birnbaum, Te Sociology o the State, Chicago, 1983. C. L. v. Mises, Omnipotent Government, New Haven, 1944; F. A. Hayek, TeRoad to Serdom, Chicago, 1956; W. Hock, Deutscher Antikapitalismus, Frankurt/M, 1960.




support among the class o established proprietors, shop owners,armers and entrepreneurs. But to derive rom this the conclusionthat it must have been a pro-capitalist movement or even the high-est stage in the development o capitalism beore its nal demise,as Marxists normally do, is entirely wrong. Indeed, ascism’s andNazism’s most ervently abhorred enemy was not socialism assuch, but liberalism. O course, both also despised the socialismo the Marxists and Bolshevists, because at least ideologically they were internationalists and pacists (relying on the orces o his-

tory that would lead to a destruction o capitalism rom within),while ascism and Nazism were nationalist movements devotedto war and conquest; and, probably even more important regard-ing its public support, because Marxism implied that the haveswould be expropriated by the have-nots and the social order thuswould be turned upside-down, while ascism and Nazism prom-ised to preserve the given order.83 But, and this is decisive or theirclassication as socialist (rather than capitalist) movements, to

pursue this goal implies—as has been explained in detail above— just as much a denial o the rights o the individual user-owner o things to do with them whatever seems best (provided one doesnot physically damage another’s property or engage in noncon-tractual exchanges), and just as much an expropriation o natu-ral owners by “society’ (that is, by people who neither producednor contractually acquired the things in question) as does thepolicy o Marxism. And indeed, in order to reach this goal bothascism and Nazism did exactly what their classication as con-servative-socialist would have led one to expect: they establishedhighly controlled and regulated economies in which private own-ership was still existent in name, but had in act become meaning-less, since the right to determine the use o the things owned hadbeen almost completely lost to political institutions. Te Nazis, inparticular, imposed a system o almost complete price controls

(including wage controls), devised the institution o our-year

C. one o the oremost representatives o the German “Historical School,” the“Kathedersozialisr’ and naziapologist: W. Sombart, Deutscher Sozialimus, Berlin,1934.




plans (almost like in Russia, where the plans spanned the periodo ve years) and established economic planning and supervis-ing boards which had to approve all signicant changes in theproduction structure. An “owner” could no longer decide whatto produce or how to produce it, rom whom to buy or to whomto sell, what prices to pay or to charge, or how to implement any changes. All this, to be sure, created a eeling o security. Everyonewas assigned a xed position, and wage-earners as well as ownerso capital received a guaranteed, and in nominal terms, stable or

even growing income. In addition, giant orced labor programs,the reintroduction o conscription, and nally the implementationo a war economy strengthened the illusion o economic expan-sion and prosperity.84 But as would have to be expected rom aneconomic system that destroys a producer’s incentive to adjust todemand and avoid not adjusting to it, and that thereby separatesdemand rom production, this eeling o prosperity proved to benothing but an illusion. In reality, in terms o the goods that peo-

ple could buy or their money the standard o living ell, not only in relative but even in absolute terms.85 And in any case, even dis-regarding here all o the destruction that was caused by the war,Germany and to a lesser extent Italy were severely impoverishedaer the deeat o the Nazis and ascists.

C. W. Fischer, Die Wirtschaspolitik Deutschlands 1918-45, Hannover, 1961; W.reue, Wirtschasgeschichte der Neuzeit, vol. 2, Stuttgart, 1973; R. A. Brady, “Mod-ernized Cameralism in the Tird Reich: Te Case o the National Industry Group,”in: M. I. Goldman (ed.), Comparative Economic Systems, New York, 1971. Te average gross income o employed persons in Germany in 1938 (last gure

available) was (in absolute terms, i.e., not taking ination into account!) still lowerthan that o 1927. Hitler then started the war and resources were increasingly shiedrom civilian to non-civilian uses, so that it can saely be assumed that the standardo living decreased even urther and more drastically rom 1939 on. C. StatistischesJahrbuch uer die BRD, 1960, p.542; c. also V. rivanovitch, Economic Developmento Germany Under National Socialism, New York, 1937, p.44.




Chapter 6

Te Socialism o Social Engineering andTe Foundations o Economic Analysis

In light o the theoretical arguments presented in the preced-ing chapters it appears that there is no economic justicationor socialism. Socialism promised to bring more economicprosperity to the people than capitalism, and much o its

popularity is based on this promise. Te arguments brought or-ward, though, have proved that the opposite is true. It has beenshown that Russian-type socialism, characterized by nationalizedor socialized means o production, necessarily involves economic

waste since no prices or actors o production would exist (becausemeans o production would not be allowed to be bought or sold),and hence no cost-accounting (which is the means or directingscarce resources with alternative uses into the most value-produc-tive lines o production) could be accomplished. And as regardssocial-democratic and conservative socialism, it has been demon-strated that in any event, both imply a rise in the costs o produc-tion and, mutatis mutandis, a decline in the costs o its alternative,i.e., non-production or black-market production, and so wouldlead to a relative reduction in the production o wealth, since both

117




versions o socialism establish an incentive structure that (com-

pared to a capitalist system) relatively avors nonproducers andnoncontractors over producers and contractors o goods, productsand services.

Experience, too, supports this. By and large, living standardsin the East European countries are signicantly lower than in West-ern Europe, where the degree to which the socialization o means o production that has taken place, though certainly remarkable, is rel-atively much lower. Also, wherever one extends the degree o redis-

tributive measures and the proportion o produced wealth that isredistributed is increased, as, or instance, in West Germany duringthe 1970s under social-democratic liberal government coalitions,there is a retardation in the social production o wealth or even anabsolute reduction in the general standard o living. And wherevera society wants to preserve the status quo, that is, a given incomeand wealth distribution, by means o price controls, regulations,

and behavioral controls—as, or instance, in Hitler’s Germany orpresent-day Italy and France—the living standards will constantly all urther behind those o more liberal (capitalist) societies.

Nonetheless, socialism is very much alive and well, even in theWest where social-democratic socialism and conservatism haveremained powerul ideologies. How could this come about? Oneimportant actor is that its adherents abandoned the original idea

o socialism’s economic superiority and instead, resorted to a com-pletely dierent argument: that socialism might not be economically superior but is morally preerable. Tis claim will be considered inChapter 7. But that is certainly not the end o the story. Socialismhas even regained strength in the eld o economics. Tis becamepossible because socialism combined its orces with the ideology o empiricism, which traditionally has been strong in the Anglo-Saxon world and which, in particular through the inuence o the

so-called Vienna-circle o positivist philosophers, became the dom-inant philosophy-epistemology-methodology o the twentieth cen-tury, not only in the eld o the natural sciences but also in the socialsciences and economics. Tis applies not only to the philosophers




and methodologists o these sciences (who, incidentally, have since

reed themselves rom the spell o empiricism and positivism) butprobably even more so to the practitioners (who are still very muchunder its inuence). Combining its orce with empiricism or posi-tivism, which includes or our purposes the so-called critical ratio-nalism o K. R. Popper and his ollowers, socialism developed intowhat will henceorth be called the ”socialism o social engineering.”86 It is a orm o socialism very dierent in its style o reasoning romtraditional Marxism, which was much more rationalistic and deduc-

tive—one that Marx had adopted rom the classical economist D.Ricardo, the most important source or Marx’s own economic writ-ings. But it seems to be precisely because o this dierence in stylethat the socialism o social-engineering has been able to win moreand more support rom the traditional camps o social-democraticand conservative socialists. In West Germany, or instance, the ide-ology o “piecemeal social engineering,” as K. R. Popper has calledhis social philosophy,87 has now become something like the com-

mon ground o “moderates” in all political parties, and only doctri-naires, so it seems, o either side do not subscribe to it. Te ormerSPD-chancellor Helmut Schmidt even publicly endorsed Popperi-anism as his own philosophy.88 However, it is in the United Statesthat this philosophy is probably more deeply rooted, as it is almostcustom-tailored to the American way o thinking in terms o practi-cal problems and pragmatic methods and solutions.

O. on the classical positivist position A.J. Ayer, Language, ruth and Logic, NewYork, 1950; on critical rationalism K. R. Popper, Logic o Scientic Discovery, Lon-don, 1959; Conjectures and Reutations, London, 1969; and Objective Knowledge,Oxord, 1973; on representative statements o empiricism-positivism as the appro-priate methodology o economics c. e.g. M. Blaug, Te Methodology o Econom-ics, Cambridge, 1980; . W. Hutchinson, Te Signicance and Basic Postulates o Economic Teory, London, 1938; and Positive Economics and Policy Objectives,London, 1964; and Politics and Philosophy o Economics, New York, 1981; also M.Friedman, “Te Methodology o Positive Economics,” in: M. Friedman, Essays inPositive Economics, Chicago, 1953; H. Albert, Marktsoziologie und Entscheidung-

slogik , Neuwied, 1967. On piecemeal social engineering c. K. R. Popper, Te Poverty o Historicism,London, 1957. C. G. Luehrs (ed.), Kritischer Rationalismus und Sozialdemokratie, 2 vols., Bonn,1975-76.




How could empiricism-positivism help save socialism? On a

highly abstract level the answer should be clear. Empiricism-posi-tivism must be able to provide reasons why all the arguments givenso ar have ailed to be decisive; it must try to prove how one canavoid drawing the conclusions that I have drawn and still claimto be rational and to operate in accordance with the rules o sci-entic inquiry. But how, in detail, can this be accomplished? Onthis the philosophy o empiricism and positivism oers two seem-ingly plausible arguments. Te rst and indeed the most central

o its tenets is this:89 knowledge regarding reality, which is calledempirical knowledge, must be veriable or at least alsiable by experience; and experience is always o such a type that it could,in principle, have been other than it actually was so that no onecould ever know in advance, i.e., beore actually having had someparticular experience, i the outcome would be one way or another.I, mutatis mutandis, knowledge is not veriable or alsiable by experience, then it is not knowledge about anything real—empiri-

cal knowledge, that is—but simply knowledge about words, aboutthe use o terms, about signs and transormational rules or them—or analytical knowledge. And it is highly doubtul that analyticalknowledge should be ranked as “knowledge” at all.

I one assumes this position, as I will do or the moment, itis not dicult to see how the above arguments could be severely rebued. Te arguments regarding the impossibility o economic

calculation and the cost-raising character o social-democratic orconservative measures necessarily leading to a decline in the pro-duction o goods and services and hence to reduced standards o living evidently claimed to be valid a priori, i.e., not alsiable by any kind o experience, but rather known to be true prior to any later experiences. Now i this were indeed true, then accordingto the rst and central tenet o empiricism-positivism, this argu-ment could not contain any inormation about reality, but insteadwould have to be considered idle verbal quibbling—an exercise in

On the ollowing c. M. Hollis and E. Nell, Rational Economic Man, Cambridge,1975, pp.3.




tautological transormations o words such as “cost,” “production,”

“output o production,” “consumption”—which do not say anythingabout reality. Hence, empiricism concludes that insoar as reality,i.e., the real consequences o real socialism, is concerned, the argu-ments presented thus ar carry no weight whatsoever. Rather, inorder to say anything convincing about socialism, experience andexperience alone would have to be the decisive thing to consider.

I this were indeed true (as I will still assume), it would at oncedispose o all o the economic arguments against socialism which Ihave presented as being o a categorical nature. Tere simply couldnot be anything categorical about reality. But even then, wouldn’tempiricism-positivism still have to ace up to the real experienceswith real socialism and wouldn’t the result o this be just as deci-sive? In the preceding chapters, much more emphasis was placedon logical, principle, categorical (all used synonymously here) rea-sons directed against socialism’s claims o oering a more prom-

ising way to economic prosperity than through capitalism; andexperience was cited only loosely in order to illustrate a thesiswhose validity could ultimately have been known independento illustrative experience. Nonetheless, wouldn’t even the some-what unsystematically cited experience be sucient to make a caseagainst socialism?

Te answer to these questions is a decisive “no.” Te second

tenet o empiricism-positivism explains why. It ormulates theextension or rather the application o the rst tenet to the prob-lem o causality and causal ex planation or prediction. o causally explain or predict a real phenomenon is to ormulate a statemento either the type “i A, then B” or, should the variables allow quan-titative measurement, “i an increase (or decrease) o A, then anincrease (or decrease) o B.” As a statement reerring to reality (withA and B being real phenomena), its validity can never be estab-

lished with certainty, i.e., by examination o the proposition aloneor o any other proposition rom which the one in question couldin turn be logically deduced, but will always be and remain hypo-thetical, depending on the outcome o uture experiences which




cannot be known in advance. Should experience conrm a hypo-thetical causal explanation, i.e., should one observe an instancewhere B indeed ollowed A, as predicted, this would not prove thatthe hypothesis is true, since A and B are general, abstract terms(“universals,” as opposed to “proper names”) which reer to eventsor processes o which there are (or, at least might , in principle, be)an indeinite number o instances, and hence later experiencescould still possibly alsiy it. And i an experience alsied a hypoth-esis, i.e., i one observed an instance o A that was not ollowed by

B, this would not be decisive either, as it would still be possiblethat the hypothetically related phenomena were indeed causally linked and that some other previously neglected and uncontrolledcircumstance (“variable”) had simply prevented the hypothesizedrelationship rom being actually observed. A alsication wouldonly prove that the particular hypothesis under investigation wasnot completely correct as it stood, but rather needed some rene-ment, i.e., some speciication o additional variables which one

would have to watch out or and control in order to be able toobserve the hypothesized relationship between A and B. But to besure, a alsication would never prove once and or all that a rela-tionship between some given phenomena did not exist.

Given that this empiricist-positivist position on causal expla-nation is correct, it is easy to see how socialism could be rescuedrom empirically justied criticism. O course, a socialist-empiri-

cist would not deny the acts. He would not argue that there indeedis a lower standard o living in Eastern than in Western Europe,and that increased taxation or a conservative policy o regulationsand controls have indeed been ound to correlate with a retardationor shrinking in the production o economic wealth. But within theboundaries o his methodology he could perectly well deny thatbased on such experiences a principled case against socialism andits claim o oering a more promising path toward prosperity could

be ormulated. He could, that is to say, play down the (seemingly)alsiying experiences, and any other that might be cited, as merely accidental; as experiences that had been produced by some unor-tunately neglected and uncontrolled circumstances which would




disappear and indeed turn into its very opposite, revealing the truerelationship between socialism and an increased production o social wealth, as soon as these circumstances had been controlled.Even the striking dierences in the standard o living between Eastand West Germany—the example that I stressed so heavily becauseit most closely resembles that o a controlled social experiment—could thus be explained away: in arguing, or instance, that thehigher living standards in the West must be explained not by itsmore capitalist mode o production, but by the act that Marshall

aid had streamed into West Germany while East Germany had topay reparations to the Soviet Union; or by the act that rom the

very beginning, East Germany encompassed Germany’s less devel-oped, rural, agricultural provinces and so had never had the samestarting point; or that in the eastern provinces the tradition o ser-dom had been discarded much later than in the western ones andso the mentality o the people was indeed dierent in both Eastand West Germany, etc.

In act, whatever empirical evidence one brings orwardagainst socialism, as soon as one adopts the empiricist-positiv-ist philosophy, i.e., as soon as the idea o ormulating a principled case either in avor o or against socialism is dropped as in vainand ill-conceived, and it is instead only admitted that one can, o course, err with respect to the details o some socialist policy planbut would then be exible enough to amend certain points in one’s

policy whenever the outcome was not satisactory, socialism ismade immune to any decisive criticism, because any ailure canalways be ascribed to some as yet uncontrolled intervening vari-able. Not even the most perectly conducted, controlled experi-ment, it should be noted, could change this situation a bit. It wouldnever be possible to control all variables that might conceivably have some inuence on the variable to be explained—or the prac-tical reason that this would involve controlling literally all o the

universe, and or the theoretical reason that no one at any point intime could possibly know what all the variables are which make upthis universe. Tis is a question whose answer must permanently remain open to newly discovered and discerned experiences.




Hence, the above characterized immunization strategy would work

without exception and unailingly. And since, as we know rom thewritings o the empiricists themselves, and in particular those o D.

Hume, there exists no “band” that one could observe to connect

visibly certain variables as causes and eects,90 it should be noted

that there would be no way whatsoever to exclude any variable as a

possible disturbing inuence rom the outset without indeed trying

it out and controlling it. Not even the seemingly most absurd and

ridiculous variables, such as, or instance, dierences in weather,

or a y passing by in one case but not in the other, could be ruled

out in advance; all that could be done would be to point to expe-

rience again. (“Flies passing or not passing by never made a di-

erence or the outcome o an experiment.”) But according to the

empiricist doctrine itsel, this experience, reerring as it does only

to past instances, would once again not help decide the matter

denitively, and a reerence to it would only amount to a begging

o the question.

No matter what the charges brought against socialism are,

then, as long as they are based on empirical evidence the empir-

icist-socialist could argue that there is no way o knowing in

advance what the results o a certain policy scheme will be with-

out actually enacting it and letting experience speak or itsel. And

whatever the observable results are, the original socialist idea—the“hard-core” o one’s “research programme” as the neo-Popperian

philosopher Lakatos would have called it91—can always be rescued

easily by pointing out some previously neglected, more or less plau-

sible variable, whose noncontrol is hypothesized to be responsi-

ble or the negative result, with the newly revised hypothesis again

0 C. D. Hume, A reatise o Human Nature and Enquiry Concerning HumanUnderstanding, in Selby-Bigge (ed.), Hume’s Enquiries, Oxord, 1970; also H. H.Hoppe, Handeln und Erkennen, Bern, 1976 C. I. Lakatos, “Falsiication and the Methodology o Scientiic Research Pro-grammes,” in: Lakatos and Musgrave (eds.), Criticism and the Growth o Knowl-edge, Cambridge, 1970.




needing to be tried out indenitely, ad innitum.92Experience only tells us that a particular socialist policy scheme did not reach thegoal o producing more wealth; but it can never tell us i a slightly dierent one will produce any dierent results, or i it is possible toreach the goal o improving the production o wealth by any social-ist policy at all.

I have now reached the point in my argument where I shallchallenge the validity o these two central tenets o empiricism-positivism. What is wrong with them, and why cannot even empir-

icism help save socialism? Te answer will be given in three stages.First, I will demonstrate that the empiricist position proves to besel-deeating at closer analysis because it itsel must at least implic-itly assume and presuppose the existence o non-empirical knowl-edge as knowledge about reality. Tis being mainly a destructivetask, I will then have to address the question o how it is possibleto have or conceive o knowledge that inorms about reality, but

which is not itsel subject to conrmation or alsication by expe-rience. And thirdly, I will show that such knowledge not only isconceivable and must be presupposed but that there are positiveinstances o it which serve as the rm epistemological oundationon which the economic case against socialism can be and indeedall along has been built.

In spite o the apparent plausibility o empiricism’s centralideas, it might be noted at the very outset that even on the levelo intuition things do not seem to be exactly the way empiricismwould want them to be. It certainly is not evident that logic, math-ematics, geometry, and also certain statements o pure economics,like the law o supply and demand or the quantity theory o money,because they do not allow any alsication by experience, or ratherbecause their validity is independent o experience, do not give

All o this has been brought home to Popperianism, mainly by . S. Kuhn, TeStructure o Scientic Revolutions, Chicago, 1964; and it was then P. Feyerabendwho drew the most radical conclusion: to throw out science’s claim to rationality altogether, and to embrace nihilism under the banner “everything goes” (P. Feyera-bend, Against Method, London, 1978; and Science in a Free Society, London, 1978).For a critique o this unounded conclusion c. note 105 below.




us any inormation about reality but are merely verbal quibble.

Te opposite seems much more plausible: that the propositionsadvanced by these disciplines—or instance, a statement o geom-etry such as “I a straight line S and a circle C have more than onepoint in common then S has exactly two points in common withC,” or a statement more closely related to the eld o action withwhich I am concerned here, such as “One cannot have his cake andeat it, too”—do in act inorm about reality and inorm about whatcannot possibly be dierent in reality at pain o contradiction.93 I I

had a cake and ate it, it can be concluded that I do not have it any-more—and this clearly is a conclusion that inorms about reality without being alsiable by experience.

But much more important than intuition, o course, is reex-ive analysis, and this will prove the empiricist position to be simply sel-deeating. I it were true that empirical knowledge must be al-siable by experience and that analytical knowledge, which is not so

alsiable, thus cannot contain any empirical knowledge, then whatkind o statement is this undamental statement o empiricism itsel? It must again be either analytical or empirical. I analytical, thenaccording to its own doctrine this proposition is nothing but somescribbling on paper, hot air, entirely void o any meaningul content.It is only because the terms used in the statement such as “knowl-edge,” “experience,” “alsiable,” etc., have already been given somemeaningul interpretation that this might at rst be overlooked. Butthe entire meaninglessness o analytical statements ollows conclu-sively rom the empiricist-positivist ideology. O course, and this isthe rst sel-deeating trap, i this were true, then empiricism couldnot even say and mean what it seems to say and mean; it would beno more than a rustling o leaves in the wind. o mean anything atall, an interpretation must be given to the terms used, and an inter-pretation o terms, to be sure, is always (as long as one expression

cannot be explained in terms o another one) a practical aair; an

C. on this and the ollowing A. Pap, Semantics and Necessary ruth, New Haven,1958; M. Hollis and E. Nell, Rational Economic Man, Cambridge, 1975; B. Blan-shard, Reason and Analysis, La Salle, 1964.




aair, that is, in which the usage o a term is practiced and learned

with real instances o the concept designated by the term, and by which a term is thus tied to reality.94 However, not just any arbitrary interpretation would do: “alsiable,” or instance, does not meanwhat one means by “red” or “green.” In order to say what empiri-cism-positivism evidently wants to say when ormulating its basictenets, the terms must be given the meaning that they actually haveor the empiricist as well as or those whom he wants to convince o the appropriateness o his methodology. But i the statement indeed

means what we thought it did all along, then it evidently containsinormation about reality. As a matter o act it inorms us aboutthe undamental structure o reality: that there is nothing in it thatcan be known to be true in advance o uture conrming or alsi-ying experiences. And i this proposition now is taken to be ana-lytical , i.e., as a statement that does not allow alsication but whosetruth can be established by an analysis o the meanings o the terms

used alone, as has been assumed or the moment, then one has noless than a glaring contradiction at hand and empiricism once againproves to be sel-deeating.95

Hence, it seems that empiricism-positivism would have tochoose the other available option and declare its central creed itsel to be an empirical statement. But then, clearly, the empiricist posi-tion would no longer carry any weight whatsoever: aer all, the

undamental proposition o empiricism serving as the basis romwhich all sorts o rules o correct scientiic inquiry are derivedcould be wrong, and no one could ever be sure i it was or was notso. One could equally well claim the exact opposite and withinthe conines o empiricism there would be no way o deciding

C. on this W. Kamlah and P. Lorenzen, Logische Propaedeutik, Mannheim, 1967. C. L. v. Mises, he Ultimate Foundation o Economic Science, Kansas City,

1978, p.5: “Te essence o logical positivism is to deny the cognitive value o a prioriknowledge by pointing out that all a priori propositions are merely analytic. Tey donot provide new inormation, but are merely verbal or tautological … Only experi-ence can lead to synthetic propositions. Tere is an obvious objection against thisdoctrine, viz., that this proposition is in itsel a—as the present writer thinks, alse—synthetic a priori proposition, or it can maniestly not be established by experience.”




which position was right or wrong. Indeed, i its central tenet were

declared an empirical proposition, empiricism would cease to bea methodo-logy—a logic o science—altogether, and would be nomore than a completely arbitrary verbal convention or callingcertain (arbitrary) ways o dealing with certain statements certain(arbitrary) names. It would be a position void o any justication o why it, rather than any other one, should be adopted.96

However, this is not all that can be mustered against empiri-cism, even i the second available alternative is chosen. Upon closer

inspection this escape route leads to another trap o sel-deeat.Even i this route were chosen, it can be shown that the empiricist-positivist position must tacitly presuppose the existence o nonem-pirical knowledge as “real” knowledge. In order to realize this, let itbe assumed that a causal explanation relating two or more eventshas been ound to t one particular instance o experiences regard-ing such events, and is then applied to a second instance, presum-

ably to undergo some urther empirical testing. Now, one shouldask onesel what is the presupposition which must be made in orderto relate the second instance o experience to the rst as either con-rming or alsiying it? At rst it might seem almost sel-evidentthat i in the second in stance o experience the observations o therst were repeated, this would be a conrmation, and i not, a al-sication—and clearly, the empiricist methodology assumes thisto be evident, too, and does not require urther explanation. But

this is not true.97 Experience, it should be noted, only reveals thattwo or more observations regarding the temporal sequence o twoor more types o events can be “neutrally” classied as “repetition”or “nonrepetition.” A neutral repetition only becomes a “positive”

M. Hollis and E. Nell remark: “Since every signicant statement is, or a positivist,analytic or synthetic and none is both, we can ask or a classication … . We know o no positivist who has tried to produce empirical evidence or statements o (the sortin question). Nor can we see how to do so, unless by arguing that this is a matter o act how people use terms … which would prompt us to ask simply ‘So what’?” (M.Hollis and E. Nell, Rational Economic Man, Cambridge, 1975, p. 110). C. on this H. H. Hoppe, Kritik der kausalwissenschalichen Sozial-orschung,Opladen, 1983; and “Is Research Based on Causal Scientic Principles Possible in theSocial Sciences,” in Ratio, XXV, 1, 1983.




conirmation and a nonrepetition a “negative” alsiication i,

independent o what can actually be discovered by experience, itis assumed that there are constant causes which operate in time-invariant ways. I, contrary to this, it is assumed that causes in thecourse o time might operate sometimes this way and sometimesthat way, then these repetitive or nonrepetitive occurrences simply are and remain neutrally registered experiences, completely inde-pendent o one another, and are not in any way logically relatedto each other as conrming or alsiying one another. Tere is one

experience and then there is another, they are the same or they aredierent, but that is all there is to it; nothing else ollows.

Tus, the prerequisite o being able to say “alsiy” or “con-irm” is the constancy principle: the conviction that observablephenomena are in principle determined by causes that are constantand time-invariant in the way they operate, and that in principlecontingency plays no part in the way causes operate. Only i the

constancy principle is assumed to be valid does it ollow rom any ailure to reproduce a result that there is something wrong with anoriginal hypothesis; and only then can a successul reproductionindeed be interpreted as a conrmation. For only i two (or more)events are indeed cause and eect and causes operate in a time-invariant way must it be concluded that the unctional relationshipto be observed between causally related variables must be the samein all actual instances, and that i this is not indeed the case, some-

thing must be at ault with the particular specication o causes.

Obviously now, this constancy principle is not itsel based onor derived rom experience. Tere is not only no observable link connecting events. Even i such a link existed, experience couldnot reveal whether or not it was time-invariant. Te principle can-not be disproved by experience either, since any event which mightappear to disprove it (such as a ailure to duplicate some experi-

ence) could be interpreted rom the outset as i experience hadshown here that merely one particular type o event was not thecause o another (otherwise the experience would have been suc-cessully repeated). However, to the extent that experience cannot




exclude the possibility that another set o events might actually be

ound which would turn out to be time-invariant in its way o oper-ating, the validity o the constancy principle cannot be disproved.

Nonetheless, although neither derived rom nor disprovable by experience, the constancy principle is nothing less than the logically necessary presupposition or there being experiences which canbe regarded as either conrming or alsiying each other (in con-trast to isolated, logically unconnected experiences). And hence,since empiricism-positivism assumes the existence o such logi-

cally related experiences, it must be concluded that it also implic-itly assumes the existence o nonempirical knowledge about reality.It must assume that there are indeed time-invariantly operatingcauses, and it must assume that this is the case although experiencecould never possibly prove nor disprove it. Once again, then, empir-icism turns out to be an inconsistent, contradictory philosophy.

By now it should be suciently clear that aprioristic knowl-

edge must exist, or at least, that empiricism-positivism—the phi-losophy which is the most skeptical about its possibility—must inact presuppose its existence. Admittedly, though, the very idea o knowledge as knowledge about real things whose validity can beascertained independent o experience is a dicult one to grasp—otherwise the overwhelming success o the philosophy o empir-icism-positivism in the scientic community and in the opiniono the “educated public” could hardly be explained. Hence, beoreproceeding to the more concrete task o elucidating the specicaprioristic oundations on which the economic case against social-ism rests, it would seem appropriate to make a ew rather generalcomments which should help make it more plausible that there isindeed something like aprioristic knowledge.

It seems to be o great importance to rst rid onesel o thenotion that aprioristic knowledge has anything to do with “innate

ideas” or with “intuitive” knowledge which would not have to bediscovered somehow or learned. Innate or not, intuitive or not: theseare questions that concern the psychology o knowledge. In com-parison, epistemology is concerned exclusively with the question o




the validity o knowledge and o how to ascertain validity—and, to

be sure, the problem o aprioristic knowledge is solely an epistemo-logical one. Aprioristic knowledge can be, and in act quite oen is, very similar to empirical knowledge rom a psychological point o view, in that both types o knowledge must be acquired, discovered,learned. Te process o discovering aprioristic knowledge mightand very oen indeed seems to be even more dicult and painstak-ing than that o acquiring empirical knowledge, which requently enough simply seems to press itsel onto us without our having

done much about it; and also, it might well be the case genetically that the acquisition o aprioristic knowledge requires one’s havingpreviously had some sort o experience. But all this, it should berepeated, does not aect the question o the validation o knowl-edge, and it is precisely and exclusively in this regard that aprioristicand empirical knowledge dier categorically.98

On the positive side, the most important notion or understand-

ing the possibility o a priori knowledge, I submit, is that there arenot only nature-given things which one has to learn about throughexperience, but that there are also articial, man-made things whichmay require the existence or use o natural materials, but which tothe very extent that they are constructs can nonetheless not only beully understood in terms o their structure and implications, butwhich also can be analyzed or the question o whether or not theirmethod o construction can conceivably be altered.99

here are three major ields o constructs: language andthought, actions, and abricated objects, all o which are man-madethings. We shall not deal here with abricated objects but will only mention in passing that Euclidean geometry, or instance, can beconceived o as ideal norms we cannot avoid using in construct-ing measurement instruments that make empirical measurements

C. I. Kant, Kritik der reinen Vernun, in Kant, Werke (ed. Weischedel), Wies-baden, 1956, vol. II, p.45. Tis, o course, is a Kantian idea, expressed in Kant’s dictum that “reason canonly understand what it has itsel produced according to its own design” (Kritik derreinen Vernun, in: Kant, Werke (ed. Weischedel), Wiesbaden, 1956, vol. II, p.23).




o space possible. (In so ar, then, Euclidean geometry cannot be

said to have been alsied by the theory o relativity; rather, thistheory presupposes its validity through the use o its instrumentso measuring.)100 Te eld o action, as our area o main concern,will be analyzed when the aprioristic oundations o economics arediscussed. Te rst explanation o aprioristic knowledge, then, asknowledge o rules o construction which cannot conceivably bealtered, shall be given using the example o language and thought.his is chosen as the starting point, because it is language and

thought which one uses in doing what is being done here, that is,in communicating, discussing, and arguing.

As empiricists see it, language is a conventionally acceptedsystem o signs and sign-combinations, which, again by conven-tion, are given some meaning, ultimately by means o ostensivedenitions. According to this view, it may seem that although lan-guage is an articial, man-made product, nothing can be known

about it a priori. And indeed, there are lots o dierent languages,all using dierent signs, and the meaning o the terms used canbe assigned and changed arbitrarily, so that everything there is toknow about language must, or so it seems, be learned rom experi-ence. But this view is incorrect, or at best is only hal o the truth.rue, any language is a conventional sign system, but what is a con-

vention? Evidently, it cannot be suggested that “convention” in turnbe deined conventionally, as that would simply be begging the

question. Everything can be called a convention (and, or that mat-ter, a language), but surely not everything that can be called oneis in act a conventional agreement. Saying and being understoodin saying “convention is used in such and such a way” presup-poses that one already knows what a convention is, as this state-ment would already have to make use o language as a means o

00

C. on this P. Lorenzen, “Wie ist Objektivitaet in der Physik moeglich”; “DasBegruendungsproblem der Geometrie als Wissenscha der raeumlichen Ordnung,”in: Methodisches Denken, Frankurt/M., 1968; and Normative Logic and Ethics,Mannheim, 1969; F. Kambartel, Erahrung und Struktur, Frankurt/M., 1968, Kap.3; also H. Dingier, Die Ergreiung des Wirklichen, Muenchen, 1955; P. Janich, Proto-physik der Zeit, Mannheim, 1969.




communication. Hence, one is orced to conclude that language

is a conventional sign system and as such knowledge about it canonly be empirical knowledge. But in order or there to be such asystem it must be assumed that every speaker o a language already knows what a convention is, and he must know this not simply inthe way he knows that “dog” means dog, but he must know the real,true meaning o convention. As such his knowledge o what a lan-guage is must be considered a priori. Tis insight can be repeatedor more particular levels. Tere are all sorts o specic statements

that can be made in a language, and surely experience plays a rolehere. However, knowing what it means to make a proposition candenitely not be learned rom experience, but rather must be pre-supposed o any speaker o a language. What a proposition is can-not be explained to a speaker by just another statement unlesshe already knows how to interpret this as a proposition. And thesame is true with denitions: it would not do to dene “denition”ostensively by pointing to someone who is just pointing out somedenition, because just as in the case in which the word “dog” isdeined by pointing to a dog, an understanding o the mean-ing o ostensive denitions must already be presupposed when itis understood that pointing to a dog, accompanied by the sound[dog] means that “dog” means dog, so in the case o “denition.” odene denition ostensively would be entirely meaningless, unlessone already knew that the particular sound made was supposed to

signiy something whose identication should be assisted by point-ing, and how then to identiy particular objects as instances o gen-eral, abstract properties. In short, in order to dene any term by convention, a speaker must be assumed to have a priori knowledgeo the real meaning—the real denition—o “denition.”101

0 On the problem o real vs. conventional or stipulated denitions c. M. Hollis andE. Nell, Rational Economic Man, Cambridge, 1975, pp.177. “Honest denitions are,

rom an empiricist point o view, o two sorts, lexical and stipulative.” (p.177) But“when it comes to justiying (this) view, we are presumably being oered a denitiono ‘denition’. Whichever category o denition the denition … alls in, we neednot accept it as o any epistemological worth. Indeed, it would not be even a possibleepistemological thesis, unless it were neither lexical nor stipulative. Te view is bothinconvenient and sel-reuting. A contrary opinion with a long pedigree is that there




Te knowledge about language, then, that must be considereda priori in that it must be presupposed o any speaker speaking any language, is that o how to make real conventions, how to make aproposition by making a statement (i.e., how to mean somethingby saying something) and how to make a real denition and iden-tiy particular instances o general properties. Any denial o thiswould be sel-reuting, as it would have to be made in a language,making propositions and using denitions. And as any experienceis conceptual experience, i.e., experience in terms o some lan-

guage—and to say that this is not so and mean it would only provethe point as it would have to be cast in a language, too—by know-ing this to be true o a language a priori, one would also know ana priori truth about reality: that it is made o particular objects thathave abstract properties, i.e., properties o which it is possible tond other instances; that any one object either does or does nothave some denite property and so there are acts that can be saidto be the case, true or wrong; and also that it cannot be known a

priori what all the acts are, except that they indeed also must beacts, i.e., instances o particular abstract properties. And onceagain, one does not know all this rom experience, as experience isonly what can appear in the orms just described.102

With this in mind we can turn to the eld o action in orderto prove the speciic point that one also has positive, aprioris-tic knowledge o actions and consequences o actions because

actions, too, are man-made constructs which can be ully under-stood regarding their rules o construction; and that empiricism-positivism cannot—at pain o contradiction—possibly be thoughtto be weakening or even seriously challenging the economic caseagainst socialism, as this case ultimately rests on such oundations,whereas the empiricist philosophy stands in contradiction to it.

In the irst argumentative step I shall demonstrate that the

empiricist methodology, contrary to its own claim, cannot possibly

are ‘real’ denitions, which capture the essence o the thing dened” (p.178); c. alsoB. Blanshard, Reason and Analysis, La Salle, 1964, pp.268.0 C. A. v. Melsen, Philosophy o Nature, Pittsburgh, 1953, esp. Chapters 1,4.




apply to actions and thereby reveal a irst, albeit rather nega-

tive, instance o aprioristic knowledge about actions. Empiricismclaims that actions, just as any other phenomenon, can and must beexplained by means o causal hypotheses which can be conrmedor reuted by experience. Now i this were the case, then empiri-cism would be orced to assume (contrary to its own doctrine thatthere is no a priori knowledge as knowledge about reality) thattime- invariantly operating causes with respect to actions exist. Onewould not know in advance which particular event might be the

cause o a particular action—experience would have to reveal this.But in order to proceed the way that empiricism wants us to pro-ceed—to relate dierent experiences regarding sequences o eventsas either conrming or alsiying each other, and i alsiying, thenresponding with a reormulation o the original causal hypothe-sis—a constancy over time in the operation o causes must be pre-supposed. However, i this were true, and actions could indeed beconceived as governed by time-invariantly operating causes, whatabout explaining the explainers, i.e., the persons who carry on the

very process o hypothesis creation, o veriication and alsiica-tion;—all o us, that is, who act the way the empiricists tell us toact? Evidently, to do all this—to assimilate conrming or alsiyingexperiences, to replace old hypotheses with new ones—one mustassumedly be able to learn. However, i one is able to learn romexperience, and the empiricist is compelled to admit this, then one

cannot know at any given time what one will know at later timeand how one will act on the basis o this knowledge. Rather, onecan only reconstruct the causes o one’s actions aer the event, asone can only explain one’s knowledge aer one already possessesit. Tus, the empiricist methodology applied to the eld o knowl-edge and action, which contains knowledge as its necessary ingre-dient, is simply contradictory—a logical absurdity.103 Te constancy

0 C. also H. H. Hoppe. Kritik der kausalwissenschatlichen Sozialorschung,Opladen, 1983; and “Is Research Based on Causal Scientic Principles Possible inthe Social Sciences” in Ratio XXV, 1, 1983. Here the argument is summed up thus(p.37): “(1) I and—as possible opponents in an argument—other people are able tolearn. (Tis statement cannot be challenged without implicitly admitting that it is




principle may be correctly assumed within the sphere o natural

objects and as such the methodology o empiricism may be applica-ble there, but with respect to actions, any attempt at causal empiri-cal explanation is logically impossible, and this, which is denitely knowledge about something real , can be known with certainty.Nothing can be known a priori about any particular action; but apriori knowledge exists regarding actions insoar as they are actionsat all. It can be known a priori that no action can be conceived o aspredictable on the basis o constantly operating causes.

Te second insight regarding action is o the same type. I willdemonstrate that while actions themselves cannot be conceived o as caused, anything that is an action must presuppose the existenceo causality in the physical world in which actions are perormed.Causality—which the empiricist-positivist philosophy somehowhad to assume existed in order to make its own methodologicalprocedures logically easible, even though its assumption dei-

nitely could not be said to be derived rom experience and justiedin terms o it—is a category o action, i.e., it is produced or con-structed by us in ollowing some procedural rule; and this rule, asit turns out, proves to be necessary in order to act at all. In otherwords, this rule is such that it cannot conceivably be alsied, aseven the attempt to alsiy it would have to presuppose it.

Ater what has been said about causality, it should indeed

be easy to see that it is a produced rather than a given eature o reality. One does not experience and learn that there are causeswhich always operate in the same way and on the basis o which

correct. Above all, it must be assumed by anyone undertaking research into causes.o this extent, proposition (1) is valid a priori.) (2) I it is possible to learn, one can-not know at any given time what one will know at any later time and how one willact on the basis o this knowledge. (I one did know at any given time what one willcome to know at some later time, it would be impossible ever to learn anything—but

see proposition (1) on this point.) (3) Te assertion that it is possible to predict theuture state o one’s own and/or another’s knowledge and the corresponding actionsmaniesting that knowledge (i.e. nd the variables which can be interpreted as thecauses) involves a contradiction. I the subject o a given state o knowledge or o an intentional act can learn, then there are no causes or this; however, i there arecauses, then the subject cannot learn—but see again proposition (1).”




predictions about the uture can be made. Rather, one establishes

that phenomena have such causes by ollowing a particular typeo investigative procedure, by reusing on principle to allow any exceptions, i.e., instances o inconstancy, and by being prepared todeal with them by producing a new causal hypothesis each time any such an apparent inconstancy occurs. But what makes this way o proceeding necessary? Why does one have to act this way? Becausebehaving this way is what perorming intentional actions is; and aslong as one acts intentionally, presupposing constantly operating

causes is precisely what one does. Intentional acts are characterizedby the act that an actor intereres in his environment and changescertain things, or prevents them rom changing, and so diverts the“natural” course o events in order to achieve a preerred result orstate o aairs; or should an active intererence prove impossible,that he prepares himsel or a result he cannot do anything aboutexcept anticipate in time, by watching out or temporally priorevents which indicate the later result. In any case, in order to pro-duce a result that otherwise would not have happened, or to be ableto adapt to an inevitable result that otherwise would have come as acomplete surprise, the actor must presuppose constantly operatingcauses. He would not interere i he did not assume this would helpbring about the desired result; and he would not prepare or andadjust to anything unless he thought the events on whose basis hebegan his preparations were indeed the constantly operating causal

orces that would produce the result in question, and the prepa-ration taken would indeed lead to the goal desired. O course, anactor could go wrong with respect to his particular assumptionso cause-and-eect relations and a desired result might not comeabout in spite o the intererence, or an anticipated event or whichpreparations had been made might ail to occur. But no matter whathappens in this respect, whether or not the results conorm to theexpectations, whether or not actions regarding some given result or

event are upheld or the uture, any action, changed or unchanged,presupposes that there are constantly operating causes even i noparticular cause or a particular event can be pre-known to any actor at any time. In act, disproving that any natural phenomenon




is governed by time-invariantly operating causes would require oneto show that given phenomenon cannot be anticipated or producedon the basis o antecedent variables. But clearly, trying to prove thiswould again necessarily presuppose that the occurrence or non-occurrence o the phenomenon under scrutiny could be eectedby taking appropriate action and that the phenomenon mustthus assumedly be embedded in a network o constantly operat-ing causes. Hence, one is orced to conclude that the validity o theconstancy principle cannot be alsied by any action as any action

would have to presuppose it.104

(Tere is only one way in which itmight be said that “experience” could “alsiy” the constancy prin-ciple: i the physical world were indeed so chaotic that one couldno longer act at all, then o course it would not make much sense tospeak o a world with constantly operating causes. But then humanbeings, whose essential characteristic is to act intentionally, wouldalso no longer be the ones who experience this inconstancy. As longas one survives as a human being—and this is what the argument in

eect says—the constancy principle must be assumed to be valid apriori, as any action must presuppose it and no experience that any-one could actually have could possibly disprove this.)105

0 M. Singer, Generalization in Ethics, London, 1863; P. Lorenzen, Normative Logicand Ethics, Mannheim, 1969; S. oulmin, Te Place o Reason in Ethics, Cambridge,1970; F. Kambartel (ed.), Praktische Philosophie und konstruktive Wissenschasthe-orie, Frankurt/M, 1974; A. Gewirth, Reason and Morality, Chicago, 1978.0 Causality, then, is not a contingent eature o physical reality, but rather a cat-egory o action, and as such, a logically necessary trait o the physical world. Tis actexplains why in spite o the possibility explained above o immunizing any hypoth-esis against possible reutations by postulating ever new uncontrolled variables, nonihilistic consequences regarding the undertaking o causal scientic research ol-low (c. note 7 above). For i it is understood that natural science is not a contempla-tive enterprise but ultimately an instrument o action (c. on this also J. Habermas,Knowledge and Human Interests, Boston, 1971, esp. Chapter 6), then neither theact that hypotheses can be immunized nor that a selection between rival theoriesmay not always seem possible (because theories are, admittedly, under- determinedby data) ever aects the permanent existence o the rationality criterion o “instru-

mental success.” Neither immunizing hypotheses nor reerring to paradigmaticdierences makes anyone less subject to this criterion in whose light every theory ultimately proves commensurable. It is the inexorability o the rationality criteriono instrumental success which explains why—not withstanding Kuhn, Feyerabend etal.—the development o the natural sciences could bring about an ultimately unde-niable, constant technological progress.




Implied in the category o causality is that o time. Whenever

one produces or prepares or a certain result and thereby categorizesevents as causes and eects, one also distinguishes between earlier andlater events. And to be sure, this categorization is not simply derivedrom experience, i.e., the mere observance o things and events. Tesequence o experiences as it appears in the temporal order o one’sobservations is quite a dierent thing rom the real sequence o eventsin real time. As a matter o act, one can observe things in an orderthat is exactly the opposite o the real temporal order in which they

stand to each other. Tat one knows how to interpret observations ina way that might deviate rom and correct on the temporal order inwhich they were made and can even locate events in objective timerequires that the observer be an actor and know what it means to pro-duce or prepare or some result.106 Only because one is an actor, andexperiences are those o an acting person, can events be interpretedas occurring earlier and later. And, one cannot know rom experi-ence that experiences must be interpreted with reerence to actions, asthe perormance o any action already presupposes the possession o experiences interpreted this way. No person who did not know whatit means to act could ever experience events placed in real time, andhence the meaning o time must be assumed to be known a priori toany actor because o the act that he is an actor.

Furthermore, actions not only presuppose causality and anobjective time order, they also require values. Values, too, are not

On the other hand, in the eld o human action, where, as has been demonstratedabove, no causal scientic research is possible, where predictive knowledge can neverattain the status o empirically testable scientic hypotheses but rather only that o inormed, not-systematically teachable oresight, and where in principle the crite-rion o instrumental success is thus inapplicable, the spectre o nihilism would seemindeed to be real, i one were to take the empiricist methodological prescriptionsseriously. However, not only are these prescriptions inapplicable to the social sci-ences as empirical sciences (c. on this H. H. Hoppe, Kritik der kausalwissenschali-chen Sozialorschung , Opladen, 1983, esp. Chapter 2); as I show here, contrary tothe empiricist doctrine according to which everything must be tried out beore itsoutcome can be known, a priori knowledge regarding action exists, and apodicti-cally true predictions regarding the social world can be made based on this a prioriknowledge. It is this, then, that proves all nihilistic temptations unounded.0 C. also, H. H. Hoppe, Handeln und Erkennen, Bern, 1976, pp.62.




known to us through experience; rather, the opposite is true. Oneonly experiences things because they are things on which positiveor negative value can be placed in the course o action. Only by anactor , that is to say, can things be experienced as value-laden and,even more generally, only because one is an actor does one haveconscious experiences at all, as they inorm about things whichmight be valuable or an acting person to know. More precisely:with every action an actor pursues a goal.107 He wants to producea denite result or be prepared or a result that he cannot prevent

rom happening. Whatever the goal o his action (which, o course,one could only know rom experience), the act that it is pursuedby an actor reveals that he places value on it. As a matter o act, itreveals that at the very start o his action he places a relatively higher

value on it than on any other goal o action he could think o, oth-erwise he would have acted dierently. Furthermore, since in orderto achieve his most highly valued goal any actor must interere at anearlier point in time or must watch out or an earlier event in order

to start preparations or some later occurrence, every action mustalso employ means (at least those o the actor’s own body and thetime absorbed by the intererence or the preparations) to producethe desired end. And as these means are assumed to be causally necessary or achieving the valued goal, otherwise the actor wouldnot employ them, value must also be placed on them. Not only thegoals, then, have value or an actor, but the means do, too—a valuethat is derived rom that o the desired end, as one could not reachan end without employing some means. In addition, as actions canonly be perormed sequentially by an actor, every action involvesmaking a choice. It involves taking up that course o action whichat the moment o acting promises the most highly valued result tothe actor and hence is given preerence by him; at the same time itinvolves excluding other possible actions with expected results o alesser value. As a consequence o having to choose whenever one

acts—o not being able to realize all valued goals simultaneously—

0 C. also L. v. Mises, Human Action, Chicago, 1966; Epistemological Problems o Economics, New York, 1981; and Te Ultimate Foundation o Economic Science,Kansas City, 1978.




the perormance o each and every action implies the incurrence o costs. Te cost o an action is the price that must be paid or hav-ing to preer one course o action over another, and it amounts tothe value attached to the most highly valued goal that cannot berealized or whose realization must now be deerred, because themeans necessary to produce it are bound up in the production o another, even more highly valued end. And while this implies thatat its starting point every action must be considered to be worthmore than its costs and able to secure a prot to the actor, i.e., a

result whose value is ranked higher than the costs, every action isalso threatened by the possibility o a loss. Such a loss would occuri in retrospect an actor ound that—contrary to his own previ-ous expectation—the result in act had a lower value than that o the relinquished alternative. And just as every action necessarily aims at a prot, the possibility o a loss, too, is a necessary accom-paniment to any action. For an actor can always go wrong regard-ing his causal-technological knowledge, and the results aimed or

cannot be produced successully or the events or which they wereproduced do not occur; or he can go wrong because every actiontakes time to complete and the value attached to dierent goals canchange in the meantime, making things less valuable now that ear-lier appeared to be highly valuable.

All o these categories—values, ends, means, choice, preer-ence, cost, prot and loss—are implied in the concept o action.

None o them is derived rom experience. Rather, that one is ableto interpret experiences in the above categories requires that onealready know what it means to act. No one who is not an actorcould understand them as they are not “given,” ready to be expe-rienced, but experience is cast in these terms as it is constructedby an actor according to the rules necessary or acting. And to besure, as actions are real things and one cannot not act—as even theattempt to do so would itsel be an action aimed at a goal, requiring

means, excluding other courses o action, incurring costs, subject-ing the actor to the possibility o not achieving the desired goal andso suering a loss—the knowledge o what it means to act mustbe considered knowledge about reality which is a priori. Te very




possession o it could not be undone or disproved, since this would

already presuppose its very existence. As a matter o act, a situa-tion in which these categories o action would cease to have a realexistence could not itsel ever be observed, as making an observa-tion is itsel an action.108

Economic analysis, and the economic analysis o socialismin particular, has as its oundation this a priori knowledge o themeaning o action as well as its logical constituents. Essentially,economic analysis consists o: (1) an understanding o the catego-ries o action and an understanding o the meaning o a changein values, costs, technological knowledge, etc.; (2) a description o a situation in which these categories assume concrete meaning,where denite people are identied as actors with denite objectsspecied as their means o action, with denite goals identiedas values and denite things specied as costs; and (3) a deduc-tion o the consequences that result rom the perormance o some

specied action in this situation, or o the consequences that resultor an actor i this situation is changed in a specied way. And thisdeduction must yield a priori-valid conclusions, provided thereis no aw in the very process o deduction and the situation andthe change introduced into it being given, and a priori—valid con-clusions about reality i the situation and situation—change, asdescribed, can themselves be identied as real, because then their

validity would ultimately go back to the indisputable validity o thecategories o action.

0 Te aprioristic character o the concept o action—i.e., the impossibility o dis-proving the proposition that man acts and acting involves the categories explainedabove, because even the attempt to disprove it would itsel be an action—has its com-plement in the eld o epistemology, in the law o contradiction and the unthinkabil-ity o its denial. Regarding this law B. Blanshard writes: “o deny the law means tosay that it is alse rather than true, that its being alse excludes its being true. But thisis the very thing that is supposedly denied. One cannot deny the law o contradiction

without presupposing its validity in the act o denying it” (B. Blanshard, Reason andAnalysis, La Salle, 1964, p.276).In act, as L v. Mises indicates, the law o contradiction is implied in the epistemo-

logically more undamental “axioms o action.” (L v. Mises, Te Ultimate Foundationo Economic Science, Kansas City, 1978, p.35). On the relation between praxeology and epistemology c. also Chapter 7, n. 5.




It is along this methodological path that in the precedingdiscussion o socialism the conclusion was derived, or instance,that i the labor expended by an actor was not itsel his goal o action, but rather only his means o reaching the goal o producingincome and i this income then is reduced against his consent—by taxation—then or him the cost o expending labor has beenincreased, as the value o other, alternative goals that can be pur-sued by means o his body and time has gone up in relative terms,and hence a reduced incentive to work must result. Along this path,

too, the conclusion—as an a priori conclusion—was reached that,or instance, i the actual users o means o production do not havethe right to sell them to the highest bidder, then no one can estab-lish the monetary costs involved in producing what is actually pro-duced with them (the monetary value, that is, o the opportunitiesoregone by not using them dierently), and no one can assure any longer that these means are indeed employed in the production o those goods considered to be the most highly valued ones by the

actors at the beginning o their productive eorts. Hence a reducedoutput in terms o purchasing power must ensue.

Aer this rather lengthy digression into the eld o epistemol-ogy, let us now return to the discussion o the socialism o socialengineering. Tis digression was necessary in order to reute theclaim o empiricism-positivism, which i true would have savedsocialism, that nothing categorical can be said against any policy-

scheme, as only experience can reveal the real consequences o cer-tain policies. Against this I have pointed out that empiricism clearly seems to contradict intuition. According to intuition, logic is moreundamental than experience and it is also knowledge about realthings. Furthermore, empiricism-positivism turns out to be sel-contradictory, as it itsel must presuppose the existence o a prioriknowledge as real knowledge. Tere indeed exists a stock o posi-tive a priori knowledge which must be presupposed o every expe-

riencing and acting person, because he knows what it means to act,and which cannot possibly be reuted by experience, as the very attempt to do so would itsel presuppose the validity o what hadbeen disputed.




he discussion has led us to a conclusion which can be

summed up as ollows: “Experience does not beat logic, but ratherthe opposite is true.” Logic improves upon and corrects experi-ence and tells us what kind o experiences we can possibly haveand which ones are instead due to a muddied mind, and so wouldbe better labeled “dreams” or “antasies” rather than as experi-ences regarding “reality.” With this reassurance about the solidity o the oundations on which the economic case against socialismhas been built, a straightorward criticism o the socialism o social

engineering is now possible; a criticism which is again a logi-cal one, drawing on a priori knowledge, and demonstrating thatthe goals pursued by the socialism o social engineering can neverbe reached by its proposed means, since this would stand in con-tradiction to such knowledge. Te ollowing critique can now bebrie, as the ideology o social engineering, apart rom its empiri-cist-positivist methodology which has been proven aulty, is really no dierent rom the other versions o socialism. Hence, the analy-ses provided in the preceding chapters regarding Marxist, social-democratic and conservative socialism nd application here, too.

Tis becomes clear once the property rules o the socialismo social engineering are stated. First, the user-owners o scarceresources can do whatever they want with them. But secondly,whenever the outcome o this process is not liked by the commu-nity o social engineers (people, that is, who are not the user-own-

ers o the things in question and who do not have a contractually acquired title to them), it has the right to interere with the practiceso the actual user-owners and determine the uses o these means,thereby restricting their property rights. Further, the community o social engineers has the right to determine unilaterally what isor is not a preerred outcome, and can thus restrict the property rights o natural owners whenever, wherever, and to the extent that

it thinks necessary in order to produce a preerred outcome.Regarding these property rules, one realizes at once that

although socialism o social engineering allows or a gradual imple-mentation o its goals with only a moderate degree o intervention




in the property rights o natural owners, since the degree to which

their rights can be curtailed is to be determined by society (thesocial engineers), private ownership is in principle abolished andpeoples’ productive enterprises take place under the threat o anever-increasing or even total expropriation o private owners. Inthese respects there is no dierence whatsoever between social-democratic and conservative socialism and socialism’s socially engineered version. Te dierence again is reduced to one o socialpsychology. While Marxist, redistributive, and conservative social-

ism all want to achieve a general goal determined in advance—agoal o égalité or o the preservation o a given order—the social-ism o social engineering does not have any such design. Its idea isone o punctuated, unprincipled intervention; exible, piece-mealengineering. he engineering socialist is thus seemingly muchmore open to criticism, changing responses, new ideas—and thisattitude certainly appeals to a lot o people who would not willingly subscribe to any o the other orms o socialism. On the other hand,

though, and this should be kept in mind as well, there is almostnothing, including even the most ridiculous thing, that some socialengineers would not like to try out on their ellowmen, whom they regard as bundles o variables to be technically manipulated likepawns on a chessboard by setting the right stimuli.

In any case, since the socialism o social engineering does notdier in principle rom any o the other versions o socialism, in that

it implies a redistribution o property titles away rom the users andcontractors o scarce resources and onto nonusers and noncontrac-tors, it, too, raises the cost o production and so leads to a reductionin the production o wealth; and this is necessarily so and no oneneed try it out rst to reach this conclusion. Tis general conclusionis true regardless o the specic course social engineering mighttake. Let us say that the community o social engineers does notapprove o some people having a low income and so decides to xminimum wages above the current market level.109 Logic tells one

0 On the eects o minimum wages c. also Y. Brozen and M. Friedman, Te Mini-mum Wage: Who Pays?, Washington, 1966.




that this implies a restriction o the property rights o the employers

as well as the employees who are no longer allowed to strike certainkinds o mutually benecial bargains. Te consequence is and mustbe unemployment. Instead o getting paid at a lower market wage,some people now will not get paid at all, as some employers can-not pay the additional costs or hire as many people as they wouldbe willing to hire at lower costs. Te employers will be hurt as they can only employ ewer people and the output o production hencewill be lower, in relative terms; and the employees will be hurt, as

instead o some income, albeit low, they now have no income. Itcannot be stated a priori who o the employees and the employerswill suer most rom this, except that it will be those o the ormerwhose specic labor services have a relatively low value on the mar-ket, and those o the latter who specically hire precisely this typeo labor. However, knowing rom experience, or instance, that low-skilled labor services are particularly requent among the young,among blacks, among women, among older people who want to

reenter the labor orce aer a longer period o household-work, etc.,it can be predicted with certainty that these will be the groups hitthe hardest by unemployment. And to be sure, the very act that theproblem which intervention was originally supposed to cure (thelow income o some people) is now even worse than beore couldhave been known a priori, independent o any experience! o think that, misled by aulty empiricist methodology, all this rst has to

be tried out as it otherwise could not have been known is not only scientic humbug; like all acting based on ill-conceived intellectualoundations, it is extremely costly as well.

o look at yet another example, the community o social engi-neers does not like the act that rents or houses or apartments areas high as they are, and hence some people are not able to live ascomortably as they think they should. Accordingly, rent-controllegislation is passed, establishing maximum rents or certain apart-ments.110 Tis is the situation, or instance, in New York City, or on

0 On the eects o rent control c. also C. Baird, Rent Control: Te Perennial Folly, SanFrancisco, 1980; F. A. Hayek et al., Rent Control: A Popular Paradox, Vancouver, 1975.




a much grander scale, in all o Italy. Again, without having to wait

or the consequences to become real one knows what they will be.Te construction o new apartments will decrease, as the returnsrom investment are now lower. And with respect to old apart-ments, immediate shortages will appear, as the demand or them,their prices being lower, will rise. Some older apartments might noteven be rented out anymore, i the xed rents are so low that therent would not even cover the cost o the deterioration that occursby just living in and using the apartment. Ten there would be a

tremendous shortage o housing next to thousands o empty apart-ments (and New York City and Italy provide us with perect illustra-tions o this). And there would be no way out o this, as it still wouldnot pay to construct new apartments. In addition, the increasedshortages would result in very costly inexibilities, as people whohad happily gotten into one o the low-priced apartments would beincreasingly un willing to move out again, in spite o the act that,or instance, the amily size normally changes during the lie cycleand so dierent needs as regards housing emerge, and in spite o the act that dierent job opportunities might appear at dierentplaces. And so a huge waste o rental space occurs, because old peo-ple, or example, who occupy large apartments that were just theright size when the children were still living at home but are muchtoo big now, still will not move into smaller apartments as there arenone available; and young amilies who are in need o larger prem-

ises cannot nd those either, precisely because such places will notbe vacated. Waste also occurs because people do not move to theplaces where there is the greatest demand or their specic laborservices, or they spend large amounts o time commuting to ratherdistant places, merely because they cannot nd a place to live wherethere is work or them, or they can only nd accommodations ata much higher price than their presently xed low rent. Clearly,the problem that the social engineers wanted to solve by means o

introducing rent control legislation is much worse than beore andthe general standard o living, in relative terms, has declined. Onceagain, all o this could have been known a priori. For the socialengineer, however, misled by an empiricist-positivist methodology




which tells him that there is no way o knowing results unless thingsare actually tried out, this experience will probably only set the stageor the next intervention. Perhaps the results were not exactly asexpected because one had orgotten to control some other impor-tant variable, and one should now go ahead and nd out. But as thischapter has demonstrated, there is a way o knowing in advance thatneither the rst nor any subsequent acts o intervention will everreach their goal, as they all imply an intererence with the rights o the natural owners o things by nonusers and noncontractors.111

In order to understand this, it is only necessary to return tosound economic reasoning; to realize the unique epistemologi-cal nature o economics as an aprioristic science o human actionthat rests on oundations whose very denial must presuppose their

validity; and to recognize, in turn, that a science o action groundedin an empiricist-positivist methodology is as ill-ounded as thestatement that “one can have his cake and eat it, too.”

C. also L. v. Mises, A Critique o Interventionism, New Rochelle, 1977.




Chapter 7

Te Ethical Justifcation o Capitalism and Why Socialism IsMorally Indeensible

T

he last our chapters have provided systematic reasons andempirical evidence or the thesis that socialism as a social

system that is not thoroughly based on the “natural theory o property” (the rst-use-rst-own rule) which character-

izes capitalism must necessarily be, and in act is, an inerior systemwith respect to the production o wealth and the average standardo living. Tis may satisy the person who believes that economicwealth and living standards are the most important criteria in

judging a society—and there can be no doubt that or many, one’sstandard o living is a matter o utmost importance—and because

o this it is certainly necessary to keep all o the above economicreasoning in mind. Yet there are people who do not attach muchimportance to economic wealth and who rank other values evenhigher—happily, one might say, or socialism, because it can thusquietly orget its original claim o being able to bring more pros-perity to mankind, and instead resort to the altogether dierentbut even more inspiring claim that whereas socialism might not bethe key to prosperity, it would mean justice, airness, and morality (all terms used synonymously here). And it can argue that a trade-o between eciency and justice, an exchange o “less wealth” or

151




“more justice” is justied, since justice and airness, are undamen-tally more valuable than economic wealth.

Tis claim will be examined in some detail in this chapter. Inso doing, two separate but related claims will be analyzed: (1) theclaim made in particular by socialists o the Marxist and the social-democratic camp, and to a lesser degree also by the conservatives,that a principled case in avor o socialism can be made because o the moral value o its principles and, mutatis mutandis, that capi-talism cannot be deended morally; and (2) the claim o empiricist

socialism that normative statements (“should” or “ought” state-ments)—since they neither solely relate to acts, nor simply statea verbal denition, and thus are neither empirical nor analyticalstatements—are not really statements at all, at least not statementsthat one could call “cognitive” in the widest o all senses, but rathermere “verbal expressions” used to express or arouse eelings (suchas ‘Wow” or “grrrrr”).112

Te second, empiricist or, as its position applied to the eldo morals is called, “emotivist” claim will be dealt with rst, as in away it is more ar-reaching.113 Te emotivist position is derived by accepting the central empiricist-positivist claim that the dichoto-mous distinction between empirical and analytical statements is o an all-inclusive nature; that is, that any statement whatsoever mustbe empirical or analytical and never can be both. Tis position, itwill be seen, turns out to be sel-deeating on closer inspection, just

as empiricism in general turned out to be sel-deeating.114 I emotiv-ism is a valid position, then its basic proposition regarding norma-tive statements must itsel be analytical or empirical, or else it mustbe an expression o emotions. I it is taken to be analytical, then it ismere verbal quibble, saying nothing about anything real, but rather

For such a position c. A. J. Ayer, Language, ruth and Logic, New York, 1950. On the emotivist position c. C. L. Stevenson, Facts and Values, New Haven,1963; and Ethics and Language, London, 1945; c. also the instructive discussion by G. Harman, Te Nature o Morality, New York, 1977; the classical exposition o theidea that “reason is and can be no more than the slave o the passions” is to be oundin D. Hume, reatise on Human Nature, (ed. Selby-Bigge), Oxord, 1970. C. also Chapter 6 above.




only dening one sound by another, and emotivism would thus bea void doctrine. I, instead, it is empirical, then the doctrine wouldnot carry any weight, as its central proposition could well be wrong.In any case, right or wrong, it would only be a proposition statinga historical act, i.e., how certain expressions have been used in thepast, which in itsel would not provide any reason whatsoever why this would have to be the case in the uture, too, and hence why oneshould or rather should not look or normative statements that aremore than expressions o emotions in that they are meant to be jus-

tiable. And the emotivist doctrine would also lose all its weight i it adopted the third alternative and declared its central tenet itsel a “wow” statement, too. For i this were the case, then it would notcontain any reason why one should relate to and interpret certainstatements in certain ways, and so i one’s own instincts or eelingsdid not happen to coincide with somebody else’s “wowing,” therewould be nothing that could stop one rom ollowing one’s owneelings instead. Just as a normative statement would be no more

than the barking o a dog, so the emotivist position then is no morethan a barking comment on barking.

On the other hand, i the central statement o empiricism-emotivism, i.e., that normative statements have no cognitive mean-ing but are simply expressions o eelings, is itsel regarded as ameaningul statement communicating that one should conceive o all statements that are not analytical or empirical as mere expres-

sive symbols, then the emotivist position becomes outrightly con-tradictory. Tis position must then assume, at least implicitly, thatcertain insights, i.e., those relating to normative statements, cannotsimply be understood and meaningul, but can also be given justi-cation as statements with specic meanings. Hence, one must con-clude that emotivism alters, because i it were true, then it couldnot even say and mean what it says—it simply would not exist asa position that could be discussed and evaluated with regard to its

validity. But i it is a meaningul position which can be discussed,then this act belies its very own basic premise. Moreover, the actthat it is indeed such a meaningul position, it should be noted,cannot even be disputed, as one cannot communicate and argue




that one cannot communicate and argue. Rather, it must be pre-

supposed o any intellectual position, that it is meaningul and canbe argued with regard to its cognitive value, simply because it ispresented in a language and communicated. o argue otherwisewould already implicitly admit its validity. One is orced, then, toaccept a rationalist approach towards ethics or the very same rea-son that one was orced to adopt a rationalist instead o an empir-icist epistemology.115 Yet with emotivism so rebued, I am stillar away, or so it seems, rom my set goal, which I share with the

Marxist and conservative socialists, o demonstrating that a princi-pled case in avor o or against socialism or capitalism can be made.What I have reached so ar is the conclusion that the question o whether or not normative statements are cognitive ones is itsel acognitive problem. However, it still seems to be a ar cry rom thereto the proo that actual norm proposals can indeed be shown to beeither valid or invalid.

Fortunately, this impression is wrong and there is already much more won here than might be suspected. Te above argu-ment shows us that any truth claim—the claim connected withany proposition that it is true, objective, or valid (all terms usedsynonymously here)—is and must be raised and decided upon inthe course o an argumentation. And since it cannot be disputedthat this is so (one cannot communicate and argue that one can-not communicate and argue), and it must be assumed that every-

one knows what it means to claim something to be true (onecannot deny this statement without claiming its negation to be

For various “cognitivist” approaches toward ethics c. K. Baier, Te Moral Pointo View, Ithaca, 1958;M. Singer, Generalization in Ethics, London, 1863; P. Lorenzen,Normative Logic and Ethics, Mannheim, 1969; S. oulmin, Te Place o Reason inEthics, Cambridge, 1970; F. Kambartel (ed.), Praktische Philosophie und konstruk-tive Wissenschastheorie, Frankurt/M., 1974; A. Gewirth, Reason and Morality,Chicago, 1978.

Another cognitivist tradition is represented by various “natural rights” theorists.C. J. Wild, Plato’s Modern Enemies and the Teory o Natural Law, Chicago, 1953;H. Veatch, Rational Man. A Modern Interpretation o Aristotelian Ethics, Bloom-ington, 1962; and For An Ontology o Morals. A Critique o Contemporary EthicalTeory, Evanston, 1968; and Human Rights. Fact or Fancy?, Baton Rouge, 1985; L.Strauss, Natural Right and History, Chicago, 1970.




true), this has been aptly called “the a priori o communication and

argumentation.”

116

Now, arguing never just consists o ree-oating propositionsclaiming to be true. Rather, argumentation is always an activity, too.But given that truth claims are raised and decided upon in argu-mentation and that argumentation, aside rom whatever is said inits course, is a practical aair, it ollows that intersubjectively mean-ingul norms must exist—precisely those which make some action

an argumentation—which have special cognitive status in that they are the practical preconditions o objectivity and truth.

Hence, one reaches the conclusion that norms must indeedbe assumed to be justiiable as valid. It is simply impossible toargue otherwise, because the ability to argue so would in act pre-suppose the validity o those norms which underlie any argumen-tation whatsoever.117 Te answer, then, to the question o which

C. K. O. Apel, ransormation der Philosophie, Vol. 2, Frankurt/M, 1973, inparticular the essay “Das Apriori der Kommunikationsgemeinscha und die Grund-lagen der Ethik”; also J. Habermas, “Wahrheitstheorien,” in: H. Fahrenbach (ed.),Wirklichkeit und Reexion, Pullingen, 1974; Teorie des kommunikativen Han-delns, Vol. 1, Frankurt/M, 1981, pp.44; and Moralbewusstsein und kommunika-tives Handeln, Frankurt/M., 1983.

Note the structural resemblance o the “a priori o argumentation” to the “a priorio action,” i.e., the act, as explained in Chapter 6 above, that there is no way o dis-proving the statement that everyone knows what it means to act, since the attempt todisprove this statement would presuppose one’s knowledge o how to perorm cer-

tain activities. Indeed, the indisputability o the knowledge o the meaning o validity claims and action are intimately related. On the one hand, actions are more unda-mental than argumentation with whose existence the idea o validity emerges, asargumentation is clearly only a subclass o action. On the other hand, to say whathas just been said about action and argumentation and their relation to each otheralready requires argumentation and so in this sense—epistemologically, that is—argumentation must be considered to be more undamental than nonargumentativeaction. But then, as it is epistemology, too, which reveals the insight that although itmight not be known to be so prior to any argumentation, in act the development o argumentation presupposes action in that validity claims can only be explicitly dis-cussed in an argument i the persons doing so already know what it means to haveknowledge implied in actions; both, the meaning o action in general and argumen-tation in particular, must be thought o as logically necessary interwoven strands o a priori knowledge. Methodologically, our approach exhibits a close resemblance to what A. Gewirthhas described as the “dialectically necessary method” (Reason and Morality, Chicago,




ends can or cannot be justied is to be derived rom the concept o

argumentation. And with this, the peculiar role o reason in deter-mining the contents o ethics is given a precise description, too.

In contrast to the role o reason in establishing empirical laws o

nature, reason can claim to yield results in determining moral laws

which can be shown to be valid a priori. It only makes explicit what

is already implied in the concept o argumentation itsel; and in

analyzing any actual norm proposal, its task is merely conned to

analyzing whether or not it is logically consistent with the very eth-ics which the proponent must presuppose as valid insoar as he is

able to make his proposal at all.118

1978, p.42-47)—a method o a priori reasoning modeled aer the Kantian idea o transcendental deductions. Unortunately, though, in his important study Gewirthchooses the wrong starting point or his analyses. He attempts to derive an ethicalsystem not rom the concept o argumentation, but rom that o action. However,this surely cannot work, because rom the correctly stated act that in action an agent

must, by necessity, presuppose the existence o certain values or goods, it does notollow that such goods then are universalizable and should thus be respected by oth-ers as the agent’s goods by right. (On the requirement o normative statements to beuniversalizable c. the ollowing discussion in the text.) Rather, the idea o truth, orregarding morals, o universalizable rights or goods only emerges with argumenta-tion as a special subclass o actions but not with action as such, as is clearly revealedby the act that Gewirth, too, is not engaged simply in action, but more specically in argumentation when he tries to convince us o the necessary truth o his ethicalsystem. However, with argumentation recognized as the one and only appropriatestarting point or the dialectically necessary method, a capitalist (i.e., non-Gewir-thian) ethic ollows, as will be seen. On the aultiness o Gewirth’s attempt to derive

universalizable rights rom the notion o action c. also the perceptive remarks by M.MacIntyre, Aer Virtue, Notre Dame, 1981, pp.6465; J. Habermas, Moralbewusst-sein und kommunikatives Handeln, Frankurt/M., 1983, pp.110-111; and H. Veatch,Human Rights, Baton Rouge, 1985, pp. 159-160. Te relationship between our approach and a “natural rights” approach can nowbe described in some detail, too. Te natural law or natural rights tradition o philo-sophic thought holds that universally valid norms can be discerned by means o rea-son as grounded in the very nature o man. It has been a common quarrel with thisposition, even on the part o sympathetic readers, that the concept o human natureis ar “too diuse and varied to provide a determinate set o contents o natural law”

(A. Gewirth, “Law, Action, and Morality” in: Georgetown Symposium on Ethics.Essays in Honor o H. Veatch (ed. R. Porreco), New York, 1984, p.73). Furthermore,its description o rationality is equally ambiguous in that it does not seem to distin-guish between the role o reason in establishing empirical laws o nature on the onehand, and normative laws o human conduct on the other. (C., or instance, the dis-cussion in H. Veatch, Human Rights, Baton Rouge, 1985, p.62-67.)




But what is the ethics implied in argumentation whose validity

cannot be disputed, as disputing it would implicitly have to presup-pose it? Quite commonly it has been observed that argumentationimplies that a proposition claims universal acceptability, or, shouldit be a norm proposal, that it is “universalizable.” Applied to normproposals, this is the idea, as ormulated in the Golden Rule o eth-ics or in the Kantian Categorical Imperative, that only those normscan be justied that can be ormulated as general principles whichare valid or everyone without exception.119 Indeed, as argumenta-

tion implies that everyone who can understand an argument mustin principle be able to be convinced o it simply because o its argu-mentative orce, the universalization principle o ethics can nowbe understood and explained as grounded in the wider “a priorio communication and argumentation.” Yet the universalizationprinciple only provides a purely ormal criterion or morality. obe sure, checked against this criterion all proposals or valid normswhich would speciy dierent rules or dierent classes o people

could be shown to have no legitimate claim o being universally acceptable as air norms, unless the distinction between dier-ent classes o people were such that it implied no discrimination,but could instead be accepted as ounded in the nature o thingsagain by everyone. But while some norms might not pass the test

In recognizing the narrower concept o argumentation (instead o the wider oneo human nature) as the necessary starting point in deriving an ethic, and in assign-

ing to moral reasoning the status o a priori reasoning, clearly to be distinguishedrom the role o reason perormed in empirical research, our approach not only claims to avoid these diculties rom the outset, but claims thereby to be at oncemore straightorward and rigorous. Still, to thus dissociate mysel rom the naturalrights tradition is not to say that I could not agree with its critical assessment o mosto contemporary ethical theory; indeed I do agree with H. Veatch’s complementary reutation o all desire (teleological, utilitarian) ethics as well as all duty (deonto-logical) ethics (see Human Rights, Baton Rouge, 1985, Chapter 1). Nor do I claimthat it is impossible to interpret my approach as alling in a “rightly conceived” natu-ral rights tradition aer all. What I claim, though, is that the ollowing approach isclearly out o line with what the natural rights approach has actually come to be, andthat it owes nothing to this tradition as it stands. Te universalization principle gures prominently indeed among all cognitiv-ist approaches to morals. For the classical exposition c. I. Kant, “Grundlegung zurMetaphysik der Sitten” and “Kritik der praktischen Vernun” in: Kant, Werke (ed.Weischedel), vol. IV, Wiesbaden, 1956.




o universalization, i enough attention were paid to their ormula-tion, the most ridiculous norms, and what is o course even morerelevant, even openly incompatible norms could easily and equally well pass it. For example, “everybody must get drunk on Sundays orbe ned” or “anyone who drinks alcohol will be punished” are bothrules that do not allow discrimination among groups o people andthus could both claim to satisy the condition o universalization.

Clearly then, the universalization principle alone would notprovide one with any positive set o norms that could be demon-

strated to be justiied. However, there are other positive normsimplied in argumentation aside rom the universalization principle.In order to recognize them, it is only necessary to call three interre-lated acts to attention. First, that argumentation is not only a cog-nitive but also a practical aair. Second, that argumentation, as aorm o action, implies the use o the scarce resource o one’s body.And third, that argumentation is a conict-ree way o interact-

ing. Not in the sense that there is always agreement on the thingssaid, but in the sense that as long as argumentation is in progressit is always possible to agree at least on the act that there is dis-agreement about the validity o what has been said. And this is tosay nothing else than that a mutual recognition o each person’sexclusive control over his own body must be presupposed as longas there is argumentation (note again, that it is impossible to deny this and claim this denial to be true without implicitly having to

admit its truth).Hence, one would have to conclude that the norm implied in

argumentation is that everybody has the right o exclusive controlover his own body as his instrument o action and cognition. Only i there is at least an implicit recognition o each individual’s prop-erty right in his own body can argumentation take place.120 Only as

0

It might be noted here that only because scarcity exists is there even a prob-lem o ormulating moral laws; insoar as goods are superabundant (“ree” goods)no conict over the use o goods is possible and no action-coordination is needed.Hence, it ollows that any ethic, correctly conceived, must be ormulated as a theory o property, i.e., a theory o the assignment o rights o exclusive control over scarcemeans. Because only then does it become possible to avoid otherwise inescapable




long as this right is recognized is it possible or someone to agree

to what has been said in an argument and hence can what has beensaid be validated, or is it possible to say “no” and to agree only onthe act that there is disagreement. Indeed, anyone who would try to justiy any norm would already have to presuppose the prop-erty right in his body as a valid norm, simply in order to say, “Tisis what I claim to be true and objective.” Any person who wouldtry to dispute the property right in his own body would becomecaught up in a contradiction, as arguing in this way and claiming

his argument to be true, would already implicitly accept precisely this norm as being valid.

Tus it can be stated that whenever a person claims that somestatement can be justied, he at least implicitly assumes the ol-lowing norm to be justied: “Nobody has the right to uninvitedly aggress against the body o any other person and thus delimit orrestrict anyone’s control over his own body.” Tis rule is implied in

the concept o justication as argumentative justication. Justiyingmeans justiying without having to rely on coercion. In act, i oneormulates the opposite o this rule, i.e., “everybody has the right touninvitedly aggress against other people” (a rule, by the way, thatwould pass the ormal test o the universalization principle!), thenit is easy to see that this rule is not, and never could be, deendedin argumentation. o do so would in act have to presuppose the

validity o precisely its opposite, i.e., the aorementioned principle

o nonaggression.

With this justication o a property norm regarding a person’sbody it may seem that not much is won, as conicts over bodies,or whose possible avoidance the nonaggression principle ormu-lates a universally justiable solution, make up only a small portion

and unresolvable conict. Unortunately, moral philosophers, in their widespread

ignorance o economics, have hardly ever seen this clearly enough. Rather, like H.Veatch (Human Rights, Baton Rouge, 1985, p. 170), or instance, they seem to think that they can do without a precise denition o property and property rights only tothen necessarily wind up in a sea o vagueness and adhoceries. On human rights asproperty rights c. also M. N. Rothbard, Te Ethics o Liberty, Atlantic Highlands,1982, Chapter 15.




o all possible conicts. However, this impression is not correct.

o be sure, people do not live on air and love alone. Tey need asmaller or greater number o other things as well, simply to survive—and o course only he who survives can sustain an argumen-tation, let alone lead a comortable lie. With respect to all o theseother things norms are needed, too, as it could come to conictingevaluations regarding their use. But in act, any other norm mustbe logically compatible with the nonaggression principle in orderto be justied itsel, and, mutatis mutandis, every norm that could

be shown to be incompatible with this principle would have to beconsidered invalid. In addition, as the things with respect to whichnorms have to be ormulated are scarce goods—just as a person’sbody is a scarce good—and as it is only necessary to ormulatenorms at all because goods are scarce and not because they are par-ticular kinds o scarce goods, the specications o the nonaggres-sion principle, conceived o as a special property norm reerring toa specic kind o good, must in act already contain those o a gen-

eral theory o property.

I will rst state this general theory o property as a set o rulesapplicable to all goods with the purpose o helping one to avoidall possible conlicts by means o uniorm principles, and willthen demonstrate how this general theory is implied in the non-aggression principle. Since according to the nonaggression princi-ple a person can do with his body whatever he wants as long as he

does not thereby aggress against another person’s body, that personcould also make use o other scarce means, just as one makes use o one’s own body, provided these other things have not already beenappropriated by someone else but are still in a natural, unownedstate. As soon as scarce resources are visibly appropriated—as soonas someone “mixes his labor,” as John Locke phrased it,121 withthem and there are objective traces o this—then property, i.e.,the right o exclusive control, can only be acquired by a contrac-tual transer o property titles rom a previous to a later owner, and

C. J. Locke, wo reatises on Government (ed. P. Laslett), Cambridge, 1970,esp. 2, 5.




any attempt to unilaterally delimit this exclusive control o previ-

ous owners or any unsolicited transormation o the physical char-acteristics o the scarce means in question is, in strict analogy withaggressions against other people’s bodies, an unjustiable action.122

Te compatibility o this principle with that o nonaggressioncan be demonstrated by means o an argumentum a contrario.First, it should be noted that i no one had the right to acquire andcontrol anything except his own body (a rule that would pass theormal universalization test), then we would all cease to exist andthe problem o the justication o normative statements (or, orthat matter, any other problem that is o concern in this treatise)simply would not exist. Te existence o this problem is only pos-sible because we are alive, and our existence is due to the act thatwe do not, indeed cannot , accept a norm outlawing property inother scarce goods next and in addition to that o one’s physicalbody. Hence, the right to acquire such goods must be assumed to

exist. Now, i this is so, and i one does not have the right to acquiresuch rights o exclusive control over unused, nature-given thingsthrough one’s own work, i.e., by doing something with things withwhich no one else had ever done anything beore, and i other peo-ple had the right to disregard one’s ownership claim with respectto such things which they had not worked on or put to some par-ticular use beore, then this would only be possible i one couldacquire property titles not through labor, i.e., by establishing some

objective, intersubjectively controllable link between a particularperson and a particular scarce resource, but simply by verbal dec-laration; by decree.123 However, acquiring property titles through

On the nonaggression principle and the principle o original appropriation c.also M. N. Rothbard, For A New Liberty, New York, 1978, Chapter 2; and Te Ethicso Liberty, Atlantic Highlands, 1982, Chapters 6-8. Tis, or instance, is the position taken by J. J. Rousseau, when he asks us to resist

attempts to privately appropriate nature given resources by, or example, encingthem in. In his amous dictum, he says, “Beware o listening to this impostor; you areundone i you once orget that the ruits o the earth belong to us all, and the earthitsel to nobody” (“Discourse upon the Origin and Foundation o Inequality amongMankind” in: J. J. Rousseau, he Social Contract and Discourses (ed. G. Cole),New York, 1950, p.235). However, it is only possible to argue so i it is assumed that




declaration is incompatible with the above justied nonaggression

principle regarding bodies. For one thing, i one could iad-ndeedappropriate property by decree, then this would imply that it wouldalso be possible or one to simply declare another person’s body tobe one’s own. Yet this, clearly enough, would conict with the rul-ing o the nonaggression principle which makes a sharp distinc-tion between one’s own body and the body o another person. Andthis distinction can only be made in such a clear-cut and unam-biguous way because or bodies, as or anything else, the separation

between “mine” and “yours” is not based on verbal declarations buton action. (Incidentally, a decision between rival declarative claimscould not be made unless there were some objective criterion otherthan declaration.) Te separation is based on the observation thatsome particular scarce resource had in act—or everyone to seeand veriy, as objective indicators or this would exist—been madean expression or materialization o one’s own will, or, as the case

may be, o someone else’s will. Moreover, and more importantly, tosay that property is acquired not through action but through a dec-laration involves an open practical contradiction, because nobody could say and declare so unless in spite o what was actually saidhis right o exclusive control over his body as his own instrumento saying anything was in act already presupposed.

It has now been demonstrated that the right o original appro-

priation through actions is compatible with and implied in thenonaggression principle as the logically necessary presuppositiono argumentation. Indirectly, o course, it has also been demon-strated that any rule speciying dierent rights, such as a social-ist property theory, cannot be justiied. Beore entering a moredetailed analysis, though, o why any socialist ethic is indeensi-ble—a discussion which should throw some additional light on theimportance o some o the stipulations o the “natural,” capitalist

property claims can be justied by decree. Because how else could “all” (i.e., eventhose who never did anything with the resources in question) or “nobody” (i.e., noteven those who actually made use o it) own something—unless property claimswere ounded by mere decree?!




theory o property—a ew remarks about what is or is not implied

by classiying these latter norms as justied seem to be in order.In making this assertion, one need not claim to have derived

an “ought” rom an “is.” In act, one can readily subscribe to thealmost generally accepted view that the gul between “ought” and“is” is logically unbridgeable.124 Rather, classiying the rulings o thenatural theory o property in this way is a purely cognitive matter.It no more ollows rom the classication o the principle under-lying capitalism as “air” or “just” that one ought to act accordingto it, than it ollows rom the concept o validity or truth that oneshould always strive or it. o say that this principle is just also doesnot preclude the possibility o people proposing or even enorcingrules that are incompatible with it. As a matter o act, with respectto norms the situation is very similar to that in other disciplines o scientic inquiry. Te act, or instance, that certain empirical state-ments are justied or justiable and others are not does not imply

that everyone only deends objective, valid statements. Rather, peo-ple can be wrong, even intentionally. But the distinction betweenobjective and subjective, between true and alse, does not lose any o its signicance because o this. Rather, people who are wrongwould have to be classied as either uninormed or intentionally lying. Te case is similar with respect to norms. O course thereare many people who do not propagate or enorce norms which

can be classied as valid according to the meaning o justicationwhich I have given above. But the distinction between justiableand nonjustiable norms does not dissolve because o this, just asthat between objective and subjective statements does not crum-ble because o the existence o uninormed or lying people. Rather,and accordingly, those people who would propagate and enorcesuch dierent, invalid norms would again have to be classied asuninormed or dishonest, insoar as one had explained to them

On the problem o the deriveability o “ought” rom “is” statements c. W. D.Hudson (ed.), Te Is-Ought Question, London, 1969; or the view that the act-

value dichotomy is an ill-conceived idea c. the natural rights literature cited in note115 above.




and indeed made it clear that their alternative norm proposals orenorcements could not and never would be justiable in argu-mentation. And there would be even more justication or doingso in the moral case than in the empirical one, since the validity o the nonaggression principle and that o the principle o origi-nal appropriation through action as its logically necessary corol-lary must be considered to be even more basic than any kind o

valid or true statements. For what is valid or true has to be denedas that upon which everyone acting according to this principle can

possibly agree. As a matter o act, as has just been shown, at leastthe implicit acceptance o these rules is the necessary prerequisiteto being able to live and to argue at all.125

Why is it, then, precisely, that socialist property theories o any kind ail to be justiable as valid? First, it should be noted that allo the actually practiced versions o socialism and most o its theo-retically proposed models as well would not even pass the rst or-

mal universalization test, and would ail or this act alone! Tese versions all contain norms within their ramework o legal ruleswhich have the orm “some people do, and some people do not.”However, such rules, which speciy dierent rights or obligationsor dierent classes o people, have no chance o being acceptedas air by every potential participant in an argumentation or sim-ply ormal reasons. Unless the distinction made between dierentclasses o people happens to be such that it is acceptable to both

sides as grounded in the nature o things, such rules would not beacceptable because they would imply that one group is awardedlegal privileges at the expense o complementary discriminationsagainst another group. Some people, either those who are allowedto do something or those who are not, thereore could not agree

Writes M. N. Rothbard in Te Ethics o Liberty, Atlantic Highlands, 1982, p.32:“Now, any person participating in any sort o discussion, including one on values, is,

by virtue o so participating, alive and arming lie. For i he were really opposed tolie he would have no business in such a discussion, indeed he would have no busi-ness continuing to be alive. Hence, the supposed opponent o lie is really armingit in the very process o discussion, and hence the preservation and urtherance o one’s lie takes on the stature o an incontestable axiom.” C. also D. Ostereld, “theNatural Rights Debate” in: Journal o Libertarian Studies, VII, I, 1983, pp.106.




that these were air rules.126 Since most kinds o socialism, as prac-

ticed or preached, have to rely on the enorcement o rules such as“some people have the obligation to pay taxes, and others have the

right to consume them” or “some people know what is good or

you and are allowed to help you get these alleged blessings even

i you do not want them, but you are not allowed to know what is

good or them and help them accordingly’ or “some people have

the right to determine who has too much o something and who

too little, and others have the obligation to comply” or even more

plainly, “the computer industry must pay to subsidize the arm-ers,” “the employed or the unemployed,” “the ones without kids or

those with kids,” etc., or vice versa, they all can be discarded easily

as serious contenders to the claim o being part o a valid theory o

norms qua property norms, because they all indicate by their very

ormulation that they are not universalizable.

But what is wrong with the socialist property theories i this is

taken care o and there is indeed a theory ormulated that contains

exclusively universalizable norms o the type “nobody is allowed

to” or “everybody can”? Even then—and this, more ambitiously, is

what has been demonstrated indirectly above and shall be argued

directly-socialism could never hope to prove its validity, no lon-

ger because o ormal reasons, but because o its material speci-

cations. Indeed, while those orms o socialism that can easily be

reuted regarding their claim to moral validity on simple ormalgrounds can at least be practiced, the application o those more

sophisticated versions that would pass the universalization test

prove, or material reasons, to be atal: even i we tried, they simply

could never be put into eect.

Tere are two related specications in the norms o the natu-

ral theory o property with at least one o which a socialist prop-

erty theory comes into conlict. he irst such speciication isthat according to the capitalistic ethic, aggression is dened as an

C. also M. N. Rothbard, Te Ethics o Liberty, Atlantic Highlands, 1982, p.45.




what was done—aecting my opportunities, my psychic integrity,

my eeling o what is owed to me—would have to be classied asan aggressive act.

Why is this idea o protecting the value o property unjusti-able? First, while every person, at least in principle, can have ullcontrol over whether or not his actions cause the physical charac-teristics o something to change, and hence also can have ull con-trol over whether or not those actions are justiable, control overwhether or not one’s actions aect the value o someone else’s prop-erty does not rest with the acting person, but rather with other peo-ple and their subjective evaluations. Tus no one could determineex ante i his actions would be classied as justiable or unjusti-able. One would rst have to interrogate the whole population tomake sure that one’s planned actions would not change anotherperson’s evaluations regarding his own property. And even thennobody could act until universal agreement was reached on who is

supposed to do what with what, and at which point in time. Clearly,or all the practical problems involved, one would be long deadand nobody would argue anything any longer long beore this wasever accomplished.129 But more decisively still, the socialist posi-tion regarding property and aggression could not even be eec-tively argued , because arguing in avor o any norm, socialist or not,implies that there is conict over the use o some scarce resource,

otherwise there would simply be no need or discussion. However,in order to argue that there is a way out o such conicts, it must bepresupposed that actions must be allowed to be perormed prior to any actual agreement or disagreement, because i they were not,one could not even argue so. Yet i one can do this—and socialism

kind (ibid., pp. 83-86), unless he thought that the right existed to have the integrity o one’s property values (rather than its physical integrity) preserved?! For a devastat-ing critique o Nozick’s theory in particular c. M. N. Rothbard, Te Ethics o Liberty,Atlantic Highlands, 1982, Chapter 29; on the allacious use o the indierence curveanalysis, employed both by Rawls and Nozick, c. the same, “oward a Reconstruc-tion o Utility and Welare Economics,” Center or Libertarian Studies, OccasionalPaper No. 3, New York, 1977. C. also M. N. Rothbard, Te Ethics o Liberty, Atlantic Highlands, 1982, p.46.




too must assume that one can, insoar as it exists as an argued intel-

lectual position—then this is only possible because the existence o ob jective borders o property i.e., borders which every person canrecognize as such on his own, without having to agree rst withanyone else with respect to one’s system o values and evaluations.Socialism, too, then, in spite o what it says, must in act presupposethe existence o objective property borders, rather than o bordersdetermined by subjective evaluations, i only in order to have any surviving socialist who can make his moral proposals.

Te socialist idea o protecting value instead o physical integ-rity also ails or a second, related reason. Evidently, the value o aperson, or example, on the labor or marriage market, can be andindeed is aected by other people’s physical integrity or degree o physical integrity. Tus, i one wanted property values to be pro-tected, one would have to allow physical aggression against people.However, it is only because o the very act that a person’s borders—

that is, the borders o a person’s property in his body as his domaino exclusive control with which another person is not allowed tointerere unless he wishes to become an aggressor—are physicalborders (intersubjectively ascertainable, and not just subjectively ancied borders) that everyone can agree on anything indepen-dently (and, o course, agreement means agreement o indepen-dent decision-making units!). Only because the protected borderso property are objective then, i.e., xed and recognizable as xed

prior to any conventional agreement, can there at all be argumen-tation, and possibly agreement, between independent decision-making units. Tere simply could not be anyone arguing anythingunless his existence as an independent physical unit was rst rec-ognized. No one could argue in avor o a property system den-ing borders o property in subjective, evaluative terms—as doessocialism—because simply to be able to say so presupposes that,

contrary to what the theory says, one must in act be a physically independent unit saying it.

Te situation is no less dire or socialism when one turns to thesecond essential specication o the rulings o the natural theory




o property. Te basic norms o capitalism were characterized not

only by the act that property and aggression were dened in phys-ical terms; it was o no less importance that in addition property was dened as private, individualized property and that the mean-ing o original appropriation, which evidently implies making adistinction between prior and later, had been specied. It is withthis additional specication as well that socialism comes into con-ict. Instead o recognizing the vital importance o the prior-laterdistinction in deciding between conicting property claims, social-

ism proposes norms which in eect state that priority is irrelevantin making such a decision and that late-comers have as much o a right to ownership as rst-comers. Clearly, this idea is involvedwhen social-democratic socialism, or instance, makes the naturalowners o wealth and/or their heirs pay a tax so that the unortu-nate latecomers might be able to participate in its consumption.And this idea is also involved, or instance, when the owner o a

natural resource is orced to reduce (or increase) its present exploi-tation in the interest o posterity. Both times it only makes sense todo so when it is assumed that the person accumulating wealth rst,or using the natural resource rst, thereby commits an aggressionagainst some late-comers. I they have done nothing wrong, thenthe late-comers could have no such claim against them.130

What is wrong with this idea o dropping the prior-later dis-

tinction as morally irrelevant? First, i the late-comers, i.e., thosewho did not in act do something with some scarce goods, hadindeed as much o a right to them as the rst-comers, i.e., thosewho did do something with the scarce goods, then literally no onewould be allowed to do anything with anything, as one would haveto have all o the late-comers’ consent prior to doing whatever onewanted to do. Indeed, as posterity would include one’s children’schildren—people, that is, who come so late that one could never

0 For an awkward philosophical attempt to justiy a late-comer ethic c. J. Rawls,A Teory o Justice, Cambridge, 1971, pp.284; J. Sterba, Te Demands o Justice,Notre Dame, 1980, esp. pp.58, pp.137; On the absurdity o such an ethic c. M. N.Rothbard, Man, Economy and State, Los Angeles, 1972, p.427.




possibly ask them—advocating a legal system that does not makeuse o the prior-later distinction as part o its underlying property theory is simply absurd in that it implies advocating death but mustpresuppose lie to advocate anything. Neither we, our oreathers,nor our progeny could, do, or will survive and say or argue any-thing i one were to ollow this rule. In order or any person—past,present, or uture—to argue anything it must be possible to sur-

vive now. Nobody can wait and suspend acting until everyone o an indeterminate class o late-comers happens to appear and agree

to what one wants to do. Rather, insoar as a person nds him-sel alone, he must be able to act, to use, produce, consume goodsstraightaway, prior to any agreement with people who are simply not around yet (and perhaps never will be). And insoar as a per-son nds himsel in the company o others and there is conictover how to use a given scarce resource, he must be able to resolvethe problem at a denite point in time with a denite number o people instead o having to wait unspecied periods o time or

unspecied numbers o people. Simply in order to survive, then,which is a prerequisite to arguing in avor o or against anything,property rights cannot be conceived o as being timeless and non-specic regarding the number o people concerned. Rather, they must necessarily be thought o as originating through acting at de-inite points in time or denite acting individuals.131

Furthermore, the idea o abandoning the prior-later distinc-

tion, which socialism nds so attractive, would again simply beincompatible with the nonaggression principle as the practicaloundation o argumentation. o argue and possibly agree withsomeone (i only on the act that there is disagreement) means torecognize each other’s prior right o exclusive control over his own

It should be noted here, too, that only i property rights are conceptualized asprivate property rights originating in time, does it then become possible to make

contracts. Clearly enough, contracts are agreements between enumerable physically independent units which are based on the mutual recognition o each contractor’sprivate ownership claims to things acquired prior to the agreement, and which thenconcern the transer o property titles to denite things rom a specic prior to aspecic later owner. No such thing as contracts could conceivably exist in the rame-work o a late-comer ethic!




body. Otherwise, it would be impossible or anyone to rst say any-thing at a denite point in time and or someone else to then be ableto reply, or vice versa, as neither the rst nor the second speakerwould be independent physical decision-making units anymore,at any time. Eliminating the prior-later distinction then, as social-ism attempts to do, is tantamount to eliminating the possibility o arguing and reaching agreement. However, as one cannot arguethat there is no possibility or discussion without the prior controlo every person over his own body being recognized and accepted

as air, a late-comer ethic that does not wish to make this dierencecould never be agreed upon by anyone. Simply saying that it couldimplies a contradiction, as one’s being able to say so would presup-pose one’s existence as an independent decision-making unit at adenite point in time.

Hence, one is orced to conclude that the socialist ethic is acomplete ailure. In all o its practical versions, it is no better than a

rule such as “I can hit you, but you cannot hit me,” which even ailsto pass the universalization test. And i it did adopt universalizablerules, which would basically amount to saying “everybody can hiteverybody else,” such rulings could not conceivably be said to beuniversally acceptable on account o their very material specica-tion. Simply to say and argue so must presuppose a person’s prop-erty right over his own body. Tus, only the rst-come-rst-ownethic o capitalism can be deended eectively as it is implied in

argumentation. And no other ethic could be so justied, as justiy-ing something in the course o argumentation implies presupposingthe validity o precisely this ethic o the natural theory o property.




Chapter 8

Te Socio-psychologicalFoundations o Socialism orTe Teory o Te State

I

n the preceding chapters it has been demonstrated that social-ism as a social system implying a redistribution o property

titles away rom user-owners and contractors to nonuser-own-ers and noncontractors necessarily involves a reduction in the

production o wealth, since the use and contracting o resourcesare costly activities whose perormance is made even more costly as compared with alternatives available to actors. Secondly, sucha system cannot be deended as a air or just social order rom amoral point o view because to argue so, in act to argue at all, in

avor or against anything , be it a moral, nonmoral, empirical, orlogico-analytical position, necessarily presupposes the validity o the rst-use-rst-own rule o the natural theory o property andcapitalism, as otherwise no one could survive and then say, or pos-sibly agree on, anything as an independent physical unit.

I neither an economic nor a moral case or socialism canbe made, then socialism is reduced to an aair o merely social-psychological signicance. What, then, are the socio-psychologi-cal oundations on which socialism rests? Or, since socialism hasbeen dened as an institutionalized policy o redistribution o

173




property titles away rom user-owners and contractors, how is an

institution that implements a more or less total expropriation o natural owners possible?

I an institution exists that is allowed to appropriate property

titles other than through original appropriation or contract, it mustassumedly damage some people who consider themselves to be the

natural owners o these things. By securing and possibly increas-ing its monetary and/or non-monetary income it reduces that o

other people—something categorically dierent rom the situationthat exists when there is a contractual relationship among people

in which no one gains at the expense o anyone else but everyoneprots, as otherwise there simply would not be any exchange. In

this case one can expect resistance to the execution o such a pol-icy. Tis inclination to resist can, o course, be more or less inten-

sive, and it can change over time and become either more or lesspronounced and pose a greater or smaller threat to the institution

carrying out the policy o redistribution. But as long as it exists atall, the institution must reckon with it. In particular, it must reckon

with it i one assumes that the people representing this institu-tion are ordinary people who, like everyone else, have an interest

not only in stabilizing their current income which they are ableto secure or themselves in their roles as representatives o this

institution but also in increasing this income as much as possible.

How, and this is precisely the problem, can they stabilize and pos-sibly increase their income rom noncontractual exchanges, even

though this necessarily creates victims—and, over time, increasingnumbers o victims, or victims who are increasingly hurt?

Te answer can be broken down into three parts which will

be discussed in turn: (1) by aggressive violence; (2) by corruptingthe public through letting them or rather parts o them share in the

enjoyment o the receipts coercively extracted rom natural ownerso things; and (3) by corrupting the public through letting them or

parts o them participate in the specic policy o expropriation tobe enacted.




o assure its very existence, any institution that enorces a

socialist theory o property must rely on the continual threat o violence. Any such institution threatens people who are unwilling

to accept its noncontractual appropriations o their natural prop-

erty with physical assault, imprisonment, enslavement, or even

death, and it must carry out such threats i necessary, in order to

stay ‘trust-worthy” as the kind o institution that it is. Since one is

dealing with an institution—an organization, that is, which per-

orms these actions on a regular basis—it is almost sel-explanatory

that it reuses to call its own practice o doing things “aggression,”

and instead adopts a dierent name or it, with neutral or possibly

even positive connotations. In act, its representatives might not

even think that they themselves are aggressors when acting in the

name o this organization. However, it is not names or terms that

matter here or elsewhere, but what they really mean.132 Regarding

On the dierence between institutional aggression committed by the state asthe very incorporation o socialism and common, criminal action c. L. Spooner,No reason, Colorado Springs, 1973, pp. 19-20.: .”..the government, like a highway-man, says to a man: “Your money, or your lie.” And many, i not most, taxes are paidunder the compulsion o that threat. Te government does not, indeed, waylay aman in a lonely place, spring upon him rom the roadside, and, holding a pistol tohis head, proceed to rie his pockets. But the robbery is none the less a robbery onthat account; and it is ar more dastardly and shameul. Te highwayman takes solely upon himsel the responsibility, danger, and crime o his own act. He does not pre-tend that he has any rightul claim to your money, or that he intends to use it or yourown benet. He does not pretend to be anything but a robber. He has not acquiredimpudence enough to proess to be merely a “protector,” and that he takes men’smoney against their will, merely to enable him to “protect” those inatuated travel-lers, who eel perectly able to protect themselves, or do not appreciate his peculiarsystem o protection. He is too sensible a man to make such proessions as these.Furthermore, having taken your money, he leaves you, as you wish him to do. Hedoes not persist in ollowing you on the road, against your will; assuming to. be yourrightul “sovereign,” on account o the “protection” he aords you. He does not keep“protecting” you, by commanding you to bow down and serve him; by requiring youto do this, and orbidding you to do that; by robbing you o more money as oenas he nds it or his interest or pleasure to do so; and by brandishing you as a rebel,

a traitor, and an enemy to your country, and shooting you down without mercy, i you dispute his authority or resist his demands. He is too much o a gentleman to beguilty o such impostures and insults and villainies as these. In short, he does not, inaddition to robbing you, attempt to make you either his dupe or his slave. Te pro-ceedings o those robbers and murderers, who call themselves “the government,” aredirectly the opposite o these o the “single highwayman.”




the content o its actions, violence is the cornerstone o socialism’sexistence as an institution. And to leave no room or misunder-standing here, the violence on which socialism rests is not the kindo violence that a natural owner o things would use or threaten touse against aggressive intruders o his property. It is not the deen-sive threat toward a prospective murderer o, let us say, subject-ing him to capital punishment, should he in act murder someone.Rather, it is aggressive violence directed at innocent victims. Aninstitution carrying out socialism literally rests on the threat posed

by a prospective murderer against innocent people (i.e., peoplewho have not done any physical harm whatsoever to anyone) tokill them should they not comply with his demands, or even to killthem just or the “un” o killing.

It is not at all dicult to recognize the truth o this. In orderto do so, it is only necessary to assume a boycott o any exchange-relation with the representatives o socialism because such an

exchange, or whatever reasons, no longer seems proitable. Itshould be clear that in a social system based on the natural the-ory o property—under capitalism—anyone would have the rightto boycott at any time, as long as he was indeed the person whoappropriated the things concerned by using them beore anyoneelse did or by acquiring them contractually rom a previous owner.However much a person or institution might be aected by such aboycott, it would have to tolerate it and suer silently, or else try to

persuade the boycotter to give up his position by making a morelucrative oer to him. But it is not so with an institution that putssocialist ideas regarding property into eect. ry, or instance, tostop paying taxes or to make your uture payments o taxes depen-dent on certain changes or improvements in the services that theinstitution oers in return or the taxes—it would ine, assault,imprison you, or perhaps do even worse things to you. Or to useanother example, try to ignore this institution’s regulations or con-

trols imposed on your property. ry, that is to say, to make the pointthat you did not consent to these limitations regarding the use o your property and that you would not invade the physical integrity o anyone else’s property by ignoring such impositions, and hence,




that you have the right to secede rom its jurisdiction, to “cancel

your membership” so to speak, and rom then on deal with it onequal ooting, rom one privileged institution to another. Again,assumedly without having aggressed against anyone through yoursecession, this institution would come and invade you and yourproperty, and it would not hesitate to end your independence. Asa matter o act, i it did not do so, it would stop being what it is. Itwould abdicate and become a regular private property owner or acontractual association o such owners. Only because it does not so

abdicate is there socialism at all. Indeed, and this is why the title o this chapter suggested that the question regarding the socio-psy-chological oundations o socialism is identical to that o the oun-dations o a state, i there were no institution enorcing socialisticideas o property, there would be no room or a state, as a state isnothing else than an institution built on taxation and unsolicited,noncontractual intererence with the use that private people canmake o their natural property. Tere can be no socialism without

a state, and as long as there is a state there is socialism. Te state,then, is the very institution that puts socialism into action; and associalism rests on aggressive violence directed against innocent

victims, aggressive violence is the nature o any state.133

But socialism, or the state as the incorporation o socialistideas, does not rest exclusively on aggression. Te representativeso the state do not engage solely in aggressive acts in order to stabi-

lize their incomes, though without it there would not be any state!As long as the relationship between the state and private property

On the theory o the state c. M. N. Rothbard, “Te Anatomy o the State,” in:the same, Egalitarianism As A Revolt Against Nature, Washington, 1974; For A NewLiberty, New York, 1978; and Te Ethics o Liberty, Atlantic Highlands, 1982; H. H.Hoppe, Eigentum, Anarchie und Staat, Opladen, 1987; c. also A. Herbert, Te Rightand Wrong o Compulsion by the State (ed. E. Mack), Indianapolis, 1978; H. Spen-cer, Social Statics, London, 1851; F. Oppenheimer, Te State, New York, 1926; A. J.

Nock, Our Enemy, the State, Delevan, 1983; c. also J. Schumpeter’s remark directedagainst then as now prevalent views, notably among economists, that “the theory which construes taxes on the analogy o club dues or the purchase o a service o,say, a doctor only proves how ar removed this part o the social sciences is rom sci-entic habits o minds” (J. Schumpeter, Capitalism, Socialism and Democracy, NewYork, 1942, p. 198).




owners is exclusively a parasitic one, and the activities o the rep-resentatives o the state consist entirely o unsolicited interer-ences with other people’s property rights, designed to increase theincome o the ormer at the expense o a corresponding reductionin income o the latter, and these agents o socialism then do noth-ing else with their income than consume it or their own privatepurposes, then the chances or the state’s growth and the spread o socialism are at least very limited and narrow. Certainly, one man,or one group o men, possessed with sucient aggressive energies

can inspire enough ear in one and possibly even in a ew others,or in another more numerous group o men who, or whatever rea-son, lack such characteristics, and can establish a stable relationshipo exploitation. But it is impossible to explain the act, characteris-tic o all states and each and every socialist social system, that thegroup o men representing the state can hold people ten, a hundred,or even a thousand times more numerous than they themselves insubmission, and extract rom them the incredibly large amounts o

income that they in act do, only by instilling ear in them.

It might be thought that an increase in the degree o exploi-tation could explain the size o income. But rom the economicreasoning o previous chapters we know that a higher degree o exploitation o natural owners necessarily reduces their incentiveto work and produce, and so there is a narrow limit to the degreeto which one person (or group o persons) can lead a comortable

lie on the income coercively extracted rom another person (or aroughly equally sized group o persons) who would have to sup-port this liestyle through his (their) work. Hence, in order or theagents o socialism to be able to lead a comortable lie and pros-per as they do, it is essential that the number o exploited subjectsbe considerably larger and grow over-proportionally as comparedwith those o the representatives o the state itsel. With this, how-ever, we are back to the question o how the ew can rule the many.

Tere would also be no convincing way around this explana-tory task by arguing that the state could simply solve this problemby improving its weaponry; by threatening with atomic bombs




instead o with guns and rifes, so to speak, thereby increasing thenumber o its subjects. Since realistically one must assume that thetechnological know-how o such improved weaponry can hardly be kept secret, especially i it is in act applied, then with the state’simproved instruments or instilling ear, mutatis mutandis the

victims’ ways and means o resisting improve as well, and hence,such advances can hardly be thought o as explaining what hasto be explained.134 One must conclude, then, that the problem o explaining how the ew can rule the many is indeed real, and that

socialism and the state as the incorporation o socialism must restin addition to aggression on some sort o active support amongthe public.

David Hume is one o the classic expositors o this insight. Inhis essay on “Te rst principles o government” he argues:

Nothing appears more surprising to those who con-sider human aairs with a philosophical eye, than the

easiness with which the many are governed by the ew,and the implicit submission, with which men resigntheir own sentiments and passions to those o theirrulers. When we inquire by what means this won-der is eected we shall nd, that as Force is always onthe side o the governed, the governors have nothingto support them but opinion. It is, thereore, on opin-ion only that government is ounded, and this maxim

extends to the most despotic and most military gov-ernments, as well as to the most ree and most popular.Te soldan o Egypt, or the emperor o Rome, mightdrive his harmless subjects, like brute beasts, againsttheir sentiments and inclination. But he must, at least,have led his mamalukes or praetorian bands, like men,by their opinion.135

In addition, the use o at least some weaponry, such as atomic bombs, againstone’s subjects would be prohibitive, since the rulers could hardly prevent that they themselves would be hurt or killed by it, too. D. Hume, Essays, Moral, Political and Literary, Oxord, 1971, p.19; c. also E. deLa Boetie, Te Politics o Obedience: Te Discourse o Voluntary Servitude, NewYork, 1975.




How indeed is this support brought about? One important

component in the process o generating it is ideology. Te statespends much time and eort persuading the public that it is notreally what it is and that the consequences o its actions are positiverather than negative. Such ideologies, spread to stabilize a state’sexistence and increase its income, claim that socialism oers asuperior economic system or a social order that is more just thancapitalism, or claim that there is no such thing as justice at all priorto the state’s stepping in and simply declaring certain norms to

be just.136 And such ideologies, too, less attractive now, but onceextremely powerul, are those, or example, o the state being sanc-tied by religion, or o the rulers not being ordinary people butinstead god-like superhumans, who must be obeyed because o their natural superiority. I have gone to great lengths in previouschapters to demonstrate that such ideas are alse and unjustied,and I will return to the task o analyzing and unmasking another

ashionable ideology in the nal chapter o this treatise. But regard-less o the alsity o these ideologies, it must be recognized that they certainly do have some eect on people, and that they do contrib-ute—some more so than others—to their submission to a policy o aggressive invasion o the property rights o natural owners.

Yet there is another more important component contribut-ing to public support and this is not verbal propaganda, but rather

actions with a clear-cut, tangible impact. Instead o being a mereparasitic consumer o goods that other people have produced, thestate, in order to stabilize itsel and increase its income as much as

Te classical exposition o the idea that in the “state o nature” no distinctionbetween “just” and “unjust” can be made and that only the state creates justice is tobe ound in . Hobbes, Leviathan, Oxord, 1946. Tat this “positivistic” theory o law is untenable has been implicitly demonstrated in Chapter 7 above. In addition,it should be noted that such a theory does not even succeed in doing what it is sup-

posed to do: in justiying the state. Because the transition rom the state o nature toa statist system can o course only be called justied (as opposed to arbitrary) i natu-ral (pre- statist) norms exist that are the justicatory basis or this very transition.

For modern positivists c. G. Jellinek, Allgemeine Staatslehre, Bad Homburg,1966; H. Kelsen, Reine Rechtslehre, Wien, 1976; or a critique o legal positivism c.F. A. Hayek, Law, Legislation and Liberty, 3 vols., Chicago, 1973-79.




possible, adds some positive ingredients to its policy, designed tobe o use to some people outside the circle o its own personnel.Either it is engaged as an agent o income transer, i.e., as an orga-nization that hands out monetary or nonmonetary income to Bthat it has previously taken away rom A without A’s consent—nat-urally aer subtracting a handling charge or the never costless acto such a transer—or it engages in the production o goods or ser-

vices, using the means expropriated earlier rom natural owners,and thus contributes something o value to the users/buyers/con-

sumers o these goods. Either way, the state generates support orits role. Te recipients o transerred incomes as well as the users/consumers o state-produced goods and services become depen-dent to varying degrees on the continuation o a given state policy or their current incomes, and their inclination to resist the social-ism embodied in state rule is reduced accordingly.

But this is only hal o the picture. Te positive achievements

o the state are not undertaken simply to do something nice orsome people, as, or instance, when someone gives somebody else apresent. Nor are they done simply to gain as high an income as pos-sible rom the exchange or the organization doing them, as whenan ordinary, prot-oriented institution engages in trade. Rather,they are undertaken in order to secure the existence and contributeto the growth o an institution that is built on aggressive violence.As such, the positive contributions emanating rom the state must

serve a strategic purpose. Tey must be designed to break up resis-tance to or add support or the continued existence o an aggressoras an aggressor. O course, the state can err in this task, as can any ordinary business, because its decisions about what measures bestserves its strategic purposes have to be made in anticipation o cer-tain expected results. And i it errs with respect to the responsesollowing its policy decisions, instead o rising its income can all,

jeopardizing its very existence, just as a prot-oriented institution

can make losses or even go bankrupt i the public is not willing todeliberately buy what it was expected to buy. But only i the pecu-liar strategic purpose o state transers and state production as com-pared with private transers or production is understood does it




become possible to explain typical, recurring structural patterns o

a state’s actions, and to explain why states generally and uniormly preer to go into certain lines o activities rather than others.

As regards the rst problem: it does not make sense or a stateto exploit every individual to the same extent, since this wouldbring everyone against it, strengthen the solidarity among the vic-tims, and in any case, it would not be a policy that would nd many new riends. It also does not make sense or a state to grant its avorsequally and indiscriminately to everybody. For i it did, the victims

would still be victims, although perhaps to a lesser degree. However,there would then be less income le to be distributed to people whowould truly proteer rom state action, and whose increased sup-port could help compensate or the lack o support rom victimizedpersons. Rather, state policy must be and indeed is guided by themotto “divide et impera”: treat people dierently, play them againsteach other, exploit one possibly smaller group and avor another

possibly larger group at the ormer’s expense, and so counterbal-ance increased resentment or resistance o some by increased sup-port o others. Politics, as politics o a state, is not “the art o doingthe possible,” as statesmen preer to describe their business. It isthe art, building on an equilibrium o terror, o helping to stabilizestate income on as high a level as possible by means o popular dis-crimination and a popular, discriminatory scheme o distributionalavors. o be sure, a prot-oriented institution can also engage in

discriminatory business policies, but to do so and to ollow a dis-criminatory employment policy or not to sell indiscriminately toanyone who is willing to pay the price set or a given service orproduct is costly, and so an economic incentive to avoid such actionexists. For the state, on the other hand, there is every incentive inthe world to engage in such discriminatory practices.137

Regarding the kinds o services preerably oered by the

state: clearly, the state cannot produce everything, or at least not

For the classical exposition o this view o politics c. N. Machiavelli, Te Prince,Harmondsworth, 1961; c. also Q. Skinner, Te Foundations o Modern PoliticalTought, Cambridge, 1978.




everything to the same extent, or i it tried to do so its income

would actually all—as the state can only appropriate what has inact been produced earlier by natural owners, and the incentive toproduce anything in the uture would be almost completely gonein a system o all-around socialization. It is o utmost importancein trying to implement socialism, then, that a state engage in andconcentrate on the production and provision o such goods andservices (and, mutatis mutandis, drive private competitors out o competition in such lines o productive activities, thereby monop-

olizing their provision) which are strategically relevant or prevent-ing or suppressing any actual revolt, rebellion, or revolution.138

Tus, all states—some more extensively than others, but every state to a considerable degree—have elt the need to take the systemo education, or one thing, into their own hands. It either directly operates the educational institutions, or indirectly controls suchinstitutions by making their private operation dependent on the

granting o a state license, thus insuring that they operate within apredened ramework o guidelines provided by the state. ogetherwith a steadily extended period o compulsory schooling, this givesthe state a tremendous head start in the competition among dier-ent ideologies or the minds o the people. Ideological competitionwhich might pose a serious threat to state rule can thereby be elim-inated or its impact considerably reduced, especially i the state asthe incorporation o socialism succeeds in monopolizing the job

market or intellectuals by making a state license the prerequisiteor any sort o systematic teaching activity.139

Te direct or indirect control o trac and communicationis o similar strategic importance or a state. Indeed, all states havegone to great pains to control rivers, coasts and seaways, streets and

C. on this and the ollowing, M. N. Rothbard, Power and Market, Kansas City,

1977, pp. 182. On the role o the intellectuals and teachers as advocates o socialism and stat-

ism c. B. de Jouvenel, “Te reatment o Capitalism by Continental Intellectuals,”

in: F.A. Hayek, Capitalism and the Historians, Chicago, 1954; L. v. Mises, Te Anti-

Capitalist Mentality , South Holland, 1972.




railroads, and especially, mail, radio, television, and telecommuni-cation systems. Every prospective dissident is decisively restrainedin his means o moving around and coordinating the actions o individuals i these things are in the hand or under the supervisiono the state. Te act, well known rom military history, that tracand communication systems are the very rst command posts tobe occupied by any state attacking another vividly underlines theircentral strategic signicance in imposing state rule on a society.

A third central concern o strategic relevance or any state is

the control and possible monopolization o money. I the state suc-ceeds in this task and, as is the case now all over the world, sup-plants a system o ree banking and metal-based currency—mostcommonly the gold standard—with a monetary system character-ized by a state-operated central bank and paper-money backed by nothing but paper and ink, a great victory has indeed been reached.In its permanent struggle or higher income, the state is no longer

dependent on the equally unpopular means o increased taxationor currency depreciation (coin-clipping), which at all times hasbeen unmasked quickly as raudulent. Rather, it can now increaseits own revenue and decrease its own debt almost at will by print-ing more money, as long as the additional money is brought intocirculation beore the inationary consequences o this practicehave taken eect or have been anticipated by the market.140

Fourth and last, there is the area o the production o security,o police, deense, and judicial courts.

O all the state-provided or controlled goods or services thisis certainly the area o oremost strategic importance. In act, itis o such great signicance or any state to gain control o thesethings, to outlaw competitors, and to monopolize these activities,that “state” and “producer o law and order” have requently beenconsidered synonyms. Wrongly so, o course, as the state must

0 On a ree market monetary system and the eects o government interven-tion on this system c. R. Paul and L. Lehrman, Te Case For Gold, San Francisco,1983, Chapters 2, 3; M. N. Rothbard, What Has Government Done to Our Money?,Novato, 1973.




be correctly described as an institution o organized aggression

attempting only to appear as an ordinary producer in order to con-tinue aggressing against innocent natural owners. But the act thatthis conusion exists and is widely shared can be explained with re-erence to the observation that all states must monopolize the pro-duction o security because o its central strategic importance, andhence, these two terms, dierent as they are with respect to theirintentional meaning, indeed have the same extensional meaning.

It is not dicult to see why in order to stabilize its existence,a state cannot, under any circumstances, leave the production o security in the hands o a market o private property owners.141 Since the state ultimately rests on coercion, it requires armed orces.Unortunately (or any given state, that is), other armed states existwhich implies that there is a check on a state’s desire to expend itsreign over other people and thereby increase its revenue appropri-ated through exploitation. It is unortunate or a given state, too,

that such a system o competing states also implies that each individual state is somewhat limited regarding the degree to whichit can exploit its own subjects, as their support might dwindle i its own rule is perceived as more oppressive than that o compet-ing states. For then the likelihood o a state’s subjects collaboratingwith a competitor in its desire to ‘take over,” or that o voting withtheir eet (leaving one’s own country and going to a dierent one)might increase.142 It is even more important, then, or each indi-

vidual state to avoid any such unpleasant competition rom otherpotentially dangerous armed organizations at least within the very territory it happens to control. Te mere existence o a private pro-tection agency, armed as it would have to be to do its job o pro-tecting people rom aggression and employing people trained inthe use o such arms, would constitute a potential threat to a state’songoing policy o invading private people’s property rights. Hence,

such organizations, which would surely spring upon the market On the problem o a ree market production o law and order c. Chapter 10below. C. on this also Chapter 5, n. 4.




as the desire to be protected against aggressors is a genuine one,

are eagerly outlawed, and the state arrogates this job to itsel andits monopolistic control. As a matter o act, states everywhere arehighly intent on outlawing or at least controlling even the merepossession o arms by private citizens—and most states haveindeed succeeded in this task—as an armed man is clearly more o a threat to any aggressor than an unarmed man. It bears much lessrisk or the state to keep things peaceul while its own aggressioncontinues, i ries with which the taxman could be shot are out o

the reach o everyone except the taxman himsel!

With respect to the judicial system matters are quite similar.I the state did not monopolize the provision o judicial services, itwould be unavoidable that, sooner or later (and most likely sooner),the state would come to be regarded as the unjust institution it inact is. Yet no unjust organization has any interest in being recog-nized as such. For one thing, i the state did not see to it that only

judges appointed and employed by the state itsel administered thelaw, it is evident that public law (those norms regulating the rela-tionship between the state and private individuals or associationso such individuals) would have no chance o being accepted by the public, but instead would be unveiled immediately as a systemo legalized aggression, existing in violation o almost everyone’ssense o justice. And secondly, i the state did not also monopo-

lize the administration o private law (those norms regulating therelationships among private citizens) but le this task to compet-ing courts and judges, dependent on the public’s deliberate nan-cial support, it is doubtul that norms implying an asymmetricaldistribution o rights or obligations between dierent persons orclasses o persons would have even the slightest chance o becom-ing generally accepted as valid laws. Courts and judges who laiddown such rules would immediately go bankrupt due to a lack o

continued nancial assistance.143However, since the state is depen-dent on a policy o divide et impera to maintain its power, it must

On this point c. also Chapter 10 below.




stop the emergence o a competitive system o private law courts at

all costs.Without a doubt, all o these state-provided services—educa-

tion, trac and communication, money and banking, and, mostimportantly, security and the administration o justice—are o vitalimportance to any society whatsoever. All o them would certainly have to be provided, and would, in act, be produced by the mar-ket i the state did not take these things into its own hands. But thisdoes not mean that the state is simply a substitute or the market.

Te state engages in these activities or an entirely dierent reasonthan any private business would—not simply because there is ademand or them, but rather because these areas o activities areo essential strategic importance in assuring the state’s continuedexistence as a privileged institution built on aggressive violence.And this dierent strategic intent is responsible or a peculiar kindo product. Since the educators, employees o trac and commu-

nication systems, those o central banks, the police and judges, areall paid by taxes, the kind o products or services provided by astate, though certainly o some positive value to some people, cannever be o such quality that everyone would deliberately spendhis own money on them. Rather, these services all share the char-acteristic that they contribute to letting the state increase its owncoercively extracted income by means o beneting some whileharming others.144

F. Oppenheimer, System der Soziologie, VoL II, Der Staat, Stuttgart, 1964.Oppenheimer sums up the peculiar, discriminatory character o state-providedgoods, in particular o its production o law and order, in this way (pp.322-323): ‘thebasic norm o the state is power. Tat is, seen rom the side o its origin: violencetransormed into might. Violence is one o the most powerul orces shaping soci-ety, but is not itsel a orm o social interaction. It must become law in the positivesense o this term, that is, sociologically speaking, it must permit the developmento a system o ‘subjective reciprocity’: and this is only possible through a system o sel- imposed restrictions on the use o violence and the assumption o certain obli-

gations in exchange or its arrogated rights. In this way violence is turned into might,and a relationship o domination emerges which is accepted not only by the rul-ers, but under not too severely oppressive circumstances by their subjects as well, asexpressing a ‘just reciprocity.’ Out o this basic norm secondary and tertiary normsnow emerge as implied in it: norms o private law, o inheritance, criminal, obliga-tional, and constitutional law, which all bear the mark o the basic norm o power




But there is even more to the socio-psychological oundations

o the state as an institution o continued aggression against naturalowners than the popular redistribution o strategically importantgoods and services. Equally important or the state’s stability andgrowth is the decision-making structure which it adopts or itsel:its constitution. An ordinary prot-oriented business would try toadopt a decision-making structure best suited to its goal o max-imizing income through the perception and implementation o entrepreneurial opportunities, i.e., dierences in production costs

and anticipated product demand. Te state, in comparison, acesthe entirely dierent task o adopting a decision-making structurewhich allows it to increase maximally its coercively appropriatedincome—given its power to threaten and bribe persons into sup-porting it by granting them special avors.

I submit that the best decision-making structure or doingso is a democratic constitution, i.e., the adoption o majority

rule. In order to realize the validity o this thesis, only the ollow-ing assumption need be made. Not only the persons actually rep-resenting the state have the desire (which they, incidentally, arealways permitted to satisy) to increase their income at the expenseo a corresponding income reduction o natural owners, produc-ers, and contractors; this lust or power and the desire to rule oth-ers also exists among the people governed. Not everyone has thisdesire to the same extent; indeed some people might never have it.But most people have it quite normally on recurring occasions. I this is so (and experience inorms us that this is indeed the case),then the state must reckon with resistance rom two analytically distinct sources. On the one hand there is resistance by the victimswhich any state policy creates. Te state can try to break this up

and domination, and which are all designed to inuence the structure o the state

in such a way as to increase economic exploitation to the maximum level which iscompatible with the continuation o legally regulated domination.” Te insight isundamental that “law grows out o two essentially dierent roots ( … ): on the onehand, out o the law o the association o equals, which can be called a ‘natural’ right,even i it is no ‘natural right,’ and on the other hand, out o the law o violence trans-ormed into regulated might, the law o unequals.”




by making supportive riends; and indeed it will succeed in doing

so to the extent that people can be corrupted through bribery. Onthe other hand, i lust or power exists among the victims and/orthe persons avored by a given state policy, then there must also beresistance or at least discontent originating rom the act that any given policy o expropriation and discriminatory distribution auto-matically excludes any other such policy with its advocates in thestate-ruled population, and hence must rustrate their particularplan o how power should be used. By denition, no change in the

expropriation-redistribution policy o the state can eliminate thissort o discontent, as any change would necessarily exclude a di-erent policy. Tus, i the state wants to do something to reduce theresistance (stemming rom the rustration o one’s lust or power)that any one particular policy implies, it can only do so by adopt-ing a decision-making structure which minimizes the disappoint-ment o potential power wielders: by opening up a popular schemeo participation in decision making, so that everyone lusting or his

particular power policy can hope to have a shot at it in the uture.

Tis, precisely, is the unction o a democracy. Since it is basedon a respect or the majority, it is by denition a popular constitu-tion or decision making. And as it indeed opens up the chance oreveryone to lobby or his own specic plan o wielding power atregular intervals, it maximally reduces current rustrated lust orpower through the prospect o a better uture. Contrary to popular

myth, the adoption o a democratic constitution has nothing to dowith reedom or justice.145 Certainly, as the state restrains itsel in its

Only the act that democracy has become a sacred cow in modern politics canexplain why the extent to which the idea o majority rule is ridden with inner con-tradictions is almost generally overlooked: rst, and this is already decisive, i oneaccepts democracy as justied, then one would also have to accept a democraticabolishment o democracy and a substitution o either an autocracy or a libertar-ian capitalism or democracy—and this would demonstrate that democracy as such

cannot be regarded as a moral value. In the same way it would have to be accepted as justied i majorities decided to eliminate minorities until the point at which therewere only two people, the last majority, le, or which majority rule could no longerbe applied, or logico-arithmetic reasons. Tis would prove once again that democ-racy cannot in itsel be regarded as justiable. Or, i one did not want to accept theseconsequences and instead adopted the idea o a constitutionally limited, liberal




use o aggressive violence when engaging in the provision o some

positively valued goods and services, so it accepts additional con-straints when the incumbent rulers subject themselves to the con-trol o the majority o those being ruled. Despite the act, though,that this constraint ullls the positive unction o satisying cer-tain desires o certain people by reducing the intensity o the rus-trated lust or power, it by no means implies the state’s orsaking itsprivileged position as an institution o legalized aggression. Rather,democratizing the state is an organizational measure undertaken

or the strategic purpose o rationalizing the execution o power,thereby increasing the amount o income to be aggressively appro-priated rom natural owners. Te orm o power is changed, butmajority rule is aggression, too. In a system based on the naturaltheory o property—under capitalism—majority rule does not andcannot play any role (apart rom the act, o course, that i accepted,anyone could join an association adopting majority rule, such as a

sports club or an association o animal lovers, whose jurisdictionis deliberately accepted by members as binding or the duration

democracy, one would at the same time have to admit that the principles romwhich these limitations are derived must then be logically more undamental thanthe majority rule—and this again would point to the act that there can be noth-ing o particular moral value in democracy. Second, by accepting majority rule it isnot automatically clear what the population is to which it should be applied. (Temajority o which population is to decide?) Here there are exactly three possibili-ties. Either one applies the democratic principle once again with regard to this ques-tion, and decides to opt or the idea that greater majorities should always prevailover smaller ones—but then, o course, there would be no way o saving the idea o national or regional democracy, as one would have to choose the total, global popu-lation as one’s group o reerence. Or, one decides that determining the populationis an arbitrary matter—but in this case, one would have to accept the possibility o increasingly smaller minorities seceding rom larger ones, with every individ-ual being his own sel-determining majority, as the logical end point o such a pro-cess o secession—and once again the unjustiability o democracy as such wouldhave been demonstrated. Tird, one could adopt the idea that selecting the popula-tion to which the majority principle is applied is neither done democratically nor

arbitrarily, but somehow dierently—but then again, one would have to admit thatwhatever this dierent principle that would justiy such a decision might be, it mustbe more undamental than the majority rule itsel, and majority rule in itsel mustbe classied as completely arbitrary. C. on this M. N. Rothbard Power and Market,Kansas City, 1977, pp. 189., H. H. Hoppe, Eigentum, Anarchie und Staat, Opladen,1987, Chapter 5.




o one’s membership). In such a system, only the rules o origi-nal appropriation o goods through use or contractual acquisitionrom previous owners are valid. Appropriation by decree or with-out a previous user-owner’s consent regardless o whether it wascarried out by an autocrat, a minority, against a majority, or by amajority against a minority is without exception an act o aggres-sive violence. What distinguishes a democracy rom an autocracy,monarchy, or oligarchy is not that the ormer means reedom,whereas the others mean aggression. Te dierence between them

lies solely in the techniques used to manage, transorm, and chan-nel popular resistance ed by the rustrated lust or power. heautocrat does not allow the population to inuence policy in any regular, ormalized way, even though he, too, must pay close atten-tion to public opinion in order to stabilize his existence. Tus, anautocracy is characterized by the lack o an institutionalized outletor potential power wielders. A democracy, on the other hand, hasprecisely such an institution. It allows majorities, ormed according

to certain ormalized rules, to inuence policy changes regularly.Accordingly, i disappointed lust or power becomes more toler-able when there is a regular outlet or it, then there must be lessresistance to democratic rule than to autocratic power. Tis impor-tant socio-psychological dierence between autocratic and demo-cratic regimes has been described masterully by B. de Jouvenel:

From the twelh to the eighteenth century governmen-

tal authority grew continuously. Te process was under-stood by all who saw it happening; it stirred them toincessant protest and to violent reaction.—In later timesits growth has continued at an accelerated pace, and itsextension has brought a corresponding extension o war. And now we no longer understand the process, weno longer protest, we no longer react. Tis quiescenceo ours is a new thing, or which Power has to thank the smoke-screen in which it has wrapped itsel. For-merly it could be seen, maniest in the person o theking, who did not disclaim being the master he was,and in whom human passions were discernible. Now,masked in anonymity, it claims to have no existence o




its own, and to be but the impersonal and passionlessinstrument o the general will.—But that is clearly a c-tion.—… oday as always Power is in the hands o agroup o men who control the power house … . All thathas changed is that it has now been made easy or theruled to change the personnel o the leading wielderso Power. Viewed rom one angle, this weakens Power,because the wills which control a society’s lie can, at thesociety’s pleasure, be replaced by other wills, in which it

eels more condence.—But by opening the prospect

o Power to all the ambitious talents, this arrangementmakes the extension o Power much easier. Under the“ancien regime,” society’s moving spirits, who had, asthey knew, no chance o a share in Power, were quick todenounce its smallest encroachment. Now, on the otherhand, when everyone is potentially a minister, no oneis concerned to cut down an oce to which he aspiresone day himsel, or to put sand in a machine which he

means to use himsel when his turn comes. Hence, it isthat there is in the political circles o a modern society awide complicity in the extension o Power.146

Given an identical population and an identical state policy o the discriminatory provision o goods and services, a democraticstate has more opportunities or increasing its own aggressively appropriated income. And mutatis mutandis, an autocracy must

settle or a relative lower income. In terms o the classics o politi-cal thought, it must rule more wisely, i.e., rule less. Since it doesnot allow any will other than that o the autocrat, and perhaps hisimmediate advisors, to gain power or inuence policy on a regularbasis, its execution o power appears less tolerable to those ruled.Tus, its stability can only be secured i the overall degree o exploi-tation enacted by the state is relatively reduced.

B. de Jouvenel, On Power, New York, 1949, pp. 9-10; on the social psychology o democracy c. also the same, On Sovereignty, Cambridge, 1957; G. Mosca, Te Rul-ing Class, New York, 1939; H. A. Mencken, Notes on Democracy, New York, 1926;on the tendency o democratic rule to “degenerate” to oligarchic rule c. R. Michels,Zur Soziologie des Parteiwesens in der modernen Demokratie, Stuttgart, 1957.




Te situation over the last two centuries vividly illustrates the validity o this thesis. During this time we have experienced analmost universal substitution o relatively democratic regimes orrelatively autocratic-monarchical systems.147 (Even Soviet Russiais notably more democratic than czarist Russia ever was.) Hand inhand with this change has gone a process never experienced beoreregarding its speed and extent: a permanent and seemingly uncon-trollable growth o the state. In the competition o dierent statesor exploitable populations, and in these states’ attempts to come

to grips with internal resistance, the democratic state has tendedto win outright over the autocratic one as the superior power-vari-ant. Ceteris paribus, it is the democratic state—and the democraticsocialism incorporated in it—which commands the higher incomeand so proves to be superior in wars with other states. And ceterisparibus, it is this state, too, that succeeds better in the managemento internal resistance: it is, and historically this has been shownrepeatedly, easier to save the power o a state by democratizing it

than by doing the opposite and autocratizing its decision-makingstructure.

Here, then, we have the socio-psychological oundations o the state as the very institution enacting socialism. Any state restson the monopolization or the monopolistic control o strategically important goods and services which it discriminately provides toavored groups o people, thereby breaking down resistance to a

policy o aggression against natural owners. Furthermore, it restson a policy o reducing the rustrated lust or power by creatingoutlets or public participation in uture changes in a policy o exploration. Naturally, every historical description o a state and itsspecic socialist policy and policy changes will have to give a moredetailed account o what made it possible or socialism to becomeestablished and to grow. But i any such description is supposedly complete and is not to all prey to ideological deception, then all

measures taken by the state must be described as embedded in this

C. on this process, R. Bendix, Kings or People, Berkeley, 1978.




very institutional ramework o violence, divide et impera, and

democratization.Whatever any given state does in terms o positively evaluated

contributions to society, and however great or small the extent o such contributions might be; whether the state provides help orworking mothers with dependent children or gives medical care,engages in road or airport construction; whether it grants avors toarmers or students, devotes itsel to the production o educationalservices, society’s inrastructure, money, steel or peace; or even i itdoes all o these things and more, it would be completely allaciousto enumerate all o this and leave it at that. What must be said inaddition is that the state can do nothing without the previous non-contractual expropriation o natural owners. Its contributions towelare are never an ordinary present, even i they are given away ree o charge, because something is handed out that the state doesnot rightully own in the rst place. I it sells its services at cost,

or even at a prot, the means o production employed in provid-ing them still must have been appropriated by orce. And i it sellsthem at a subsidized price, aggression must continue in order touphold the current level o production.

he situation is similar with respect to a state’s decision-making structure. Whether a state is organized autocratically ordemocratically, has a centralized or decentralized decision-mak-

ing structure, a single or multi stage representational structure;whether it is organized as a system o parties or as a corporate state,it would be delusory to describe it in these terms and leave it atthat. In order to be exhaustive, what must be added is that rst andoremost, the constitution o a state is an organizational device orpromoting its existence as an institution o aggression. And insoaras its stability rests on constitutionally guaranteed rights to partici-pate in the inauguration o policy changes, it must be stressed that

the state rests on an institutionalized appeal to motivational ener-gies that people in their private lives would regard as criminal andaccordingly would do everything to suppress. An ordinary busi-ness enterprise has a decision-making structure that must adapt




to the purpose o enabling it to secure as high a prot as possiblerom sales to deliberately supportive customers. A state’s constitu-tion has nothing in common with this, and only supercial socio-logical “studies in organization” would engage in investigations o structural similarities or dierences between the two.148

Only i this is thoroughly understood can the nature o thestate and socialism be ully grasped. And only then can there bea complete understanding o the other side o the same problem:what it takes to overcome socialism. Te state cannot be ought by

simply boycotting it, as a private business could, because an aggres-sor does not respect the negative judgment revealed by boycotts.But it also cannot simply be ought by countering its aggressionwith deensive violence, because the state’s aggression is supportedby public opinion.149 Tus, everything depends on a change in pub-lic opinion. More specically, everything depends on two assump-tions and the change that can be achieved regarding their status

as realistic or unrealistic. One such assumption was implied whenit was argued above that the state can generate support or its roleby providing certain goods and services to avored groups o peo-ple. Tere, evidently, the assumption involved was that people canbe corrupted into supporting an aggressor i they receive a share,however small, o the benets. And, since states exist everywhere,this assumption, happily or the state, must indeed be said to berealistic everywhere, today. But then, there is no such thing as a law

o nature stating that this must be so orever. In order or the stateto ail in reaching its objective, no more and no less than a change

On the undamental dierence between private business organizations and thestate c. L. v. Mises, Bureaucracy, New Haven, 1944. L. Spooner describes the supporters o the state as alling into two categories:“1. Knaves, a numerous and active class, who see in the government an instrumentwhich they can use or their own aggrandizement or wealth. 2. Dupes—a large class,no doubt—each o whom, because he is allowed one voice out o millions in deciding

what he may do with his own person and his own property, and because he is per-mitted to have the same voice in robbing, enslaving, and murdering others, that oth-ers have in robbing, enslaving and murdering himsel, is stupid enough to imaginethat he is a ‘ree man,’ a ‘sovereign,’ that this is a ‘ree government,’ ‘the best govern-ment on earth,’ and such like absurdities” (L Spooner, No reason. Te Constitutiono No Authority, Colorado Springs, 1973, p. 18).




in general public opinion must take place: state-supportive action

must come to be regarded and branded as immoral because it issupport given to an organization o institutionalized crime. Social-ism would be at its end i only people stopped letting themselvesbe corrupted by the state’s bribes, but would, let us say, i oered,take their share o the wealth in order to reduce the state’s bribingpower, while continuing to regard and treat it as an aggressor to beresisted, ignored, and ridiculed, at any time and in any place.

Te second assumption involved was that people indeed lustor power and hence can be corrupted into state-supportive actioni given a chance to satisy this lust. Looking at the acts, therecan hardly be any doubt that today this assumption, too, is realis-tic. But once again, it is not realistic because o natural laws, or atleast in principle, it can deliberately be made unrealistic.150 In orderto bring about the end o statism and socialism, no more and noless must be accomplished than a change in public opinion which

would lead people away rom using the institutional outlets orpolicy participation or the satisaction o power lust, but insteadmake them suppress any such desire and turn this very organiza-tional weapon o the state against it and push uncompromisingly or an end to taxation and regulation o natural owners whereverand whenever there is a chance o inuencing policy.151

0 Writes E. de la Boetie (Te Politics o Obedience: Te Discourse o Voluntary Servitude, New York, 1975, pp. 52-53): “He who domineers over you … has indeednothing more than the power that you coner upon him to destroy you … . Resolveto serve no more, and you are at once reed. I do not ask that you place hands uponthe tyrant to topple him over, but simply that you support him no longer; then youwill behold him, like a great Colossus whose pedestal has been pulled away, all o hisown weight and break into pieces.” On a strategy or liberty, and in particular on the importance o a libertarianmovement or the achievement o these goals, c. M. N. Rothbard, For A New Lib-erty, New York, 1978, Chapter 15; and Te Ethics o Liberty, Atlantic Highlands,1982, part 5.




Chapter 9

Capitalist Production andTe Problem o Monopoly

The previous chapters have demonstrated that neither aneconomic nor a moral case or socialism can be made.Socialism is economically and morally inerior to capital-ism. Te last chapter examined why socialism is nonethe-

less a viable social system, and analyzed the socio-psychologicalcharacteristics o the state—the institution embodying socialism.Its existence, stability, and growth rest on aggression and on publicsupport o this aggression which the state manages to eect. Tis itdoes, or one thing, through a policy o popular discrimination; apolicy, that is, o bribing some people into tolerating and support-ing the continual exploitation o others by granting them avors;

and secondly, through a policy o popular participation in themaking o policy, i.e., by corrupting the public and persuading itto play the game o aggression by giving prospective power wield-ers the consoling opportunity to enact their particular exploitativeschemes at one o the subsequent policy changes.

We shall now return to economics, and analyze the workingso a capitalist system o production—a market economy—as thealternative to socialism, thereby constructively bringing my argu-ment against socialism ull circle. While the nal chapter will bedevoted to the question o how capitalism solves the problem o

199




the production o so-called “public goods,” this chapter will explain

what might be termed the normal unctioning o capitalist produc-tion and contrast it with the normal working o a system o state orsocial production. We will then turn to what is generally believedto be a special problem allegedly showing a peculiar economic de-ciency in a pure capitalist production system: the so-called prob-lem o monopolistic production.

Ignoring or the moment the special problems o monopo-listic and public goods production, we will demonstrate why capi-talism is economically superior as compared to its alternative orthree structural reasons. First, only capitalism can rationally, i.e., interms o consumer evaluations, allocate means o production; sec-ond, only capitalism can ensure that, with the quality o the peopleand the allocation o resources being given, the quality o the outputproduced reaches its optimal level as judged again in terms o con-sumer evaluations; and third, assuming a given allocation o pro-

duction actors and quality o output, and judged again in terms o consumer evaluations, only a market system can guarantee that the

value o production actors is eciently conserved over time.152

As long as it produces or a market, i.e., or exchange with otherpeople or businesses, and subject as it is to the rule o nonaggressionagainst the property o natural owners, every ordinary business willuse its resources or the production o such goods and such amounts

o these goods which, in anticipation, promise a return rom sales thatsurpasses as ar as possible the costs which are involved in using theseresources. I this were not so, a business would use its resources or theproduction o dierent amounts o such goods or o dierent goodsaltogether. And every such business has to decide repeatedly whethera given allocation or use o its means o production should be upheldand reproduced, or i, due to a change in demand or the anticipationo such a change, a reallocation to dierent uses is in order. Te ques-

tion o whether or not resources have been used in the most value-productive (the most protable) way, or i a given reallocation was

C. on this also Chapter 3 above and Chapter 10 below.




the most economic one, can, o course, only be decided in a more or

less distant uture under any conceivable economic or social system,because invariably time is needed to produce a product and bring it

onto the market. However, and this is decisive, or every business thereis an objective criterion or deciding the extent to which its previousallocational decisions were right or wrong. Bookkeeping inorms us—

and in principle anyone who wanted to do so could check and veriy this inormation—whether or not and to what extent a given allo-cation o actors o production was economically rational, not only

or the business in total but or each o its subunits, insoar as marketprices exist or the production actors used in it. Since the prot-losscriterion is an ex post criterion, and must necessarily be so under any production system because o the time actor involved in production,

it cannot be o any help when deciding on uture ex ante allocations.Nevertheless, rom the consumers’ point o view it is possible to con-ceive o the process o resource allocation and reallocation as ratio-

nal, because every allocational decision is constantly tested againstthe prot-loss criterion. Every business that ails to meet this crite-rion is in the short or long run doomed to shrink in size or be drivenout o the market entirely, and only those enterprises that successully

manage to meet the prot-loss criterion can stay in operation or pos-sibly grow and prosper. o be sure, then, the institutionalization o this criterion does not insure (and no other criterion ever could) that

all individual business decisions will always turn out to be rational in

terms o consumer evaluations. However, by eliminating bad ore-casters and strengthening the position o consistently successul ones,

it does insure that the structural changes o the whole production sys-tem which take place overtime can be described as constant move-ments toward a more rational use o resources and as a never-ending

process o directing and redirecting actors o production out o less value-productive lines o production into lines which are valued more

highly by the consumer.153

On the unction o prot and loss c. L. v. Mises, Human Action, Chicago, 1966,Chapter 15; and “Prot and Loss,” in: the same, Planning or Freedom, South Hol-land, 1974; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 8.




Te situation is entirely dierent and arbitrariness rom the

point o view o the consumer (or whom, it should be recalled,production is undertaken) replaces rationality as soon as the state

enters the picture. Because it is dierent rom ordinary businesses

in that it is allowed to acquire income by noncontractual means,

the state is not orced to avoid losses i it wants to stay in business

as are all other producers. Rather, since it is allowed to impose taxes

and/or regulations on people, the state is in a position to determine

unilaterally whether or not, to what extent, and or what length o

time to subsidize its own productive operations. It can also unilat-erally choose which prospective competitor is allowed to compete

with the state or possibly outcompete it. Essentially this means that

the state becomes independent o cost-prot considerations. But

i it is no longer orced to test continually any o its various uses

o resources against this criterion, i.e., i it no longer need success-

ully adjust its resource allocations to the changes in demand o

consumers in order to survive as a producer, then the sequence o allocational decisions as a whole must be regarded as an arbitrary,

irrational process o decision making. A mechanism o selection

orcing those allocational “mutations” which consistently ignore

or exhibit a maladjustment to consumer demand out o operation

simply no longer exists.154 o say that the process o resource allo-

cation becomes arbitrary in the absence o the eective unctioning

o the prot-loss criterion does not mean that the decisions whichsomehow have to be made are not subject to any kind o con-

straint and hence are pure whim. Tey are not, and any such deci-

sion aces certain constraints imposed on the decision maker. I,

or instance, the allocation o production actors is decided dem-

ocratically, then it evidently must appeal to the majority. But i a

decision is constrained in this way or i it is made autocratically,

respecting the state o public opinion as seen by the autocrat, then

it is still arbitrary rom the point o view o voluntarily buying or

On the economics o government c., esp. M. N. Rothbard, Power and Market,Kansas City, 1977, Chapter 5.




not-buying consumers.155 Hence, the allocation o resources, what-ever it is and however it changes over time, embodies a wasteuluse o scarce means. Freed rom the necessity o making prots inorder to survive as a consumer-serving institution, the state nec-essarily substitutes allocational chaos or rationality. M. Rothbardnicely summarizes the problem as ollows:

How can it (i.e. the government, the state) knowwhether to build road A or road B, whether to investin a road or in a school—in act, how much to spend

or all its activities? here is no rational way that itcan allocate unds or even decide how much to have.When there is a shortage o teachers or schoolroomsor police or streets, the government and its support-ers have only one answer: more money. Why is thisanswer never oered on the ree market? Te reason isthat money must be withdrawn rom some other usesin consumption or investment … . and this withdrawal

Regarding democratically controlled allocations, various deiciencies havebecome quite evident. For instance J. Buchanan and R. Wagner write (Te Conse-quences o Mr. Keynes, London, 1978, p. 19), “Market competition is continuous;at each purchase, a buyer is able to select among competing sellers. Political com-petition is intermittent; a decision is binding generally or a xed number o years.Market competition allows several competitors to survive simultaneously … . Politi-cal competition leads to an all-or-nothing outcome … . in market competition thebuyer can be reasonably certain as to just what it is that he will receive rom his pur-chase. In political competition, the buyer is in eect purchasing the services o anagent, whom he cannot bind … . Moreover, because a politician needs to secure thecooperation o a majority o politicians, the meaning o a vote or a politician is lessclear than that o a ‘vote’ or a private rm.” (C. on this also J. Buchanan, “IndividualChoice in Voting and the Market,” in: the same, Fiscal Teory and Political Economy,Chapel Hill, 1962; or a more general treatment o the problem J. Buchanan and G.ullock, Te Calculus o Consent, Ann Arbor, 1962.)

What has commonly been overlooked, though—especially by those who try tomake a virtue o the act that a democracy gives equal voting power to everyone,whereas consumer sovereignty allows or unequal “votes”—is the most importantdeciency o all: that under a system o consumer sovereignty people might castunequal votes but, in any case, they exercise control exclusively over things which

they acquired through original appropriation or contract and hence are orced to actmorally. Under a democracy o production everyone is assumed to have somethingto say regarding things one did not so acquire, and hence one is permanently invitedthereby not only to create legal instability with all its negative eects on the processo capital ormation, but, moreover, to act immorally. C. on this also L. v. Mises,Socialism, Indianapolis, 1981, Chapter 31; also c. Chapter 8 above.




must be justied. Tis justication is provided by thetest o proit and loss: the indication that the mosturgent wants o the consumers are being satisied. I an enterprise or product is earning high proits orits owners and these prots are expected to continue,more money will be orthcoming; i not, and losses arebeing incurred, money will low out o the industry.Te prot-and-loss-test serves as the critical guide ordirecting the ow o productive services. No such guideexists or the government, which has no rational way to

decide how much money to spend, either in total, or ineach specic line. Te more money it spends, the moreservice it can supply—but where to stop?156

Besides the misallocation o actors o production that resultsrom the decision to grant the state the special right to appropriaterevenue in a noncontractual way, state production implies a reduc-tion in the quality o the output o whatever it decides to produce.

Again, an ordinary prot-oriented business can only maintain agiven size or possibly grow i it can sell its products at a price andin such quantity that allow it to recover at least the costs involvedin production and is hopeully higher. Since the demand or thegoods or services produced depends either on their relative qual-ity or on their price—this being one o many criteria o quality—as perceived by potential buyers, the producers must constantly be concerned about “perceived product quality” or “cheapness o

product.” A rm is dependent exclusively on voluntary consumerpurchases or its continued existence, so there is no arbitrarily dened standard o quality or a capitalist enterprise (includingso-called scientiic or technological standards o quality) set by an alleged expert or committee o experts. For it there is only thequality as perceived and judged by the consumers. Once again,this criterion does not guarantee that there are no low-quality oroverpriced products or services oered on the market because pro-

duction takes time and the sales test comes only aer the productshave appeared on the market. And this would have to be so under

M. N. Rothbard, Power and Market, Kansas City, 1977, p. 176.




any system o goods production. Nonetheless, the act that every capitalist enterprise must undergo this sales test and pass it to avoidbeing eliminated rom the market guarantees a sovereign positionto the consumers and their evaluations. Only i product quality isconstantly improved and adjusted to consumer tastes can a busi-ness stay in operation and prosper.

Te story is quite dierent as soon as the production o goodsis undertaken by the state. Once uture revenue becomes inde-pendent o cost covering sales—as is typically the case when the

state produces a good—there is no longer a reason or such a pro-ducer to be concerned about product quality in the same way thata sales-dependent institution would have to be. I the producer’suture income can be secured, regardless o whether according toconsumer evaluations the products or services produced are worththeir money, why undertake special eorts to improve anything?More precisely, even i one assumes that the employees o the state

as a productive enterprise with the right to impose taxes and toregulate unilaterally the competitiveness o its potential rivals are,on the average, just as much interested or uninterested in work asthose working in a prot-dependent enterprise,157 and i one ur-ther assumes that both groups o employees and workers are onthe average equally interested or uninterested in an increase ordecrease in their income, then the quality o products, measuredin terms o consumer demand and revealed in actual purchases,

must be lower in a state enterprise than in private business, becausethe income o the state employees would be ar less dependent onproduct quality. Accordingly, they would tend to devote relatively less eort to producing quality products and more o their timeand eort would go into doing what they, but not necessarily theconsumer, happen to like.158 Only i the people working or thestate were superhumans or angels, while everyone else was simply

Tis is a very generous assumption, to be sure, as it is airly certain that the so-called public sector o production attracts a dierent type o person rom the very out-set and boasts an unusually high number o inecient, lazy, and incompetent people. C. L. v. Mises, Bureaucracy, New Haven, 1944; Rothbard, Power and Mar-ket, Kansas City, 1977, pp. 172; and For A New Liberty New York, 1978, Chapter




an ordinary, inerior human being, could the result be any dier-

ent. Yet the same result, i.e., the ineriority o product quality o any state-produced goods, would again ensue i the human race in theaggregate would somehow improve: i they were working in a stateenterprise even angels would produce a lower quality output thantheir angel-colleagues in private business, i work implied even theslightest disutility or them.

Finally, in addition to the acts that only a market system canensure a rational allocation o scarce resources, and that only capi-talist enterprises can guarantee an output o products that can besaid to be o optimal quality, there is a third structural reason orthe economic superiority, indeed unsurpassability o a capitalistsystem o production. Only through the operation o market orcesis it possible to utilize resources eciently over time in any givenallocation, i.e., to avoid overutilization as well as underutilization.Tis problem has already been addressed with reerence to Russian

style socialism in Chapter 3. What are the institutional constraintson an ordinary prot-oriented enterprise in its decisions about thedegree o exploitation or conservation o its resources in the par-ticular line o production in which they happen to be used? Evi-dently, the owner o such an enterprise would own the productionactors or resources as well as the products produced with them.Tus, his income (used here in a wide sense o the term) consistso two parts: the income that is received rom the sales o the prod-ucts produced aer various operating costs have been subtracted;and the value that is embodied in the actors o production whichcould be translated into current income should the owner decideto sell them. Institutionalizing a capitalist system—a social orderbased on private property—thus implies establishing an incentivestructure under which people would try to maximize their incomein both o these dimensions. What exactly does this mean?159 Every

10; also M. and R. Friedman, Te yranny o the Status Quo, New York, 1984, pp.35-51. On the ollowing c. L. v. Mises, Human Action, Chicago, 1966, Chapter 23.6;M.N. Rothbard, Man Economy and State, Los Angeles, 1970, Chapter 7, esp. 7.4-6;




act o production evidently aects both mentioned income dimen-

sions. On one hand, production is undertaken to reach an incomereturn rom sales. On the other hand, as long as the actors o pro-duction are exhaustible, i.e., as long as they are scarce and not reegoods, every production act implies a deterioration o the value o the production actors. Assuming that private ownership exists,this produces a situation in which every business constantly triesnot to let the marginal costs o production (i.e., the drop in value o the resources that results rom their usage) to become greater than

the marginal revenue product, and where with the help o book-keeping an instrument or checking the success or ailure o theseattempts exists. I a producer were not to succeed in this task andthe drop in the value o capital were higher than the increase in theincome returns rom sales, the owner’s total income (in the widersense o the term) would be reduced. Tus, private ownership isan institutional device or saeguarding an existing stock o capitalrom being overexploited or i it is, or punishing an owner or let-ting this happen through losses in income. Tis helps make it pos-sible or values produced to be higher than values destroyed duringproduction. In particular, private ownership is an institution inwhich an incentive is established to eciently adjust the degree o conserving or consuming a given stock o capital in a particularline o production to anticipated price changes. I, or instance, theuture price o oil were expected to rise above its current level, then

the value o the capital bound up in oil production would imme-diately rise as would the marginal cost involved in producing themarginal product. Hence, the enterprise would immediately beimpelled to reduce production and increase conservation accord-ingly, because the marginal revenue product on the present marketwas still at the unchanged lower level. On the other hand, i in theuture oil prices were expected to all below their present level, thiswould result in an immediate drop in the respective capital valuesand in marginal costs, and hence the enterprise would immediately

“Conservation in the Free Market,” in: Egalitarianism As A Revolt Against Nature,Washington, 1974; and For A New Liberty, New York, 1978, Chapter 13.




begin to utilize its capital stock more intensively since prices on thepresent market would still be relatively higher. And to be sure, botho these reactions are exactly what is desirable rom the point o

view o the consumers.

I the way in which a capitalist production system works iscompared with the situation that becomes institutionalized when-ever the state takes care o the means o production, striking di-erences emerge. Tis is true especially when the state is a modernparliamentary democracy. In this case, the managers o an enter-

prise may have the right to receive the returns rom sales (aer sub-tracting operation costs), but, and this is decisive, they do not havethe right to appropriate privately the receipts rom a possible saleo the production actors. Under this constellation, the incentiveto use a given stock o capital economically over time is drastically reduced. Why? Because i one has the right to privately appropriatethe income return rom product sales but does not have the right

to appropriate the gains or losses in capital value that result roma given degree o usage o this capital, then there is an incentivestructure institutionalized not o maximizing total income—i.e.,total social wealth in terms o consumer evaluations—but rathero maximizing income returns rom sales at the expense o lossesin capital value. Why, or instance, should a government ocialreduce the degree o exploitation o a given stock o capital andresort to a policy o conservation when prices or the goods pro-

duced are expected to rise in the uture? Evidently, the advantageo such a conservationist policy (the higher capital value result-ing rom it) could not be reaped privately. On the other hand, by resorting to such a policy one’s income returns rom sales wouldbe reduced, whereas they would not be reduced i one orgot aboutconserving. In short, to conserve would mean to have none o theadvantages and all o the disadvantages. Hence, i the state man-agers are not super-humans but ordinary people concerned with

their own advantages, one must conclude that it is an absolutely necessary consequence o any state production that a given stock o capital will be overutilized and the living standards o consum-ers impaired in comparison to the situation under capitalism.




Now it is airly certain that someone will argue that whileone would not doubt what has been stated so ar, things would inact be dierent and the deciency o a pure market system wouldcome to light as soon as one paid attention to the special case o monopolistic production. And by necessity, monopolistic produc-tion would have to arise under capitalism, at least in the long run.Not only Marxist critics but orthodox economic theorists as wellmake much o this alleged counter-argument.160 In answer to thischallenge our points will be made in turn. First, available histori-

cal evidence shows that contrary to these critics’ thesis, there is notendency toward increased monopoly under an unhampered mar-ket system. In addition, there are theoretical reasons that wouldlead one to doubt that such a tendency could ever prevail on a reemarket. Tird, even i such a process o increasing monopoliza-tion should come to bear, or whatever reason, it would be harm-less rom the point o view o consumers provided that ree entry into the market were indeed ensured. And ourth, the concept o

monopoly prices as distinguished rom and contrasted to competi-tive prices is illusory in a capitalist economy.

Regarding historical evidence, i the thesis o the critics o capitalism were true, then one would have to expect a more pro-nounced tendency toward monopolization under relatively reer,unhampered, unregulated laissez-aire capitalism than under a rel-atively more heavily regulated system o “welare” or “social” capi-

talism. However, history provides evidence o precisely the oppositeresult. Tere is general agreement regarding the assessment o thehistorical period rom 1867 to World War I as being a relatively more capitalist period in history o the United States, and o thesubsequent period being one o comparatively more and increas-ing business regulations and welare legislation. However, i onelooks into the matter one nds that there was not only less develop-ment toward monopolization and concentration o business taking

place in the rst period than in the second but also that during therst period a constant trend towards more severe competition with

0 On this and the ollowing c. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2.




continually alling prices or almost all goods could be observed.161

And this tendency was only brought to a halt and reversed whenin the course o time the market system became more and moreobstructed and destroyed by state intervention. Increasing monop-olization only set in when leading businessmen became more suc-cessul at persuading the government to interere with this ercesystem o competition and pass regulatory legislation, imposinga system o “orderly” competition to protect existing large rmsrom the so-called cutthroat competition continually springing up

around them.162 G. Kolko, a le-winger and thus certainly a trust-worthy witness, at least or the critics rom the le, sums up hisresearch into this question as ollows

Tere was during this [rst] period a dominant trendtoward growing competition. Competition was unac-ceptable to many key business and nancial leaders, andthe merger movement was to a large extent a reection o

voluntary, unsuccessul business eects to bring irresist-ible trends under control … As new competitors sprangup, and as economic power was diused throughout anexpanding nation, it became apparent to many impor-tant businessmen that only the national governmentcould [control and stabilize] the economy … Ironically,contrary to the consensus o historians, it was not theexistence o monopoly which caused the government tointervene in the economy, but the lack o it.163

hus states J. W. McGuire, Business and Society, New York, 1963, pp. 38-39:“From 1865 to 1897, declining prices year aer year made it dicult or businessmento plan or the uture. In many areas new railroad links had resulted in a nationaliza-tion o the market east o the Mississippi, and even small concerns in small townswere orced to compete with other, oen larger rms located at a distance. At thesame time there were remarkable advances in technology and productivity. In shortit was a wonderul era or the consumer and a rightul age or the producers espe-cially as competition became more and more severe.” C. on this G. Kolko, Te riumph o Conservatism, Chicago, 1967; and Rail-roads and Regulation, Princeton, 1965; J. Weinstein, Te Corporate Ideal in the Lib-eral State, Boston, 1968; M. N. Rothbard and R. Radosh (eds.), A New History o Leviathan, New York, 1972. G. Kolko, he riumph o Conservatism, Chicago, 1967, pp.4-5; c. also theinvestigations o M. Olson, Te Logic o Collective Action, Cambridge, 1965, to the




In addition, these ndings, which stand in clear contradiction

to much o the common wisdom on the matter, are backed by the-oretical considerations.164 Monopolization means that some spe-cic actor o production is withdrawn rom the market sphere.Tere is no trading o the actor, but there is only the owner o thisactor engaging in restraint o trade. Now i this is so, then no mar-ket price exists or this monopolized production actor. But i thereis no market price or it, then the owner o the actor can also nolonger assess the monetary costs involved in withholding it rom

the market and in using it as he happens to use it. In other words,he can no longer calculate his prots and make sure, even i only ex post acto, that he is indeed earning the highest possible pro-its rom his investments. Tus, provided that the entrepreneur isreally interested in making the highest possible prot (something,to be sure, which is always assumed by his critics), he would have tooer the monopolized production actors on the market continu-ally to be sure that he was indeed using them in the most protableway and that there was no other more lucrative way to use them,so as to make it more protable or him to sell the actor than keepit. Hence, it seems, one would reach the paradoxical result that inorder to maximize his prots, the monopolist must have a perma-nent interest in discontinuing his position as the owner o a pro-duction actor withheld rom the market and, instead, desire itsinclusion in the market sphere.

Furthermore, with every additional act o monopolization theproblem or the owner o monopolized production actors—i.e.,that because o the impossibility o economic calculation, he canno longer make sure that those actors are indeed used in the mostprotable way—becomes ever more acute. Tis is so, in particular,

eect that mass organizations (in particular labor unions), too, are not market phe-nomena but owe their existence to legislative action. On the ollowing c. L. v. Mises, Socialism, Indianapolis, 1981, part 3.2; andHuman Action, Chicago, 1966, Chapters 25-26; M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, pp.544; pp.585; and “Ludwig von Mises and Eco-nomic Calculation under Socialism,” in: L. Moss (ed.), Te Economics o Ludwig

von Mises, Kansas City, 1976, pp. 75-76.




because realistically one must assume that the monopolist is not

only not omniscient but that his knowledge regarding uture com-peting goods and services by the consumers in uture marketsbecomes more and more limited as the process o monopolizationadvances. As production actors are withdrawn rom the market,and as the circle o consumers served by the goods produced withthese actors widens, it will be less likely that the monopolist, unableto make use o economic calculation, can remain in command o all the relevant inormation needed to detect the most protable

uses or his production actors. Instead, it becomes more likely inthe course o such a process o monopolization, that other peopleor groups o people, given their desire to make prots by engag-ing in production, will perceive more lucrative ways o employingthe monopolized actors.165 Not necessarily because they are bet-ter entrepreneurs, but simply because they occupy dierent posi-tions in space and time and thus become increasingly aware o

entrepreneurial opportunities which become more and more di-cult and costly or the monopolist to detect with every new steptoward monopolization. Hence, the likelihood that the monopolistwill be persuaded to sell his monopolized actors to other produc-ers—nota bene: or the purpose o thereby increasing his prots—increases with every additional step toward monopolization.166

C. F. A. Hayek, Individualism and Economic Order, Chicago, 1948, esp. Chapter

9; I. Kirzner, Competition and Entrepreneurship, Chicago, 1973. Regarding large-scale ownership, in particular o land, Mises observes that itis normally only brought about and upheld by nonmarket orces: by coercive vio-lence and a state-enorced legal system outlawing or hampering the selling o land.“Nowhere and at no time has the large scale ownership o land come into beingthrough the working o economic orces in the market. Founded by violence, it hasbeen upheld by violence and that alone. As soon as the latiundia are drawn intothe sphere o market transactions they begin to crumble, until at last they disappearcompletely … . Tat in a market economy it is dicult even now to uphold the lati-undia, is shown by the endeavors to create legislation institutions like the ‘Fidei-

kommiss’ and related legal institutions such as the English ‘entail’ … . Never was theownership o the means o production more closely concentrated than at the time o Pliny, when hal the province o Arica was owned by six people, or in the day o theMerovingian, when the church possessed the greater part o all French soil. And inno part o the world is there less large-scale land ownership than in capitalist NorthAmerica,” Socialism, Indianapolis, 1981, pp.325–326.




Now, let us assume that what historical evidence as well as

theory proves to be unlikely happens anyway, or whatever reason.And let us assume straightaway the most extreme case conceivable:

there is only one single business, one super-monopolist so to speak,

that provides all the goods and services available on the market,

and that is the sole employer o everyone. What does this state o

aairs imply regarding consumer satisaction, provided, o course,

as assumed, that the super-monopolist has acquired his position

and upholds it without the use o aggression? For one thing, it evi-dently means that no one has any valid claims against the owner

o this rm; his enterprise is indeed ully and legitimately his own.

And or another thing it means that there is no inringement on

anyone’s right to boycott any possible exchange. No one is orced to

work or the monopolist or buy anything rom him, and everyone

can do with his earnings rom labor services whatever he wants. He

can consume or save them, use them or productive or nonproduc-tive purposes, or associate with others and combine their unds or

any sort o joint venture. But i this were so, then the existence o a

monopoly would only allow one to say this: the monopolist clearly

could not see any chance o improving his income by selling all or

part o his means o production, otherwise he would do so. And

no one else could see any chance o improving his income by bid-

ding away actors rom the monopolist or by becoming a capitalistproducer himsel through original saving, through transorming

existing nonproductively used private wealth into productive capi-

tal, or through combining unds with others, otherwise it would be

done. But then, i no one saw any chance o improving his income

without resorting to aggression, it would evidently be absurd to

see anything wrong with such a super-monopoly. Should it indeed

ever come into existence within the ramework o a market econ-omy, it would only prove that this sel-same super-monopolist was

indeed providing consumers with the most urgently wanted goods

and services in the most ecient way.




Yet the question o monopoly prices remains.167 Doesn’t a

monopoly price imply a suboptimal supply o goods to consum-ers, and isn’t there then an important exception rom the generally

superior economic working o capitalism to be ound here? In a

way this question has already been answered by the above explana-

tion that even a super-monopolist establishing itsel in the market

cannot be considered harmul or consumers. But in any case, the

theory that monopoly prices are (allegedly) categorically dierent

rom competitive prices has been presented in dierent, techni-cal language and hence deserves special treatment. Te result o

this analysis, which is hardly surprising now, only reinorces what

has already been dis covered: monopoly does not constitute a spe-

cial problem orcing anyone to make qualiying amendments to

the general rule o a market economy being necessarily more e-

cient than any socialist or statist system. What is the deinition

o “monopoly price” and, in contrast to it, o “competitive price”according to economic orthodoxy (which in the matter under

investigation includes the so-called Austrian school o economics

as represented by L. v. Mises)? Te ollowing denition is typical:

Monopoly is a prerequisite or the emergence o monop-

oly prices, but it is not the only prerequisite. Tere is a

urther condition required, namely a certain shape o

the demand curve. he mere existence o monopoly does not mean anything in this regard. Te publisher

o a copyrighted book is a monopolist. But he may not

be able to sell a single copy, no matter how low the price

he asks. Not every price at which a monopolist sells a

monopolized commodity is a monopoly price. Monop-

oly prices are only prices at which it is more advanta-

geous or the monopolist to restrict the total amount

C. on the ollowing in M. N. Rothbard, Man, Economy and State, Los Angeles,1970, Chapter 10, esp. pp.586; also W. Block, “Austrian Monopoly Teory. A Cri-tique,” in: Journal o Libertarian Studies, 1977.




to be sold than to expand its sales to the limit which acompetitive market would allow.168

However plausible this distinction might seem, it will beargued that neither the producer himsel nor any neutral outsideobserver could ever decide i the prices actually obtained on themarket were monopoly or competitive prices, based on the crite-rion “restricted versus unrestricted supply’ as oered in the abovedenition. In order to understand this, suppose a monopolist pro-ducer in the sense o “a sole producer o a given good” exists. Te

question o whether or not a given good is dierent rom or homo-geneous to other goods produced by other rms is not one that canbe decided based on a comparative analysis o such goods in physi-cal or chemical terms ex ante, but will always have to be decided expost acto, on uture markets, by the dierent or equal treatmentand evaluations that these goods receive rom the buying public.Tus every producer, no matter what his product is, can be con-

sidered a potential monopolist in this sense o the term, at thepoint o decision making. What, then, is the decision with whichhe and every producer is aced? He must decide how much o thegood in question to produce in order to maximize his monetary income (with other, nonmonetary income considerations assumedto be given). o be able to do this he must decide how the demandcurve or the product concerned will be shaped when the productsreach the market, and he must take into consideration the various

production costs o producing various amounts o the good to beproduced. Tis done, he will establish the amount to be producedat that point where returns rom sales, i.e., the amount o goodssold times price, minus production costs involved in producingthat amount, will reach a maximum. Let us assume this happensand the monopolist also happens to be correct in his evaluationo the uture demand curve in that the price he seeks or his prod-ucts indeed clears the market. Now the question is, is this marketprice a monopoly or a competitive price? As M. Rothbard realized

L.v. Mises, Human Action, Chicago, 1966, p.359; c. also any current textbook,such as P. Samuelson, Economics, New York, 1976, p.500.




in his path-breaking but much neglected analysis o the monop-

oly problem, there is no way o knowing. Was the amount o thegood produced “restricted” in order to take advantage o inelasticdemand and was a monopoly price thus reaped, or was the pricereached a competitive one established in order to sell an amounto goods that was expanded “to the limit that a competitive mar-ket would allow”? Tere is no way to decide the matter.169 Clearly,every producer will always try to set the quantity produced at alevel above which demand would become elastic and would hence

yield lower total returns to him because o reduced prices paid. Hethus engages in restrictive practices. At the same time, based on hisestimate o the shape o uture demand curves, every producer willalways try to expand his production o any good up to the pointat which the marginal cost o production (that is, the opportunity cost o not producing a unit o an alternative good with the help o scarce production actors now bound up in the process o produc-ing another unit o x) equals the price per unit o x that one expects

to be able to charge at the respective level o supply. Both restric-tion and expansion are part o prot-maximizing and market-priceormation, and neither o these two aspects can be separated romthe other to make a valid distinction between monopolistic andcompetitive action.

Now, suppose that at the next point o decision making themonopolist decides to reduce the output o the good produced

rom a previously higher to a new lower level, and assume that heindeed succeeds in securing higher total returns now than at theearlier point in time. Wouldn’t this be a clear instance o a monop-oly price? Again, the answer must be no. And this time the reasonwould be the indistinguishability o this reallocational “restric-tion” rom a “normal” reallocation that takes account o changesin demand. Every event that can be interpreted in one way can alsobe interpreted in the other, and no means or deciding the matterexist, or once again both are essentially two aspects o one and the

C. M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, Chapter 10,esp. pp.604-614.




same thing: o action, o choosing. Te same result, i.e., a restric-

tion in supply coupled not only with higher prices but with priceshigh enough to increase total revenue rom sales, would be broughtabout i the monopolist who, or example, produces a unique kindo apples aces an increase in the demand or his apples (an upwardshit in the demand curve) and simultaneously an even higherincrease in demand (an even more drastic upward shit o thedemand curve) or oranges. In this situation he would reap greaterreturns rom a reduced output o apples, too, because the previous

market price or his apples would have become a subcompetitiveprice in the meantime. And i he indeed wanted to maximize hisprots, instead o simply expanding apple production according tothe increased demand, he now would have to use some o the ac-tors previously used or the production o apples or the produc-tion o oranges, because in the meantime changes in the system o relative prices would have occurred. However, what i the monop-olist who restricts apple production does not engage in producingoranges with the now available actors, but instead does nothingwith them? Again, all that this would indicate is that besides theincrease in demand or apples, in the meantime an even greaterincrease in the demand or yet another good—leisure (more pre-cisely, the demand or leisure by the monopolist who is also a con-sumer)-had taken place. Te explanation or the restricted applesupply is thus ound in the relative price changes o leisure (instead

o oranges) as compared with other goods.

Neither rom the perspective o the monopolist himsel norrom that o any outside observer could restrictive action then bedistinguished conceptually rom normal reallocations which sim-ply ollow anticipated changes in demand. Whenever the monopo-list engages in restrictive activities which are ollowed by higherprices, by denition he must use the released actors or another

more highly valued purpose, thereby indicating that he adjusts tochanges in relative demand. As M. Rothbard sums up,

We cannot use “restriction o production” as the testo monopoly vs. competitive price. A movement rom




a sub-competitive to a competitive price also involvesa restriction o production o this good, coupled, o course, with an expansion o production in other linesby the released actors. Tere is no way whatever to dis-tinguish such a restriction and corollary expansion romthe alleged “monopoly price” situation. I the restrictionis accompanied by increased leisure or the owner o thelabor actor rather than increased production o someother good on the market, it is still the expansion o theyield o a consumer good—leisure. Tere is still no way

o determining whether the “restriction” resulted in a“monopoly” or a “competitive” price or to what extentthe motive o increased leisure was involved. o denea monopoly price as a price attained by selling a smallerquantity o a product at a higher price is thereore mean-ingless, since the same denition applies to the “compet-itive” price as compared with a subcompetitive price.170

Te analysis o the monopoly question, then, provides no rea-son whatsoever to modiy the description given above o the way apure market economy normally works and its superiority over any sort o socialist or statist system o production. Not only is a pro-cess o monopolization highly unlikely to occur, empirically as wellas theoretically, but even i it did, rom the point o view o the con-sumers it would be harmless. Within the ramework o a marketsystem a restrictive monopolistic price could not be distinguished

rom a normal price hike stemming rom higher demand andchanges in relative prices. And as every restrictive action is simul-taneously expansionary, to say that the curtailment o productionin one production line coupled with an increase in total revenueimplies a misallocation o production actors and an exploitationo consumers is simply nonsense. Te misunderstanding involvedin such reasoning has been accurately revealed in the ollowingpassage rom one o L. v. Mises’ later works in which he implic-

itly reutes his own above-cited orthodox position regarding themonopoly-price problem. He states:

0 M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, p.607.




An entrepreneur at whose disposal are 100 units o cap-

ital employs, or instance, 50 units or the productiono p and 50 units or the production o q. I both lines

are proitable, it is odd to blame him or not having

employed more, e.g., 75 units, or the production o p.

He could increase the production o p only by curtailing

correspondingly the production o q. But with regard toq the same ault could be ound with the grumblers. I

one blames the entrepreneur or not having produced

more p, one must blame him also or not having pro-

duced more q. Tis means: one blames the entrepreneur

or the act that there is scarcity o actors o production

and that the earth is not a land o Cockaigne.171

he monopoly problem as a special problem o marketsrequiring state action to be resolved does not exist.172 In act, only when the state enters the scene does a real, nonillusory problemo monopoly and monopoly prices emerge. Te state is the only

enterprise whose prices and business practices can be conceptu-ally distinguished rom all other prices and practices, and whoseprices and practices can be called ‘too high” or “exploitative” ina completely objective, nonarbitrary way. hese are prices andpractices which consumers are not voluntarily willing to pay andaccept, but which instead are orced upon them through threats o

violence. And only or so privileged an institution as the state is it

also normal to expect and to nd a permanent process o increas-ing monopolization and concentration. As compared to all otherenterprises, which are subject to the control o voluntarily buyingor not-buying consumers, the enterprise “state” is an organizationthat can tax people and need not wait until they accept the tax, and

L.v. Mises, “Prot and Loss,” in: Planning or Freedom, South Holland, 1974,p.116.

In act, historically, governmental anti-trust policy has almost exclusively been apractice o providing less successul competitors with the legal tools needed to ham-per the operation o their more successul rivals. For an impressive assembly o casestudies to this eect c. D. Armentano, Antitrust and Monopoly, New York, 1982;also Y. Brozen, Is Government the Source o Monopoly? And Other Essays, SanFrancisco, 1980.




can impose regulations on the use people make o their property without gaining their consent or doing so. Tis evidently gives thestate, as compared to all other institutions, a tremendous advantagein the competition or scarce resources. I one only assumes thatthe representatives o the state are as equally driven by the protmotive as anyone else, it ollows rom this privileged position thatthe organization “state” must have a relatively more pronouncedtendency toward growth than any other organization. And indeed,while there was no evidence or the thesis that a market system

would bring about a tendency toward monopolistic growth, thethesis that a statist system would do so is amply supported by his-torical experience.




Chapter 10

Capitalist Production andthe Problem o Public Goods

We have tried to demolish socialism on the economicas well as moral ronts. Having reduced it to a phe-nomenon o exclusively socio-psychological signi-cance, i.e., a phenomenon or whose existence neither

good economic nor good moral reasons can be ound, its rootswere explained in terms o aggression and the corruptive inuencethat a policy o divide et impera exercises on public opinion. Telast chapter returned to economics in order to give the nal blowsto socialism by engaging in the constructive task o explaining theworkings o a capitalist social order as socialism’s economically superior rival, ready or adoption at any time. In terms o consumer

evaluations, capitalism was indicated as being superior with respectto the allocation o production actors, the quality o the output o goods produced, and the preservation o values embodied in capi-tal over time. Te so-called monopoly problem allegedly associ-ated with a pure market system was in act demonstrated not toconstitute any special problem at all. Rather, everything said aboutthe normally more ecient unctioning o capitalism is true alsowith respect to monopolistic producers, as long as they are indeedsubject to the control o voluntary purchases or voluntary absten-tions rom purchases by consumers.

223




Tis nal chapter will analyze an even more requently cited

special case which allegedly requires one to make qualiyingamendments regarding the thesis o the economic superiority o capitalism: the case o the production o so-called public goods.

Considered in particular will be the production o security.

I what has been stated in the oregoing chapter regarding theworking o a market economy is true, and i monopolies are com-

pletely harmless to consumers as long as the consumers have the

right to boycott them and reely enter the market o competing pro-ducers themselves, then one must draw the conclusion that or eco-nomic as well as moral reasons, the production o all goods and

services should be le in private hands. And in particular it ollowsthat even the production o law and order, justice and peace—those

things that one has come to think o as being the most likely can-didates or state-provided goods or reasons explained in Chap-

ter 8—should be provided privately, by a competitive market. Tis

indeed is the conclusion that G. de Molinari, a renowned Belgianeconomist, ormulated as early as 1849—at a time when classicalliberalism was still the dominant ideological orce, and “econo-

mist” and “socialist” were generally (and rightly so) considered tobe antonyms:

I there is one well established truth in political economy, it is

this: Tat in all cases, or all commodities that serve to provide orthe tangible or intangible need o the consumer, it is in the con-

sumer’s best interest that labor and trade remain ree, because thereedom o labor and trade have as their necessary and permanent

result the maximum reduction o price. And this: Tat the inter-ests o the consumer o any commodity whatsoever should always

prevail over the interests o the producer. Now, in pursuing theseprinciples, one arrives at this rigorous conclusion: Tat the produc-

tion o security should, in the interest o consumers o this intan-gible commodity, remain subject to the law o ree competition.

Whence it ollows: Tat no government should have the right toprevent another government rom going into competition with it,




or require consumers o security to come exclusively to it or this

commodity.

173

And he comments on this argument by saying: “Either this islogical and true, or else the principles on which economic scienceis based are invalid.”174

Tere is apparently only one way out o this unpleasant (orall socialists, that is) conclusion: to argue that there are particulargoods to which or some special reasons the above economic rea-

soning does not apply. It is this that the so-called public goods the-orists are determined to prove.175 However, we will demonstratethat in act no such special goods or special reasons exist, and thatthe production o security in particular does not pose any problemdierent rom that o the production o any other good or service,be it houses, cheese, or insurance. In spite o its many ollowers,the whole public goods theory is aulty, ashy reasoning, riddenwith internal inconsistencies, nonsequiturs, appealing to and play-

ing on popular prejudices and assumed belies, but with no scien-tic merit whatsoever.176

What, then, does the “escape route” that socialist economistshave ound in order to avoid drawing Molinari’s conclusion look like? Since Molinari’s time it has become increasingly common toanswer the question o whether there are goods to which dierentsorts o economic analyses apply in the armative. As a matter o

G. de Molinari, “Te Production o Security,” Center or Libertarian Studies,Occasional Paper No. 2, New York, 1977, p.3. Ibid., p.4. For various approaches o public goods theorists c. J. Buchanan and G. ull-ock, Te Calculus o Consent, Ann Arbor, 1962; J. Buchanan, Te Public Finances,Homewood, 1970; and Te Limits o Liberty, Chicago, 1975; G. ullock, PrivateWants, Public Means, New York, 1970; M. Olson, Te Logic o Collective Action,New York, 1965; W. Baumol, Welare Economics and the Teory o the State, Cam-bridge, 1952. C. on the ollowing M. N. Rothbard, Man, Economy and State, Los Angeles,1970, pp. 883; and “he Myth o Neutral axation,” in: Cato Journal, 1981; W.Block, “Free Market ransportation: Denationalizing the Roads,” in: Journal o Lib-ertarian Studies, 1979; and “Public Goods and Externalities: Te Case o Roads,” in:Journal o Libertarian Studies, 1983.




act, nowadays it is almost impossible to nd a single economic text-

book that does not make and stress the vital importance o the dis-tinction between private goods, or which the truth o the economic

superiority o a capitalist order o production is generally admit-

ted, and public goods, or which it is generally denied.177 Certain

goods or services, and among them, security, are said to have the

special characteristic that their enjoyment cannot be restricted to

those persons who have actually nanced their production. Rather,

people who have not participated in their nancing can draw ben-ets rom them, too. Such goods are called public goods or services

(as opposed to private goods or services, which exclusively bene-

t those people who actually paid or them). And it is due to this

special eature o public goods, it is argued, that markets cannot

produce them, or at least not in sucient quantity or quality, and

hence compensatory state action is required.178 Te examples given

by dierent authors or alleged public goods vary widely. Authorsoen classiy the same good or services dierently, leaving almost

C. or instance, W. Baumol and A. Blinder, Economics, Principles and Policy,New York, 1979, Chapter 31. Another requently used criterion or public goods is that o “non-rivalrous con-sumption.” Generally, both criteria seem to coincide: when ree riders cannot beexcluded, nonrivalrous consumption is possible; and when they can be excluded,consumption becomes rivalrous, or so it seems. However, as public goods theoristsargue, this coincidence is not perect. It is, they say, conceivable that while the exclu-sion o ree riders might be possible, their inclusion might not be connected withany additional cost (the marginal cost o admitting ree riders is zero, that is), andthat the consumption o the good in question by the additionally admitted ree riderwill not necessarily lead to a subtraction in the consumption o the good available toothers. Such a good would be a public good, too. And since exclusion would be prac-ticed on the ree market and the good would not become available or nonrivalrousconsumption to everyone it otherwise could—even though this would require noadditional costs—this, according to statist- socialist logic, would prove a market ail-ure, i.e., a suboptimal level o consumption. Hence, the state would have to take overthe provision o such goods. (A movie theater, or instance, might only be hal-ull,

so it might be “costless” to admit additional viewers ree o charge, and their watch-ing the movie also might not aect the paying viewers; hence the movie would qual-iy as a public good. Since, however, the owner o the theater would be engaging inexclusion, instead o letting ree riders enjoy a “costless” perormance, movie theaterswould be ripe or nationalization.) On the numerous allacies involved in deningpublic goods in terms o nonrivalrous consumption c. notes 12 and 16 below.




no classiication o a particular good undisputed.179 his clearly

oreshadows the illusory character o the whole distinction. None-theless, some examples that enjoy particularly popular status aspublic goods are the re brigade that stops a neighbor’s house romcatching re, thereby letting him prot rom my re brigade, eventhough he did not contribute anything to nancing it; or the policethat by walking around my property scare away potential burglarsrom my neighbor’s property as well, even i he did not help nancethe patrols; or the lighthouse, a particularly dear example to econo-

mists,180 that helps ships nd their way, even though they did notcontribute a penny to its construction or upkeep.

Beore continuing with the presentation and critical exam-ination o the theory o public goods let us investigate how use-ul the distinction between private and public goods is in helpingdecide what should be produced privately and what by the stateor with state help. Even the most supercial analysis could not ail

to point out that using this alleged criterion, rather than present-ing a sensible solution, would get one into deep trouble. While atleast at rst glance it seems that some o the state-provided goodsand services might indeed qualiy as public goods, it certainly isnot obvious how many o the goods and services that are actually produced by states could come under the heading o public goods.Railroads, postal services, telephone, streets, and the like seem tobe goods whose usage can be restricted to the persons who actu-ally nance them, and hence appear to be private goods. And thesame seems to be the case regarding many aspects o the multidi-mensional good “security”: everything or which insurance couldbe taken out would have to qualiy as a private good. Yet this doesnot suce. Just as a lot o state-provided goods appear to be privategoods, so many privately produced goods seem to t in the cate-gory o a public good. Clearly my neighbors would prot rom my

C. on this W. Block, “Public Goods and Externalities,” in: Journal o LibertarianStudies, 1983.0 C. or instance, J. Buchanan, Te Public Finances, Homewood, 1970, p.23; P.Samuelson, Economics, New York, 1976, p.160.




well-kept rose garden—they could enjoy the sight o it without ever

helping me garden. Te same is true o all kinds o improvementsthat I could make on my property that would enhance the value o neighboring property as well. Even those people who do not throwmoney in his hat could prot rom a street musician’s perormance.Tose ellow travellers on the bus who did not help me buy it protrom my deodorant. And everyone who ever comes into contactwith me would prot rom my eorts, undertaken without theirnancial support, to turn mysel into a most lovable person. Now,

do all these goods—rose gardens, property improvements, streetmusic, deodorants, personality improvements—since they clearly seem to possess the characteristics o public goods, then have to beprovided by the state or with state assistance?

As these latter examples o privately produced public goodsindicate, there is something seriously wrong with the thesis o pub-lic goods theorists that these goods cannot be produced privately

but instead require state intervention. Clearly they can be providedby markets. Furthermore, historical evidence shows us that all o the alleged public goods which states now provide had at sometime in the past actually been provided by private entrepreneurs oreven today are so provided in one country or another. For exam-ple, the postal service was once private almost everywhere; streetswere privately nanced and still are sometimes; even the beloved

lighthouses were originally the result o private enterprise;

181

private police orces, detectives, and arbitrators exist; and help or thesick, the poor, the elderly, orphans, and widows has been a tradi-tional eld or private charity organizations. o say, then, that suchthings cannot be produced by a pure market system is alsied by experience one hundredold.

Apart rom this, other diculties arise when the public-private goods distinction is used to decide what to leave to the mar-ket and what not. What, or instance, i the production o so-called

C. R. Coase, “Te Lighthouse in Economics,” in: Journal o Law and Econom-ics, 1974.




public goods did not have positive but negative consequences orother people, or i the consequences were positive or some andnegative or others? What i the neighbor whose house was savedrom burning by my re brigade had wished (perhaps because hewas overinsured) that it had burned down, or my neighbors hateroses, or my ellow travellers nd the scent o my deodorant dis-gusting? In addition, changes in the technology can change thecharacter o a given good. For example, with the development o cable V, a good that was ormerly (seemingly) public has become

private. And changes in the laws o property—o the appropriationo property—can have the very same eect o changing the public-private character o a good. Te lighthouse, or instance, is a publicgood only insoar as the sea is publicly (not privately) owned. But i it were permitted to acquire pieces o the ocean as private property,as it would be in a purely capitalist social order, then as the light-house only shines over a limited territory, it would clearly becomepossible to exclude nonpayers rom the enjoyment o its services.

Leaving this somewhat sketchy level o discussion and lookinginto the distinction between private and public goods more thor-oughly, it turns out to be a completely illusory distinction. A clear-cut dichotomy between private and public goods does not exist,and this is essentially why there can be so many disagreements onhow to classiy given goods. All goods are more or less private orpublic and can—and constantly do—change with respect to their

degree o privateness/publicness with people’s changing values andevaluations, and with changes in the composition o the popula-tion. Tey never all, once and or all, into either one or the othercategory. In order to recognize this, one must only recall whatmakes something a good. For something to be a good it must berealized and treated as scarce by someone. Something is not agood-as-such, that is to say, but goods are goods only in the eyeso the beholder. Nothing is a good without at least one person

subjectively evaluating it as such. But then, since goods are nevergoods—as-such—since no physico-chemical analysis can identiy something as an economic good—there is clearly no xed, objec-tive criterion or classiying goods as either private or public. Tey




can never be private or public goods as such. Teir private or pub-

lic character depends on how ew or how many people considerthem to be goods, with the degree to which they are private or pub-lic changing as these evaluations change, and ranging rom one toinnity. Even seemingly completely private things like the interioro my apartment or the color o my underwear thus can becomepublic goods as soon as somebody else starts caring about them.182 And seemingly public goods, like the exterior o my house or thecolor o my overalls, can become extremely private goods as soon

as other people stop caring about them. Moreover, every good canchange its characteristics again and again; it can even turn roma public or private good to a public or private bad and vice versa,depending solely on the changes in this caring or uncaring. How-ever, i this is so, no decision whatsoever can be based on the clas-sication o goods as private or public.183 In act, to do so it wouldnot only become necessary to ask virtually every individual personwith respect to every single good whether or not he happened tocare about it, positively or negatively and perhaps to what extent, inorder to determine who might prot rom what and should henceparticipate in its nancing. (And how could one know i they weretelling the truth?) It would also become necessary to monitor allchanges in such evaluations continually, with the result that no de-inite decision could ever be made regarding the production o any-thing, and as a consequence o a nonsensical theory all o us would

be long dead.184

C. or instance, the ironic case that W. Block makes or socks being public goodsin “Public Goods and Externalities,” in: Journal o Libertarian Studies, 1983. o avoid any misunderstanding here, every single producer and every associa-tion o producers making joint decisions can, at any time, decide whether or not toproduce a good based on an evaluation o the privateness or publicness o the good.In act, decisions on whether or not to produce public goods privately are constantly made within the ramework o a market economy. What is impossible is to decidewhether or not to ignore the outcome o the operation o a ree market based on theassessment o the degree o privateness or publicness o a good. In act, then, the introduction o the distinction between private and public goodsis a relapse into the presubjectivist era o economics. From the point o view o sub-

jectivist economics no good exists that can be categorized objectively as private orpublic. Tis, essentially, is why the second proposed criterion or public goods, i.e.,




But even i one were to ignore all these diculties, and werewilling to admit or the sake o argument that the private-publicgood distinction did hold water, even then the argument wouldnot prove what it is supposed to. It neither provides conclusivereasons why public goods—assuming that they exist as a separatecategory o goods—should be produced at all, nor why the staterather than private enterprises should produce them. Tis is whatthe theory o public goods essentially says, having introduced theabove-mentioned conceptual distinction: Te positive eects o

public goods or people who do not contribute anything to theirproduction or nancing proves that these goods are desirable. Butevidently, they would not be produced, or at least not in sucientquantity and quality, in a ree, competitive market, since not allo those who would prot rom their production would also con-tribute nancially to make the production possible. So in order toproduce these goods (which are evidently desirable, but would notbe produced otherwise), the state must jump in and assist in their

production. Tis sort o reasoning, which can be ound in almostevery textbook on economics (Nobel laureates not excluded185) iscompletely allacious, and allacious on two counts.

permitting nonrivalrous consumption (c. note 6 above), breaks down, too. For howcould any outside observer determine whether or not the admittance o an addi-tional ree rider at no charge would not indeed lead to a reduction in the enjoymento a good by others?! Clearly, there is no way that he could objectively do so. In act,it might well be that one’s enjoyment o a movie or driving on a road would be con-

siderably reduced i more people were allowed in the theater or on the road. Again,to nd out whether or not this is the case one would have to ask every individual—and not everyone might agree. (What then?) Furthermore, since even a good thatallows nonrivalrous consumption is not a ree good, as a consequence o admittingadditional ree riders “crowding” would eventually occur, and hence everyone wouldhave to be asked about the appropriate “margin.” In addition, my consumption may or may not be aected, depending on who it is that is admitted ree o charge, so Iwould have to be asked about this, too. And nally, everyone might change his opin-ion on all o these questions over time. It is thus in the same way impossible to decidewhether or not a good is a candidate or state (rather than private) production basedon the criterion o nonrivalrous consumption as on that o nonexcludability. (C.also note 16 below). C. P. Samuelson, “Te Pure Teory o Public Expenditure,” in: Review o Eco-nomics and Statistics, 1954; and Economics, New York, 1976, Chapter 8; M.Friedman, Capitalism and Freedom, Chicago, 1962, Chapter 2; F. A. Hayek, Law,Legislation and Liberty, vol. 3, Chicago, 1979, Chapter 14.




For one thing, to come to the conclusion that the state has to

provide public goods that otherwise would not be produced, onemust smuggle a norm into one’s chain o reasoning. Otherwise,rom the statement that because o some special characteristics o theirs certain goods would not be produced, one could never reachthe conclusion that these goods should be produced. But with anorm required to justiy their conclusion, the public goods theoristsclearly have le the bounds o economics as a positive, wertrei sci-ence. Instead they have transgressed into the eld o morals or eth-

ics, and hence one would expect to be oered a theory o ethics asa cognitive discipline in order or them to legitimately do what they are doing and to justiably derive the conclusion that they actu-ally derive. But it can hardly be stressed enough that nowhere inthe public goods theory literature can there be ound anything thateven aintly resembles such a cognitive theory o ethics.186 Tus it

In recent years economists, in particular o the so-called Chicago-school, have

been increasingly concerned with the analysis o property rights (c. H. Demsetz,“Te Exchange and Enorcement o Property Rights,” in: Journal o Law and Eco-nomics, 1964; and ‘oward a Teory o Property Rights,” in: American EconomicReview, 1967; R. Coase, ‘Te Problem o Social Cost,” in: Journal o Law and Eco-nomics, 1960; A. Alchian, Economic Forces at Work, Indianapolis, 1977, part 2; R.Posner, Economic Analysis o Law, Boston, 1977). Such analyses, however, havenothing to do with ethics. On the contrary, they represent attempts to substitute eco-nomic eciency considerations or the establishment o justiable ethical principles(on the critique o such endeavors c. M. N. Rothbard, Te Ethics o Liberty, Atlan-tic Highlands 1982, Chapter 26; W. Block, “Coase and Demsetz on Private Property Rights,” in: Journal o Libertarian Studies, 1977; R. Dworkin, “Is Wealth a Value,”in: Journal o Legal Studies, 1980; M. N. Rothbard, “Te Myth o Eciency,” in: M.Rizzo (ed.), ime, Uncertainty, and Disequilibrium, Lexington, 1979). Ultimately, alleciency arguments are irrelevant because there simply exists no nonarbitrary way o measuring, weighing, and aggregating individual utilities or disutilities that resultrom some given allocation o property rights. Hence, any attempt to recommendsome particular system o assigning property rights in terms o its alleged maxi-mization o “social welare” is pseudo-scientic humbug (see in particular, M. N.Rothbard, ‘oward a Reconstruction o Utility and Welare Economics,” Center orLibertarian Studies, Occasional Paper No. 3, New York, 1977; also, L. Robbins, “Eco-nomics and Political Economy,” in: American Economic Review, 1981).

Te “Unanimity Principle” which J. Buchanan and G. ullock, ollowing K. Wick-sell (Finanztheoretische Untersuchungen, Jena, 1896), have repeatedly proposed as aguide or economic policy is also not to be conused with an ethical principle proper.According to this principle only such policy changes should be enacted which cannd unanimous consent—and that surely sounds attractive; but then, mutatis mutan-dis, it also determines that the status quo be preserved i there is less than unanimous




must be stated at the outset, that the public goods theorists are mis-

using whatever prestige they might have as positive economists orpronouncements on matters on which, as their own writings indi-

cate, they have no authority whatsoever. Perhaps, though, they have

stumbled on something correct by accident, without supporting it

with an elaborate moral theory? It becomes apparent that nothing

could be urther rom the truth as soon as one explicitly ormulates

the norm that would be needed to arrive at the above-mentioned

conclusion about the state’s having to assist in the provision o pub-

lic goods. Te norm required to reach the above conclusion is this:

whenever it can somehow be proven that the production o a par-

ticular good or service has a positive eect on someone but would

not be produced at all, or would not be produced in a denite quan-

tity or quality unless others participated in its nancing, then the

use o aggressive violence against these persons is allowed, either

directly or indirectly with the help o the state, and these persons

may be orced to share in the necessary nancial burden. It does

not need much comment to show that chaos would result rom

implementing this rule, as it amounts to saying that everyone can

aggress against everyone else whenever he eels like it. Moreover, it

should be suciently clear rom the discussion o the problem o

the justication o normative statements (Chapter 7) that this norm

could never be justied as a air norm. For to argue in that way and

to seek agreement or this argument must presuppose, contrary to

agreement on any proposal o change—and that sounds ar less attractive because itimplies that any given, present state o aairs regarding the allocation o property rights must be legitimate either as a point o departure or as a to-be-continued state.However, the public choice theorists oer no justication in terms o a normativetheory o property rights or this daring claim as would be required. Hence, the una-nimity principle is ultimately without ethical oundation. In act, because it wouldlegitimize any conceivable status quo, the Buchananites most avored principle is no

less than outrightly absurd as a moral criterion (c. on this also M. N. Rothbard, TeEthics o Liberty, Atlantic Highlands, 1982, Chapter 26; and “Te Myth o Neutralaxation,” in: Cato Journal, 1981, pp.549).

Whatever might still be le or the unanimity principle, Buchanan and ullock,ollowing the lead o Wicksell again, then give away by reducing it in eect to one o “relative” or “quasi” unanimity.




what the norm says, that everyone’s integrity as a physically inde-

pendent decision-making unit is assured.But the public goods theory breaks down not just because o

the aulty moral reasoning implied in it. Even the utilitarian, eco-nomic reasoning contained in the above argument is blatantly wrong. As the public goods theory states, it might well be that itwould be better to have the public goods than not to have them,though it should not be orgotten that no a priori reason exists thatthis must be so o necessity (which would then end the public goodstheorists’ reasoning right here). For it is clearly possible, and indeedknown to be a act, that anarchists exist who so greatly abhor stateaction that they would preer not having the so-called public goodsat all to having them provided by the state!187 is In any case, even i the argument is conceded so ar, to leap rom the statement that thepublic goods are desirable to the statement that they should there-ore be provided by the state is anything but conclusive, as this is by

no means the choice with which one is conronted. Since money orother resources must be withdrawn rom possible alternative usesto nance the supposedly desirable public goods, the only relevantand appropriate question is whether or not these alternative usesto which the money could be put (that is, the private goods whichcould have been acquired but now cannot be bought because themoney is being spent on public goods instead) are more valuable—

more urgent—than the public goods. And the answer to this ques-tion is perectly clear. In terms o consumer evaluations, howeverhigh its absolute level might be, the value o the public goods isrelatively lower than that o the competing private goods, becausei one had le the choice to the consumers (and had not orcedone alternative upon them), they evidently would have preerredspending their money dierently (otherwise no orce would havebeen necessary). Tis proves beyond any doubt that the resources

C. on this argument M. N. Rothbard, “Te Myth o Neutral axation,” in: CatoJournal, 1981, p.533. Incidentally, the existence o one single anarchist also inval-idates all reerences to Paretooptimality as a criterion or economically legitimatestate action.




used or the provision o public goods are wasted, as they provide

consumers with goods or services which at best are only o second-ary importance. In short, even i one assumed that public goodswhich can be distinguished clearly rom private goods existed, andeven i it were granted that a given public good might be useul,public goods would still compete with private goods. And thereis only one method or nding out whether or not they are moreurgently desired and to what extent, or, mutatis mutandis, i, andto what extent, their production would take place at the expense o

the nonproduction or reduced production o more urgently neededprivate goods: by having everything provided by reely competingprivate enterprises. Hence, contrary to the conclusion arrived at by the public goods theorists, logic orces one to accept the result thatonly a pure market system can saeguard the rationality, rom thepoint o view o the consumers, o a decision to produce a publicgood. And only under a pure capitalist order could it be ensuredthat the decision about how much o a public good to produce

(provided it should be produced at all) is rational as well.188 No less

Essentially the same reasoning that leads one to reject the socialist-statist theory built on the allegedly unique character o public goods as dened by the criterion o nonexcludability, also applies when instead, such goods are dened by means o thecriterion o nonrivalrous consumption (c. notes 6 and 12 above). For one thing, inorder to derive the normative statement that they should be so oered rom the state-ment o act that goods which allow nonrivalrous consumption would not be oeredon the ree market to as many consumers as could be, this theory would ace exactly the same problem o requiring a justiable ethics. Moreover, the utilitarian reasoningis blatantly wrong, too. o reason, as the public goods theorists do, that the ree-mar-ket practice o excluding ree riders rom the enjoyment o goods which would per-mit nonrivalrous consumption at zero marginal costs would indicate a suboptimallevel o social welare and hence would require compensatory state action is aulty on two related counts. First, cost is a subjective category and can never be objectively measured by any outside observer. Hence, to say that additional ree riders could beadmitted at no cost is totally inadmissible. In act, i the subjective costs o admit-ting more consumers at no charge were indeed zero, the private owner-producer o the good in question would do so. I he does not do so, this reveals that to the con-trary, the costs or him are not zero. Te reason or this may be his belie that to do

so would reduce the satisaction available to the other consumers and so would tendto depress the price or his product; or it may simply be his dislike or uninvited reeriders as, or instance, when I object to the proposal that I turn over my less-than-capacity-lled living room to various sel- inviting guests or nonrivalrous consump-tion. In any case, since or whatever reason the cost cannot be assumed to be zero,it is then allacious to speak o a market ailure when certain goods are not handed




than a semantic revolution o truly Orwellian dimensions would be

required to come up with a dierent result. Only i one were will-ing to interpret someone’s “no” as really meaning “yes,” the “non-

buying o something” as meaning that it is really “preerred over

that which the nonbuying person does instead o non-buying,”

o “orce” really meaning “reedom,” o “non-contracting” really

meaning “making a contract” and so on, could the public goods

theorists’ point be “proven.”189 But then, how could we be sure that

out ree o charge. On the other hand, welare losses would indeed become unavoid-able i one accepted the public goods theorists’ recommendation o letting goodsthat allegedly allow or nonrivalrous consumption to be provided ree o charge by the state. Besides the insurmountable task o determining what ullls this criterion,the state, independent o voluntary consumer purchases as it is, would rst ace theequally insoluble problem o rationally determining how much o the public good toprovide. Clearly, since even public goods are not ree goods but are subject to “crowd-ing” at some level o use, there is no stopping point or the state, because at any levelo supply there would still be users who would have to be excluded and who, with alarger supply, could enjoy a ree ride. But even i this problem could be solved mirac-

ulously, in any case the (necessarily inated) cost o production and operation o thepublic goods distributed ree o charge or nonrivalrous consumption would haveto be paid or by taxes. And this then, i.e., the act that consumers would have beencoerced into enjoying their ree rides, again proves beyond any doubt that rom theconsumers’ point o view these public goods, too, are inerior in value to the compet-ing private goods that they now no longer can acquire. he most prominent modern champions o Orwellian double talk are J.Buchanan and G. ullock (c. their works cited in note 3 above). Tey claim thatgovernment is ounded by a “constitutional contract” in which everyone “conceptu-ally agrees” to submit to the coercive powers o government with the understandingthat everyone else is subject to it, too. Hence, government is only seemingly coercivebut really voluntary. Tere are several evident objections to this curious argument.First, there is no empirical evidence whatsoever or the contention that any consti-tution has ever been voluntarily accepted by everyone concerned. Worse, the very idea o all people voluntarily coercing themselves is simply inconceivable, much inthe same way that it is inconceivable to deny the law o contradiction. For i the vol-untarily accepted coercion is voluntary, then it would have to be possible to revokeone’s subjection to the constitution and the state would be no more than a volun-tarily joined club. I, however, one does not have the “right to ignore the state”—and that one does not have this right is, o course, the characteristic mark o a stateas compared to a club—then it would be logically inadmissible to claim that one’s

acceptance o state coercion is voluntary. Furthermore, even i all this were possible,the constitutional contract could still not claim to bind anyone except the originalsigners o the constitution.

How can Buchanan and ullock come up with such absurd ideas? By a seman-tic trick. What was “inconceivable” and “no agreement” in pre- Orwellian talk is orthem “conceptually possible” and a “conceptual agreement.” For a most instructive




they really mean what they seem to mean when they say what they

say, and do not rather mean the exact opposite, or don’t mean any-thing with a denite content at all, but are simply babbling? Wecould not! M. Rothbard is thus completely right when he com-ments on the endeavors o the public goods ideologues to provethe existence o so-called market ailures due to the nonproductionor a quantitatively or qualitatively “decient” production o publicgoods. He writes, “… such a view completely misconceives the way in which economic science asserts that ree-market action is ever

optimal. It is optimal, not rom the standpoint o the personal ethi-cal views o an economist, but rom the standpoint o ree, volun-tary actions o all participants and in satisying the reely expressedneeds o the consumers. Government intererence, thereore, willnecessarily and always move away rom such an optimum.”190

Indeed, the arguments supposedly proving market ailuresare nothing short o being patently absurd. Stripped o their dis-

guise o technical jargon all they prove is this: a market is not per-ect, as it is characterized by the nonaggression principle imposedon conditions marked by scarcity, and so certain goods or serviceswhich could only be produced and provided i aggression wereallowed will not be produced. rue enough. But no market theoristwould ever dare deny this. Yet, and this is decisive, this “imperec-tion” o the market can be deended, morally as well as economi-cally, whereas the supposed “perections” o markets propagated by

the public goods theorists cannot.191 It is true enough, too, that a

short exercise in this sort o reasoning in leaps and bounds c. J. Buchanan, “A Con-tractarian Perspective on Anarchy,” in: Freedom in Constitutional Contract, CollegeStation, 1977. Here we learn (p. 17) that even the acceptance o the 55 m.p.h, speedlimit is possibly voluntary (Buchanan is not quite sure), since it ultimately rests onall o us conceptually agreeing on the constitution, and that Buchanan is not really astatist, but in truth an anarchist (p. 11).0 M. N. Rothbard, Man, Economy and State, Los Angeles, 1970, p.887.

Tis, rst o all, should be kept in mind whenever one has to assess the validity o statist-interventionist arguments such as the ollowing, by J. M. Keynes (“Te Endo Laissez Faire,” in: J. M. Keynes, Collected Writings, London 1972, vol. 9, p.291):“Te most important Agenda o the state relate not to those activities which privateindividuals are already ullling but to those unctions which all outside the sphereo the individual, to those decisions which are made by no one i the state does not




termination o the state’s current practice o providing public goods

would imply some change in the existing social structure and thedistribution o wealth. And such a reshufing would certainly imply hardship or some people. As a matter o act, this is precisely why there is widespread public resistance to a policy o privatizing stateunctions, even though in the long run overall social wealth wouldbe enhanced by this very policy. Surely, however, this act cannotbe accepted as a valid argument demonstrating the ailure o mar-kets. I a man had been allowed to hit other people on the head and

is now not permitted to continue with this practice, he is certainly hurt. But one would hardly accept that as a valid excuse or uphold-ing the old (hitting) rules. He is harmed, but harming him meanssubstituting a social order in which every consumer has an equalright to determine what and how much o anything is produced,or a system in which some consumers have the right to determinein what respect other consumers are not allowed to buy voluntarily what they want with the means justly acquired by them and at theirdisposal. And certainly, such a substitution would be preerablerom the point o view o all consumers as voluntary consumers.

By orce o logical reasoning, then, one must accept Moli-nari’s above-cited conclusion that or the sake o consumers, allgoods and services be provided by markets.192 It is not only alse

make them. Te important thing or government is not to do things which individu-

als are doing already and to do them a little better or a little worse: but to do thosethings which are not done at all.” Tis reasoning not only appears phony, it truly is. Some libertarian minarchists object that the existence o a market presupposesthe recognition and enorcement o a common body o law, and hence a govern-ment as a monopolistic judge and enorcement agency.(C., or instance, J. Hospers,Libertarianism, Los Angeles, 1971; . Machan, Human Rights and Human Liber-ties, Chicago, 1975.) Now, it is certainly correct that a market presupposes the rec-ognition and enorcement o those rules that underlie its operation. But rom this itdoes not ollow that this task must be entrusted to a monopolistic agency. In act, acommon language or sign-system is also presupposed by the market; but one would

hardly think it convincing to conclude that hence the government must ensure theobservance o the rules o language. Just as the system o language then, the rules o market behavior emerge spontaneously and can be enorced by the “invisible hand”o sel-interest. Without the observance o common rules o speech people could notreap the advantages that communication oers, and without the observance o com-mon rules o conduct, people could not enjoy the benets o the higher productivity




that clearly distinguishable categories o goods exist, which would

render special amendments to the general thesis o capitalism’seconomic superiority necessary; even i they did exist, no specialreason could be ound why these supposedly special public goodsshould not also be produced by private enterprises since they invariably stand in competition with private goods. In act, in spiteo all the propaganda rom the side o the public goods theorists,the greater eciency o markets as compared with the state hasbeen realized with respect to more and more o the alleged public

goods. Conronted daily with experience, hardly anyone seriously studying these matters could deny that nowadays markets couldproduce postal services, railroads, electricity, telephone, education,money, roads and so on more eectively, i.e., more to the liking o the consumers, than the state. Yet people generally shy away romaccepting in one particular sector what logic orces upon them: inthe eld o the production o security. Hence, the rest o this chap-ter will explain the superior unctioning o a capitalist economy inthis particular area—a superiority whose logical case has already been made, but which shall be rendered more persuasive oncesome empirical material is added to the analysis and it is studied asa problem in its own right.193

o an exchange economy based on the division o labor. In addition, as I have dem-onstrated in Chapter 7, independent o any government, the rules o the market canbe deended a priori as just. Moreover, as I will argue in the conclusion o this Chap-

ter, it is precisely a competitive system o law administration and law enorcementthat generates the greatest possible pressure to elaborate and enact rules o conductthat incorporate the highest degree o consensus conceivable. And, o course, the

very rules that do just this are those that a priori reasoning establishes as the logically necessary presupposition o argumentation and argumentative agreement. Incidentally, the same logic that would orce one to accept the idea o the pro-duction o security by private business as economically the best solution to the prob-lem o consumer satisaction also orces one, as ar as moral-ideological positionsare concerned, to abandon the political theory o classical liberalism and take thesmall but nevertheless decisive step (rom there) to the theory o libertarianism,

or private property anarchism. Classical liberalism, with L. v. Mises as its oremostrepresentative in this century, advocates a social system based on the undamentalrules o the natural theory o property. And these are also the rules that libertarian-ism advocates. But classical liberalism then wants to have these laws enorced by amonopolistic agency (the government, the state)—an organization, that is, whichis not exclusively dependent on voluntary, contractual support by the consumers




How would a system o nonmonopolistic, competing pro-

ducers o security work? It should be clear rom the outset that inanswering this question one is leaving the realm o purely logicalanalysis and hence the answers must necessarily lack the certainty,the apodictic character o pronouncements on the validity o thepublic goods theory. he problem aced is precisely analogousto that o asking how a market would solve the problem o ham-burger production, especially i up to this point hamburgers hadbeen produced exclusively by the state, and hence no one could

draw on past experience. Only tentative answers could be ormu-lated. No one could possibly know the exact structure o the ham-burger industry—how many competing companies would comeinto existence, what importance this industry might have com-pared to others, what the hamburgers would look like, how many dierent sorts o hamburgers would appear on the market and per-haps disappear again because o a lack o demand, and so on. No

one could know all o the circumstances and the changes whichwould inuence the very structure o the hamburger industry thatwould take place over time—changes in demand o various con-sumer groups, changes in technology, changes in the prices o vari-ous goods that aect the industry directly or indirectly, and so on.

o its respective services, but instead has the right to unilaterally determine its ownincome, i.e., the taxes to be imposed on consumers in order to do its job in the areao security production. Now, however plausible this might sound, it should be clearthat it is inconsistent. Either the principles o the natural property theory are valid,in which case the state as a privileged monopolist is immoral, or business built onand around aggression—the use o orce and o noncontractual means o acquiringresources—is valid, in which case one must toss out the rst theory. It is impossibleto sustain both contentions and not be inconsistent unless, o course, one could pro-

vide a principle that is more undamental than both the natural theory o property and the state’s right to aggressive violence and rom which both, with the respectivelimitations regarding the domains in which they are valid, can be logically derived.However, liberalism never provided any such principle, nor will it ever be able todo so, since, as I demonstrated in Chapter 7, to argue in avor o anything presup-

poses one’s right to be ree o aggression. Given the act then that the principles o the natural theory o property cannot be argumentatively contested as morally validprinciples without implicitly acknowledging their validity, by orce o logic one iscommitted to abandoning liberalism and accepting instead its more radical child:libertarianism, the philosophy o pure capitalism, which demands that the produc-tion o security be undertaken by private business, too.




It must be stressed that all this is no dierent when it comes to the

question o the private production o security. But this by no meansimplies that nothing denitive can be said on the matter. Assumingcertain general conditions o demand or security services whichare known to be more or less realistic by looking at the world asit presently is, what can and will be said is how dierent socialorders o security production, characterized by dierent structuralconstraints under which they have to operate, will respond dier-ently.194 Let us rst analyze the specics o monopolistic, state-run

security production, as at least in this case one can draw on ampleevidence regarding the validity o the conclusions reached, andthen turn to comparing this with what could be expected i such asystem were replaced by a nonmonopolistic one.

Even i security is considered to be a public good, in the allo-cation o scarce resources it must compete with other goods. Whatis spent on security can no longer be spent on other goods that also

might increase consumer satisaction. Moreover, security is not asingle, homogeneous good, but rather consists o numerous com-ponents and aspects. Tere is not only prevention, detection, andenorcement but there is also security rom robbers, rapists, pollut-ers, natural disasters, and so on. Moreover, security is not producedin a “lump,” but can be supplied in marginal units. In addition, di-erent people attach dierent importance to security as a whole andalso to dierent aspects o the whole thing, depending on their per-sonal characteristics, their past experiences with various actors o insecurity, and the time and place in which they happen to live.195 Now, and here we return to the undamental economic problem o allocating scarce resources to competing uses, how can the state—an organization which is not inanced exclusively by voluntary

C. on the problem o competitive security production G. de Molinari, “Te Pro-duction o Security” Center or Libertarian Studies, Occasional Paper No. 2, NewYork, 1977; M. N. Rothbard, Power and Market, Kansas City, 1977, Chapter 1; andFor A New Liberty, New York, 1978, Chapter 12; also: W.C. Wooldridge, Uncle Samthe Monopoly Man, New Rochelle, 1970, Chapters 5-6; M. and L. annehill, TeMarket or Liberty, New York, 1984, part 2. C. M. Murck, Soziologie der oeentlichen Sicherheit, Frankurt/M., 1980.




contributions and the sales o its products, but rather partially or

even wholly by taxes—decide how much security to produce, howmuch o each o its countless aspects, to whom and where to provide how much o what? Te answer is that it has no rational way to decide this question. From the point o view o the consumersits response to their security demands must thus be consideredarbitrary. Do we need one policeman and one judge, or 100,000 o each? Should they be paid $100 a month, or $10,000? Should thepolicemen, however many we might have, spend more time patrol-

ling the streets, chasing robbers, recovering stolen loot, or spyingon participants in victimless crimes such as prostitution, drug use,or smuggling? And should the judges spend more time and energy hearing divorce cases, trac violations, cases o shopliing, murder,or antitrust cases? Clearly, all o these questions must be answeredsomehow because as long as there is scarcity and we do not live inthe Garden o Eden, the time and money spent on one thing can-not be spent on another. Te state must answer these questions, too,but whatever it does, it does it without being subject to the prot-and-loss criterion. Hence, its action is arbitrary and thus necessar-ily involves countless wasteul misallocations rom the consumer’s

viewpoint.196 Independent to a large degree o consumer wants, thestate-employed security producers instead do, as everyone knows,what they like. Tey hang around instead o doing anything, and i they do work they preer doing what is easiest or work where they

can wield power rather than serve consumers. Police ocers drivearound a lot in cars, hassle petty trac violators, and spend hugeamounts o money investigating victimless crimes which a lot o people (i.e., nonparticipants) do not like, but which ew would bewilling to spend their money on to ght, as they are not immedi-ately aected by it. Yet with respect to the one thing that consumerswant most urgently—the prevention o hard-core crime (i.e., crimeswith victims), the detection and eective punishment o hard-corecriminals, the recovery o loot, and the securement o compensation

On the deciencies o democratically controlled allocation decisions c. above,Chapter 9, n. 4.




to victims o crimes rom the aggressors—they are notoriously ine-

cient, in spite o ever higher budget allocations.Further, and here I return to the problem o a lowered quality

o output (with given allocations), whatever state-employed police

or judges happen to do (arbitrary as it must be), since their income

is more or less independent o the consumers’ evaluations o their

respective services, they will tend to do poorly. Tus one observes

police arbitrariness and brutality and the slowness in the judicial

process. Moreover, it is remarkable that neither the police nor the judicial system oers consumers anything even aintly resembling

a service contract in which it is laid down in unambiguous terms

what procedure the consumer can expect to be set in motion in a

specic situation. Rather, both operate in a contractual void which

over time allows them to change their rules o procedure arbitrarily,

and which explains the truly ridiculous act that the settlement o

disputes between police and judges on the one hand and privatecitizens on the other is not assigned to an independent third party,

but to another police or judge who shares employers with one

party—the government—in the dispute.

hird, anyone who has seen state-run police stations and

courts, not to mention prisons, knows how true it is that the actors

o production used to provide us with such security are overused,

badly maintained, and lthy. Tere is no reason or them to satisy the consumers who provide their income. And i, in an exceptional

case, this happens not to be so, then it has only been possible at

costs that are comparatively much higher than those o any similar

private business.197

Sums up Molinari (“Production o Security,” Center or Libertarian Studies,

Occasional Paper No. 2, New York, 1977, pp. 13-14): “I … the consumer is not reeto buy security wherever he pleases, you orthwith see open up a large proessiondedicated to arbitrariness and bad management. Justice becomes slow and costly,the police vexatious, individual liberty is no longer respected, the price o security is abusively inated and inequitably apportioned, according to the power and inu-ence o this or that class o consumers.”




Without a doubt, all o these problems inherent in a system o

monopolistic security production would be solved relatively quickly once a given demand or security services was met by a competitivemarket with its entirely dierent incentive structure or producers.Tis is not to say that a “perect” solution to the problem o secu-rity would be ound. Tere would still be robberies and murders;and not all loot would be recovered nor all murderers caught. Butin terms o consumer evaluations the situation would improve tothe extent that the nature o man would allow this. First, as long as

there is a competitive system, i.e., as long as the producers o secu-rity services depend on voluntary purchases, most o which prob-ably take the orm o service and insurance contracts agreed to inadvance o any actual “occurrence” o insecurity or aggression, noproducer could increase its in come without improving services orquality o product as perceived by the consumers. Furthermore,all security producers taken together could not bolster the impor-tance o their particular industry unless, or whatever reason, con-sumers indeed started evaluating security more highly than othergoods, thus ensuring that the production o security would neverand nowhere take place at the expense o the non- or reduced pro-duction o, let us say, cheese, as a competing private good. In addi-tion, the producers o security services would have to diversiy their oerings to a considerable degree because a highly diversi-ed demand or security products among millions and millions

o consumers exists. Directly dependent on voluntary consumersupport, they would immediately be hurt nancially i they did notappropriately respond to the consumers’ various wants or changesin wants. hus, every consumer would have a direct inluence,albeit small, on the output o goods appearing on or disappearingrom the security market. Instead o oering a uniorm “security packet” to everyone, as is characteristic o state production policy,a multitude o service packages would appear on the market. Tey

would be tailored to the dierent security needs o dierent peo-ple, taking account o dierent occupations, dierent risk-takingbehavior, dierent things to be protected and insured, and dierentgeographical locations and time constraints.




But that is ar rom all. Besides diversication, the content andquality o the products would improve, too. Not only would thetreatment o consumers by the employees o security enterprisesimprove immediately, the “I could care less” attitude, the arbitrari-ness and even brutality, the negligence and tardiness o the presentpolice and judicial systems would ultimately disappear. Since they then would be dependent on voluntary consumer support, any maltreatment, impoliteness, or ineptitude could cost them their

jobs. Further, the above-mentioned peculiarity—that the settle-

ment o disputes between a client and his service provider is invari-ably entrusted to the latter’s judgment—would almost certainly disappear rom the books, and conict arbitration by independentparties would become the standard deal oered by producers o security. Most importantly though, in order to attract and retaincustomers the producers o such services would have to oer con-tracts which would allow the consumer to know what he was buy-ing and enable him to raise a valid, intersubjectively ascertainable

complaint i the actual perormance o the security producer didnot live up to its obligations. And more specically, insoar as they are not individualized service contracts where payment is made by the customers or covering their own risks exclusively, but ratherinsurance contracts proper which involve pooling one’s own riskswith those o other people, contrary to the present statist practice,these contracts most certainly would no longer contain any delib-erately built-in redistributive scheme avoring one group o peopleat the expense o another. Otherwise, i anyone had the eeling thatthe contract oered to him involved his paying or other people’speculiar needs and risks—actors o possible insecurity, that is, thathe did not perceive as applicable to his own case—he would simply reject signing it or discontinue his payments.

Yet when all this is said, the question will inevitably surace,“Wouldn’t a competitive system o security production still nec-

essarily result in permanent social conlict, in chaos and anar-chy?” Tere are several points to be made regarding this allegedcriticism. First, it should be noted that such an impression wouldby no means be in accordance with historical, empirical evidence.




Systems o competing courts have existed at various places, such

as in ancient Ireland or at the time o the Hanseatic league, beorethe arrival o the modern nation state, and as ar as we know they

worked well.198 Judged by the then existent crime rate (crime

per capita), the private police in the Wild West (which inciden-

tally was not as wild as some movies insinuate) was relatively

more successul than today’s state-supported police.199 And turn-

ing to contemporary experience and examples, millions and mil-

lions o international contacts exist even now—contacts o trade

and travel—and it certainly seems to be an exaggeration to say, or

instance, that there is more raud, more crime, more breach o con-

tract there than in domestic relations. And this is so, it should be

noted, without there being one big monopolistic security producer

and law-maker. Finally it is not to be orgotten that even now in a

great number o countries there are various private security pro-

ducers alongside to the state: private investigators, insurance detec-

tives, and private arbitrators. Regarding their work, the impressionseems to conrm the thesis that they are more, not less, successul

in resolving social conicts than their public counterparts.

However, this historical evidence is greatly subject to dispute,

in particular regarding whether any general inormation can be

derived rom it. Yet there are systematic reasons, too, why the ear

expressed in the above criticism is not well-ounded. Paradoxical as

it may seem at rst, this is because establishing a competitive system

o security producers implies erecting an institutionalized incen-

tive structure to produce an order o law and law-enorcement that

embodies the highest possible degree o consensus regarding the

question o conict resolution, and hence will tend to generate less

rather than more social unrest and conict than under monopolistic

C. the literature cited in note 21 above; also: B. Leoni, Freedom and the Law,Princeton, 1961; J. Peden, “Property Rights in Celtic Irish Law,” in: Journal o Liber-tarian Studies, 1977. C. . Anderson and P. J. Hill, “Te American Experiment in Anarcho-Capital-ism: Te Not So Wild, Wild West,” in: Journal o Libertarian Studies, 1980.




auspices!200 In order to understand this it is necessary to take a

closer look at the only typical situation that concerns the skepticand allows him to believe in the superior virtue o a monopolisti-cally organized order o security production. Tis is the situationwhen a conict arises between A and B, both are insured by dier-ent companies and the companies cannot come to an immediateagreement regarding the validity o the conicting claims broughtorward by their respective clients. (No problem would exist i suchan agreement were reached, or i both clients were insured by one

and the same company—at least the problem then would not bedierent in any way rom that emerging under a statist monop-oly!) Wouldn’t such a situation always result in an armed conron-tation? his is highly unlikely. First, any violent battle betweencompanies would be costly and risky, in particular i these com-panies had reached a respectable size which would be importantor them to have in order to appear as eective guarantors o secu-rity to their prospective clients in the rst place. More importantly though, under a competitive system with each company dependenton the continuation o voluntary consumer payments, any battlewould have to be deliberately supported by each and every client o both companies. I there were only one person who withdrew hispayments because he was not convinced the battle was necessary in the particular conict at hand, there would be immediate eco-nomic pressure on the company to look or a peaceul solution to

the conict.201 Hence, any competitive producer o security wouldbe extremely cautious about his dedication to engaging in violentmeasures in order to resolve conicts. Instead, to the extent that itis peaceul conict-resolution that consumers want, each and every security producer would go to great lengths to provide such mea-sures to its clients and to establish in advance, or everyone to know,

00 C. on the ollowing H. H. Hoppe, Eigentum, Anarchie und Staat, Opladen, 1987,Chapter 5.0 Contrast this with the state’s policy o engaging in battles without having everyone’sdeliberate support because it has the right to tax people; and ask yoursel i the risk o war would be lower or higher i one had the right to stop paying taxes as soon as onehad the eeling that the state’s handling o oreign aairs was not to one’s liking!




to what arbitration process it would be willing to submit itsel and

its clients in case o a disagreement over the evaluation o conict-ing claims. And as such a scheme could only appear to the clients o dierent rms to be really working i there were agreement amongthem regarding such arbitrational measures, a system o law gov-erning relations between companies which would be universally acceptable to the clients o all o the competing security produc-ers would naturally evolve. Moreover, the economic pressure togenerate rules representing consensus on how conicts should be

handled is even more ar-reaching. Under a competitive system theindependent arbitrators who would be entrusted with the task o nding peaceul solutions to conicts would be dependent on thecontinued support o the two disagreeing companies insoar as they could and would select dierent judges i either one o them weresuciently dissatised with the outcome o their arbitration work.Tus, these judges would be under pressure to nd solutions to theproblems handed over to them which, this time not with respect tothe procedural aspects o law, but its content, would be acceptableto all o the clients o the rms involved in a given case as a air and

just solution.202 Otherwise one or all o the companies might losesome o their customers, thus inducing those rms to turn to a di-erent arbitrator the next time they were in need o one.203

But wouldn’t it be possible under a competitive system or asecurity-producing irm to become an outlaw company—a irm,

that is, which, supported by its own clients, started to aggress againstothers? Tere is certainly no way to deny that this might be possible,though again it must be emphasized that here one is in the realm

0 And it may be noted here again that norms that incorporate the highest possibledegree o consensus are, o course, those that are presupposed by argumentation andwhose acceptance makes consensus on anything at all possible, as shown in Chapter 7.0 Again, contrast this with state-employed judges who, because they are paid rom

taxes and so are relatively independent o consumer satisaction, can pass judgmentswhich are clearly not acceptable as air by everyone; and ask yoursel i the risk o notnding the truth in a given case would be lower or higher i one had the possibility o exerting economic pressure whenever one had the eeling that a judge who oneday might have to adjudicate in one’s own case had not been suciently careul inassembling and judging the acts o a case, or simply was an outright crook.




o empirical social science and no one could know such a thing

with certainty. And yet the tacit insinuation that the possibility o asecurity rm becoming an outlaw company would somehow indi-cate a severe deciency in the philosophy and economics o a purecapitalist social order is allacious.204 First, it should be recalled thatany social system, a statist-socialist order no less than a pure mar-ket economy, is dependent or its continued existence on publicopinion, and that a given state o public opinion at all times delim-its what can or cannot occur, or what is more or less likely to occur

in a given society. Te current state o public opinion in West Ger-many, or instance, makes it highly unlikely or even impossible thata statist-socialist system o the present-day Russian type could beimposed on the West German public. Te lack o public support orsuch a system would doom it to ailure and make it collapse. Andit would be even more unlikely that any such attempt to impose aRussian-type order could ever hope to succeed among Americans,given American public opinion. Hence, in order to see the prob-lem o outlaw companies correctly, the above question should bephrased as ollows: How likely is it that any such event would occurin a given society with its specic state o public opinion? Formu-lated in this way, it is clear that the answer would have to be dier-ent or dierent societies. For some, characterized by socialist ideasdeeply entrenched in the public, there would be a greater likelihoodo the reemergence o aggressor companies, and or other societies

there would be a much smaller chance o this happening. But then,would the prospect o a competitive system o security productionin any given case be better or worse than that o the continuation o a statist system? Let us look, or instance, at the present-day UnitedStates. Assume that by a legislative act the state had abolished itsright to provide security with tax unds, and a competitive system o security production were introduced. Given the state o public opin-ion, how likely would it then be that outlaw producers would springup, and what i they did? Evidently, the answer would depend on the

0 C. on the ollowing in particular, M. N. Rothbard, For A New Liberty, New York,1978, pp.233.




reactions o the public to this changed situation. Tus, the rst reply to those challenging the idea o a private market or security wouldhave to be: what about you? What would your reaction be? Doesyour ear o outlaw companies mean that you would then go out andengage in trade with a security producer that aggressed against otherpeople and their property, and would you continue supporting it i itdid? Certainly the critic would be much muted by this counterattack.But more important than this is the systematic challenge impliedin this personal counterattack. Evidently, the described change in

the situation would imply a change in the cost-benet structure thateveryone would ace once he had to make his decisions. Beore theintroduction o a competitive system o security production it hadbeen legal to participate in and support (state) aggression. Now suchan activity would be an illegal activity. Hence, given one’s conscience,which makes each o one’s own decisions appear more or less costly,i.e., more or less in harmony with one’s own principles o correctbehavior, support or a rm engaging in the exploitation o people

unwilling to deliberately support its actions would be more costly now than beore. Given this act, it must be assumed that the num-ber o people—among them even those who otherwise would havereadily lent their support to the state—who would now spend theirmoney to support a rm committed to honest business would rise,and would rise everywhere this social experiment was tried. In con-trast, the number o people still committed to a policy o exploita-tion, o gaining at the expense o others, would all. How drastic thiseect would be would, o course, depend on the state o public opin-ion. In the example at hand—the United States, where the naturaltheory o property is extremely widespread and accepted as a privateethic, the libertarian philosophy being essentially the ideology onwhich the country was ounded and that let it develop to the height itreached205—the above-mentioned eect would naturally be particu-larly pronounced. Accordingly, security-producing rms committed

to the philosophy o protecting and enorcing libertarian law would

0 C. B. Bailyn, Te Ideological Origins o the American Revolution, Cambridge,1967; J. . Main, Te Anti-Federalists: Critics o the Constitution, Chapel Hill, 1961;M. N. Rothbard, Conceived in Liberty, 4 vols., New Rochelle, 1975-1979.




attract the greatest bulk o public support and nancial assistance.

And while it may be true that some people, and among them espe-cially those who had proted rom the old order, might continue

their support o a policy o aggression, it is very unlikely that they

would be sucient in number and nancial strength to succeed in

doing so. Rather, the likely outcome would be that the honest com-

panies would develop the strength needed—alone or in a combined

eort and supported in this eort by their own voluntary custom-

ers—to check any such emergence o outlaw producers and destroy them wherever and whenever they came into existence.206 And i

0 Naturally, insurance companies would assume a particularly important role inchecking the emergence o outlaw companies. Note M. and L. annehill: “Insurancecompanies, a very important sector o any totally ree economy, would have a specialincentive to dissociate themselves rom any aggressor and, in addition, to bring alltheir considerable business inuence to bear against him. Aggressive violence causes

value loss, and the insurance industry would suer the major cost in most such valuelosses. An unrestrained aggressor is a walking liability, and no insurance company,

however remotely removed rom his original aggression, would wish to sustain therisk that he might aggress against one o its own clients next. Besides, aggressors andthose who associate with them are more likely to be involved in situations o violenceand are, thus, bad insurance risks. An insurance company would probably reusecoverage to such people out o a oresighted desire to minimize any uture losseswhich their aggressions might cause. But even i the company were not motivatedby such oresight, it would still be orced to raise their premiums up drastically orcancel their coverage altogether in order to avoid carrying the extra risk involved intheir inclination to violence. In a competitive economy, no insurance company couldaord to continue covering aggressors and those who had dealings with aggressorsand simply pass the cost on to its honest customers; it would soon lose these cus-tomers to more reputable rms which could aord to charge less or their insurancecoverage.

What would loss o insurance coverage mean in a ree economy? Even i [theaggressor] could generate enough orce to protect itsel against any aggressive orretaliatory orce brought against it by any actor or combination o actors, it wouldstill have to go completely without several economic necessities. It could not pur-chase insurance protection against auto accidents, natural disasters, or contractualdisputes. It would have no protection against damage suits resulting rom accidentsoccurring on its property. It is very possible that [it] would even have to do withoutthe services o a re extinguishing company, since such companies are natural out-

growths o the re insurance business.In addition to the terriic penalties imposed by the business ostracism whichwould naturally ollow its aggressive act [it] would have trouble with its employ-ees … . [For] i a deense service agent carried out an order which involved theintentional initiation o orce, both the agent and the entrepreneur or manager whogave him the order, as well as any other employees knowledgeably involved, would




against all odds the honest security producers should lose their ghtto retain a ree market in the production o security and an outlawmonopoly reemerged, one would simply have a state again.207

In any case, implementing a pure capitalist social system withprivate producers o security—a system permitting reedom o choice—would necessarily be better than what one has now. Eveni such an order should then collapse because too many peoplewere still committed to a policy o aggression against and exploita-tion o others, mankind would at least have experienced a glorious

interlude. And should this order survive, which would seem to bethe more likely outcome, it would be the beginning o a system o

justice and unheard-o economic prosperity.

be liable or any damages caused” (M. and L. annehill, Te Market or Liberty, NewYork, 1984, pp.110-111).0

Te process o an outlaw company emerging as a state would be even urthercomplicated, since it would have to reacquire the “ideological legitimacy’ that marksthe existence o the presently existing states and which took them centuries o relent-less propaganda to develop. Once this legitimacy is lost through the experiencewith a pure ree market system, it is dicult to imagine how it could ever be easily regained.




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Albert, H., 255

Alchian, A., 232,255

Anderson, P., 255

Anderson, ., 246, 255

Apel, K. O., 255

Ayer, A. J., 255

Badie, B., 255

Baechler, J., 255

Bailyn, B., 250, 255

Baird, C., 255

Baler, K., 255

Baumol, W., 225,226, 255

Becker, G., 255

Bendix, R., 255

Bernstein, E., 255

Birnbaum. P., 255

Blanshard, B., 255

Blaug, M., 255

Blinder, A., 226,255Bloch, M., 255

Block, W., 225,227, 230, 232,255

Boehm-Bawerk, E. v., 255

Boetie, E. de La, 256

Bottomore, ., 259

Brady, R. A., 256

Bramsted, E. K., 256

Brandt, W., 256

Brozen, Y., 256

Brutzkus, B., 256

Buchanan, J. M., 225, 227,232,233, 236,237, 256

Carey, G. W., 256

Cipolla, C. M., 256

Coase, R., 228,232, 255,256

Demsetz, H., 232,255, 256

Dicey, A. V., 256

Dingier, H., 256

Dworkin, R., 232,256

Erhard, L., 256

Eucken, W., 256

Evers, W., 256

Fahrenbach, H., 257

Fetter, F., 256

Feyerabend, P., 256

Fischer, W., 256

Flew, A., 257

Friedman, M., 231,256,257Friedman, R., 257

Galbraith, J. K., 257

Gewirth, A., 257

Goldman, M. I., 256,258

Greenlea, W. H., 257

Gregory, P. R., 257

Habermas, J., 257

Hamel, H. v., 257

Hampshire, S., 259

Index o Names

263




Harman, G., 257

Harris, M., 257

Hayek, F. A., 231, 257,258

Herbert, A., 257

Hill, P. J., 246, 250,255,256, 259

Hilton, R., 257

Hock, W., 257

Hoepker, ., 262

Hohmann, H. H., 257

Hollis, M., 257

Hoppe, H. H., 247, 257

Hospers, J., 238, 257

Hume, D., 258

Hutchinson, . W., 258

Janich, P., 258

Jellinek, G., 258

Jencks, C., 258Jesse, E., 258

Jouvenel, B. de, 258

Kaltenbrunner, G. K., 258

Kambartel, F., 258

Kamlah, W., 258

Kant, I., 258

Kaser, M., 257

Kautsky, K., 258

Kelsen, H., 258

Keynes, 237,256, 258

Kirzner, I., 258

Kolakowski, L., 258,259

Kolko, G., 258

Kuhn, . S., 258

Lakatos, I., 258

Lange, O., 258

Laslett, P., 258,262

Lehrman, L., 260

Leonhard, W., 258

Leoni, B., 246,258

Levy, M., 261

Locke, J., 258

Lorenzen, P., 258

Luehrs, G., 258

Lukes, S., 259

Machan, ., 238, 259

Machiavelli, N., 259

MacIntyre, A., 259

Main, J. ., 250,259

Marx, K., 259

McGuire, J. W., 259

Melhuish, K. J., 256

Melsen, A. v., 259

Mencken, H. A., 259

Merklein, R., 259Meyer, ., 259

Michels, R., 259

Miller, M., 259

Mises, 239, 259–261

Molinari, G. de, 224–225,238,241, 243,259

Morgenstern, O., 259

Mosca, G., 259

Moss, L., 260

Murck, M., 241,259

Musgrave, A., 258

Nell, E., 257

Nisbet, R., 259

Nock, A. J., 259

Nove, A., 259

Nozick, R., 259

Olson, M., 225, 259

Oppenheimer, F., 259




Ostereld, D., 259

Pap, A., 260

Parkin, F., 260

Paul, R., 260

Peden, J., 246,260

Pejovich, S., 260

Pirenne, H., 260

Polanyi, K., 260

Popper, K. R., 260

Posner, P., 232, 260Radosh, R., 260

Rakowska, ., 260

Rawls, J., 260

Reisman, 260

Rizzo, M., 232,260

Robbins, L., 232,260

Roepke, W., 260

Rothbard, M., 225, 232–234, 237,241,249–250, 256, 260

Rousseau, J. J., 260

Rubner, A., 261

Runciman, W. G., 262

Samuelson, P., 227, 231,261

Schoeck, H., 261

Schumpeter, J., 261Schwan, G., 261

Senghaas, D., 261

Singer, M., 261

Skinner, Q., 261

Smith, H., 261

Sombart, W., 261

Spencer, H., 261

Spooner, L., 261

Sterba, J., 261

Stevenson, C. L., 261

Stigler, G., 261

Strauss, L., 261

Stuart, R. C., 257

annehill, M. and L., 241,251–252, 261

Talheim, K., 257, 261Tirlby, J. F., 256

igar, M., 261

oulmin, S., 261

reue, W., 261

rivanovitch, V., 261

ullock, G., 225,232–233,236,256, 261

Veatch, H., 257,261

Vonnegut, K., 261

Wagner, R., 256

Weber, M., 262

Weinstein, J., 262

Wellisz, S., 262

Wicksell, 232–233,262

Wild, J., 246, 255,262

Williams, B., 262

Willis, D. K., 262

Windmoeller, E., 262

Wooldridge, W. C., 241,262

Wright, D. Mc. C., 262

Zap, W., 262

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